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A Small but Significant Fuel Tax Hike for Arkansas

The 3 cent gas tax and 6 cent diesel tax increases are among the lowest of any states that have hiked fuel taxes since 2013, but combined with other revenue sources in the legislation, plus an upcoming sales tax ballot measure, it's historic.
April 20, 2019, 11am PDT | Irvin Dawid
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"Arkansas motorists will pay 3 cents more for a gallon of gasoline and 6 cents more for diesel after Gov. Asa Hutchinson signed part of what he called 'the largest highway plan in the state’s history' into law Tuesday (March 12)," reports Steve Brawner of Talk Business & Politics, an Arkansas news website.ax

Arkansas' current 21.8 cents-per-gallon (CPG) state gas tax (and 22.8 CPG diesel tax), while higher than five of its six neighbors as shown in the chart in the neighboring states section below, is almost 12 cents lower than the national average of 33.78 CPG, according to the American Petroleum Institute, and the tenth lowest in the nation, according to the Tax Foundation. It's been two decades since the General Assembly last voted to hike gas and diesel taxes by three and four CPG, respectively, when then-Gov. Mike Huckabee signed into law Act 1028 of 1999 [pdf].

Fuel tax hikes are low and barely variable

Lawmakers in at least 27 states have approved gas tax increases since February 2013 when Wyoming became "the first state to approve a gas tax increase in over three and a half years (no state enacted a gas tax increase in 2010, 2011, or 2012)," according to Carl Davis of the Institute on Taxation and Economic Policy (ITEP).

While a 3-cent increase is small (only Alaska's was lower at 0.95 CPG), when combined with three other highway fund revenue measures in the two-part legislative package, it provided the anchor for the long-term highway funding legislative package totalling $300 million in annual revenues, the "biggest highway-funding plan in state history," boasted Hutchison during the March 12 bill-signing ceremony (video). [See sections below for General Fund transfers, EV and hybrid fees, and sales tax ballot measure.]

Unlike the existing flat 21.5 cents CPG gasoline excise tax [pdf], the new gas tax is a variable 1.6 percent wholesale sales tax, and the diesel or "distillate special fuel" tax is a 2.9 percent wholesale sales tax, as specified in Act 416, formerly SB 336, sponsored by Sen. Terry Rice, R-Waldron. The taxes take effect on Oct. 1, 2019, according to Matt Cole of Overdrive

Though small, because the new taxes are tied to the wholesale price of fuel, they can increase should crude oil prices increase. When SB 336 passed the Senate on Feb. 21, "future increases would [have been] limited to 1 cent a year," reported Michael R. Wickline for the Arkansas Democrat-Gazette, but that didn't sit well in the House. The final version limits increases to no more than one-tenth of a cent, but should fuel prices decline, the tax remains stable. Even with the de minimus allowable increase, the Natural State thus joins a growing list of states that have variable, as opposed to fixed-rate fuel taxes.

Neighboring states

As small as the increase was, it still generated opposition from Americans for Tax Reform, a nonprofit, 501(c)(4) taxpayer advocacy group linked to the Koch brothersIn his March 1 letter to the legislature opposing SB 336, founder and president Grover Norquist observed how Arkansas' fuel tax rate compares with its neighbors.

"As shown on the chart below, excluding Tennessee, Arkansas’s current fuel tax rates are already higher than all of its neighboring states...Under SB 336, Arkansas would replace Tennessee as having the unfortunate distinction as home to the highest diesel tax in the region, and have an even less regionally competitive gas tax."

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*Tax rates are measured in cents per gallon. Source: https://www.taxadmin.org/assets/docs/Research/Rates/mf.pdf

Courtesy of Americans for Tax Reform

Tennessee legislation approved in April 2017 increased the gas tax by six cents-per-gallon (CPG) and diesel tax by 10 CPG incrementally, with the final one CPG gas tax increase and three CPG diesel tax increase to take effect on July 1. Missouri voters rejected a 10 CPG gas tax hike last November.

General fund transfers

The two new fuel taxes are projected to generate almost $87 million annually, with $58 million going to the state highway fund after 30 percent of revenues are transferred to cities and counties. The second largest source of revenue, $35 million annually, comes from existing, but now dedicated casino tax revenues and Restricted Reserve Funding (aka rainy day fund), according to the governor's 2019 Highway Funding Package [pdf]. According to the legislation, legislative and bureaucratic changes to the casino fund resulted in "additional revenue" provided to the state that makes the dedication possible.

New user fees for plug-in electric and conventional hybrid vehicles

For those vehicles that can run on battery power, even if only a short range, they'll be subject to a new $200 annual registration fee that is projected to accrue $160,400 annually while the new $100 hybrid registration fee will reap almost $1.9 million annually. Considering that hybrid vehicles are also subject to the gas tax, the low revenue from these fees would appear to bolster the criticism from electric vehicle (EV) advocates who see them as punitive and a creating a disincentive for reducing transportation emissions.

Sales tax ballot measure for highways

The second and by far largest part of the governor's legislative package was House Joint Resolution 1018 by Rep. Jeff Wardlaw, R-Hermitage, which worked in tandem with SB 336. The resolution places a constitutional amendment before voters on Nov. 3, 2020, to permanently extend the 10-year, half-cent transportation sales tax measure known as Issue 1 that was approved by 58 percent of voters in November 2012.

"The proposal is projected by state officials to eventually raise about $205 million a year more for the state Department of Transportation for highways and $44 million a year more each for cities and counties," reported Wickline of the Democrat-Gazette. Surprisingly, the Arkansas Transportation Sales Tax Continuation Amendment (2020) has already been posted online by the good folks at Ballotpedia, although it "has not yet identified any organized support or opposition campaigns."

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Published on Tuesday, March 12, 2019 in Talk Business & Politics
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