The single largest source of funding for Minnesota’s transportation system comes from the state gas tax. However, the purchasing power of that tax has dropped by over one-third over the course of the century, leaving funding for state roads and bridges in a precarious fiscal situation. While the majority of states have increased their gas tax revenues in recent years, Minnesota policymakers have failed to approve a gas tax increase, even as the decline in real gas tax revenue is projected to continue.
Minnesota’s gas tax is levied at a rate of 28.5 cents per gallon. (The blend of gasoline and 85% ethanol is taxed at 20.25 cents per gallon.) Revenue from the gas tax (estimated at $921 million in 2018) is combined with dollars from other sources and constitutionally dedicated to fund roads and bridges.
When examining long-term trends in gas tax revenue, it is important to adjust for erosion in the purchasing power of the dollar over time due to inflation. The inflationary pressures that impact the cost road and bridge are somewhat unique, being disproportionately driven by changes in the cost of petroleum. The Minnesota Department of Transportation has developed the Minnesota Construction Cost Index (MCCI) to measure these distinct inflationary pressures. Amounts in this article will be presented in constant 2018 dollars, adjusted based the MCCI.
Adjusted for inflation, the trend in Minnesota gas tax revenue has been downward over the course of the 21st century. The tax generated $1,432 million in 2000, falling to $896 million in 2008. The gas tax rate was increased incrementally from 20 cents to 28.5 cents from 2008 to 2012, which temporarily interrupted the decline in gas tax revenue. However, sharp increases in petroleum prices in 2010 and 2011 pushed the cost of highway construction and maintenance upward, leading to a decline in the real purchasing power of gas tax revenues from 2011 to 2012, even as the latter stages of the gas tax increase were being implemented.
By 2018, the real purchasing power of the gas tax had declined by 35.6% relative to 2000. As gas tax revenues eroded, the state’s road infrastructure came under increase pressure due to a 14% increase in the state’s population and an approximately 8% increase in the number of Minnesota businesses.† To compound matters, gas tax revenue is projected to continue to decline by another 14% from 2018 to 2021.
The decline in the real purchasing power of the gas tax indicated here is consistent the findings of the Minnesota Transportation Advisory Committee:
The transportation system in Minnesota creates a critically important, positive economic impact that provides a high quality of life for the citizens of our state. Funding for this system in the future faces declining revenues while the needs and costs keep increasing, creating a funding gap. If Minnesota wants to maintain its competitive advantage, significant additional revenue will be needed during the next 20 years to address this gap and provide an economically competitive, world-class transportation system here in Minnesota.
The decline in the purchasing power of the gas tax since 2000 was driven by a significant increase in highway construction and maintenance costs, as well as by reduced gasoline consumption driven by more fuel-efficient vehicles and increased reliance on less fuel-intensive transportation options, such as mass transit. In response, 26 states and the District of Columbia have increased their gas tax rates or reformed their gas tax in a way the generates additional revenue. A 27th state—Missouri—will vote on a ten cent per gallon gas tax increase in November.
Due to declining gasoline consumption and increasing road construction and maintenance costs, the old fixed tax-per-gallon model—currently in use by Minnesota and most other states—is failing to generate enough revenue to meet transportation needs. To address this problem, several states have switched to a variable-rate gas tax. According to the Institute on Taxation and Economic Policy:
Since 2013, six states (Maryland, New Jersey, Pennsylvania, Rhode Island, Utah, and Virginia) as well as the District of Columbia (DC) have abandoned their old gas tax structures in favor of more sustainable, variable-rate designs where the tax rate is allowed to rise alongside gas prices, the general inflation rate in the economy, vehicle fuel-efficiency, or other relevant factors. Over this same period, states such as California, Georgia, Indiana, Michigan, and North Carolina have made significant improvements to their existing variable-rate tax structures.
The principle cause of Minnesota’s transportation funding gap is a decline in the purchasing power of state’s gas tax. This gap needs to be addressed by increasing gas tax revenues—preferably through reforms that index the gas tax rate to factors that reflect the need for transportation revenues.
†The estimate of an 8% growth in the number of Minnesota businesses is based on a comparison of the commercial and industrial parcel counts from the 2000 and 2018 abstracts of assessment prepared by the Minnesota Department of Revenue.