B. Bi-Annual Cost Of Living Adjustments And The Governor’s Proposed “Pause”
Under existing law, the State adjusts the motor fuel tax every 2 years to account for changes in the cost of living during the previous two years. Under this formula, the motor fuel tax is scheduled to increase by 3¢ to 37.5¢/gallon on July 1. The governor’s budget proposes instituting a “pause” on that increase, and using $24.6 million from last year’s surplus to replace the $12.3 million in revenue that the “pause” would consume during the next two years (or until the scheduled next cost-of-living adjustment).
C. Concerns With The “Pause”
1.Uncertain Savings For Motorists
While this proposal has a certain amount of superficial appeal, the hearing revealed a number of concerns. Senators Murray and DiPalma asked for evidence that such a tax reduction would result in genuine savings for the consumer at the pump. The administration observed that comparison data from Massachusetts and Connecticut failed to demonstrate that their (lower) tax rates produced correspondingly lower fuel prices, and offered to conduct further research to share with the Finance Committee.
2. Fiscal Policy Consequences
I presented two lines of questions at the hearing, both of which followed from the administration’s position that there would be no reduction in transportation or transportation-related spending in conjunction with the proposed tax “pause.”
a. Permanent Revenue Loss
The first was to find out, if we assumed the Governor’s plan was enacted and no cost adjustment occurred in 2023, whether the adjustment in 2025 would be for four years (since 2021, when the last adjustment occurred) or for two years (i.e. beginning in 2023). The administration proposed limiting the 2025 adjustment to two years, which would mean that the 3¢/gallon increase due in July (and the additional $12.3 million in annual revenue) would be gone forever. In other words, the 2-year $24.6 million patch of surplus funds would only cover the beginning of this perpetual lost revenue stream, after which the lost motor fuel tax revenues would have to be replaced with general revenue (such as income and sales taxes). In other words, the proposal is not for a time-limited pause, but instead for a permanent revenue loss to be filled with broad-based tax revenue.
b. Swapping A User Fee For A Broad-Based Tax Increase
The second line of questions concerned the fiscal and policy ramifications of the Governor’s proposal. More specifically, one can view the motor fuel tax as a type of “user fee” through which motorists who use the State’s roads and highways contribute to the cost of maintaining them. The correspondence is not perfect; for example, electric vehicle owners do not pay any motor fuel tax, but from a broader standpoint, the motor fuel tax has the virtue of many user fees by matching the cost of a government program with people who benefit from it. This correspondence is particularly valuable given the State’s Act on Climate, which has the goal of reducing climate change by, among other things, reducing the use of fossil fuels that power our transportation system. Viewed from this perspective, the gasoline tax “pause” has the unfortunate effect of shifting the burden of maintaining our roads from motorists to the general public, many of whom ride bicycles, take public transportation or in other ways do their part to reduce the carbon footprint of our State’s transportation sector.
c. Broader Shift Of The Cost Burden From Road Users To All Taxpayers
It also is worth noting that the Governor’s motor fuel tax proposal is part of a broader project to shift the cost of maintaining our roads from motorists to the general public. The Governor’s budget proposes using an additional $157 million of the surplus to pay the State’s matching fund obligation for the highways and roads that will be built in Rhode Island under the Infrastructure Investment and Jobs Act passed by Congress in 2021. Also, last year the State completed the “phase out” of the local automobile excise tax. As is true with this year’s proposal from the Governor, the “phase out” was not the result of any reduction in expenses; instead, the program uses State general revenues (from sales tax, income tax, etc.) to substitute for revenues previously generated by the local automobile excise tax. While the previous tax raised questions about equity and fairness, it had the benefit of charging the cost of maintaining our local roads to those who used them, including electric vehicle owners who do not pay any motor fuel tax.
To conclude, it is unclear whether the Governor’s proposed “pause” in the motor fuel tax increase would produce any savings at the pump. On the other hand, it is clear that the proposal would create a permanent hole in the State’s transportation revenues, replacing a user fee with a burden for the taxpayers as a whole. This shift could set back the policy goals of the Act on Climate.