Even if you go all the way back to the days Nebraskans drove Model T roadsters over mostly gravel and dirt roads, you won’t find a time when the state’s gas tax had less buying power than it does today.
When adjusted for inflation, Nebraska’s gas tax rate is at the lowest point in its 90-year history, according to a World-Herald analysis. With state policymakers over the past two decades keeping the rate about as flat as freshly laid concrete, the state’s motor fuels tax during that time has lost 30 percent of its buying power.
In fact, the 25.6-cent-per-gallon tax would have to rise 11 cents to reach the same value it had in 1995.
As the Nebraska Legislature and Gov. Pete Ricketts appear headed for a showdown this week over a proposed 6-cent increase in the gas tax, The World-Herald examined the impact of inflation on Nebraska’s primary source of funding for state and local road improvements.
Having two decades of largely flat gas tax rates has obviously kept more dollars in taxpayers’ pockets. It also has dropped Nebraska’s tax from among the highest in the nation to the bottom half among states.
But the combined effects of the flat rate and rising inflation also are costing the state in potential road-building funds: more than $120 million last year alone, and collectively more than $1 billion since 1995. That’s the extra amount Nebraska would have collected if the gas tax rate had kept pace with inflation.
State Sen. Jim Smith of Papillion, chairman of the committee that oversees transportation, said the lost buying power reflected by the figures in the analysis can be seen today in the condition of the state’s highways and streets. He said that’s why the state needs the 6-cent increase, which would be phased in 1.5 cents at a time over the next four years.
“If you look at the rising cost of concrete, asphalt and steel, we are just not buying as much for our dollars anymore,” Smith said. “The need is there. Roads are absolutely critical to the lifeblood of Nebraska.”
Ricketts has vowed to veto the bill, which he says runs counter to his pledge to lower taxes for Nebraskans. He’s calling on lawmakers to delay action until his new roads director can consider all funding options.
“Raising taxes ought to be a last resort,” he said at a recent Tea Party rally in Omaha.
If Nebraska raised gas taxes, it would join Iowa and six other states that have already done so this year, a time when consumers are paying much lower gas prices at the pump.
Iowa, which boosted fuel taxes by 10 cents, had essentially gone 26 years without an increase. Iowa taxes for ethanol blends and diesel hadn’t changed at all, while in that time taxes had gone up a single cent on gasoline without ethanol.
While there have been many arguments for and against Nebraska’s gas tax measure, one that has gotten little attention is the toll of inflation. The issue is rooted in a fundamental — and little understood — difference between gas taxes and the other major taxes that fund state government.
Income and sales taxes are levied on a percentage basis: income taxes as a percentage of paychecks and other income, sales taxes as a percentage of purchase prices. As a result, even if rates are not changed, revenues from those taxes continue to rise with time as the economy grows and prices and wages rise. The state often sees hundreds of millions in additional sales and income tax dollars annually, even without state leaders touching the rates.
Gas taxes are different. They most often are levied at a flat per-gallon rate. And if that rate is not changed over time, ever-rising construction prices chip away at its buying power.
Quite simply, a quarter — roughly what Nebraskans have paid in state taxes on each gallon of gas they’ve bought over the past two decades — does not buy what it used to.
“It’s an inevitable fact that if gas tax rates are not updated from time to time, the tax is not going to keep pace with construction costs,” said Carl Davis of the Institute on Taxation and Economic Policy, a think tank in Washington.
However, due to the difficulty of mustering the votes to raise a tax, gas tax rates rarely do change. Since 1995, Nebraska policymakers have enacted only one notable gas tax increase: a 1.2-cent boost in 2008 that was about one-tenth what was needed to keep pace with inflation over the past 20 years.
Gas tax revenues can increase if fuel consumption rises. But higher consumption also means more wear and tear and congestion on roads, which also increases the needs.
The increased consumption seen in Nebraska over the past two decades also has not been enough to offset the inflation losses. In 1996, Nebraska’s gas tax produced about $259 million — or $395 million in today’s dollars. Even with a nearly 20 percent increase in fuel consumption, overall fuel tax collections last year were $329 million — about $66 million, or 17 percent, below the value of the 1996 tax.
Recently, consumption in Nebraska actually has been falling because of fuel-efficient cars, dropping in three of the past six years and currently barely above 2005 levels. As a result, actual state fuel tax collections last year were unchanged from three years earlier.
Davis said that while lawmakers often want to blame lagging highway revenues on reduced consumption, it’s largely because they don’t raise rates in the face of inflation.
“Efficiency is chipping away at gas taxes a little bit, but it’s not the reason gas tax revenue is not keeping up,” he said.
Nebraska has lots of company in seeing gas tax revenues run dry, Davis said. At the start of the year, 22 states had not touched their gas tax rates in more than a decade. Sixteen had left them unchanged for more than two decades.
Iowa’s 26-year run of flat rates for most fuels was the third-longest in the country before Republican Gov. Terry Branstad last month signed the 10-cent increase. However, even that hefty hike only made up for just over half the value the tax had lost to inflation since 1989.
The longer some states go without adjusting rates, the more difficult it is for neighboring states to change theirs, as concerns rise about motorists in border towns crossing over to buy cheaper gas. Iowa’s lower rate was often cited in past debates about raising Nebraska’s gas tax.
Congress has likewise not adjusted the federal gas tax rate, stuck at 18.4 cents since 1993. Rather than increase the tax, Congress in recent years has been tapping billions in other federal revenues to shore up the federal road-building fund, exacerbating budget deficits and the national debt. Even with the highway fund set to run out of money again in a month, many in Washington see the odds of the Republican-led Congress raising the tax as slim.
Collectively, the federal government and states have been losing more than $33 billion a year in road-building funds to inflation since the last time they changed their rates, Davis’ group said in a 2011 report.
Nebraska policymakers once were fairly vigilant about adjusting the gas tax rate as road-building costs rose. In the years since the tax was initiated at 2 cents per gallon in 1925, it climbed gradually and reached 18 cents per gallon by the late 1980s. Between 1970 and 1988 alone, the tax was adjusted at least a half dozen times.
Then, in 1989, the Legislature launched an ambitious highway improvement program that called for major improvements in the state’s 10,000-mile road system. Lawmakers raised the gas tax 3.5 cents to kick the plan into gear, and there were subsequent increases intended to keep it on track.
The last of those, approved by the 1995 Legislature, increased the tax by a total of about 1.5 cents. At the time, Nebraska’s roughly 25-cent tax was the nation’s fifth-highest, a price some state leaders said they were willing to accept to ensure a good roads system in a state with vast rural stretches.
But since then there’s been only one significant increase: the 1.2-cent hike the 2008 Legislature passed over Gov. Dave Heineman’s veto. In addition, lawmakers in 2004 approved a minuscule hike — one-tenth of a cent — after a state task force had recommended a 2-cent increase.
Those increases are hardly noticeable in the state’s rate history due to a portion of the state gas tax formula that causes the rate to fluctuate as much as a couple of cents during the year as wholesale gas prices change. The current 25.6-cent rate is actually below the 26.5-cent rate many Nebraska motorists were paying in 1991 and about the same as the 25.4 cents paid in 1996.
Over that time, The World-Herald analysis found, inflation caused the tax’s buying power to slide significantly. The tax rate would have to rise nearly 15 cents to reach 1990 inflation-adjusted levels and about 11 cents to equal 1995 value.
The OpenSky Policy Institute, a Lincoln think tank focusing on tax policy, last week contrasted Nebraska’s flat gas tax rates over the past two decades with the increasing cost of gas in that time. It found that the average Nebraskan since 1993 is paying $1,200 more annually to fuel up a car but only $3 more in gas taxes.
Meanwhile, Nebraska has dropped out of the ranks of high gas tax states. It currently ranks 27th, even counting a separate 0.9-cent-per-gallon tax that goes not for roads but for cleaning up leaky fuel tanks.
Iowa has a similar 1-cent fee that raises its current overall tax on a gallon of unblended gasoline to 32 cents — ranking the state 16th-highest nationally — and 30 cents on ethanol blends. If the 6-cent increase in the current Nebraska bill is fully implemented, Nebraska’s total gas tax would reach 32.5 cents — in the same ballpark as Iowa’s.
Matt Litt, the Nebraska director for Americans for Prosperity, said the failure of Nebraska’s gas tax to keep up with inflation is not a reason to raise it now. Given the growth in the overall state budget, he said, senators should be able to prioritize spending and find other ways to fund road improvements.
Like all taxes, the pennies at the pump add up, Litt said. For a Nebraskan who drives 15,000 miles a year and gets 20 miles to the gallon, the Legislature’s proposed higher tax would mean about $11.25 more taxes next year and $45 annually when it’s fully implemented.
“It’s frustrating for me to hear a senator say it’s not that much money when it could mean new ballet shoes for my daughter,” he said. “It’s a spending problem, not a revenue problem.”
But highway advocates say there’s been a price for Nebraska’s flat tax rate.
The percentage of Nebraska highways whose conditions are rated as good or better fell from 84 percent to 74 percent in the past decade. Counties are facing as much as $2 billion in work on old bridges alone. And congestion in the state’s cities continues to rise.
“No one wants to pay taxes, but most people recognize you get what you pay for,” said Larry Johnson of the Nebraska Trucking Association, which supports the tax hike.
The overall roads funding picture has improved over the past three years due to a 2011 move by the Legislature to designate one quarter of 1 cent of the sales tax for state roads projects.
But Smith noted that those extra dollars —-$63 million this year — are earmarked for specific expressway projects. When fully implemented, his gas tax hike would raise $75 million a year to deal with the backlog of other needs, with the money split evenly among the state, cities and counties.
Smith said the impact of inflation on the gas tax in The World-Herald’s analysis goes a long way toward showing why the roads backlog built up, calling it “right on the money.”
“It helps explain the problem,” said Smith, whose bill will likely come up for a final vote this week.
Davis said there seems to be a growing understanding nationally of how roads funding is being undermined by flat gas tax rates.
Of 15 states that have changed gas taxes since 2013, five have indexed their rates to inflation in full or in part, causing revenues to automatically rise in the future as inflation climbs. Georgia this year took the most novel approach, setting its rate to adjust for both inflation and reduced fuel consumption.
“There are a lot of things being talked about,” Davis said. “The encouraging thing is a number of states are realizing a gas tax that never changes is not going to hold up.”
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