The sales tax on fuel vs. the gas tax

MoveMN, the local transportation infrastructure lobby, released their proposal today. There is much to discuss, but let’s start with their proposal to:

Apply state’s sales tax to the price of fuel ($422 million)

Move MN proposed adding the state’s 6.5 percent sales tax to the price of fuel. A sales tax on fuel is based on the price of fuel – the higher the price of fuel, the more tax revenue is generated. A sales tax on fuel is similar to the sales tax consumers pay at a retailer – the higher the cost of the product, the more you will pay in a sales tax.

One difference between a retail sales tax and the proposed sales tax on fuel is that the sales tax on fuel is calculated into a cent-per-gallon tax and adjusted annually to reflect the changing price of fuel. When applied at the gas pump, the state’s gas tax would increase by approximately 14 cents per gallon. This revenue is constitutionally dedicated and can only be spent on roads and bridges.

More than a dozen states have already started to transition from a stagnant per gallon gas tax to a sales tax, or a gross receipts tax, on fuel. Iowa and Wisconsin are currently studying shifting to a sales tax on fuel.

Since the price of fuel is at a recent low, this is politically a very nice time to apply an additional tax on fuel — it will be felt least by potential taxpayers. (In practice, if motorists weren’t told, they wouldn’t notice.)

A Political Economy of Access: Infrastructure, Networks, Cities, and Institutions by David M. Levinson and David A. King
A Political Economy of Access: Infrastructure, Networks, Cities, and Institutions by David M. Levinson and David A. King

However, if the price of gas goes up (they say this is adjusted annually), say to last year’s level, this 6.5% tax (14 cents) might be 28 cents. If gas hits $5/gallon pre tax, we might be at an additional 33 cents. On top of the current gas tax of 28.6 cents.

Political Genius! The tax goes up and no one had to vote for it.

Political Tragedy! People realize the state gas tax on $5/gallon is $0.616 instead of $0.286. But now we can build more roads, even as demand collapses because of the high price.

Will the rate be higher for Metro area residents, who get the local sales tax for transit as well on other goods?

This is not quite as gimmicky as the “refinery tax” or “wholesale tax”, at least they call it a gas tax in the end, since they want it to be constitutionally dedicated, and don’t want to re-amend the constitution. But 14 cents per gallon is a 50% increase in the state gas tax. 28 cents per gallon is a 100% increase. Can you imagine legislators running on doubling the gas tax? Massachusetts voters recently repealed indexation. This proposal is a clever attempt at indexation by another name. But it has its risks.

Suppose the price of gas continue to fall, and next year is $1/gallon instead of $2 or $4/gallon. Then the revenue is only 7 cents per gallon. There will be large budget shortfalls, since spending would have been predicated on anticipated revenue.

We do not know the price of gas next year to nearly the same level of accuracy which we know the level of gasoline consumption. (Show me a transportation lobbyist who predicted the recent fall in the price of gas).

Further the quantity of gas consumed is a far better measure of “need” than the price of gas consumed. This is a two edged sword.

If the Legislature wants to raise more money, it would be far better public policy to just raise the gas tax. This is honest and less volatile.

If the Legislature thinks it is fair to impose a sales tax on fuel like on most other goods (so that highways do not have a hidden subsidy) they should do so, lower tax rates overall, and put the money in general revenue. Since the tax is regressive, a negative income tax of some kind would be in order.

Updated: While I am all for a higher state gas tax IF the money were spent on the right things (preservation, maintenance, operations), of that I am increasingly doubtful (See MnSHIP Illustrative Project List of Unmet Needs).

3 thoughts on “The sales tax on fuel vs. the gas tax

  1. I don’t think that item involves extending 610 over to 35E (which AFAIK is not anywhere in the cards). Moreso, it’s the proposed extension to I-94. That item is really 3 separate projects (610 extension, 35E managed lane, another managed lane) rolled into one line item.


  2. I hope not, I thought extension of 610 to I-94 was already budgeted though. Corrected main post. Still lots of capacity expansion in the list.


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