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Call for changes to state's fuel tax gaining momentum

09/04/2015  |  By: Brian McCuller, JD, CPA, Shareholder, Practice Leader Tax


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The drumbeat to raise or change the way Tennessee taxes fuel at the pump is getting louder and steadier.

In December, Gov. Bill Haslam said he expected to see a gas tax bill in the Legislature either this year or next.

In January, the state comptroller released a report saying the state’s gas tax is no longer sufficient to fund maintenance of existing road infrastructure and meet long-term needs.

And in May — after a legislative session with no gas tax bill — the Transportation Coalition of Tennessee announced its formation with a plan to push for more funding for the transportation system, noting the state’s gas tax has remained unchanged since 1989. The group’s steering committee is comprised of the state’s road builders and trucking associations, Auto Club Group/AAA Tennessee, and government groups such as the Tennessee Municipal League and County Highway Officials Association.

Finally, earlier this summer, Haslam told the Associated Press he is gearing up for a statewide tour to make the case about the “declining trajectory” of Tennessee’s transportation funding.

With a dozen or more states looking at changing their gas tax rates, it is reasonable to expect some serious conversation when state lawmakers return to Nashville in January.

Tennessee levies a fixed tax rate of 21.4 cents per gallon on gasoline, the 13th lowest rate among 50 states, according to the January 2015 Comptroller’s report, Tennessee Transportation Funding.

Combined with the federal gas tax of 18.4 cents, a buyer in Tennessee pays 39.80 cents in taxes on fuel at the pump. For diesel, the state rate is 18.4 cents per gallon for a total of 42.80 when combined with the federal tax.

As in many other states, taxes on fuel are the largest source of revenue for construction and maintenance of highways in Tennessee, followed by fees from state vehicle registration and licensing.

The problem with the gas tax, some say, is that while the population using the roads has increased, gas use per capita has been dropping steadily, slowing the growth in the fund.

The comptroller’s report pointed out that inflation has reduced the purchasing power of the gas tax revenue, and estimated that Tennessee’s gas tax would have to be 38 cents per gallon in 2014 to equal the purchasing power of 20 cents in 1989.

To bring in more money to pay for transportation infrastructure, some states have implemented variable rate taxes on fuel, which adjusts regularly by tying it to the Consumer Price Index or to the wholesale or retail price of fuel, or both. Eighteen states had a variable rate tax as of earlier this year.

Other states collect sales taxes on fuel or dedicate a percentage of general sales taxes to highways. A broader range of options are also being discussed in state legislatures nationwide, including a system that taxes users based on how many miles they drive, or expanding the use of toll roads. Either of those options bring revenue from drivers of hybrid and electric vehicles, which pay little or no gas tax at all.

Some states have simply increased the rate. Iowa raised its state fuel tax by 10 cents, Utah by 5 cents and Idaho by 7 cents. In Tennessee, the comptroller’s report said that a 1 percent increase in the fuel tax would yield an estimated $147 million. Likewise, a $1 increase in vehicle registration fees would generate $6.8 million annually.

Lt. Gov Ron Ramsey has said he is not in favor of just raising the gas tax, and that any solution needed to be “comprehensive.”

If what is happening in other states is an indication, expect to hear the term “user fee” in place of “gas tax” as not only a more politically palatable option, but an indication that policymakers are increasingly adopting the conclusion that linking their key funding source for roads to gallons of fuel purchased may need an overhaul.

Brian McCuller is partner-in-charge of state and local tax services at LBMC. Contact him at 615- 690-1971 or