Replacing a Stable Revenue Stream with a Far Less Predictable Source

Tuesday, October 14, 2014 at 7:20 PM by

Governor Walker floated the idea this week of replacing the current gas tax with a sales tax on motor fuel. It’s an interesting idea, but I don’t think it would be good public policy because it would replace a stable revenue stream with a tax source that is far less predictable.   (You can read more about the idea in this Journal Sentinel article.)

Although we don’t have details of what the plan would look like, the Governor said it would be revenue neutral – at least at first. But clearly the intent is that the sales tax approach would generate more revenue over time, as gas prices increase, and I think that’s a reasonable assumption to make. However, fluctuations in gas prices mean that in any given year this source of revenue could fall well short of the anticipated level.  

From a political perspective the chief virtue of the plan, perhaps the sole virtue, is that it offers a way of potentially raising more revenue for transportation projects without periodically asking elected lawmakers to vote on gas tax increases. In that sense, rising gas costs would achieve one of the things that highway builders loved about the former gas tax indexing formula – providing more revenue without all the hassles of making elected officials vote on the increases. Although I didn’t like the automatic increases that resulted from indexing, that formula was a far more logical way to boost revenue than the volatile increases and decreases that the Governor’s new idea would produce. 

Keep in mind that there’s no guarantee that the sales tax alternative will actually boost revenue in any given year.  If that sort of revenue-neutral shift had been initiated a few months ago (based on the higher gas prices at that time), state transportation revenue based on the sales tax would probably now be more at least 10% per month lower than what policymakers had been planning to spend. 

Some groups, like WISPIRG have questioned the need for more revenue for major highway projects, and that’s a very important debate to have. But even if we assume for the moment that raising more revenue for the Transportation Fund is needed, should we tie transportation funding to a very volatile revenue source? The goal of letting legislators and governors off the hook for increases in gas tax revenue isn’t a good reason to switch to a far less predictable source of transportation financing. 

Jon Peacock


One Response to “Replacing a Stable Revenue Stream with a Far Less Predictable Source”

  1. Jon Peacock says:

    A couple of people have asked me how much revenue Wisconsin would raise by applying the current sales tax rate to motor fuel, compared to the revenue from the current gas tax. A 5% sales tax would generate about half as much as the state currently receives from the gas tax.

    Although the Governor hasn’t provided any details, my guess is that what he has in mind would be a special sales tax for gas that would be roughly twice the current rate. Alternatively, state lawmakers could devise a “revenue neutral” plan that would apply the current 5% rate to gasoline while cutting in half the current gas tax. The second option would yield less volatility in revenue than the first.

    There are currently 8 states that apply sales taxes to gasoline. All of those states ( as well as the other 42) also apply an excise tax to gas.