Politics & Government

Kentucky's gas tax dropping 4.3 cents a gallon; officials warn of 'crippling' effect

Seth Perlman

FRANKFORT — Kentucky motorists will pay less taxes for gas starting New Year's Day, but the change will mean fewer road improvements, state officials warned Wednesday.

Kentucky's tax on sales of gasoline, diesel and ethanol motor fuels will drop by 4.3 cents a gallon on Jan. 1, resulting in a loss to the Kentucky Road Fund of about $129 million on an annualized basis, according to the state Transportation Cabinet.

Kentucky's gas tax fluctuates with the average wholesale price of gas, which has dropped in recent months.

"The gas tax accounts for more than half of the revenue in the Kentucky Road Fund," state Transportation Secretary Mike Hancock said in a news release. "A loss of revenue is always concerning, but a revenue impact of this magnitude is crippling. It means less money for building, improving, maintaining and repairing our roads, streets and bridges."

A loss of $129 million would amount to about 6 percent of Kentucky's highway funding, which was forecast to collect $2.25 billion in the current fiscal year from all revenue sources, including state and federal motor-fuels taxes and a state usage tax on motor vehicles.

Kentucky roads and bridges are largely paid for by those who use them. The main user fee is the tax on motor fuels, which is paid at the pump and has two components: a variable excise tax — 21.2 cents beginning Jan. 1 — and a fixed user fee of 5 cents a gallon for gasoline and 2 cents a gallon for diesel and other "special fuels."

There also is a state fee that is paid at the pump — 1.4 cents a gallon — for cleanup of old underground fuel storage tanks.

And there is a federal tax of 18.4 cents a gallon per gasoline and 24.4 cents per gallon of diesel. The federal tax is not indexed for inflation and hasn't changed since 1993.

Local governments also will feel a pinch from the lower tax because 48 percent of it is returned to cities and counties in the form of revenue sharing for local streets and roads.

The state excise tax was enacted in 1920. State lawmakers allowed the tax to vary with the wholesale price of fuel beginning in the 1980s. The variable excise tax rate is 9 percent of the average wholesale price, so the tax rises, falls or stays unchanged from quarter to quarter on the basis of a survey of average wholesale price of motor fuels.

The survey is conducted by the Department of Revenue in the first month of each quarter, and the change in rate — if any — takes effect on the first day of the first month of the following quarter.

The amount of any increase in the average wholesale price is capped at 10 percent a year. The legislature imposed the cap to protect taxpayers at a time when pump prices were skyrocketing.

But the Road Fund was not accorded the same protection against dramatic declines in fuel prices, Hancock said.

The only limit is a "statutory floor" — a minimum average wholesale price for tax calculation purposes.

Since April 2009, that floor has been $1.786 a gallon — far below the actual average wholesale price, which was surveyed at $2.354 a gallon in October, down from $2.837 in the July survey.

The decline in the tax will be the fourth drop in the last five quarters.

In a legislative committee this week, Russ Romine, deputy secretary of the Transportation Cabinet, said that the January 2015 survey will determine the tax rate for the final three months of fiscal year 2015, which ends June 30. Any increase after that would be capped at 10 percent for all of fiscal year 2016.

If the average wholesale price declines even more in the January survey, as happened last January, it will take years for the tax rate to recover to the July 2014 level, he said.