howardnlby Howard Stephenson
A ten cent per gallon gas tax increase in FY2006 may be inevitable if Governor Walker and the legislature decide to raid the Centennial Highway Fund (CHF) of its remaining sales tax revenue in order to increase public education spending.

Shifting Revenues from Transportation to Higher Education to Public Education

In November, Governor Olene Walker announced that she intends to increase public education funding without raising taxes. Insiders say that one of the ways the Governor intends to accomplish this by diverting CHF sales tax dollars to higher education which would then allow the shifting of income tax dollars from higher education to public education. With gas taxes already expected to increase 5 cents per gallon by FY2006, diversion of sales tax revenues from CHF would most likely lead to a 10 cent per gallon increase in FY2006. If gas taxes are not increased, other taxes will likley be hiked in order to balance the budget.

Income tax dollars may only be allocated for public and higher education, although prior to 1997 public education received 100% of all individual and corporate income taxes. (The State Tax Commission and Administrative Services also get a 2% to 3% administrative piece of the income tax pie). Revenue shifting has occurred for the past two years as public education’s share of income taxes increased from 82.8% in 2001 to 92.1% in 2004. As income tax dollars have been shifted from higher education to public education, sales tax dollars have been shifted from transportation to higher education to compensate higher education’s loss of income tax dollars. The Governor’s proposal to shift even more sales tax revenue from CHF will leave the state only one option: a 10-cent per gallon increase in FY2006.

Would Revenue Shifting Be Justified?

Proponents of revenue shifting use several arguments to justify raiding the CHF of sales tax revenue. None of these arguments, however, withstand sound tax policy scrutiny. Proponents of raiding the CHF of sales tax revenues have argued that roads should be financed by user fees (i.e. gas taxes) and not subsidized by sales tax revenues. While this argument has some merit, few if any of these groups would support making mass transit pay its own way. In FY 2001, the Utah Transit Authority, which provides buses and light rail for the Wasatch Front, received $5.37 in sales tax dollars for each dollar receiving from passenger fares and advertising. On the other hand, the state highway and local road fund received $0.37 in sales tax dollars for each dollar in gas tax revenue in FY2001. In FY2003, this ratio had decreased to $0.20 in sales tax dollars for each gas tax dollar. Mass transit is far more heavily subsidized with sales tax dollars than roads and highways. Ironically, those most inclined to support removing sale tax subsidies for highways will vigorously oppose any attempt to do the same with mass transit.

Most taxpayer advocates generally support, where applicable, financing government with user fees instead of general taxes. However, when government increases its reliance on user fees, government must reduce general taxes dollar-for-dollar to offset the higher in user fees. Otherwise this is merely a tax increase. The spending lobby frequently promotes user fees as a means to increase total government spending because this allows general tax revenue to be spent elsewhere.

Last year, the Legislative Fiscal Analyst (LFA) reported that gas tax revenues as a percent of total personal income had decreased from 0.94% in 1972 to 0.57% in 2001, a 39% decrease. Many legislators immediately cried that gas taxes must be raised.

The LFA study neglected to report however that the gas tax burden had decreased since 1972 because the state was relying on an increased sales tax burden to fund transportation. In 1972, the state spent no sales tax dollars on transportation. Utah’s sales tax burden increased significantly from 3.15% of personal income in 1972 to approximately 3.70% in 2003. The increase in sales tax
burden was 0.55% of personal income compared to a decrease in the gas tax burden of 0.37% or personal income, and these changes are directly related.

In FY2003, $110 million in sales tax revenues were used for transit, with the official justification that increased transit spending would decrease the need for highway spending. Combined with the $65 million sale tax revenues used for highways in 2003, sales tax dollars used for transit and transportation amounted to 0.32% of total personal income. When this figure is combined with the current gas tax burden, the total, 0.89% is only slightly lower than the gas tax burden in 1972, the LFA’s benchmark, but higher than the gas tax burden in 1974 (0.88%).

Since sales tax dollars have been used to reduce gas tax burdens, the only logical consequence of raising gas tax burdens to fund transportation would be to decrease sales tax burdens.