The DOT budget- Pay up if you want those Transportation projects!

One of the big headlines in Wisconsin over the weekend that didn't involve the dominance of Melvin Gordon III or Aaron Rodgers dealt with the Friday afternoon release of the Wisconsin Department of Transportation's budget request and plans for the state's Transportation Fund. There is a lot to go into here, and I want to split up my analysis into two parts. The first will deal with gas taxes and registration fees related initiatives that strictly within in the Transportation Fund. The second deals with the large amount of General Fund money that are slated to be transferred into the Transportation Fund, which not only will change how transit and other DOT programs get funded, but also will put an extra strain on a General Fund budget that already seems slated for a huge deficit over the next 2½ years.

On the Transportation Fund side, it started the 2015 Fiscal Year on July 1 with just under $117 million in the black. However, that number is expected to go down to barely over $1 million by next June 30, because of an anticipated 4% increase in costs without a matching increase in revenues. With huge needs in the 2015-17 budget such as increased payments for the Zoo Interchange and I-94 projects in Southeastern Wisconsin, and needed increases in shared payments to cash-strapped local governments, the DOT has developed several initiatives in its budget request that are designed to raise more money for the Transportation Fund. (you can click here for more details, and if you feel like reading all of a 582-page document).

One initiative sure to get plenty of attention is the proposed increase in gas taxes, which fits the DOT’s Transportation Finance and Policy Commision’s call in 2013 for a nickel-a-gallon raise. While it’s not a copy of Governor Walker’s trial balloon of using an excise tax based on price instead of the flat 30.9-cent-a-gallon fee on gasoline that we use today (a silly idea that I ripped when it came out last month), the DOT’s proposal has a price-based element included in it.

Under this proposal, the existing state excise tax for gasoline and diesel fuel consumed for highway use is reduced to $0.135 for all grades of gasoline and $0.163 for diesel fuel intended for highway use. A new variable component based on wholesale price is added. For purposes of calculating a new 8 percent variable tax component of the excise tax, a permanent minimum wholesale price of $3.081 per gallon for diesel fuel and $2.800 per gallon for all grades of gasoline would be established beginning September 1, 2015. This proposal increases the annual cost of operation for a mid-size sedan by about $28 annually in Wisconsin.

Under this proposal, on April 1, 2016, and each April 1 thereafter, DOR is required to adjust the cents-per-gallon tax resulting from the 8 percent tax applied to the average annual wholesale price of gasoline and diesel fuel. The average annual wholesale price of gasoline and diesel fuel in Wisconsin will be determined by DOR based on wholesale price information obtained from the federal Energy Information Administration. Increases to the total tax rate on motor vehicle fuel due to changes in the annual average whole sale prices of gasoline and diesel fuel may not exceed five percent on April 1, 2017 and each April 1 thereafter. The Department of Transportation is required to publically announce the new rate.

With a tax mechanism in place as outlined above the sum of the fixed rate tax and the 8 percent tax applied to a minimum wholesale price of motor vehicle fuel can never be lower than $0.359 for gasoline and $0.409 for diesel fuel. Under this proposal all refunds of motor vehicle tax allowed under current law and all exemptions to motor vehicle fuel tax will remain in effect.

There are two parts of the statement that confuse me. First, is this bill requiring only a tax floor or does it include a price floor on gas? There’s clearly a tax floor of 35.9 cents for gas and 40.9 cents for diesel, but the language about a “permanent minimum wholesale price” gives me pause. Right now, wholesale gasoline futures are trading at just over $2 a gallon, and diesel is in the neighborhood of $2.50. That is well below the “permanent minimums” of $2.80 for gas and $3.08 for diesel that is listed in the DOT budget request, and not far off of the after-tax pump price of $2.85 I saw this morning in Madison. It’s one thing to have a 5-cent raise in the gas tax, but it’s entirely another to make Wisconsin motorists pay a price well above the rate they’d pay in almost any other state. I’d like to see that possibility investigated and the language cleaned up. But otherwise, it’s not a bad idea- if you think it’s a priority to spend money to fix and expand roads, you’d better be paying for it (fiscal conservatism at its finest!).

The gas tax increase is expected to add $358.3 million to the DOT’s coffers in the next two years. Another bump up in the DOT’s revenues involves $378.9 million that would come from a new fee that Wisconsinites would pay when they first buy a vehicle.

The Department is requesting the creation of a fee for new passenger vehicles (automobiles, vans, sport utility vehicles, light trucks, motorcycles) to address critical transportation priorities.

This fee would be collected at the time of initial vehicle registration. The fee would be calculated at 2.5 percent of the manufacturer’s suggested base retail price (MSRP), exclusive of destination charges.

Basically, it’s a one-time shot that’s paid when you buy a car, and the DOT argues that Wisconsin’s relatively low sales tax of 5% is a mitigating factor when you compare this fee to neighboring states. However, the kicker is that the sales tax is General Fund money, while this license fee is solely for the use of the Transportation Fund.

It also will likely encourage some individuals that have dual residency between Wisconsin and other states to license that vehicle in the other state, causing Wisconsin to lose the license revenue entirely (for example, my aunt and uncle currently use their Vilas County address as the place of registration for their vehicles instead of in their home state of Illinois). One of the advantages Wisconsin has had over other states when it came to taxes is that we have traditionally had a much lower amount of registration fees, and that we didn’t have a sales tax that increased as the price of gas went up. Both of these advantages would be pretty much go away under this plan.

There’s also a theme of equity across the spectrum of vehicles in this request. Grabbing a lot of attention is the $50 added registration fee for owners of hybrid and electric vehicles, which the DOT claims will help to make up for the fact that those vehicles use less gasoline and therefore pay less into the system. But what hasn’t been mentioned is a $25 credit that would be given to owners of cars and light trucks that run on diesel. The DOT mentions that the number of these types of diesel-powered vehicles have increased by over 31% in Wisconsin since 2006, to nearly 83,000 today (by comparison, there are less than 48,000 hybrids and/or electric vehicles in Wisconsin), and the DOT argues that the users of these passenger vehicles should not have to pay the same price as an 18-wheeler that causes much more stress to the roads. The net change in fees from these two moves is estimated at an increase of about $2.3 million.

Obviously, there is much more in the DOT’s budget request,including modifications to fees for items such as motorcycles and oversize permits, as well as some rail initiatives. But I wanted to limit it to just those three items listed above to allow more time to go into detail on them. At least on the Transportation Fund side, I appreciate Secretary Mark Gottlieb and DOT staff being honest about what it would take to increase revenues to pay for the high wish list of highway projects and related needs. And even with all of these tax and fee increases, the DOT still projects to end 2017 with less than $4 million to spare- a rounding error in a $2.17 billion annual budget. As you can see, there is no free ride when it comes to building roads (at least not without another fed-funded stimulus coming along), and if these proposals are put into law, a whole lot of us will be paying more for upgrades in highways and maintaining local roads in Wisconsin.