Economist: Lower gas prices take sting out of potential gas tax increase

DES MOINES - An Iowa State University economist said Tuesday declining oil prices mean the timing may be right for Gov. Terry Branstad and state legislator to consider a gas tax or other revenue options to boost funding for critical transportation needs.

David Swenson, an ISU associate scientist in economics, said prices at Iowa gas pumps are down about $1 per gallon from what they were a year ago, meaning a driver with a vehicle that averages 25 miles per gallon who travels 15,000 a year is paying about $50 per month less in fuel costs. If gas prices continue to moderate, that reduced cost would grow to $600 on an annual basis.

For instance, unleaded regular gasoline with a 10 percent ethanol blend was priced at $1.89 a gallon in the Des Moines market on Tuesday.

'Psychologically, having the gas price at $2 or less makes people feel like they're getting a bargain,” Swenson said Tuesday. 'That's why many people think that this is an ideal time to introduce, not just a state gas tax increase but also a federal gas tax increase because people have gotten used to a lower price recently and they're not feeling pinched.”

Swenson's assessment came as Gov. Terry Branstad and leaders of the split-control Legislature prepare to hold a closed-door meeting Wednesday at the Statehouse to discuss options aimed at forging bipartisan agreement on a plan to generate more revenue to address a projected $215 million shortfall in critical state infrastructure needs.

Iowa's fuel tax has not been increased since 1989. Motorists currently pay a state fuel tax of 21 cents a gallon for regular gasoline, 19 cents on each gallon of ethanol-blended gasoline and 22.5 cents per gallon for diesel fuel. Each penny increase in the state gas tax would raise $23 million in revenue.

'The gas tax has not been adjusted for a very long time and the consequences of that have been pretty harsh for the state's road infrastructure,” Swenson said. 'An increase is overdue, and there is broad-base support among a wide range of interests in the state of Iowa.”

A recent analysis by the state's nonpartisan Legislative Services Agency tested five possible methods for increasing fuel tax revenue, and only two generated sufficient funds to cover the state's shortfall. One was a 10-cent increase followed by tying the tax to inflation; the other was a 'combination” tax that lowered the per-gallon tax to 16 cents and added a 5 percent sales tax on the retail price of fuel.

A phased-in 10-cent gas tax increase with an inflationary adjustment would mean an additional cost of $80 a year for a motorist who drives 20,000 miles a year and average 25 miles a gallon. That cost would grow to $300 annually for a motorist who drives 30,000 miles in a vehicle that averages 10 miles a gallon.

Motor vehicle transportation declined during the 2008 recession, Motor vehicle transportation declined during the 2008 recession, Swenson said, falling well below projections for fuel tax revenues. Since then, he said, transportation rates have remained flat, causing the backlog of road repairs to grow at the state and national level -- raising safety concerns about aging roads and bridges.

The ISU economist said motorists should consider those safety issues and the potential damage to their vehicles. While motorists may not want to pay more in taxes, Swenson noted, they are likely already paying more in car repairs.

'I caution people to think about the wear and tear on their car, suspension, shock absorbers, all the other parts that get rattled about and broken, and the things that happen to vehicles because of potholes,” Swenson said. 'We are doing more damage to our vehicles on an annual basis than the cost of the increase in taxes.”