Malloy’s gasoline tax plan comes at a bad time

Though there’s arguably no good time to increase taxes, Gov. Dannel P. Malloy would have been hard pressed to find a worse time for the gasoline tax hike he presented to lawmakers last week.

The governor’s proposal, which would add 3 cents to the retail gasoline tax and 2 cents to the diesel fuel tax, came just days after Connecticut’s overall fuel tax burden eclipsed New York’s for the first time in more than two years, rising to the top among Northeastern states.

gas tax chart

And with continued unrest in North Africa driving up oil prices worldwide, the head of one of the state’s largest associations of fuel retailers warned that gasoline prices here could remain on the rise at least for the next few months.

Malloy’s budget director says the fuel tax increases are a necessary part of the administration’s commitment to fixing the transportation network.

“At the end of the day, if we have roads that are free-flowing, if we have a viable rail system, all of this is going to reduce the amount of money we spend to travel and improve the amount of time it takes,” Office of Policy and Management Secretary Benjamin Barnes said Tuesday.

Malloy, who was mayor of Stamford from 1996 through 2009, pledged during the fall campaign to address the root causes of highway congestion that has plagued Connecticut–and particularly its southwestern corner–for more than a decade.

But Malloy also inherited a Special Transportation Fund headed for insolvency and a General Fund facing a built-in shortfall next fiscal year ranging from $3.2 billion to $3.67 billion.

“We believe we need to maintain a robust long-term outlook in our transportation fund if we want to make the investments we need to,” Barnes said.

The administration proposed $1.09 billion in bonding for new transportation projects over the next two fiscal years combined. Before Connecticut approaches Wall Street for the financing, though, it needs to address a $1.2 billion transportation fund projected to run a cumulative deficit of more than $110 million over the next two fiscal years.

To counter this problem, Malloy would boost the gasoline excise tax from 25 to 28 cents per gallon, and the retail tax on diesel fuel from 26 to 28 cents.

But those aren’t the only taxes that affects retail fuel prices, nor are they the only ones likely to demand more from motorists in the near future.

Connecticut also levies the Petroleum Products Gross Receipts Tax on wholesale transactions involving gasoline and other fuels, but not on home heating oil.

And unlike the fixed, 25-cent excise tax, this tax is volatile, imposing a 7 percent rate on transactions. So when the wholesale price of gasoline rises, so does the amount owed under the gross receipts tax. Although the wholesalers pay the tax, the state allows them to pass the cost to retailers, who in turn pass it to consumers.

When wholesale prices peaked in Connecticut during the spring of 2008, topping $3.40 per gallon, the wholesale levy was adding nearly 26 cents to the price. Combined with the excise tax, the state was collecting 51 cents per gallon from motorists, a tax burden that surpassed all New England states, New York and New Jersey, and drove retail gasoline prices here above those in all Northeastern states.

The wholesale tax burden fell as the recession hit and a weakened state market drove down the price of oil. But steadily rising oil prices over the last year finally drove Connecticut’s tax burden back to the top among Northeastern states last week.

The Independent Connecticut Petroleum Association, which represents more than 575 gasoline station owners and home heating fuel retailers, reported an average wholesale price of $2.57 per gallon on Feb. 15 at New Haven harbor, the single-largest fuel importing site in Connecticut. Based on that price, the state was collecting 19.39 cents per gallon from its wholesale levy, and 44.39 cents per gallon in total taxes. New York state fuel taxes total 44.36 cents per gallon.

The AAA of Connecticut reported the average retail price for a gallon of regular gasoline was $3.37 on Tuesday.

Eugene Guilford, the ICPA’s executive director, said the average wholesale price in New Haven had risen to $2.64 per gallon through Tuesday. And given though the continued unrest in Tunisia, Egypt and Libya hasn’t had any physical impact on oil supplies, it still has the potential to drive prices — and therefore state taxes — even higher in the coming months.

“I think all of that adds up to a good deal of uncertainty,” Guilford said, adding that “markets climb a wall of fear.”

The president of the Motor Transport Association of Connecticut, Michael J,. Riley, said the state’s largest trucking coalition believes the proposed fuel increases will harm the industry while punishing consumers in many ways.

“Anyone with a head on their shoulders” who operates a trucking business imposes a fuel surcharge on customers, Riley said, adding that rising fuel taxes would translate into higher prices for groceries, clothing, lumber, automobiles and other items transported primarily by truck.

Riley said Connecticut would be better served if Malloy focused on reducing the use of fuel tax revenue used to fund day-to-day government operations rather than to pay for transportation improvements. More than $113 million in fuel tax revenues are being used in the General Fund this year.

Malloy did propose reducing that figure by $35 million next fiscal year, but $30 million of that would be used to pay for municipal road improvement grants–an expense that state government has financed with bonding for the past two years.

“It is outrageous that we are going to continue to divert large amounts of money generated by gasoline taxes to pay for operating expenses,” Riley said.

Barnes said the administration wants to gradually reduce the use of fuel revenues for non-transportation purposes. But he added that over the long-term, gasoline tax increases would pay for an improvement transportation network that means less time on the road–and less money spent on gasoline–for everyone.

“It’s an impossible situation,” Sen. Gary D. LeBeau, D-East Hartford and co-chairman of the Commerce Committee, said of the state’s transportation quandary. “Clearly we need to make the repairs and improvements that are due.”

LeBeau, who believes electronic tolling can provide the revenue necessary both to relieve highway congestion and reduce fuel taxes, added that it is crucial that Malloy continue trying to focus all fuel tax revenue on the transportation network.

But Sen. Andrew Roraback of Goshen, ranking Republican senator on the Finance, Revenue and Bonding Committee, said the governor could restore more fuel tax revenue to the transportation fund by instead cutting General Fund spending–and eliminating the need for a gasoline tax hike.

“The first order of business has to be meaningful spending General Fund spending reductions,” he said, calling Malloy’s proposal a “tax on necessity. Most working people have to consume gasoline and they already are conserving as best as they can.”