Already reeling from skyrocketing national inflation, Connecticut consumers face a one-two punch beginning July 1 that threatens to make groceries and other basic goods even more expensive.
The Department of Revenue Services is expected within the next two weeks to announce a major increase in the state’s diesel tax, effective July 1 and driven by wholesale fuel prices that have more than doubled over the past year.
And six months after that, the state will impose a new highway use tax on large commercial trucks that’s expected to cost the industry $90 million per year — an expense companies already have said will be passed onto Connecticut shoppers.
“It’s going to tax Connecticut consumers at a point where they can least afford it,” said DataCore Partners economist Donald Klepper-Smith, who was the state’s chief economic advisor in the late 2000s under Gov. M. Jodi Rell.
The diesel tax hike stems from an annual adjustment the legislature established in 2007. When Gov. Ned Lamont proposed the highway use tax in February 2021 to support the state’s transportation construction program, the Consumer Price Index showed low inflation of 1.4%.
Those moves were “not unreasonable” when made, “but the timing is going to be brutal” when they strike consumers, said University of Connecticut economist Fred V. Carstensen. “Transportation costs are embedded in everything we buy. … This is the one [tax] you can’t escape.”
Big diesel fuel tax increase due on July 1
The diesel fuel that powers most trucks is taxed by the state following an annual formula that includes a fixed base and an adjustment that looks at average wholesale diesel prices over the prior year, as well as the tax rate applied to wholesale gasoline transactions.
Gov. Ned Lamont’s administration, which must announce the new rate by June 15, hasn’t done so yet. But the key variable — the wholesale price of diesel — is not looking good.
Wholesale diesel prices at New Haven harbor hovered around $2.23 per gallon during the first week of July 2021, according to the Connecticut Energy Marketers Association.
By mid-May 2022, the wholesale price of diesel was about $4.79 per gallon. The AAA reported an average retail price for diesel of nearly $6.24 per gallon on Tuesday.
The diesel tax, which currently stands at 40.1 cents per gallon, has been as high over the past five years as 46.5 cents — where it stood in 2019. Industry experts say the latest conditions could produce a tax hike of more than 10 cents per gallon, if wholesale prices remain on the rise.
“We fully expect a significant increase in what the tax will look like,” said Chris Herb, president and CEO of the marketers association, who added that the late February Russian invasion of Ukraine only pushed escalating oil prices even higher. “We’re surging into the [diesel tax] recalculation.”
“We call it the perfect storm when you have these types of situations,” said Michael Fox, executive director of the Connecticut-based Gasoline & Automotive Service Dealers of America, commonly known as GASDA.
The association, which represents roughly 500 gas stations in Connecticut, is bracing for a diesel tax hike that could have “a huge negative impact on deliveries into our state,” Fox said.
Diesel tax increase will find a way to consumers
Don’t look for Connecticut’s trucking companies or supermarkets to absorb those added fuel costs. Both industries already are struggling with staffing shortages worsened by the coronavirus pandemic.
John Pruchnicki, co-owner of Coastal Carriers of Connecticut, a small trucking company in Ansonia, says he’s been forced to turn down business because of a lack of drivers.
“I’m always short 10 to 15 % [on staff] on a regular basis,” he said.
At times, during the worst of the pandemic, two or three drivers would be unavailable each week because of illness or the need to quarantine.
“A lot of people have reevaluated their life” since then, Pruchnicki added.
Connecticut’s supermarkets and grocery stores also are grappling with low staffing, as well as rising wholesale costs for beef, pork and other staples, said Wayne Pesce, president of the Connecticut Food Association.
“We’re spiraling right here,” said Pesce, whose association represents about 250 stores. “That tax on diesel fuel is going to hurt. It gets passed right on.”
But that’s just the first hit household budgets face.
Highway use tax adds $90 million to annual trucking costs
The second one comes Jan. 1, when a highway use tax begins on large commercial trucks, excluding dairy vehicles. Per-mile rates, based on a vehicle’s weight, range from 2.5 cents to 17.5 cents.
Joe Sculley, president of the Motor Transport Association of Connecticut, said the impact will be more severe than that of the diesel tax hike.
The entire diesel tax — not just one rate increase — generated about $115 million in each of the previous two fiscal years, according to the revenue services department’s annual report.
The legislature’s nonpartisan Office of Fiscal Analysis estimates this new highway use will generate $90 million annually.
“It’s going to make things more expensive in Connecticut,” added Sculley, whose organization represents more than 500 trucking and trucking-related businesses. "I don’t see how anyone could dispute that.”
Spiking fuel costs becoming a campaign issue
Herb, Sculley and Fox all are urging Lamont and the legislature to call a special session this summer or fall to suspend the diesel tax hike and repeal the highway use fee.
Rep. Holly Cheeseman of East Lyme, ranking House Republican on the Finance, Revenue and Bonding Committee, said the GOP minority in both chambers backed both options earlier this spring before the regular 2022 General Assembly session adjourned on May 4.
And though debates about truck mileage taxes and diesel fuel can seem dry and technical, they boil down to extra costs on groceries, clothing and other basic goods no household can avoid.
“At the end of the day, the person who is going to be footing the bill for this is the Connecticut taxpayer,” Cheeseman said. “These are not optional extras. It’s a tax hike on the goods … without which the average person cannot exist.”
“Connecticut is already a tax disaster, and this makes it even worse,” added Madison Republican Bob Stefanowski, Lamont’s opponent in the 2022 gubernatorial race. “A tax hike on diesel adds to the sky-high Biden/Lamont inflation, increasing the cost of food and consumer goods. Enough is enough. The governor should have done more to prevent this and to help struggling families.”
But Lamont’s communications director, Max Reiss, said the Republican call to ease diesel taxes came only after lawmakers from both parties had already compromised in late March on a plan to suspend the 25-cents-per-gallon retail tax on regular gasoline from April through June. It later was extended through Nov. 30.
Lamont, a Democrat, proposed the highway use tax to help stabilize the state’s long-term transportation construction program after legislators from both parties rejected his proposals to install electronic tolling on highways.
But when he pitched the highway use fee in February 2021, the national inflation rate was 1.4%. The Consumer Price Index has been over 8% throughout the spring.
Fox noted that the state government’s fiscal position has gotten much rosier since then, even as inflation has weakened Connecticut households.
The budget’s Special Transportation Fund is projected to be $200 million in surplus this fiscal year and has a $441 million emergency reserve.
And if it needs more help, the General Fund is running $3.8 billion in the black this year, with another $3.1 billion in its rainy day fund.
But Reiss said the governor “is focused on providing real relief to residents.”
The governor signed a $660 million state tax cut package this year that includes:
• A $250 per child tax rebate for low- and middle-income families;
• More than $40 million in payments to working poor households, worth about $300 to families making a little less than $58,000 per year;
• An expansion from $200 to $300 for the income tax credit that offsets property tax costs;
• And a statewide cap on motor vehicle taxes at 32.46 mills.
Reiss added that repealing the highway use tax would ensure large out-of-state trucks that do major damage to Connecticut’s roads continue to ride through the state at no added cost.
With economists beginning to warn of a major national recession in 2023, Democrats also wanted to be careful not to overextend, said Senate Majority Leader Martin M. Looney, D-New Haven.
“Given the reality of what we can afford,” Looney added, “we decided to focus our approach on what would benefit the most people immediately.”