Tennessee’s General Assembly has two roadway funding proposals this session to address long-term funding of its infrastructure. A report released today by UT’s Boyd Center for Business and Economic Research reviews the broader economic impacts of each.
The report, Evaluating Options for Funding Tennessee’s Infrastructure Needs, compares the two proposals and focuses on their economic impact, fiscal soundness, and effects on the state’s bond rating.
“The important thing is that we have an opportunity to address the longer-term infrastructure funding problem,” said Don Bruce, research professor with the Boyd Center and author of the report. “Investments in human capital and infrastructure are key to the state’s economic development. While Tennessee has made significant progress with major education investments, infrastructure is lagging a bit behind because of the inability of gas tax revenues to fully support the state’s needs.”
The per-gallon tax on motor and diesel fuel is based on quantities of fuel and not prices, so the revenue stream is not able to grow with the economy.
“Additionally, improvements over time in overall fleet fuel efficiency, aided by the emergence of electric and hybrid-fuel vehicles, have resulted in slower growth in fuel demand over time. The resulting revenue stream is not able to keep pace with increasing demands on our highways,” the report says.
Governor Bill Haslam’s Improving Manufacturing, Public Roads and Opportunities for a Vibrant Economy (IMPROVE) Act calls for increasing gas and diesel tax rates while offsetting the cost of business taxes, grocery food sales taxes, and the Hall Income Tax.
The alternative proposal, known as the Hawk Plan, would earmark a percentage of existing general sales tax revenues solely for infrastructure projects.
The proposals share two features: both provide needed funds for infrastructure and neither results in a net increase or decrease in overall taxes.
Bruce said, “While both proposals would generate similar levels of revenue for infrastructure spending, the IMPROVE Act carries potential for an additional economic benefit through the adjustment in business taxes.
“Specifically, the additional impact would arise when Tennessee businesses choose to have their taxes based solely on the percentage of their sales that occur in Tennessee, instead of the traditional three-factor formula that also considers their property and payroll.”
Bruce added that the IMPROVE Act would reduce business taxes for Tennessee companies—especially manufacturers—that produce in state but sell primarily out of state, creating the potential for companies to expand and create more jobs.
The report considers the long-term fiscal soundness of both proposals.
By raising gas tax rates and reducing the sales tax on grocery food, the IMPROVE Act would shift more of the tax burden to higher-income households and out-of-state taxpayers, the report notes.
“As household income grows, spending on gas grows more quickly than spending on grocery food,” said Bruce.
The report cites Tennessee Department of Revenue data showing that slightly more than half of diesel taxes are paid by out-of-state companies.
Bruce said it is also important for state policy makers to consider the potential impacts of the two plans on the state’s bond ratings and longer-term recession readiness.
Further earmarking of the sales tax, which is the state’s main revenue source, would not necessarily be viewed favorably by the ratings agencies and would also reduce fiscal flexibility in the event of a future economic downturn, according to the report.
Tennessee is not alone when it comes to dealing with sluggish gas tax revenues. Nineteen states have raised gas tax rates since 2012, and 21 states are considering increases this year. Tennessee’s last gas tax increase was in 1989.
The full report is available for download.
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