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June 2004
Scenarios predict adequacy of Minnesota road taxes in 2030
Download Barry Ryan's presentation "Evaluation Study - SR 91 Express Lanes" (372 KB PPT)
Will statewide taxes keep pace with road costs over the next 25 years? Barry Ryan, research fellow in the Department of Applied Economics, outlined different scenarios to help answer this question.
His ongoing research project, "Adequacy of Minnesota Road Taxes in 2030," focuses on three statewide road taxes dedicated to the Highway Users Fund: the motor fuels excise tax, the motor vehicle registration tax, and a portion of the motor vehicle sales tax. Combined, these sources brought in $1.3 billion to Minnesota in 2003. Ryan is also looking at road service costs (adjusted for inflation) to estimate what current levels of road service would cost in 2030. The question, he said, is whether revenues will increase more or less than the cost of road services.
He began by reviewing potential threats to the state's fuel tax collections. Oil production may peak as soon as 2010, he said—or possibly not until 2030 or even 2050 if more optimistic forecasts are correct. Whenever the peak is reached, however, it is unclear if production will decline slowly or rapidly, with some estimates indicating the falloff could be as high as 6 to 8 percent annually.
Federal policy—both taxes and mileage regulations—also may threaten revenues. And alternative fuels pose another danger to the Highway Users Fund, albeit in the long term, he said. Estimates are that by 2008 there will be only about 350,000 alternative-fuel vehicles in the country. The plan touted by the Bush administration calls for mass production of hydrogen fuel-cell vehicles by 2020, while GM's goal is introduction of the vehicles in 2010 and 1 million in sales by 2020.
Ryan then presented three fiscal outlooks for 2030, all based on current law. What distinguishes the three scenarios—the trend, optimistic, and pessimistic—is the level of inflation. The trend scenario assumes state and local construction cost inflation will roughly double over the next 25 years, ending 2030 at about 3 percent annually. Higher inflation weakens purchasing power and thus reduces the growth rate of the light-vehicle fleet and resulting tax revenues.
His forecasts for one point in time—the year 2030—vary considerably (see figure).
|
Base revenues |
Index costs |
Surplus or deficit |
2003 actual |
$1.32 billion |
$1.32 billion |
|
2030 trend |
$2.69 billion |
$2.6 billion |
$90 million |
2030 optimistic |
$2.82 billion |
$2.23 billion |
$590 million |
2030 pessimistic |
$2.55billion |
$2.97billion |
$(420)million |
Several interesting points emerge when the specific taxes are analyzed. First, registration tax revenues—likely to increase 80 percent in the trend scenario—are based on assumptions regarding number of vehicles, mix of vehicles, taxable value, and age distribution. Today 37 percent of the fleet is 10 years or older, an average car is eight years old, and the average car life is 15 years.
The Ventura administration capped registration fees at $99 for vehicles three to nine years old and at $35 for vehicles 10 years or older—which means that over time, more and more of Minnesota's older cars will reach their cap. Thus, in 2003, 26 percent of the registration tax was gathered from first-year autos, but by 2030 it is projected to reach 41 in the trend scenario, 38 percent in the optimistic, and 43 percent in the pessimistic scenario. "This is an interesting feature that may need to be addressed between now and 2030," Ryan said.
Another critical factor is that sales tax collections will soar by roughly 200 percent. Even in the optimistic scenario the average cost of a new vehicle will top $40,000 by 2030, Ryan said, and would be closer to $60,000 in the high-inflation outcome.
Still, the fuel tax is the most interesting of taxes, Ryan mused. His calculations assume current federal mileage regulations and a steady climb in U.S. vehicle-miles traveled. He did not factor in the potential impact of new technologies, explaining that estimates for improving fuel economy are not very promising. Minnesota fuel tax revenues rise 93 percent in the trend scenario. Ryan also warned that refining, transport, and storage will need to double by 2030.
In summary, if the trend scenario comes to pass, road service costs will likely double while sales tax receipts nearly triple by 2030. "The sales tax is what keeps us at par and what will save us in the future," Ryan concluded. And in response to a question from the audience, Ryan noted that these numbers do not address the current construction backlog or the aging bridge infrastructure, for example.
You can download Ryan's presentation "Evaluation Study - SR 91 Express Lanes" as a PowerPoint file (372 KB).