Highway Funding Group Considers Competing Ideas

Members of the Governor’s Working Group on Highway Funding are considering competing draft packages to raise funding for highways, two of which would increase taxes and one that would be revenue neutral.

Task force members are focusing on a short-term goal of raising an additional $110 million for highways, with a five-year goal of $250 million and a 10-year goal of $400 million.

In a meeting Thursday, Craig Douglass, executive director of the pro-highway Arkansas Good Roads Foundation, advocated for his group’s plan to increase the motor fuels tax by 10 cents. That tax gradually would be lowered and offset by a phased-in transfer from general revenues to highways of sales taxes collected on motor vehicle sales. That transfer would take five to seven years. The plan would index the fuel tax to the construction cost index. Currently, the gasoline tax of 21.5 cents per gallon and the diesel tax of 22.5 cents are not indexed to inflation.

Douglass told the task force that this plan would provide needed immediate funding. Meanwhile, the phased-in motor vehicles sales tax would provide a better long-term solution than relying on the motor fuels tax, which is a declining source of revenue as cars become more fuel-efficient.

Bills to transfer vehicle sales taxes from general revenue to highways have been filed in the past two legislative sessions but have run into opposition from both Gov. Mike Beebe and Gov. Asa Hutchinson, as well as other interests who worry about a loss of general revenue funding. In fact, this year’s bill by Rep. Dan Douglas, R-Bentonville, led to Hutchinson’s appointment of the working group as a compromise. Douglas is a member of the task force.

Two members of the task force who also are members of the state’s higher education community – Dr. Brett Powell, Arkansas Department of Higher Education director, and Dr. Robin Bowen, president of Arkansas Tech University – expressed concerns. Bowen said the state doesn’t have enough money to meet current needs such as its foster care system. She said she was a foster parent for 12 years. She suggested raising registration fees.

“We’ve got to look at another way to get more money, or we will find ourselves here again in a couple of years saying we have a crisis in foster care, or we have a crisis in prisons, and now we have to raise money for them,” she said.

Raising the registration fee $12.50 would collect $24 million. To get to $110 million would require about a $50 increase, said Arkansas and Highway Transportation Director Scott Bennett. That amount would be difficult for some to swallow all at once. Regardless, Arkansans still would see it as a tax increase.

And any tax increase would have great difficulty getting past the Arkansas Legislature. Rep. Andy Davis, R-Little Rock, has told his fellow task force members that his fellow legislators will only support ideas that are revenue neutral. Rep. Douglas told the working group, “If we think that we’re going to get any type of tax increase passed through the Legislature at this time with the political makeup in it, we ought to be out selling beachfront property in Arizona or something because it’s just not going to happen.”

Davis instead presented a package that would raise $111 million through several avenues. His plan would raise the diesel tax by 10 cents, collecting $60 million, at the same time that the grocery tax is scheduled to be cut once the state’s desegregation payments to the Little Rock, North Little Rock, and Pulaski County School Districts end at the end of 2017. With the end of the grocery tax saving taxpayers $70 million, that would be a revenue neutral plan, he said.

“Conceivably the Legislature and the governor may decide to leave the grocery tax where it is and decrease something else, like an income tax, and offset that with an increase in the diesel tax,” Davis said.

Other funding mechanisms in Davis’ plan include creating a sales tax rebate for road construction materials, which would raise about $20 million, and redirecting to highways $4 million in diesel taxes that currently flow into the general fund. Davis also would redirect into highways the 3% of revenues from the state’s half-cent sales tax passed by voters in 2012 that currently flow into the state central services fund. Voters approved that tax to fund highways, not increase those funds, Davis said. The Department of Finance and Administration has said that proposal would raise between $5 and $6 million a year.

Davis also suggested an income tax deduction of $20 million “offset by some sort of user fee for highways.”

Davis said that, unlike a motor fuels tax hike requiring 75% support in the Legislature, all but the diesel tax increase would be achievable with a simple majority.

Political considerations were less important to task force member Frank Scott, a highway commissioner. He would index the motor fuels tax to the consumer price index and increase the fuel tax by a nickel a year for three years, raising a total of $460 million in new funding. He said doing this would require one legislative discussion that would solve the problem for “many, many, many, many years.”

He said the task force’s job is to recommend the best route for highway funding and let the policymakers decide from there. He noted that Republican officials in other states have recently approved motor fuels tax increases, and he advocated taking the proposal to a vote of the people if the Legislature would not approve it.

Larry Walther, Department of Finance Administration director, said legislators and the governor will consider the working group’s recommendation in light of other needs.

“A lot of our expenses in the budget have been covered by one-time dollars, and I don’t know how long we’ll be able to sustain that,” he said. “For the last several years, the (general improvement fund) has sort of come in to save the day to allow us to improve different areas – the prisons, education, the private option. How long that will go on, I don’t know.”

General improvement funds are collected from surplus revenues and typically go to specific programs and one-time expenses, with a percentage distributed at the discretion of the governor and Legislature.