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Fully Tax Ethanol: An Easy First Step to Reforming Iowa’s Gas Tax Shortfall

Dec 13, 2011

By Dave Swenson 

 
By Dave Swenson
 
Notwithstanding a sweeping recommendation to do so by a commission appointed by him, a 10 cent gas tax boost to deal with Iowa’s rapidly deteriorating state and local highway system was recently nixed by Iowa Governor Terry Branstad.  His idea of fiscal, not roadway, maintenance was to delay a decision for a year and let the Iowa Department of Transportation (DOT) find $50 million in savings through operational efficiencies; the equivalent, he claimed, of a tax increase of two-cents a gallon.  After four years of nothing short of draconian cuts to all state accounts, the governor is of the opinion that the DOT has some fat left to trim. 
 
The governor’s gambit is what the Brits might call a half-arsed solution.  You see, half of the state’s road use tax fund goes to county and city governments.  Mr. Brandstad’s ploy does absolutely nothing for them – DOT savings, whether they materialize or not, do not deal with that other half of the problem. 
 
The last time Iowa’s gas tax was systematically addressed was in 2002 (not 1989 as many in the media reported).  It was boosted then from 20 cents to 20.1 cents per gallon and increased slightly annually until reaching 21 cents per gallon in 2008 where it sits today. Yes, over a six-year period it was raised a whopping penny.  But here’s the problem: back then and more so now, the excises on gasoline don’t cover the costs of maintaining the state’s extensive road system.  
 
Roads are torn up by use and by the changing seasons.  The cycle of freeze and thaw and excessive heat heaves and shifts roads leaving bumps, dips, and potholes all of which are accentuated through continued use – deterioration begets more deterioration.   According to the Governor’s Transportation 2020 Citizen Advisory Commission, the state currently faces a $1.6 billion transportation infrastructure unmet repairs bill, $215 million of which the commission called critical.  In the face of $215 in urgent needs, Mr. Branstad offered up $50 million – maybe.  Take it or leave it. 
 
Revenue bills start in the Iowa House of Representatives, not in the governor’s office.  That house is decidedly Republican, but that house is composed of savvy folks who know full well that the state’s no-tax-under-any-circumstances stand can be modified in this instance.  Cities and counties are struggling to fix roads, there are hundreds of bridges in Iowa that are unsafe, and most legislators are very locally focused.   As retiring Senator Jack Kibbie noted on Radio Iowa last week, “I suppose we’re going to have to wait ’til a school bus falls through a bridge, then we’ll wake up.”  His point is well taken, and has bi-partisan support.  One great failure will render the state’s miserliness inane.
 
Others argue that at a time of general economic stress we should not impose more costs on workers.  In fact, the imposition is literally meaningless.  The average Iowa commuter travels 28 miles round trip to work.  Multiply that trip times 310 work days and assume the auto gets 25 miles to gallon and the annual “burden” of the tax is $34.72 or a mere $2.90 a month.  Meanwhile, cars and trucks take a pounding on deteriorating highways.  Long ago Iowa became penny wise and pound foolish regarding the gas tax.  We’re paying the tax and much more in higher repair bills and worn out cars.  
 
There is, however, one very simple solution to boosting the state’s gasoline tax receipts this year.  Regular gasoline, the kind that I burn in my car, is taxed at 21 cents per gallon.  E-10 and E-75 ethanol, the kind of gas burned by the vast majority of Iowans, is taxed at 19 cents per gallon.  That lower rate was originally designed to provide gasoline retailers an incentive to market E-10; they captured the two-cents difference by paying lower state taxes.  Now that the nation is approaching near-saturation of E-10 owning to the blending mandate at the federal level, there is no rational economic reason for continuing that subsidy.  The federal 45 cents blenders’ credit is going to expire in December, and the time is ripe for eliminating the Iowa retail ethanol credit as well. 
 
These kinds of special interest sweeteners are called “tax expenditures,” and were this governor true to his state expenditure-cutting principles, he would immediately recommend the elimination of this unwarranted and out-of-date subsidy.  
 

Oh, it would also produce increased revenues of, wait for it, two-cents a gallon – the same as the DOT operational savings gimmick. Except in this instance, half of the savings, or more properly half the reduction in tax expenditures, would be distributed to local government where in so many regards the needs and the stakes are the greatest. 

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Dave Swenson is a long-time analyst of Iowa political, social, and economic issues. He is a staff research economist at Iowa State University and a community and regional economics analyst and educator. He also teaches planners (those nefarious agents of totalitarian control) how to do economic things in their profession at both Iowa State University and The University of Iowa. 

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