A Toll Instead of a Tax

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March 4, 2017 9:36 AM

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As Indiana lawmakers enter the second half of the 2017 session, the big focus will continue to be on roads and infrastructure and how do we pay for them.    Indiana has $1 billion in annual road needs and needs a long-term plan to make it happen.   House Republicans get major kudos for have the courage to raise the gas tax to help pay for part of the costs.  And anyone who thinks this can be done without a tax increase has been inhaling too many fumes.

Where I do have concerns is the use of raising the cigarette tax to indirectly plug the hole created by immediately shifting all the sales tax on gasoline to roads.  The sales tax on gasoline contributes about $300 million to the general revenue fund.  Increasing the cigarette tax would allow Indiana to pay for Medicaid while shifting dollars back to the general fund.   The problem is that raising the cigarette tax could put the state on bumpy ground down the road.

When Indiana increased the cigarette tax in 2007 by 44 cents to 99.5 cents a pack, revenue jumped from $359 million to $515 million.  However, over the past ten years, those numbers have dropped.  In 2015, the cigarette tax took in an estimated $431 million.  The good thing is that the declining revenue means fewer people are smoking, but the bad news is also that fewer people are smoking and bringing in less revenue.  Of course the trade off is the costs to the state and business is that fewer people smoking means lower health care costs and more productivity.

I think tolling is the better route to take instead of relying in part on a declining tax to help fill a budget hole.    As I have written before, tolls are the ultimate “user fee” because if you don’t use the road, you don’t have to pay the toll.  Tolls also help you capture out of state traffic, which is estimated to be about 25 percent of Indiana’s interstate use.   Secondly, tolls are a much more stable, long-term source of funding.  And third, no one pays a toll until the road is built.  That way you see and get to use what you paid for.  Now how much and what you would toll remains to be seen, but if you tolled everything possible you could generate more than $1.3 billion.

So as lawmakers go forward to figure out how to pay for Indiana’s infrastructure, I strongly suggest my friends at Capitol and Washington move tolling to the forefront of the conversation and perhaps put the cigarette tax increase on hold.   Tolls are a much more stable source of funding, and with more people driving, more people will pay.  As opposed to a cigarette tax where if it’s effective, you end up getting less of it.

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