A new report released yesterday by the Tax Foundation and promoted by the Kentucky Chamber of Commerce recommends an immediate hike in Kentucky’s gas tax while also putting future gas tax increases in the Bluegrass State on automatic pilot.

The report’s release comes on the heels of recent polling showing a significant decline in Americans’ confidence in the economy “as the cost of goods is rising nationwide, particularly gas prices.” (AP)

The report from the Tax Foundation, which describes itself as “the nation’s leading independent tax policy nonprofit,” covers a broad range of tax reform topics. We’ll get to some of those later in this post but will start with their recommendation on raising the state’s fuel tax.

From the report:

Kentucky’s statutory gas tax rate has been raised infrequently during its century in existence, and the tax is not indexed to inflation…At present, Kentucky’s gas tax revenues are outpaced by inflation, unstable, and relatively unpredictable.

To improve the Transportation Cabinet’s ability to self-fund now and in the future, Kentucky should impose a specific (cents per gallon) excise tax on gasoline, repeal the statutory price floor and variable tax rate, make a one-time gas tax adjustment, and tie the new rate to inflation. (emphasis added)

We interpret the “one time gas tax adjustment” as the Tax Foundation’s preferred phrase for raising Kentucky’s gas tax above the current rate. That would be consistent with their endorsement of a 10 cents per gallon increase during the 2021 legislative session.

Their discussion of tying the “new rate to inflation” doesn’t specify which inflation index to link the gas tax with. It’s a departure from Rep. Sal Santoro’s approach of raising fuel taxes in perpetuity based upon the National Highway Construction Cost Index. (Link). Both approaches would put future gas tax increases on automatic pilot.

The report doesn’t offer a fiscal analysis on how much revenue would be raised if their recommendations were adopted. We know Santoro’s legislation (again, endorsed by the Tax Foundation last March) would add up to a $671.8 million tax increase from consumer fuel purchases over two years. The total price tag of Santoro’s legislation is estimated to be $920 million per biennium.

Which is a good segue to a larger point about the full report.

There are several recommendations from the Tax Foundation the Bluegrass Institute could probably support: transitioning to a consumption-based tax system, lowering the state’s income tax rates, repealing the inheritance tax and modifying the local property tax recall provision. Their recommendation to shift from a variable rate gas tax to a specific excise tax on fuels is worth examining.

Where we depart is their general comfort with Frankfort’s conventional wisdom that tax reform must equal raising revenues.

In our “Lost Decades” report we laid out three principles for tax policy changes in Kentucky, identifying “revenue neutrality” as the first principle:

Organizations like the Tax Foundation and the Kentucky Chamber seem to ignore total tax burden as an important factor shaping a state’s business climate. Our argument has been that Kentucky must embrace a new governing framework with economic freedom at its center to finally compete. Red states can be blue too, and Kentucky is already a high tax state. (National Review 5/3/21)

At the end of the day, the Tax Foundation’s report suffers from the fatal flaw of accepting the premise that tax reform should be revenue positive.

We’d welcome the organization’s policy analysts to apply their considerable talents to reexamining their various analyses of Kentucky through the lens of economic freedom.