Maryland gas tax revenues off by $526 million

Revenues from a gas tax passed in 2013 are projected to be 26 percent lower than expected, and legislative analysts say the culprit is lower-than-expected gas prices since the law took effect nearly three years ago.

It seems what’s good for motorists is not so good for state coffers, and the largest portion of what makes up the new excise tax passed three years ago is also the most volatile and difficult to predict.

“No one could foresee the cost of a gallon of gas going down,” said Steve McCulloch, a principal analyst for the Department of Legislative Services, speaking of projections made when the 2013 legislation was passed. “They would not be working here if they could project that kind of thing.”

Maryland’s gas tax is set to increase by nine-tenths of a cent on July 1, bringing the total increase to 10 cents since July 2013.

But the tax isn’t as high as it was originally projected in 2013. An analysis of the legislation that year contemplated that gas prices, then about $3.70 per gallon, would remain at that level. Expected increases in the sales and use tax and for inflation would drive the per gallon tax to 39.2 cents per gallon in fiscal 2016 and 43.7 cents per gallon by July 1 of this year.

A revised analysis by the department projects that gas tax revenue will be $526 million less than initial estimates for the first five years.

The effect of the drop in expected revenue is not fully known. To put it in context, Gov. Larry Hogan, in announcing the cancellation of the Red Line light-rail project in Baltimore, promised to spend $500 million to fix bridges and improve roads around the state and $845 million for major projects such as road widening and traffic management tools.

The 2013 law was the first state gas tax  increase since 1993 and was meant to help pay for Maryland’s  long-term transportation needs including the Purple Line light-rail project in Montgomery and Prince George’s counties and the now-canceled Red Line project in Baltimore.

The complicated gas tax formula includes an inflationary escalator and a more volatile sales and use tax that is now at its maximum of 5 percent. Both are adjusted annually.

The sales and use tax is assessed on the average annual cost of a gallon of gas before adding in state and federal taxes. And while the portion of the tax pegged to inflation can never go down, the sales and use tax rate rises and falls with the price of gallon of gas.

McCulloch said the decision in 2013 to not set a floor for the sales and use tax “compounded the potential error for forecasting” revenues.

In 2013, when the tax was passed and implemented, a pre-tax gallon of gas cost slightly more than $3.14.  Since then fuel costs have steadily declined.

Today, the same pre-tax gallon of gas costs roughly $1.75.

The result is less money for the state .

Over the first two years under the new fuel tax, the state took in almost $12 million less than projected just in the sales and use tax. A lower than expected inflation rate cost the state $7.4 million over the same period.

For the fiscal year that ends on June 30, state analysts are expecting sales and use revenue collection will be down more than $100 million compared to initial projections. They also project another $14 million less in revenue because of the lower-than-anticipated growth in the consumer price index.

The news for fiscal 2017 and 2018 isn’t much better with analysts now forecasting sales and use collections will be off by a combined $341 million, according to new projections from the legislative analysts.

Of course, that’s assuming that gas prices don’t go back up to where they were in early 2013.