The problem is simple – and it’s also one that’s being faced by most states around the country. South Dakota’s gas tax has been levied at a rate of 24 cents per gallon for close to a decade. With inflation and improving vehicle fuel efficiency eroding the value of that tax, the state is now facing a shortfall of transportation revenues. As a result, South Dakota has grown increasingly incapable of paying for routine road maintenance, much less improvements to its transportation system.
Thankfully, the South Dakota Joint Transportation Committee took the obviously needed, but politically difficult step of approving a bill that would raise the gas tax, among other transportation-related revenue sources.
Specifically, the committee approved a bill raising the gas tax by 10 cents (to be phased-in by 2012), and increasing the vehicle sales excise tax from 3% to 4% (also to be phased-in by 2012). Annual vehicle registration fees would also be increased, and heavier vehicles would be required to pay more in fees.
The plan is both straightforward and effective, and its broad outlines should be examined by the multitude of other states facing dwindling transportation revenue streams. The downside to the plan is its regressivity. Should the bill become law, lower- and moderate-income families can be expected to pay a disproportionate share of their incomes in tax as a result of these tax and fee increases. For this reason, South Dakota should consider providing some offsetting relief to low-income families, similar to what it already does with the state’s grocery tax via its low-income refund program. In states with EITCs or other low-income credits, the options for providing low-income relief to offset the regressivity of gas tax and fee hikes are even more straightforward.