As fuel taxes dip, will road funding suffer?

Summary:  Recent Policy Briefs have documented the impact of the pandemic lockdown on statewide tax revenues and what that means going forward.  These Briefs have analyzed turnpike toll revenue, gaming tax revenue and general fund revenue. While the percentage drop in general fund revenue was not as severe as the other two, the decline is large enough to require hard decisions to be made in the upcoming budget talks as the interim budget is set to expire at the end of November.

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This Brief examines the effect the lockdown on motor license fund revenues, specifically the three petroleum-based taxes of the oil company franchise tax, the Act 89-fuels tax (diesel) and the Act 89-liquid fuels tax (gasoline) which fund highway and bridge improvements, among other things. 

The oil company franchise tax imposes a tax on “all oil companies conducting business in Pennsylvania for the privilege of exercising their corporate franchise, doing business, employing capital, owning or leasing property, maintaining an office or having employees in the Commonwealth” (Pennsylvania Tax Compendium, Department of Revenue). Act 3 of 1997 imposed a tax on liquid fuels (153.5 mills) and fuels (208.5 mills) on a cents-per-gallon equivalent based on the wholesale price per gallon of $1.25 on distributors. 

Act 89 of 2013 raised that wholesale price floor to $2.99 per gallon and then added additional mills, lifting the tax to 192.5 mills on liquid fuels and 247.5 mills on fuels effective January 2020. (Pennsylvania Bulletin, Vol. 49, No. 50).  On a cents-per-gallon basis distributors pay 57.6 cents per gallon on liquid fuels and 74.1 cents per gallon on fuels as of January 1, 2020. However, most, if not all, of the tax is ultimately passed on to the consumer.

The revenue from the oil company franchise tax is split into three categories: the original tax, 45.9 cents per gallon on liquid fuels and 62.4 cents per gallon on fuels, referred to as the “first sale” to a “wholesale or retail dealer, consumer or direct use in the Commonwealth of petroleum products occurring immediately after importation or production (Pennsylvania Code, Chapter 351).”  Then there are the Act 89 add-on mills for both liquid fuels and fuels (11.7 cents per gallon) charged at the point of retail.  The proceeds from all are placed in the motor license fund and are restricted to certain highway activities such as maintenance and construction.

Oil company franchise tax

For the 2020 fiscal year (July 2019 to June 2020) the oil company franchise tax brought in $931.4 million—7.4 percent lower than the estimated $1.005 billion than the state originally forecast for the budget.  Because the lockdown only covered slightly more than the last quarter of the fiscal year (mid-March through June) the fiscal year’s total revenue was buoyed by the first eight-plus months of strong revenues. Through February the oil company franchise tax was running 1.7 percent ahead of projections and one percent better than the previous fiscal year. 

But in March revenue from this tax began to dip as the lockdown commenced and fell 14 percent below February’s level. Still, the revenue was marginally higher than March 2019’s collections.  Revenue revived somewhat in April, perhaps on optimism that the lockdown would be short-lived.  But the April uptick was short-lived as May’s collections dropped dramatically, falling 66 percent from April’s revenues ($26.5 million vs. $77.7 million) and was 68 percent lower than the tally in May 2019 ($81.9 million).

Keeping in mind that this is a tax on importation and production and not on retail, the reality of the lockdown may have caused oil companies to slow production or importation in May. In June, as the lockdown began to relax, the revenue ticked up a bit to $56.4 million but was still 32 percent lower than in June 2019 ($83.3 million), perhaps reflecting an expected muted summer driving season.  Unfortunately, July’s data that would shed light on possible improving market conditions is not yet available.

Fuels tax

At the retail level, revenue from the fuels tax (diesel) remained the strongest relative to forecasts. This is undoubtedly due to the fact that most delivery vehicles use diesel and those vehicles were still very busy even during the most severe weeks of the lockdown. Moving supplies to grocery stores, service stations, building supply and general merchandise stores and manufacturers allowed to operate went on largely unabated. In February, the fiscal year-to-date revenue collection from the fuels tax reached $98.41 million.  This was 2.1 percent ahead of the estimated $96.4 million and just slightly lower than the February year-to-date of the previous fiscal year.   

The lockdown notwithstanding, March 2020 revenue was higher than the year-earlier collection.  However, that was the last month of the fiscal year that was greater than its year-earlier count.  Compared to the same month a year earlier, April’s revenues were down 1.3 percent; May’s collections were 7 percent lower and June’s fell by 18 percent.   

All told, the revenue from the fuels tax finished the fiscal year at $142.1 million, just under the estimated amount of $142.9 million.  The strong performance in the first three quarters kept the 2020 fiscal year decline from being worse. 

Liquid fuels tax

The liquid fuels tax from Act 89 is also paid at the retail level and has taken a harder hit than the fuels tax, perhaps because it mirrors travel in gasoline-fueled vehicles—either for work or leisure. 

Revenue for the 2020 fiscal year fell almost $30 million short of the budget estimate ($493 million vs. $522.5 million).  It finished behind the previous fiscal year by 8.1 percent. 

Through the first three quarters of the fiscal 2020 (July 2019 through March 2020), the Act 89 liquid fuels tax garnered $334.5 million.  In fiscal 2019 that amount was $357.5 million.  Thus, the first three quarters of fiscal 2020 collected $23 million less than the previous fiscal year (6.4 percent).  One reason is an anomaly in August 2019 which the Department of Revenue records a negative $2.995 million.  The explanation was that money was moved from August to correct for delayed funding for June and July.  Without the transfer, the fiscal year would have ended with increases over the estimated amount and the previous fiscal year (6 percent and 3.3 percent respectively).    

The final quarter of the fiscal year—April, May and June—was, not surprisingly, lower than that of fiscal 2019. This final quarter of 2020 was 11.3 percent off the final quarter of 2019 ($158.5 million vs. $178.7 million).  A large part was due to the lockdown which forbade non-essential travel for most of the quarter while some can be attributed to reporting delays as companies may not have had personnel in place to report/pay the tax on time.      

In sum, all three petroleum-based fuels taxes—the oil company franchise tax, the Act 89-fuels tax and the Act 89-liquid fuels tax—had revenue declines in fiscal 2019-20. As stated in the Pennsylvania code, these taxes are designated for highway maintenance and construction and, unfortunately, for the foreseeable future, those revenues are likely to fall short of the levels they would reach absent the Covid-19 restrictions imposed by the state.   

For many years the Institute has advocated repealing the state’s prevailing-wage requirement on public construction including highway maintenance and construction.  Pennsylvania’s prevailing-wage law mandates that the Department of Labor and Industry set a wage minimum to be paid on projects receiving government funding (in any form). That minimum is typically (and artificially) defined as the union wage. 

While most contractors pay a similar wage, the added mandate of paying a cash rate for fringe benefits, if a benefit package is not being offered, can keep non-union firms from bidding. The cash rate paid by a non-union firm is then subject to all payroll taxes whereas a union shop that shares in a large benefit plan is not required to pay these extra taxes (see Policy Brief Vol. 18, No. 25 for more details).

The presence of the prevailing-wage law keeps non-union firms from bidding on projects.  And if they do win a contract and pay the higher mandated rates, those costs simply get passed on to the taxpayers who are funding them through the taxes collected.  Removing the prevailing-wage mandate will result in significantly lower costs for highway maintenance and construction projects and allow all levels of government to stretch limited highway dollars that much further. 

The pandemic has caused everyone to rethink how things are being done.  The time has come to end Pennsylvania’s prevailing-wage mandate.

Let’s Make Deal on a Transportation Bill

Democrats and liberal op-ed writers are busy beating up Republicans for refusing to do what Republicans are supposed to always do, shut and vote for higher taxes to fund roads, bridges and public transit.

Republicans should agree on some revenue enhancements when Democrats are ready to make two key concessions. First, Democrats will agree to unlink highway funding from transit funding. The issues need separate priority and have many differences when it comes to the best way to fund them and at what level they should be funded. Second, Democrats will stop opposing the elimination of prevailing wage requirements.

Simply having Republicans hold their noses and vote for revenue enhancements for transportation will not serve the Commonwealth’s long term best interests. Savings opportunities will have been foregone and needed structural changes will not be enacted.

There is a reason Pennsylvania is now facing a multiplicity of serious financial problems. The state government-for too long-has kicked cans down the road as it kowtows to the power and influence of unions. Teachers, transit workers and other government workers have had their way with legislation regarding strikes, prevailing wages, pensions, layoff rules, and so on for decades. Every problem is met with demands for more money to feed the monster that has been created. Especially noteworthy are the Port Authority of Allegheny County as well the largest school districts in the state.

Previous governors have redirected highway funds to keep the Port Authority from going on strike robbing Southwest Pennsylvania of dollars needed to keep roads and bridges maintained. Why do the complainers about Republican inaction not want to hear about that abuse of power? Then too, tens of millions of Federal highway funds were redirected to the North Shore Connector in Pittsburgh. Where was the outrage over that? Likewise, almost a hundred million in state and local tax dollars were required to build the Connector. That’s a lot of road and bridge work. But as always the supporters of public transit were 100 percent behind building the tunnel regardless of costs: one that provides free rides to users.

The mindlessness encapsulated by this venture is the single greatest argument for Republicans to demand some concessions from Democrat and transit supporters before folding and voting for the higher revenue status quo fans want.

Proposed House Transportation Amendment Serious About Costs

According to newspaper accounts, the proposed House amendment to the transportation funding legislation takes a very sensible and long overdue approach to difficult issues that have been time and time again kicked down the road. As presented earlier this week, the proposal takes on special interests and offers money saving solutions.

 

 

First, and of paramount importance, the proposed legislation would eliminate the prevailing wage requirement on some road projects. The monetary savings from elimination of the wage requirement would be substantial and, depending on the type of project, could amount to as much 20 percent of the current cost of the work.  Moreover, it frees up work to bidding by non-union contractors, a freedom enhancing move.

 

Second, the amendment would drop the $100 add on charge for traffic violations that would be used primarily for mass transit. This provision in the Senate bill has been roundly criticized as an inappropriate and problematic method to generate funding for transit. 

 

Third, the House proposal offers local communities tax options to increase the local share of transit funding.  Fare revenue, which provides about 25 percent of total funding, combined with the 15 percent local match requirement to receive state aid means the transit service area is providing far less than 50 percent of the funds needed to operate the mass transportation system. Raising an additional five percent locally seems more than fair. By putting any transit funding levy option on a referendum ballot, local voters will have a say in how much the local transit agency has to spend.

 

Fourth, the amendment calls for privatizing ten percent of bus service at the Port Authority of Allegheny County (PAT) and SEPTA. Privatization is a step that was recommended years ago by the Rendell Transportation Task Force. Privatization does not mean shutting down routes and letting private firms come in. The transit agency would put routes up for bids.  Authority funds, including state and Federal subsidies, would be used to pay a company that enters into a contract to provide service.  The idea is to get the service delivered at a lower cost than the authority can provide it. There are successful examples in Southwest Pennsylvania and Denver, Colorado.

 

To be precise and more effective, this provision should be retitled as “outsourcing” or “competitive contracting” as opposed to simply privatizing. Indeed, regional transit agencies in the PAT area should be able to bid on routes that make sense for them to incorporate into their service capabilities.  It is well known that the employee compensation costs at these agencies are well below those at PAT.

 

Finally, the House amendment greatly reduces the three year increase in funding for transit agencies, in large part due to the elimination of the $100 add on traffic violation charge. 

 

The advocates of mass transit are all up in arms over these provisions with the usual claims that the state underfunds mass transit already. Too bad the critics never bother to look at the outlandish cost structure the authorities, especially the Port Authority, face because of a long history of excessively generous labor contracts and a massive buildup of legacy costs.  Why is it so hard to understand that most taxpayers have no interest in paying more for retiree benefits at PAT that most of them can only dream about?  There are many studies that illustrate the high and unsustainable cost structure at PAT. They should be examined.

 

The objection to eliminating prevailing wage is nothing more than special pleading for union construction workers.  It is simply a mechanism to transfer wealth from taxpayers to union workers beyond what the marketplace would do through market determined wages.  The right to strike by teachers and transit workers accomplishes the same result.

 

The objection to privatizing a share of bus service at PAT and SEPTA is predictable with claims that before PAT the private bus service was a disaster.  But PAT’s outsourcing of service is not a return to the pre-public transit days. The authority would enter into contracts with providers to obtain service delivery at a lower cost than it can accomplish. It would, in effect, pass along a large share of the subsidy it receives in its payments to the private provider. There is no way a purely private bus operation can compete with a heavily subsidized public transit agency such as PAT.

 

Then too, opponents claim the House Republican transportation proposal is too ideological-which really means that it threatens to reduce union clout.  Who are the ideologues in this?  Efforts aimed at limiting the increase in taxes that would otherwise be necessary to continue on the path of funding the status quo are deemed to be ideological. Would raising taxes and rewarding past irresponsible behavior be considered non-ideological? 

 

The opposition to the proposed House transportation legislation is of a piece with resistance to meaningful state employee and teacher pension reform that is so desperately needed and the full court efforts to prevent liquor store privatization. Talk about ideological. It is all about government kowtowing to the demands of its public sector employees. This unfortunate situation is demonstrably at the heart of severe government financial problems from sea to sea shining sea.

County Priorities Set for 2013

The County Commissioners Association of PA is a statewide association representing the interests of the state’s counties, and it has released its "wish list" by setting priorities for its members of what they would like to see the General Assembly act on. The priorities for county government include action on human services, Marcellus Shale, and 911, but let’s focus briefly on three issues that we have written about:

Property Assessments: The Association talks about the 2010 study done on assessment practices by the Legislative Budget and Finance Committee, task forces, work they have done with other professional associations in the state, and would like to see the recommendations of the 2010 study (training, funding, tools to determine timing of assessments, etc.). No word on the Association’s feelings on the court battles that took place in the member counties of Allegheny and Washington over doing a reassessment.

Transportation: The Association supports the work of the 2011 Transportation Commission on how to fund the state’s road, bridge, highway, and transit needs overall, but points out that it "does not have a unified position on mass transit" because of the differences between systems across the state.

Prevailing Wage: The Association notes how the prevailing wage requirement on public projects has not been updated since the 1960s and how a court decision brought what was considered "maintenance" under the auspices of the wage requirements. Priorities the Association would like to see acted upon include indexing the amount, opt out provisions, or a full repeal.

Convention Center and Prevailing Wage

One of the oft repeated assertions of unions in their advocacy of perpetuating the market defying law known as the Prevailing Wage act has been that paying union wages means much higher quality workmanship. That argument has been debunked by a thorough study from the Ohio legislature that examined prevailing wage projects and market wage projects. Overwhelmingly, respondents indicated they detected no quality differences in workmanship.

The new Convention Center in Pittsburgh, a prevailing wage project, has had a number of incidents related to work quality, specifically roof leaks. So bad were the leaks that the Sports and Exhibition Authority has had to sue installers to recover extensive repair costs.

The point is that to get the Center built, workers earned wages and benefits that were as much 30 to 40 percent above market wages. Those costs added tens of millions of dollars to the cost of the overall project. Costs Pennsylvania and local taxpayers were forced to pay.

This madness needs to be stopped. It will require legislative courage, but it must be done. Pennsylvania taxpayers and non-union construction workers deserve better.

Defense of Prevailing Wage Law Falls Far Short

govt state

The Keystone Research Center (KRC) recently released a report touting the benefits of Pennsylvania’s prevailing wage law.  The report appears to be timed to offer arguments against a group of bills currently moving through the Legislature that are aimed at reducing dramatically the effects of the prevailing wage requirement on government funded or assisted projects. Principal findings of the KRC study are; (1) eliminating the prevailing wage law will lower the quality of construction and, (2) will not reduce construction costs.  This Policy Brief will demonstrate that neither assertion is correct.

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Job Creation Silliness

It must be the time of year for some to engage in the kind of intellectual vacuity that represents total abandonment of reason. The Keystone Research Center just released a study purportedly showing Pennsylvania’s employment situation to be worse than the 7.4 percent current unemployment rate depicts. Fair enough. Everyone who follows the labor market knows there are lots of folks who are underemployed or have dropped out of the work force because they have become discouraged. That is not news.

But come on. Pennsylvania’s unemployment rate is well below the national average-for several reasons. First, because the state has been such a slow performer for many years prior to the recession and did not have a housing boom as did many states, the housing induced downturn was not as dramatic in Pennsylvania. Second, the industry mix of jobs in Pennsylvania has changed substantially over the decades away from goods producing jobs that are subject to recessions toward industries that are more recession resistant. Third, the state is in the midst of a booming growth in the natural gas business thanks to Marcellus Shale that is greatly improving the labor situation.

There is no mention in the report of the reasons Pennsylvania has been a perennial slow growth state. That list would include punitive anti-business labor laws, lawsuit abuse, environmental regulations, business taxes, prevailing wage requirements and a generally unfriendly business climate.

But the report does have recommendations on how to grow jobs. More government spending, especially on infrastructure, extending jobless benefits and job training.

How predictable. Government spending of money the state does not have to create prevailing wage jobs to support union workers. Job training to do what? To learn how to work on roads that are in endless need of repair?

Not a word about addressing the obstacles to growth in the state. There is no talk of Right to Work, ending teacher strikes, eliminating prevailing wage and getting environmental regulations under control. In short, this is nothing more than the failed policies that have crippled Pennsylvania’s economy for decades. It is stunning to see how resistant to facts and reason some people can be.

Labor Head Decries Slow Job Creation

In a statement about Governor Corbett, Richard Trumka (head of the AFL-CIO) proves that even union bosses have a sense of humor. Trumka accuses the Governor of not spending enough to create jobs in Pennsylvania and upbraided the Governor for his unwillingness to raise taxes. What makes this so funny? Simple. The union movement which Mr. Trumka now heads has done more to destroy jobs in Pennsylvania and it continues to press for policies that will worsen the business climate further.

By pushing for card check, ever higher minimum wages, opposing the elimination of prevailing wage laws, opposing the greatest freedom enhancer of all, making Pennsylvania a right to work state, and supporting nationalized health care, the union leader wittingly or unwittingly is creating a reluctance of companies to invest and grow their businesses.

Unions live in world where economics is about using power to subvert the laws of the free market and competition. But even worse perhaps, in union economic thoughts there is no recognized role for, or respect for, the entrepreneurs who create the products that create the jobs union members feel entitled to. Indeed, much of what unions do-with the help of their handmaidens in government-is to strip away the rights and privileges of property owners and entrepreneurs necessary to carrying out the critical role of generating dynamism and growth in the economy.

In short, the union mentality is one of unbridled selfishness that cares not a whit about its effect on the general welfare as long as the senior members of the union are taken care of. What’s worse is that the laws of the United States and many individual states take a strong position in favor of the unions and against the people who hire the workers. So, reading that Mr. Trumka is offering economic advice to the Governor evokes some hilarity.

Time to Repeal Prevailing Wage Law

Many, perhaps most, Pennsylvania school districts are facing a financial crunch.  With taxpayers already stretched to the limit and Harrisburg contemplating large cuts to K-12 education spending, districts must watch every penny. One way the Legislature can help offset the budget cuts and assist school districts would be to repeal the prevailing wage requirement for school construction and renovation. 

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Transportation Funding Commission Omission

Upon a moment’s reflection there is an obvious and glaring flaw in a newly appointed commission set up for the express and single purpose of looking for funding sources for the state’s transportation systems. Here’s a better idea. How about a commission to look for ways to solve the problems facing transportation?

For one thing, the eagerness to lump mass transit in with highways and bridges is a mistake. There are vastly different issues involved that should be examined separately. Transit operations are localized and have localized issues. Port Authority in Allegheny County, for example, is beset by vast financial problems of its own making and more funding will not solve them until the underlying problems are addressed.

Then too, road and bridge work faces unnecessarily high costs because of the requirement that employees on these projects be paid a prevailing wage. Before the Governor or the Legislature enact any new funding plan for transportation, they should take a long, hard and honest look at how much the prevailing wage requirement is adding to the annual cost of supporting transportation projects.

Further, do we know for sure that the engineering, design, and implementation procedures-including letting of contracts-used by the state are the best available and devoid of political favoritism? If not, why not?

This commission, with its unfortunate single focus on finding funding sources, is missing an important opportunity to find ways to save money or do things more efficiently. Looking for funding only sends a message that enables the spenders of the money to be less assiduous in their search for cost savings.