The Motor Fuel Tax Evasion Issue in Kentucky

Tax evasion is an elusive and burgeoning problem. Methods of tax evasion are continually changing and adapting to new methods of tax enforcement. However, there are strategies that can reduce the potential loss due to fuel tax evasion. This study of fuel tax evasion in Kentucky and the southeastern states provides additional information regarding the causes and nature of the road fund tax evasion problem, and identifies state and federal/state efforts to mitigate the tax evasion challenge. The concepts, issues, and recommendations in this report can aid in reducing evasion of the Kentucky motor fuels tax., thereby, enhancing the efficiency and equity in the administration of the motor fuels tax and increase the resources collected in the Kentucky Road Fund

Legislation Review and Recommendations to Reduce Evasion of Kentucky Road Fund Revenues

Kentucky, like other states, is facing fiscal challenges in providing expanding public services demanded by citizens. One danger of constrained fiscal resources and shortsighted political horizons is the tendency to neglect the investment and maintenance of long-term infrastructures like highways. The Kentucky road fund protects against these dangers by providing earmarked resources for the state\u27s roadways, insuring that basic infrastructure needs are met. However, evasion of road fund revenues decreases the funds available to meet the needs of Kentucky\u27s transportation infrastructure. For these reasons, the Kentucky Transportation Cabinet is interested in developing policy recommendations intended to mitigate evasion of road fund revenues. This report compliments the final report The Motor Fuel Tax Evasion Issue in Kentucky, 1996 (KYSPR 93-153) which identifies potential concerns in the nature and causes of road fund tax evasion. This current study constitutes an informal report that is complimentary to research report KTC-96-16. Moreover, it provides additional detail regarding the legislative action that addresses fuel tax evasion in the southern region. This report also develops estimates of the revenues lost through evasion in vehicle registration and licensing in the Commonwealth. The Federal Highway Trust and the Kentucky road fund were established to provide earmarked resources for maintaining and building federal and state roadways. Two major sources of the revenues for the Kentucky road fund are the motor fuels tax and vehicle licensing and registration fees/taxes. Evasion of these revenues diminishes the resources available to maintaining and building state roadways. There are three studies that have estimated the fuel tax revenue lost through evasion. The U.S. Department of Transportation estimated that evasion of the gasoline tax is between three and seven percent of the gallons consumed nationally, while diesel fuel tax evasion is 15 to 25 percent of gallons consumed nationally. Evidence of fuel tax evasion is provided in the Council of State Governments (CSG) study that estimated nearly 1.2 billion dollars of aggregate state fuel tax revenue was evaded in fiscal year 1993. Estimates of the fuel tax evasion occurring in Kentucky are provided in the KTC final report The Motor Fuel Tax Evasion Issue in Kentucky (1996). This study estimates that up to 20 million dollars of Kentucky fuel tax revenue was potentially evaded in fiscal year 1993. Estimates of revenue lost through evasion of vehicle registration and licensing are less common. The CSG report estimated that between 421 to 654 million dollars of aggregate state revenue from licensing and registration were evaded in fiscal year 1993. Similar analysis is applied to obtain the evasion losses of Kentucky vehicle registration and the associated ad valorem taxes as reported in Appendix B. The estimation predicts that over 239 thousand vehicles were unregistered in Kentucky in 1994, resulting in a road fund revenue loss that approach 50 million dollars

For the People: Popular Financial Reporting Practices of Local Governments

Popular financial reports are reports distributed to citizens and other interested parties who lack a background in formal government financial reporting but who desire an overview of the government’s financial status and activities. This paper examines the current state of local government popular financial reporting in the U.S. The results of a survey of large cities and counties indicate that 75 percent of these local governments have issued popular financial reports and that the types of reports and methods of distribution vary. Many of the reasons for providing popular reports relate to providing information and improving transparency and accountability by providing more user friendly financial reports. This paper concludes with a discussion on popular financial reporting in the context of government transparency and accountability, and offers a research agenda for continued study of the topic

Innovative Financing Options for Kentucky’s Transportation Infrastructure

A strong linkage exists between economic growth and the availability of an adequate and efficient transportation system. Due to its location, geography and economy, this linkage — particularly in regard to highway transportation — is critical to continued economic progress in the Commonwealth of Kentucky. However, Kentucky’s ability to provide the infrastructure investments needed to be competitive in the new “global economy” is constrained by the structure of its funding mechanism, the Road Fund. During the last two decades, Road Fund revenue growth has dramatically lagged the growth of motor vehicle travel. As a consequence, Kentucky faces highway investment needs which exceed projected revenues. In fact, Kentucky Transportation Cabinet officials estimate that there are some $22 billion in “unscheduled highway needs” beyond the$18.2 billion of highway projects which can be accomplished with anticipated Road Fund revenues over the next 20 years. As a consequence, Kentucky, like other states, must search for alternative and innovative means of financially supporting the continued maintenance and development of the state’s system of roads. Kentucky’s Road Fund has been the principal revenue source for highway construction and maintenance since 1920 when the first motor fuels tax was enacted. The Road Fund was strengthened in 1945 with the passage of a constitutional amendment requiring that all motor vehicle fees and taxes be used only for public roads. These vehicle-related revenues include taxes, licenses, permits, tolls and special charges. Although the Road Fund has hundreds of revenue types, more than three-quarters of the total is derived from just two tax categories — motor fuels taxes and motor vehicle usage taxes. And though both these tax types are equally important to the Road Fund, their respective contributions have changed significantly over the past 20 years. While the vehicle usage tax’s contribution to the total has grown by 67%, the fuel tax’s share has dropped by 20%. This disparate performance can be attributed to the differing structures of the two highway user fees. The vehicle usage tax has grown steadily with the economy over recent years because the tax is assessed based on value of each vehicle sold. Conversely, the motor fuels tax revenue has experienced little growth because the tax is a flat rate for each gallon of fuel sold. Consequently, even though vehicle travel has increased, motor vehicle efficiency has increased to the degree that motor fuels tax revenue growth has been limited. This slow growth during a period of rapid expansion in system utilization has created a major funding problem for the state. Consequently, the identification of improved financial practices and viable sources of supplemental or leveraged funding is an important transportation financing policy challenge for the Commonwealth. Given the need to maximize Kentucky’s limited highway system funding, the purpose of this study was to review and analyze new transportation financing innovations suggested by the Federal Highway Administration. The FHWA suggestions may provide ways to leverage funds from traditional sources and to incorporate new sources of revenue into the Commonwealth’s transportation financing plan. In the study, the workings of these financing innovations were evaluated and other states’ applications of these financing techniques were reviewed. In addition, a preliminary assessment was made of the potential applicability of these financing innovations in Kentucky. Obstacles and barriers to their use were also identified

State Road Fund Revenue Collection Processes: Differences and Opportunities of Improved Efficiency

Research regarding the administration and collection of road fund revenues has focused on gaining an understanding of the motivations for tax evasion, methods of evasion, and estimates of the magnitude of evasion for individual states. To our knowledge, little attention has been focused on the impact road fund collection, assessment, audit, and enforcement processes have on tax evasion. The purpose of this study is to review the current road fund assessment, collection, audit, and enforcement processes and procedures and to develop recommendations to improve the efficiency and effectiveness of the process