Arthur W. Wright

English

Research Papers in Economics

BY ARTHUR W. WRIGHT
It’s  no  secret  in  our  neck  of  the 
woods that Connecticut gasoline pric-
es are quite a bit higher than those 
in Massachusetts and Rhode Island.   
Neither is it a secret that most of the 
difference traces to variations in the 
states’ gasoline taxes.  which raises 
the  question:  why,  and  indeed  how 
exactly,  is  it  Connecticut’s  policy  to 
tax gasoline (and diesel fuel as well) 
more heavily than our fellow southern 
New England states do?  As is often 
the  case  with  public  policies,  the 
answer is something of a muddle.  Not 
surprisingly, so are most of the public 
debates  about  highway  fuel  taxes, 
especially when oil prices shoot up.
 
wHY TAx MOTOR VEHICLE FUELS 
IN THE FIRST PLACE? 
	 Even	 “live	 free	 or	 die”	 New	
Hampshire	 imposes	 excise	 taxes	 on	
motor	vehicle	fuels.		Besides	economic-
efficiency	arguments	for	taxing	goods	
and	services	(like	gasoline)	with	inelas-
tic	demands,	fuel	excises	are	viewed,	in	
the	modern	theory	of	highway	finance,	 	
as	“user	taxes”—payments	for	the	use	
of	 publicly-funded	 roads.	 	 But	 the	
user-tax	view	of	highway	fuel	taxes	is	
not	all	that	old.
	 Prior	 to	 the	 Interstate	 Highway	
System,	begun	in	1956,	Federal	excise	
taxes	on	highway	fuels	simply	went	into	
the	U.S.	Treasury’s	general	fund.		To	
finance	the	huge	investment	that	the	
interstate	 system	 required,	 Congress	
raised	the	Federal	tax	by	50%—from	
2	to	3	cents	a	gallon!—and	stipulated	
that	 the	 proceeds	 should	 go	 into	 a	
Federal	Highway	Trust	Fund	(HTF),	
to	be	doled	out	to	the	states	for	high-
way	 projects	 on	 a	 matching	 basis.	 	
State	governments,	which	often	needed	
to	 raise	 the	 matching	 funds	 through	
bonding,	 themselves	 adopted	 “dedi-
cated”	 highway	 fuel	 taxes	 to	 obtain	
good	credit	ratings	for	their	bonds.
	 Inevitably,	of	course,	the	press	of	
other	national	and	state	priorities	made	
it	too	tempting	to	restrict	the	use	of	
highway	fuel	taxes	solely	to	road	build-
ing	 and	 maintenance.	 	 The	 Federal	
HTF—today	 funded	 at	 18.4	 cents	
per	gallon—includes	separate,	smaller	
dedicated	funds	for	mass	transit	grants	
and	 coping	 with	 leaky	 underground	
petroleum	storage	tanks.		Many	states	
have	enjoyed	wider	latitude,	reverting	
from	 time	 to	 time	 (especially	 during	
recessions)	 to	 the	 traditional	 practice	
of	tapping	highway	fuel	taxes	for	non-
highway	uses.
	 Until	the	mid-1970s,	Connecticut	
dedicated	such	taxes	(and	other	vehicle-
related	imposts)	to	the	Transportation	
Fund,	which	supported	highway	out-
lays	 and	 other	 transportation	 proj-
ects.		The	legislature	ended	that	fund	
in	 1975,	 and	 bonding	 for	 highway	
programs	declined.		But,	the	collapse	
of	 the	 Mianus	 River	 Bridge	 in	 1983	
concentrated	 people’s	 minds	 on	 the	
importance	 of	 fixing	 and	 maintain-
ing	highway	infrastructure.		In	1984,	
the	 General	 Assembly	 and	 Governor	
O’Neill	 adopted	 the	 Transportation	
Infrastructure	 Renewal	 Program	 and	
created	 the	 Special	 Transportation	
Fund	(STF),	which	exists	to	this	day.	 	
Highway	 fuel	 taxes	 have	 been	 the	
mainstay	 of	 the	 STF,	 whose	 largest	
single	role	is	to	fund	debt	service	on	
transportation	bonds.
GO FOR BROkE?
	 In	the	mid-1990s,	Connecticut	got	
carried	away.		As	the	first	graph	below	
shows,	 it	 forced-marched	 its	 already	
above-average	gasoline	excise	tax	from	
$0.29	in	1994	to	$0.39	per	gallon	in	
1997.	 	 When	 service	 stations	 began	
relocating	 across	 the	 border	 in	 New	
York,	Massachusetts	or	Rhode	Island,	
taking	with	them	tobacco	tax	revenues	
and	lottery	proceeds,	the	State	beat	a	
hasty	retreat	on	the	gasoline	excise	tax,	
slashing	the	rate	by	$0.14	per	gallon,	
to	$0.25,	by	2000.		That	last	rate,	still	
in	effect,	is	not	egregiously	high	com-
pared	with	other	states—in	fact,	it’s	a	
nickel	a	gallon	less	than	Rhode	Island’s	
gasoline	excise	tax.
	 But	 a	 missing	 piece	 from	 the	
story	 is	 the	 Connecticut	 Petroleum	
Companies	Gross	Earnings	Tax,	or	“oil	
10  THE CONNECTICUT ECONOMY  FALL 2008
Deconstructing Connecticut’s 
Gasoline Excise Taxes
CT OIL COMPANIES TAx
$
M
i
l
l
i
o
n
s
0
50
100
150
200
250
300
350
400
Total Revenue
2
0
0
8
2
0
0
6
2
0
0
4
2
0
0
2
2
0
0
0
1
9
9
8
1
9
9
6
2%
4%
6%
8%
10%
Effective Rate
0%
CT HIGHWAY FUEL ExCISE TAxES
SOURCE: The Connecticut Economy from CT Office of Policy and Management data
$
M
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s
0
20
40
60
80
2
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4
2
0
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2
2
0
0
0
1
9
9
8
1
9
9
6
Diesel
Gasoline
0
100
200
300
400
500
600
Total Revenue
1
9
9
4
C
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t
s
/
G
a
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0
20
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60
80
2
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6
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2
0
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0
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0
1
9
9
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1
9
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6
Diesel
Gasoline
0
100
200
300
400
500
600
Total Revenue
1
9
9
4 0
20
40
60
80
2
0
0
8
2
0
0
6
2
0
0
4
2
0
0
2
2
0
0
0
1
9
9
8
1
9
9
6
Diesel
Gasoline
0
100
200
300
400
500
600
Total Revenue
1
9
9
4 0
20
40
60
80
2
0
0
8
2
0
0
6
2
0
0
4
2
0
0
2
2
0
0
0
1
9
9
8
1
9
9
6
Diesel
Gasoline
0
100
200
300
400
500
600
Total Revenue
1
9
9
4 0
20
40
60
80
2
0
0
8
2
0
0
6
2
0
0
4
2
0
0
2
2
0
0
0
1
9
9
8
1
9
9
6
Diesel
Gasoline
0
100
200
300
400
500
600
Total Revenue
1
9
9
4FALL 2008  THE CONNECTICUT ECONOMY  11 
companies	 tax,”	 which	 originated	 in	
the	1970s	as	a	sort	of	windfall-profits	
tax.	 	This	 tax	 outlived	 that	 long-ago	
oil-price	spike,	and	these	days	blends	
into	the	State	of	Connecticut’s	revenue	
landscape,	yielding	a	hefty	$350	mil-
lion	in	fiscal	2008	(see	the	second	chart	
on	page	10).		Because	(unlike	the	gaso-
line	excise	tax),	the	oil	companies	tax	is	
a	percentage	of	first-sale	gross	revenues	
from	 highway	 fuels	 and	 other	 petro-
leum	 products	 (though	 not	 heating	
fuels,	 expressly	 exempted),	 revenues	
increase	or	decrease	with	the	wholesale	
prices	of	oil	products.
	 The	effective	oil	companies	tax	rate	
actually	exceeds	the	stated	or	statutory	
rate.		The	reason:	an	oil	company’s	tax	
base	includes	not	only	what	it	pays	for	
products	at	wholesale,	but	also	all	the	
taxes	collected.		For	instance,	suppose	
an	oil	jobber	sells	$100	worth	of	gaso-
line	to	a	service	station.		At	the	current	
7%	statutory	rate,	it	collects	the	statu-
tory	$7	of	tax	on	the	$100,	but	it	will	
also	owe	the	Department	of	Revenue	
Services	(DRS)	another	7%	on	the	$7	
of	tax,	or	49	cents;	then	a	further	7%	
on	the	$0.49,	or	3.43	cents;	and	so	on.	 	
In	the	limit,	the	jobber	will	owe	the	
DRS	some	$7.53	on	the	$100	sale,	for	
an	effective	rate	of	7.53%.
	 The	oil	companies	tax	is	ideal	from	
the	standpoint	of	those	doing	the	tax-
ing:	it’s	complex,	not	very	visible,	and	
hard	to	explain	or	understand.		And	
(whenever	 oil	 prices	 “skyrocket”)	 it	
seems	 to	 target	 a	 popular	 whipping	
boy,	oil	companies.		But	this	tax	can	
come	back	to	haunt	the	taxers	when	
voters	 start	 to	 feel	 the	 pinch	 of	 ris-
ing	gasoline	prices—and	then	discover	
that	the	tax	is	amplifying	the	impact	
of	market	forces	on	their	budgets.		For	
example,	currently	a	one-dollar	rise	in	
wholesale	 gasoline	 prices	 triggers	 an	
additional	 rise	 of	 some	 7.5	 cents	 in	
retail	gasoline	prices.		Earlier	this	year,	
as	 pump	 prices	 soared,	 the	 General	
Assembly	 hastily	 voted	 to	 cancel	 a	
scheduled	 July	 1	 increase	 in	 the	 oil-
companies	(statutory)	tax	rate.
	 The	oil	companies	tax	also	makes	
State	budgeting	more	exciting,	because	
it	makes	the	State	treasury	a	de facto	
speculator	in	oil	markets.		Like	a	trader	
who	 is	 “long”	 in	 gasoline	 or	 diesel	
fuel,	 Connecticut’s	 fisc	 gains	 revenue	
when	oil-product	prices	rise,	but	loses	
revenue	when	they	fall.		So	if	those	evil	
“speculators”	 were	 in	 fact	 responsible	
for	oil-market	turbulence	(they’re	not,	
but	that’s	another	story),	the	State	of	
Connecticut	could	be	counted	among	
the	malefactors.
	 Most	 of	 the	 proceeds	 from	 the	
oil	 companies	 tax	 have	 gone	 into	
the	General	Fund	(see	the	first	chart	
below).		In	fiscal	2007,	a	comparable	
amount	of	the	tax	went	into	the	Special	
Transportation	Fund	(mainly	to	help	
defray	the	cost	of	new	Metro-North	rail	
cars	 and	 the	 notoriously	 over-budget	
new	maintenance	facility),	but	in	2008	
the	seesaw	teetered	back	towards	non-
transportation	 priorities	 once	 again.	 	
True,	two	of	the	“other”	funds	benefit-
ing	 from	 this	 tax—the	 Underground	
Storage	Tank	Fund	and	the	Emergency	
Spill	Response	Fund—have	at	least	a	
remote	connection	with	transportation	
activities.	 	 But	 the	 fact	 remains	 that	
the	oil	companies	tax	actually	has	done	
little	to	enhance	Connecticut’s	ability	
to	grapple	with	its	pressing	transporta-
tion	problems.
CONNECTICUT’S NUMBER 1!
	 Charges	that	Connecticut	has	the	
highest	 state	 highway	 fuel	 taxes	 in	
the	country	are	true.		But	they’re	only	
true	 because	 the	 oil-companies	 tax	
adds	another	20	or	25	cents	per	gallon	
(assuming	wholesale	gas	prices	in	the	
vicinity	of	$3	a	gallon)	to	our	25-cent	
excise	tax,	which	falls	in	the	middle	of	
the	pack	nationally.		Other	states	add	
their	 own	 gew-gaw	 taxes,	 and	 many	
also	 collect	 regular	 sales	 taxes	 at	 the	
pump.		But	none	can	challenge	our	45-
50	cent	total-tax	figure.		The	bar	chart	
below	 shows	 the	 result:	 among	 the	
eight	northeastern	states,	Connecticut’s	
(continued on page 14)
DISPOSITION OF THE 
OIL COMPANIES TAx
SOURCE: The Connecticut Economy from OPM data
$
M
i
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l
i
o
n
s
0
50
100
150
200
250
Other Funds
General Fund
Special Transportation Fund
2
0
0
8
2
0
0
6
2
0
0
4
2
0
0
2
2
0
0
0
1
9
9
8
1
9
9
6
AAA AvERAGE RETAIL
GASOLINE PRICE
SOURCE: Ind. CT Petroleum Assn.
$
\
G
a
l
l
o
n
3.50
3.75
4.00
4.25
4.50
State Excise Tax
Other State Taxes
Federal Tax
Wholesale
NJ VT NH MA ME RI NY CT14  THE CONNECTICUT ECONOMY  FALL 2008
average	retail	gasoline	price	is	the	high-
est.
	 The	source	for	the	bar	chart,	the	
Independent	 Connecticut	 Petroleum	
Association	 (ICPA),	 whose	 members	
are	mainly	service-station	owners	and	
heating	oil	dealers,	argues	that	whole-
sale	gasoline	prices	in	Connecticut	are	
basically	the	same	as	in	other	north-
eastern	states.		As	the	bar	chart	shows,	
as	 of	 mid-2008	 total	 state	 taxes	 per	
gallon	varied	from	14.5	cents	in	New	
Jersey	 to	 51.4	 cents	 in	 Connecticut.	 	
But	 subtracting	 those	 taxes	 and	 the	
Federal	excise	tax	from	the	AAA	aver-
age	 retail	 price	 for	 regular	 gasoline	
yields	 wholesale	 prices	 ranging	 from	
$3.60	to	$3.70	per	gallon	across	the	8	
states.
NOw I ASk YOU…
	 Two	questions:		First,	is	it	part	of	
a	sound	overall	fiscal	strategy	for	the	
State	 of	 Connecticut	 to	 depend	 on	
highway	fuel	taxes	for	$350	million	a	
year,	 or	 about	 2.5%,	 in	 general  fund 
revenue?		Second,	would	it	have	been	
a	good	idea,	as	many	urged	earlier	this	
year,	 to	 reduce	 or	 even	 temporarily	
suspend	 Connecticut’s	 gasoline	 excise	
tax,	to	lessen	the	impact	on	consumers	
of	spiraling	pump	prices?		My	answer	
to	both	questions	is	no.
	 (1)	 Given	 my	 druthers,	 I’d	 urge	
Connecticut	or	any	other	state	to	devise	
a	 tax	 system	 based	 on	 stable,	 broad-
based	taxes	that,	over	the	long	term,	
yield	a	net	deficit	of	zero	but	make	use	
of	 a	 “rainy-day-fund”	 to	 balance	 out	
the	inevitable	swings	of	fortune.		The	
oil	companies	tax,	with	most	proceeds	
going	for	non-transportation	purposes	
and	causing	us	to	have	the	highest	gas-
oline	prices	around,	does	not	fit	that	
description.		So	I’d	urge	Connecticut	
lawmakers	and	the	governor	to	figure	
out	how	to	phase	it	out	over	the	long	
term.
	 (2)	The	 impulse	 for	 elected	 offi-
cials	to	do	something,	don’t	just	stand	
there,	when	oil	product	prices	go	wild	
is	understandable.		It	may	be	shouting	
into	a	howling	wind,	but	all	the	same	
I	urge	legislators	and	the	governor	not	
to	 mess	 with	 the	 gasoline	 excise	 tax	
(and	thus	future	highway	building	and	
maintenance	funds)	when	prices	spike,	
but	also	to	state	and	repeat	the	reasons	
why,	calmly,	clearly	and	simply,	until	
the	 apoplexy	 abates.	 	 On	 efficiency	
grounds,	 cutting	 excise	 taxes	 during	
spikes	 would	 run	 exactly	 counter	 to	
what’s	 needed	 most	 to	 restore	 mar-
ket	order—letting	markets	clear,	usage	
drop,	and	holders	of	speculative	inven-
tories	panic	at	the	prospect	of	falling	
prices.		On	equity	grounds,	there	are	
far	better	ways	to	use	State	funds	to	
help	those	hit	hardest	in	relative	terms	
than	easing	the	impact	of	higher	prices	
a	bit	on	owners	of	the	biggest,	baddest	
SUVs.	
DECONSTRUCTING CONNECTICUT’S GASOLINE ExCISE TAxES (continued from page 11)
  Connecticut  also  levies  excise  taxes  on  diesel 
fuel (see the first chart on page 10).  The oil companies 
tax on diesel was repealed as of June 30, 2007, but its 
avatar lives on in the form of an ex post add-on to the 
diesel excise tax, to make up for the revenues lost by 
exempting diesel from the oil companies tax.  This is why 
the diesel excise has skyrocketed by two-thirds over the 
last two fiscal years—from 26 cents a gallon in 2007 to 
43.4 cents a gallon in 2009.
  Eliminating the oil companies tax on diesel, and 
relying instead just on an excise tax, would arguably be 
a good thing.  But adjusting the size of the excise each 
year so that the add-on generates a stream of revenue 
equal to what the oil companies tax would have pro-
duced, smacks of policy caprice.  Currently, the diesel 
excise shoots up along with wholesale prices, but will 
careen downward when prices retreat. 
  The  2007-2009  increases  put  Connecticut 
squarely at the top of the state excise tax ladder for 
diesel fuel.  According to the ICPA, in our region New 
York comes in a distant second at 32.3 cents per gallon, 
trailed by Rhode Island at 31 cents and Maine at 29.5 
cents.  Massachusetts—arguably Connecticut’s closest 
rival for over-the-road trucking—taxes diesel at just 23.5 
cents a gallon.
  Diesel  fuel  accounts  for  roughly  15%  of  total 
highway fuels sold in Connecticut each year.  Though 
quantitatively less significant than gasoline in terms of 
total excise-tax revenues, diesel is highly significant for 
business costs in the state.  One might argue for levy-
ing higher user taxes on diesel fuel than on gasoline, 
because trucks tend to be heavier and thus to beat up 
highways and bridges more than autos.  But one could 
scarcely argue, on policy grounds, for a tax policy on 
diesel that can whipsaw the diesel excise tax from rea-
sonable to punitive in two winks of an eye.
  If (as I argue at the end of the main article) we 
should replace the oil companies tax with a broader-
based tax of some kind, then ending the oil companies 
tax on diesel in mid-2007 would have been a good idea, 
or at least part of one.  But enacting a make-up provision 
that will make the diesel excise tax fluctuate was a really 
bad idea, one that has “high business-tax state” written 
all over it.
DIESEL FUEL TAxES: A BROKEN POLICY

Deconstructing Connecticut's Gasoline Excise Taxes

http://cteconomy.uconn.edu/articles/AW_F2008.pdf

Deconstructing Connecticut's Gasoline Excise Taxes

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