This gas tax fix could level Oklahoma’s revenue rollercoaster

rollercoasterMany Americans have reason to celebrate when gas prices drop. In states that aren’t as dependent on the oil and gas industry for jobs and tax revenues, low prices can help the finances of regular families and boost the economy as a whole. Those benefits also come to energy-dominated states like Oklahoma, but the downside is much greater.

The energy industry’s tendency to go through cycles of boom and bust has put Oklahoma’s state revenues on a roller coaster. This volatility can make it very difficult to keep Oklahoma’s state budget in balance, and it means state revenues plummet just when Oklahoma can least afford the loss. Gross production taxes from oil and gas drilling have dropped to a twelve year low, and the impact is also being felt in suppressed income and sales tax collections as energy industry cutbacks reverberate through the economy.

Oklahoma’s Rainy Day Fund was created as one way to ease this volatility, and state officials have made various proposals to create other funds or increase what can be deposited in the Rainy Day Fund to stabilize the budget. Another idea worth considering is to adopt a temporary gas tax increase that only stays in effect as long as gas prices are low.

We’ve written before about how Oklahoma’s gas tax is highly outdated. Because it’s set at a flat 17 cents per gallon and hasn’t been adjusted since 1987, the tax has lost nearly one half of its real value over the past three decades. When you include the 14 cents per gallon of diesel that also hasn’t been adjusted since 1987, that translates to more than $338 million per year in lost revenues.

For every cent that we increase the gas tax, Oklahoma stands to gain about $19 million per year in revenues. About $8 million per year would be gained for each cent increase in the tax on diesel. If we increased each of these taxes by just 5 cents per gallon, that would create $135 million in new revenues to help address the budget hole. Even then, Oklahoma’s gas taxes would remain below the national average of 24.7 cents per gallon, and the state’s overall gas prices would still be among the lowest in the nation.

Some might argue that increasing the price at the pump could hurt revenues by causing Oklahomans to reduce their driving. But the evidence from swings in gas prices much larger than 5 cents show that Oklahomans’ demand for gas is fairly inelastic — we get about as much revenues from the gas tax when gas prices are high as when they are low.

fuel tax revenues and gas prices

Over the past decade, fluctuation in gas prices has been about nine times greater than any resulting changes in revenue from this tax. Oklahomans are using about the same amount of gas year after year — while it’s likely that more miles are being driven due to population increases, better fuel efficiency of vehicles means that the number of gallons burned stays level.

Lawmakers have recognized that the current gas tax is far from sufficient to cover Oklahoma’s transportation infrastructure expenses. That’s why Oklahoma has diverted large and increasing amounts of income tax revenue to the ROADS Fund. This year lawmakers have discussed taking out bonds to pay for transportation projects during the budget shortfall instead of providing these hundreds of millions of dollars in off-the-top funding. That idea may have some merit — but it also digs Oklahoma deeper into a hole in future years by growing our debt and increasing our reliance on one-time funding.

Even if lawmakers do not have the appetite for a permanent increase to the gas tax, enacting a temporary increase in times of low prices would make a lot of sense. It would kick in only when the burden of gas prices to regular families is low and when the need for a state revenue boost is highest. It would help provide a natural counterbalance to the highly volatile gross production tax.

This is another example of how our legislators have options to address the budget shortfall without devastating cuts to services that Oklahoma families need. If the worst cuts happen, it won’t be because of the oil and gas downturn; it will be because lawmakers refused to adopt sensible options in a crisis.

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Gene Perry worked for OK Policy from 2011 to 2019. He is a native Oklahoman and a citizen of the Cherokee Nation. He graduated from the University of Oklahoma with a B.A. in history and an M.A. in journalism.

6 thoughts on “This gas tax fix could level Oklahoma’s revenue rollercoaster

  1. I think the gas tax increase is fine, as long as the Legislators and the Governor are willing to rescind the tax breaks given to the Oil & Gas industry and do away with the supposed “tax cut” put into place when she went into office. The top households aren’t burdened, like middle and lower income citizen are, when the price of goods and services go up at the cash register. The top earners and corporations are getting all the breaks, while the rest of us are breaking our backs trying to support their tax cuts and incentives.
    Be fair, rescind the huge tax cuts given to the large corporations.

  2. The problem with good ideas like this is that they only seem to pop up when the State has already padded the pockets of its industry friends via tax breaks and, in our case, destroyed the infrastructure in question through extreme neglect. At this point, introducing something like an increased gas tax would seem like an obvious ditch effort to force taxpayers pay for the mistakes and egregious malpractice of our elected officials and their supporting corporate donors.

    All that being said, if such a measure included provisions that limit the tax proceeds strictly to the repair and maintenance of our existing transportation infrastructure (NOT new toll roads that a bought and paid for city official wants to erect for a friend) and restricted any defunding of said infrastructure as long as the tax was in place then i’d be all for it. We should have learned our lesson with the lottery but, if we don’t restrict funding cuts, our substandard government will pull the same bait and switch.

    As a matter of fact, kick in an extra dime per gallon for public education across the state and i’ll be there with bells on.

  3. I wouldn’t care if gas was taxed more for public education. Also, the state could tax the fuel stations on the interstate highways a little more and ear mark that money to public ed. Something like the hotel/motel tax that taxes people traveling through the state-new money, if you will.

  4. The legislature could pass a gas tax that would set a floor to gas prices, but above a certain amount would end. The tax could be set so that the total cost for consumers is $2.50 per gallon. When gas prices drop below that amount the tax would be for the difference. Once the price of gas hit $2.50 the tax would be 0. So as the cost of a gallon of gas dropped below that amount the tax would increase. Voters/consumers would know that they wouldn’t be taxed continuously, but only when the price fell.

  5. $135 million in taxes levied against a $1.3 billion deficet. *smh*
    Makes about as much sense as our current tax on groceries.
    All these taxes do is hurt working families at or below the poverty line. It’d be one thing if we actually had any public transportation infrastructure, but seeing as that’s not the case, this tax will do little to help.

  6. I have a similar proposal out under Budgets in the Oklahoma portion on my website The only difference is instead of a temporary increase that goes back down to the original amount, after the 1st year an automatic 6 month sliding adjusting scale would kick in. As gas prices go up, the excise tax on the consumer would drop. As gas prices plumet the excise tax on consumers would increase. This shifts the tax liability structure of paying bases while ensuring Oklahoma remains revenue nuetral.

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