Andrew Smith
A few months back, I drove to Ohio and, being the roadgeek I am, took the scenic route.
Passing through the small suburban town of Engelwood, I noticed gasoline was about 75 cents/gallon cheaper than back home, so even though my tank was more than half-full, I pulled over and filled up. On the way out of the state later that evening, I did the same thing.
Why?
Because I’m from Indiana, where gasoline is crazy expensive.
It’s crazy expensive everywhere, but it’s especially so in Indiana because the state has one of the highest gas tax rates in the nation.
In July, 62.1 cents of every gallon of gas purchased in Indiana will go to the state government coffers. Add the 18.4 cent federal excise tax, and that means Indiana taxpayers will have an 80.5 cent-per-gallon tax burden. To fill up my 13-gallon tank, I’ll be paying $10.47 in taxes.
Why so high? Because Indiana’s 33 cent-per-gallon excise tax is the 11th-highest in the United States, and it automatically increases one cent per gallon each July 1.
Add to that, Indiana is one of 16 states that imposes a sales tax on gasoline — in our case, the standard 7%. Of those 16 states, not all impose their full sales tax on gasoline purchases, but neighbors Michigan and Illinois do.
Indiana began subjecting gasoline to sales tax in 2014, and rising gas prices means rising sales taxes and a windfall for the state. Indiana announced July’s sales tax will be 29.1 cents per gallon, as it bases the monthly rate on the average sale price for the previous month.
Why so high, especially in a state with a Republican-supermajority legislature that claims to be in favor of low taxes?
It goes back to the governorship of Mitch Daniels from 2005–13. A classic conservative, he believed strongly in reducing the impact of income taxes but replacing them with user fees. One of his first acts as governor was to lease the Indiana Toll Road to a private company and then use the revenue to pay for other road projects — including the in-progress (and still-in-progress) I-69 extension from Indianapolis to Evansville and a never-built beltway that would’ve connected two legs of I-69 between Anderson and Martinsville around the east and south sides of Indianapolis.
On paper, ideologically, it makes sense to a policy wonk — let those who use the roads pay for them, which was the initial concept of the first turnpikes built in the U.S. prior to the 1956 creation of the Interstate Highway System.
But we’ve gotten used to the idea of freeways. Tolling I-69 was politically unpopular and was shelved, with the new road being built as a freeway. Proposals to toll existing freeways never got off the ground. The “Indiana Commerce Connector” beltway was vaporware due to local opposition and cost. Thus, the only new toll roads in Indiana from the Daniels era were two new Ohio River bridges connecting Indiana and Kentucky in Louisville, both of which have seen ridership far below projections.
While Daniels’ big ambitions of road and highway expansion paid for with tolls and user fees didn’t really happen, the concept remained — how do we pay for transportation and infrastructure improvements? Raise the gas tax.
In 2017, Indiana’s gas excise tax was increased from 18 cents per gallon to 28 cents, with annual increases baked into the law. Most of that goes into INDOT’s coffers, with the rest doled out to municipal governments.
But that’s also not enough. The sales tax — which goes into the state’s general fund — is now nearly as much as the gas excise tax itself and has been a windfall for the state with high gas prices in 2022. It was increased from 6% to 7% due to another Daniels priority, school choice.
With property taxes constitutionally capped at 1% of assessed value for homeowners, it opened the door for a change in how schools are funded. The state legislature agreed to increase the sales tax by 1% to offset the loss of property tax revenue. Now, per-pupil funding comes completely from the state’s general fund, which allows for a money-follows-the-child system that allows for public school choice, the expansion of charter schools and one of the nation’s largest voucher programs for private school students.
It was essentially intended to be revenue-neutral, but because the sales tax is rolled into the gas tax, that 1% increase now equates to about five cents per gallon. When the state gasoline sales tax was enacted in 2014, it was closer to one or two cents per gallon.
It all created a perfect storm that has made for higher taxes on Indiana motorists. While the state’s income tax is low — and getting lower, gradually being reduced from 3.4% to 2.9% — it’s being made up for in other ways.
But is this large gas tax needed? Because of the sales tax, Indiana’s gasoline tax is on par with high-tax states like California, Illinois and Pennsylvania. California and Pennsylvania both have higher-than-needed taxes, because they divert many of their gas taxes (and in Pennsylvania’s case, its confiscatory Turnpike tolls) to propping up subsidy-hungry, money-losing mass transit systems, requiring road users to fund systems that only serve only a few users in specific localities.
Going to Ohio or Kentucky — or farther south — offers a lot of relief at the pump for travelers or those who live near the border and can quickly cross over to fill up (and yes, I fill up every single time I’m in those states). It’s not as if Indiana has better roads than states with significantly smaller gasoline taxes.
It’s time for Indiana lawmakers to do the right thing and decouple the sales tax from gasoline. It would offer significant immediate relief at the pump for motorists while still providing the excise-tax revenue stream to repair and build the state’s roads. The state is in a good fiscal position — with nearly $4 billion in cash reserves. We need solutions far beyond half-measures like sending rebate checks to taxpayers. More permanent relief should be on the Republican supermajority’s agenda.
Andrew Smith is an economics instructor at New Palestine High School and Vincennes University and the Vice Chairperson of the Libertarian Party of Hancock County.
