Falling Gas Prices Will Have No Effect on New PA Funding Law

December 10, 2014

Price changing on gas signRetail gasoline prices have fallen to the lowest levels in more than five years, and many are wondering whether this drop will negatively affect the revenue available from the recent enactment of Act 89, PA’s most significant comprehensive transportation funding law since 1997.

The answer is no…but here’s why.

Act 89 did not change the fact that Pennsylvania’s highways are still funded by a user-pay system. Fuel taxes on gasoline and diesel remain the cornerstone of this user pay system. However, only about 11 percent of the actual price of a gallon of gasoline is determined by federal and state taxes. The vast majority is dependent upon the market price of crude oil.

The authors of Act 89 were wise in that they protected the state revenues derived by Act 89 and by effectively freezing the calculation rate used to determine that state tax level. Prior to Act 89, a large portion of the state tax rate was dependent upon a calculation of the average wholesale price of gasoline and then was run through a formula. An artificial cap was placed on this calculation formula in the mid 1980’s. This is the main reason Pennsylvania’s highway funds became stagnate because the cap was reached in the early 2000’s.

Now under Act 89, the entire “capping formula” has been removed and a flat rate ($2.49 per gallon) will be used beginning on Jan. 1, 2015 going forward. Here is an in-depth explanation of how the state tax rate adjusts in the following way:

  • For calculation purposes, the wholesale price was set at $1.87 on January 1, 2014 – regardless of the market wholesale price;
  • For calculation purposes, the wholesale price will be set at $2.49 on January 1, 2015 – again, regardless of the market wholesale price;
  • Beginning on January 1, 2017, establishes a new “floor price” of $2.99 to protect the state from any sharp declines in price.
  • Beginning on January 1, 2017, re-establishes an annual average wholesale price determination by the Dept. of Revenue as it existed prior to Act 89, but in no case, however, shall the price determination be less than $2.99 per gallon.

For a more detailed explanation of how Pennsylvania calculates its fuel taxes, click HERE.

For a more detailed summary of the entire Act 89, click HERE.


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