Some states have attempted to overcome motor fuel tax inelasticity problem by indexing or linking gas tax rates to inflation, federal tax rates or other measures. The most common form of indexing is to link gas tax rates with inflation. To do this, state lawmakers must pass a law to require changes in motor fuel excise tax rates based on changes in inflation. Generally, states use a widely acceptable mechanism such as the Consumer Price Index (CPI) to measure inflation changes.
The advantage of inflation indexing is that the gas tax can be adjusted to fluctuations in inflation without legislative approval each legislative session for the increases. Moreover, adjustments can occur much more rapidly, ensuring a consistent revenue stream for transportation projects. According to a Brookings Institute report, " ... variable rate taxes have emerged as an effective strategy to increase the tax rate and offset declines in revenue without the politically acrimonious task of tax increases by the legislature or through public referendums ... inflation indexing remains an important option for augmenting transportation funding, regardless of inflationary pressures."12
The disadvantage to indexing is the perceived lack of control. Some citizens may be opposed to the notion of an automatic tax increase that does not require legislative or executive approval.
At least seven states-Florida, Iowa, Kentucky, Maine, Nebraska, New York and North Carolina-have some form of "variable rate" tax linked to inflation, fuel prices or fuel sales.13 Florida and Maine link their gas tax increases to the CPI, while Iowa's gas tax rates vary according to the amount of ethanol blended fuel sold in the state. Kentucky's variable element is based on 9 percent of the average wholesale price of gasoline, with a minimum price of $1.34. New York's Petroleum Business Tax is assessed according to a formula that is linked to inflation based on the producer price index. North Carolina assesses a flat rate gas tax plus a variable component that is automatically altered twice per year based on 7 percent of the average wholesale price of gasoline during a six-month period. Four states-California, Nevada, Oklahoma and Tennessee-have statutory provisions in their statutes that would increase the state motor fuel excise tax rate if the federal motor fuel tax rate decreases.
Some states have evaluated indexing in recent years. A joint committee in Washington studying transportation financing alternatives recommended the use of an index so that existing collections can grow with the economy and population.14 A 2005 Texas bill to index the state gas tax to inflation had initial support in the House Transportation Committee, but failed to win support in the Ways and Means Committee. Nevada may consider indexing in its 2007 legislative session. Wisconsin repealed its gas tax index in December 2005.