Highway Funding Issues Will Get Worse Before They Get Better

By: TCHOA Director Brett Howell and TCSA Director David Connor

Legislation that would dramatically impact county highway department budgets is progressing through the Senate and House committee system, with two major tests coming next Tuesday and Wednesday. SB273/HB321 (Massey, Howell) is set for 8:30 a.m. Tuesday, March 14, in Senate Finance. A finance subcommittee will be meeting ahead of that, which means the bill will not be heard until that calendar is complete. It is scheduled for 10:30 a.m. Wednesday, March 15, in House Finance Subcommittee.

While most of the talk about how the bill affects counties centers on the $300 million in one-time State Aid Road funds, equally important is the long-term impact a revenue sharing plan will have on county transportation needs. The bill is a comprehensive initiative that provides a portion of future state registration fee collections on electric and hybrid vehicles to counties, counterbalancing losses that are beginning to mount from lower-than-expected gasoline tax revenues.

Gas taxes are the single largest revenue source for many county highway departments, but that stream of funding is showing signs of stress, especially in the first seven months of FY2022-2023. We are seeing that the county portion of gas collections is already $1.5 million behind what was collected by this time last year. That deficit is likely to grow to $2-2.5 million by the end of June 2023. Collections traditionally lag this time of year for various reasons, including reduced travel during the winter months.

SB273/HB321 creates a new funding stream for counties, as the state starts sharing the EV registration fees with counties using the same rate and formula as is used with the existing gas tax. The revenue generated from these registration fees will be slowly rolled out as part of a compromise with the auto manufacturing industry and are not expected to fully replace the lost gas funds immediately.

“This sets us up for a budget shortfall as we head into the final few months of this fiscal year,” said Brett Howell, executive director of the Tennessee County Highway Officials Association. “Highway departments will need to pay close attention to their monthly gasoline revenues. They may have to amend their budget, depending on what we see in collections during the next few months.”

He added that without the revenue sharing portion of this bill, counties would be forced to either find another source of state or local funding to make up for the loss or make drastic cuts to their county road plans at a time when the state’s is seeing a huge increase in population and the needs and demands brought about because of that growth.

Beginning January 1, 2024, the current $100/year per electric vehicle will go to $200/year and be charged at the time of renewal, rather than at the time of purchase. That fee will remain at that level until January 2026, when it increases to $274, the amount originally proposed in the bill. The following year the fee will grow by a consumer price index determined by the U.S. Department of Labor, not to exceed 3 percent.

A new $100/year per hybrid vehicle fee will be charged at the time a hybrid vehicle is registered, beginning January 1, 2025. Each January after that, the fee will be increased by the same CPI, not to exceed 3 percent.

Based on the current number of EVs and hybrids registered in Tennessee, the county portion of the fee collections will be approximately $1 to 1.5 million. This will be a growing revenue stream for counties. However, we will likely see some continued drop in the amount of gasoline revenues until the new registration fees catch up as electric/hybrid vehicles grow to become an even greater segment of total vehicles registered each year.

“The bottom line is to remember that every county highway department will need to monitor its actual monthly revenues and plan its budget for the remainder of this year accordingly,” Howell said.

The bill passed by voice vote out of House Government Operations Committee this week with a positive recommendation. Only three members of the 21-member committee are recorded against the bill.

The next three weeks are critical to the success of this measure, which also includes the $300 million increase in State Aid Roads funding, choice lanes on select interstate routes, alternative delivery methods for road projects and public-private partnerships to provide additional financial alternatives for some projects.

Senator Becky Massey and Representative Dan Howell, sponsors of the bill, are asking that TCHOA members contact their Senate and House members seeking their support, as well as to sign onto the legislation as a co-sponsor.