HIGHWAY USER TAX DISTRIBUTION FUND

(HUTDF)

• The Highway User Tax Distribution Fund (HUTDF) is created in Article 14 of the Minnesota constitution.


• Revenues within the HUTDF must be used solely for "highway purposes."


• The HUTDF receives all revenues derived from the state's motor fuel and vehicle registration taxes.


• Article 14 establishes a formula for distribution of the HUTDF revenues as follows: 62 percent for state trunk highways, 29 percent for county state-aid highways, and 9 percent for municipal state-aid streets. The other major source of funding for county state-aid highways and municipal state-aid streets is local property taxes.


• Article 14 allows 5% of the HUTDF revenues to be taken "off-the-top" and allocated by the legislature among the three funds. The 5 percent formula may be changed no more frequently than once every six years and was last changed during the 1998 session, effective FY 2000.


• In FY 1998, revenues to the HUTDF totaled $1.06 billion, of which 51% ($545 million) was generated by the motor fuel tax, 48% ($511 million) was generated by the vehicle registration tax and 1% ($7 million) was from miscellaneous revenue.


• Since 1970, the "real dollar" growth in HUTDF revenues has come primarily from vehicle registration tax revenues, not from motor fuel tax revenues, leading to an increased reliance on the registration tax as a source of transportation revenue.


• In 1970, 34% of the total HUTDF revenues came from the registration tax, while in 1998, 48% of the total HUTDF revenues came from the registration tax.

• 100% of the revenues from the motor fuel tax are deposited in the HUTDF and may be spent only for "highway purposes."

• In Minnesota gasoline and diesel fuels are taxed at the same rate, currently at 20 cents per gallon.


• The tax rate was last increased in 1988, from 17 cents to the current 20 cents per gallon.


• Because the gas tax is collected on a per gallon basis, the revenues do not grow with inflation. Revenues increase only as consumption increases.


• A one cent increase in the gas tax raises approximately $27 - $28 million.


• Minnesota's fuel tax rate is about average for the nation, 20 states have a higher tax rate and eight states also have a 20 cent per gallon tax. Some other states also allow "local option" gas taxes (city or county gas tax) or charge a sales tax on gas -- Minnesota does not allow either.

• Wisconsin's gas tax is 25.8 cents per gallon, North Dakota's 20 cents per gallon, South Dakota's 21 cents per gallon, and Iowa's 20 cents per gallon.

VEHICLE REGISTRATION TAXES

• 100% of the revenues from the vehicle registration tax are deposited in the HUTDF and may be spent only for "highway purposes."

• Registration taxes differ based on the "class" of vehicle. There are 29 vehicle classes including passenger vehicles, pickups, buses, commercial trucks, motorcycles, and trailers.

• Passenger vehicles (including pickup trucks and SUVs) pay an annual registration tax based upon the value and age of the vehicle. Vehicles eleven years and older pay a flat tax of $35.


• In 1998, Minnesota had approximately 3.55 million registered passenger vehicles, about 40% of which pay the minimum tax of $35.


• In comparison to the other states, Minnesota's registration tax ranks about in the middle. Our rank varies depending on the value and age of the vehicle. For example, on a 1998 passenger vehicle with a value of $20,000, Minnesota's tax would rank 27th highest.


• The average registration tax paid in Minnesota is higher than that in the neighboring states of Wisconsin, North and South Dakota and Iowa.


• Thirty-one states levy a value-based registration tax. Many of these states also allow local governments to levy a personal property tax on the vehicle. Minnesota does not allow local option registration taxes.


• Trucks pay an annual registration tax based upon the weight and age of the vehicle. The minimum tax is $120 and the maximum for a truck registered at 80,000 lbs is $1760.


• Of the $511 million collected from the vehicle registration tax in FY 1998, 85% (approximately $432 million) was paid by passenger vehicles, 12% (approximately $61 million) was paid by commercial trucks and 3% was paid by other classes of vehicles.

(Value/Age-Based)

• The current passenger vehicle registration tax is imposed by M.S. 168.013 and is calculated based upon the value and age of the vehicle. The tax is equal to $10 plus an additional amount equal to 1.25 percent of the vehicle's base value (manufacturer's suggested retail price).


• The value of the vehicle is depreciated over time as follows: 100 percent of base value for the first and second year; 90 percent for the third and fourth years; 75 percent for the fifth and sixth years; 60 for the seventh year; 40 percent for the eighth year; 30 percent for the ninth year; and 10 percent for the tenth year.


• For the eleventh year and each year thereafter, the additional tax is equal to a flat sum of $25 (total of $35).

Pros:

• The passenger vehicle registration tax raises a significant amount of money for the HUTDF, approximately $432 million in 1998 (48% of the total HUTDF revenue).


• Revenues grow annually, traditionally at a rate greater than inflation.


• The tax is progressive -- it really is a personal property tax levied by the state.


• About 40 percent of the registered passenger vehicles pay the minimum tax of $35.


• The tax is deductible on federal and state income tax returns (only the amount above the minimum $35 tax is deductible).

Cons:

• Many taxpayers view the tax on newer vehicles as being too high.


• The depreciation schedule does not provide for a tax reduction each year and does not drop off quickly enough to see a noticeable reduction from year-to-year.


• The tax on newer vehicles is significantly higher than in the surrounding states, which encourages tax evasion and builds dissatisfaction among taxpayers.


• Many taxpayers feel transportation taxes should be user-fee based, not value-based.

OPTIONS FOR CHANGING THE REGISTRATION TAX

• Revenue loss estimates are provided by the Department of Transportation Financial Management and Analysis Section and are for FY 1998.

Flat Registration Tax

• Some states simply charge a flat tax or fee for all vehicles, for example, Wisconsin has a flat registration tax of $45.


• A revenue neutral flat tax would result in a flat tax of approximately $122 per passenger vehicle.

Pros:

• Easily understandable, brings the tax in line with neighboring states.


• Owners of newer vehicles would see a significant tax reduction.

Cons:

• Potential for significant revenue loss, depending on where the flat tax is set. A flat tax of $45 results in a revenue loss of approximately $272 million (equivalent to 61% of MVET).


• A flat tax in excess of $35 results in a tax increase to those currently paying the minimum tax (40% of passenger vehicles) and possibly others whose tax calculation is very low.


• Loss of annual growth in registration tax revenues (other than revenue increases due to growth in the total number of registered vehicles).


• Loss of federal and state tax deductibility (due to the change from a value-based property tax to a flat tax).

Reduce the Tax Rate

• The current tax rate could be reduced from the 1.25 percent rate to a lower rate such as 1.00 percent (20% reduction) or .625 percent (50% reduction). This option could also be combined with an increase in the minimum registration tax in order to minimize the revenue loss.

Pros:

• All owners of vehicles not paying the minimum tax would see a tax reduction, possibly a fairly large reduction if the rate is lowered significantly.


• Annual growth rate in revenues is maintained.


• Federal and state tax income tax deductibility is retained.


• Tax progressivity is retained.

Cons:

• Revenue loss varies depending on rate reduction. A change to a tax rate of 1% results in approximately a $70 - $76 million loss, a change to a .625% rate results in a revenue loss of approximately $170 - $190 million.


• If the current depreciation schedule is maintained, owners of newer vehicles still will not see a noticeable tax reduction from year-to-year.


• Maintains the current value/age based formula which is hard to understand and is not user-fee based.


• Tax for newer vehicles is probably still assessed at a higher rate than the Wisconsin tax.

Change the Depreciation Schedule

• The vehicle depreciation schedule was changed by the Legislature in 1989 (effective 1990) to raise more revenue for the HUTDF. The current and pre-1989 depreciation schedules are as follows:

• The 1988 formula change resulted in a tax increase for all vehicles aged 2 to 9 years. Returning to the pre-1989 depreciation schedule would result in a revenue loss of approximately $100 million.

Pros:

• Could be designed to give more significant tax relief to owners of the newest vehicles and to provide tax reductions from year-to-year.


• No tax increase for vehicles paying the minimum tax.


• Retains progressivity.


• Retains federal and state tax deductibility.


• Maintains annual growth rate in revenues.

Cons:

• Revenue loss varies depending on depreciation schedule changes - loss will probably range from $50 - $100 million.


• Maintains current value/age-based formula which is hard to understand and is not user-fee based.


• Still dissimilar to, and probably higher than, Wisconsin registration tax.

Set a Maximum Tax

• A maximum registration tax could be established, in addition to the minimum tax. Under this option, the current formula calculation would be maintained, however, if the calculation results in a tax that exceeds the maximum, the maximum tax would be assessed instead.


• A variation on this option would be to establish maximum tax rates based on the age of the vehicle, i.e. $250 maximum in the first year, $225 maximum in the second year, etc... .

Pros:

• Provides tax relief to those currently paying the most.


• Could be designed to provide a tax decrease from year-to-year.


• No tax increase for those paying the minimum.

Cons:

• Does not provide tax relief across the board.


• Could result in a significant revenue loss depending on where the maximum tax is set. A maximum tax of $100 would result in a revenue loss to the HUTDF of approximately $170 - $200 million.


• Somewhat changes the progressivity of the current formula.


• Maximum tax would not be deductible on federal and state income tax returns.


• Annual revenue growth rate would be less than under current system.

Weight-Based Registration Tax

• Some states (such as North Dakota) assess the registration tax based upon the gross weight of the vehicle.


• This type of tax is seen as being more of a user fee - those with heavier vehicles pay a higher tax due to the increased damage to the roads. However, this argument really does not hold true when comparing passenger vehicles and light trucks. Roads are designed to accommodate heavy trucks and the weight variations among passenger vehicles and light trucks really has a negligible effect on the damage inflicted upon the roads.


• A weight-based tax is more regressive in that older, heavier vehicles often pay a higher tax than do newer vehicles.


• A mileage-based tax is probably a better example of a transportation user fee. The federal highway administration and MnDOT are currently researching the feasibility of implementing such a tax in the future.

Other Options

• The registration tax is probably the most onerous to taxpayers in the first year when they are required to pay both a sales tax of 6.5% - 7.0% of the vehicle's cost and a registration tax of 1.25% of the vehicle's base value. The registration tax could be lowered or combined with the sales tax during the vehicle's first year to minimize this combined cost.


• The minimum tax of $35 could be increased under all of the options previously described in order to minimize the revenue loss to the HUTDF.

SALES TAX ON MOTOR VEHICLES

(MVET)

• The sales tax on motor vehicles (formerly known as the motor vehicle excise tax or MVET) is currently deposited 100% in the general fund, not in the HUTDF.


• In 1981, legislation was passed phasing in a transfer of MVET revenue from the general fund to the HUTDF and a newly created transit assistance fund. However, this legislation was changed a number of times and eventually eliminated in 1991. The original legislation and the transfer that actually took place are shown below.

• In FY 1998, the sales tax on motor vehicles generated approximately $445 million.


• The sales tax on motor vehicles traditionally grows at a rate exceeding the rate of inflation. Annual growth in the revenue was approximately 8.7% per year between 1992 and 1998.