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Minnesota's Highway Finances

Motor Fuel Tax

At current consumption levels, each one cent increase in the gas tax would yield about $32 million per year to the Highway User Tax Distribution Fund. This would generate $18 million in revenues to the Trunk Highway Fund. The current tax of 20 cents per gallon yielded $620 million in FY 2003 after refunds, collection costs and transfers to DNR. The tax was last increased in 1988. In 1994, the Legislature enacted a phase-out of the ethanol tax credit over four years.

Of motor fuel tax revenues, 82% are generated from gasoline sales. The remainder is mostly generated from diesel and special fuel sales.

State law requires transfers of gas tax revenues presumed to be attributed to non-highway uses (e.g., boats, and snowmobiles) to accounts managed by the Department of Natural Resources. About 3% of gasoline tax revenues, or approximately $15.6 million, are termed "unrefunded" and transferred from the Highway User Tax Distribution Fund to the Department of Natural Resources each year.

Based on Federal Highway Administration Table MF-121T, Tax Rates on Motor Fuel, published October 2002, as well as recent reports from neighboring states, twenty-four states have gas tax rates higher than Minnesota's and five states have gas tax rates the same as Minnesota's. Some states have local option gas taxes and/or levy a sales tax on gasoline sales. These have not been taken into account in the ranking mentioned above. If they were, additional states would have higher gas taxes than Minnesota.

Motor Vehicle Registration Taxes

In FY 2003 motor vehicle registration taxes, after refunds and collection and other costs, yielded $482 million. Passenger class and pickup truck vehicles generated approximately 80% of total motor vehicle registration tax revenues.

Motor Vehicle Sales Tax

When passenger vehicle registration taxes (tab fees) were reduced in its 2000 session, the Legislature provided replacement revenue for the Highway User Tax Distribution Fund (HUTDF). This consisted of a General Fund transfer ($162 million) for FY 2001, and specified percentages of revenue from the Motor Vehicle Sales Tax (MVST) in subsequent years.

In FY 2002, the HUTDF received 30.86% of MVST revenues, equal to $189 million. In FY 2003 the HUTDF received 32% of MVST revenues, equal to $194 million. The 2003 legislature changed the percentages of revenue from the MVST to the HUTDF to 30% for FY 2004-FY 2007. New distributions were provided for the County State Aid Highway Fund (0.65%) and the Municipal State Aid Street Fund (0.17%). Beginning in FY 2008 the distribution to the HUTDF will return to 32%, and the distributions to the two state aid funds will be discontinued.

Federal Highway Funds

The TEA-21 authorization ended September 30, 2003. The U.S. Congress and Executive Branch were unable to complete work on the next federal transportation authorization bill during the first nine months of 2003. Because of this, Congress and the Executive Branch agreed to maintain the provisions and funding levels of the final year of the previous authorization (TEA-21) through February 29, 2004. In all likelihood, TEA-21 will need to be extended again beyond the current expiration date, because so little time remains to pass a new authorization bill. There is a lot of uncertainty about whether a new authorization bill will be passed by the 2004 Congress.

Highway User Tax Distributions

The Minnesota Constitution provides that 95% of highway user tax revenues are distributed as follows: Trunk Highways - 62%; County State Aid Highways - 29%; and Municipal State Aid Streets - 9%. The remaining 5% is distributed in accordance with a formula established by the Legislature, but the formula may only be changed once every six years. The 1998 Legislature made the most recent change in this formula. Since July 1, 1999, all of the five percent set-aside revenues - approximately $65 million per year - have been transferred to the County State Aid Highway Fund where they have been further allocated to the Township Roads Account (30.5 %), Township Bridges Account (16 %), and Flexible Highway Account (53.5%, see below). The most recent allocation of the set-aside revenues prior to July 1, 1999, distributed them to the Trunk Highway Fund (28%), the County State Aid Highway Fund (64%) and the Municipal State Aid Street Fund (8%). This formula could be changed by the 2004 legislature, since six years have passed since it was last changed.

Flexible Highway Account

The Flexible Highway Account was created by the 1998 Legislature essentially by combining monies from the five percent set aside that were previously allocated to the Trunk Highway Fund, the County Turnback Account in the County State Aid Highway Fund, and the Municipal Turnback Account in the Municipal State Aid Street Fund. The Commissioner of Transportation must recommend allocation of money in the Flexible Highway Account among those funds and accounts mentioned above for each upcoming two-year period, as part of the biennial budget proposal. The following table describes the HUTDF five percent set aside for FY 2002-2005.

HUTDF 5% Set-aside Distributions	In Millions of Dollars
	2002	2003	2204	2005
Town Road Account (30.5%)	19.3	19.8	20.1	20.6
Town Bridge Account (16.0%):	10.1	10.4	10.5	10.8
Flexible Highway Account:
County Turn Back Account	27.4	32.4	20.8	27.8
Municipal Turn Back Account	6.4	2.4	14.4	8.3
Trunk Highway Fund	0	0	0	0
Subtotal Flexible Highway (53.5%):	33.8	34/8	35.2	36.1
GRAND TOTAL 5% HUTDF Set-aside:	63.2	65	65.8	67.5

Since the distribution of money in the Flexible Highway Account is subject to decisions made in the biennial budget process, the relative amounts in the preceding table could be different in future bienniums. The 2004 legislature could choose to change the distribution of the HUTDF five percent set-aside monies.

County State Aid Highway Fund and Municipal State Aid Street Fund Spending

Monies in these funds are allocated to counties and to municipalities with populations greater than 5,000 based on statutorily defined apportionment formulas. For the County State Aid Highway (CSAH) Fund, the counties' respective shares are based on money needs (50%), relative shares of lane miles of roads (30%), relative shares of motor vehicle registrations (10%), and equal shares to each of the 87 counties (10%). For the Municipal State Aid Street (MSAS) Fund, the municipalities' respective shares are based on money needs (50%) and population (50%).

As a result of each decennial census, or as a result of the annual State Demographer's estimate, additional municipalities may qualify for funding because their population became greater than 5,000. At each census, some municipalities may stop qualifying for funding because their population fell below 5,000. As we progress through the decade, additional municipalities may qualify for funding due to incorporation, consolidation, or by State Demographer's estimate. Municipalities may also appeal their census counts.

The total number of municipalities qualifying for MSAS funds from 2000-2003 is shown below:

	2000	2001	2002	2003
Total Number of Municipalities Qualifying for MSAS Funds:	127	129	130	133

Bonding

The 2003 legislature authorized the sale of $400 million of trunk highway bonds to eliminate traffic bottlenecks and improve at-risk interregional corridors in the metropolitan area and outstate Minnesota. In addition a total of $220 million of trunk highway bonds were recently authorized in accordance with the 2000 funding program. As part of the 2004 Capital Budget request, trunk highway bonds are being proposed for two building projects; approximately $19 million of trunk highway bonds will be authorized if the Governor's recommendations are approved.. This is the first time that trunk highway bonds have been proposed as a funding source for trunk highway building projects.

Advance Construction

The legislation authorizing $400 million of trunk highway bonds referenced above also explicitly authorized Mn/DOT to spend federal funding made available using advance construction funding procedures. Advance construction funding, in general, permits recognizing federal revenues scheduled to be received in future years in the current year. There are a number of benefits that are realized using advance construction funding. It should be noted that this is borrowing from future federal revenues to be used in the current or at least earlier years than planned. Thus, careful management of the use of this funding is needed, and Mn/DOT is working hard to put these management techniques in place.

 

Prepared by the Mn/DOT Office of Finance, 2004