Report shows solving transportation needs could affect taxpayers

(The Center Square) – Tennessee will need billions to meet its transportation needs, which could force lawmakers to consider increases in taxes or user fees. A draft report presented to the Tennessee Advisory Commission on Intergovernmental Relations shows that state funding is not keeping up with inflation. Add increased construction costs, and the state may need billions. "The state needs roughly $1.6 billion in fiscal year 2028 just to maintain its existing infrastructure; $3.6 billion to make improvements as Tennessee continues to grow," the report said. State lawmakers included $1.9 billion in one-time funds to the Tennessee Department of Transportation's budget during their 2026 session. Expenses for the department are projected to grow about 3% annually while revenue from existing sources will increase by less than 1% each year, according to the report. Higher construction costs drive part of the increased need. Since 2019, inflation has led to a 100% increase in lead pipe costs and an 80% increase in guardrail costs, Natalie Krzysztof, deputy commissioner for the Tennessee Department of Transportation, told a House Finance, Ways and Means Committee in February. Electric vehicles and the high fuel efficiency of gas-powered vehicles have affected motor fuel tax collections. Lawmakers will grapple with how to fund the shortfalls when they return to Nashville in January. The solutions could have taxpayers paying more at the pump. Forty percent of the transportation budget, about $1.2 billion annually, comes from the federal government, primarily from federal fuel taxes on gas and diesel, according to the report. Of the remaining 60% of the department's budget, 30% comes from state fuel taxes, which are 27 cents per gallon for gasoline and 28 cents for diesel. Tennessee's fuel taxes have not increased since 2020 and rank in the middle when compared to surrounding states. Virginia and North Carolina have the highest gas tax at 41 cents per gallon; Georgia's is 34 cents per gallon. Kentucky levies 26 cents per gallon, and Alabama 31 cents per gallon. If the 2026 fuel tax had been indexed to grow with inflation to 32 cents for gas and 33 cents for diesel, the report said. "Increasing both fuel taxes to adjust for inflation since 2020 and indexing them to adjust in the future (assuming annual average inflation of 2.5%) could raise $5.1 billion over the next decade," the report said. The state's portion of the increased fuel tax would be $3.2 billion, with the rest going to cities and counties. The Department of Transportation receives 11% of its funding from vehicle registration fees, which is about $330 million. Tennesseans pay $26.50 for registering passenger vehicles each year. "Increasing registration fees for passenger and commercial vehicles to where they would likely be for fiscal year 2027-28 had they been indexed to inflation ($35.00 for passenger vehicles, $99.75 to $1,911.75 for commercial) would increase state transportation funding by $129 million in fiscal year 2027-28," the report said. Other taxes could also bring in more revenue for the department. Fees for weight-bearing passenger vehicles, a tax currently charged to commercial vehicles, could bring in by $58 million in fiscal year 2027-28 and $122 million in fiscal year 2047-48, according to the report. The fee would affect about 30% of passenger vehicles. Other states have taxed rideshare companies. "Commission staff estimate that a 50 cents per trip tax in Tennessee could generate approximately $45 million in fiscal year 2027-28 and approximately $268 million at 82¢ per trip in fiscal year 2047-48 if current trends in use of these services continue and the tax is indexed to inflation," the report said. A per-mile tax on personal vehicles would be challenging to implement. But adding a tax on heavy vehicles, as Kentucky does, would bring in $190 million in revenue from both in-state and out-of-state companies. Tennessee could also consider issuing bonds to finance transportation projects. The state has a "pay-as-you-go" strategy for road projects, which has helped with the triple-A credit rating, according to the report. "Given the potential benefits of accelerating delivery of strategically important projects and the possibility that Tennessee could take on debt without negatively affecting its credit rating, if done judiciously, the commission finds that Tennessee would likely benefit from using debt to help finance the construction of strategically important projects that aren't good candidates for public-private partnerships," the report said. But there is no silver bullet to fix the state's transportation funding woes. "By way of example, to increase state transportation funding by $900 million solely by increasing the state's existing fuel taxes would necessitate increasing the gas and diesel taxes to 56 cents per gallon and 60 cents per gallon, respectively," the report said. "Additionally, it seems unlikely that the federal government will increase recurring federal sources of revenue in the near future." This is not the first time concerns about transportation funding have been raised. The Public Infrastructure Needs Inventory, released in February, shows a $3.6 billion increase in transportation projects from July 2024 to June 2029. The inventory is used by policymakers to establish long-range goals and to consider funding options. The final report is due to lawmakers in September.