Indiana gas taxes rise July 1 as revenue soars

Hoosier drivers will have to shell out a new record-high of 62 cents in state taxes on every gallon of gasoline purchased in July, as gas taxes climb regardless of high prices.

The taxes will go up two ways on Friday: a penny will be added to the state’s gas tax under a bill passed in 2017. Also, the sales tax on gasoline – called the use tax – will rise from 24 cents per gallon to 29 cents.

In June, Indiana was $33 million in net gas tax revenues ahead of its April 2021 projections, according to the state’s Office of Management and Budget. The money, part of a broader surplus, has inspired a potential $1 billion taxpayer giveback.

“The state just doesn’t need that much money right now in order to operate,” said Director Cris Johnston. “So why not, you know, return it to taxpayers?”

Hoosiers pay four taxes on gas: a state sales tax (29.1 cents/gallon), a state excise tax (33 cents/gallon), a federal excise tax (18.3 cents/gallon) and a second, tiny federal tax funding hazardous waste clean-ups (0.1 cents/gallon). That adds up to more than 80 cents of tax on every gallon of gas.

Raking it in

From February to June 2022, Indiana had collected $185 million in gasoline sales taxes, $45 million more than projected in 2021. And it might stay ahead.

The tax is recalculated each month, based on gas prices themselves. Statewide, gas cost $4.16 a gallon on average from May 16 to June 15, according to the office, up from just $3.44 in the month prior. Multiply by Indiana’s 7% sales tax rate, and that’s a tax of 29 cents on each gallon bought.

Indiana also added a cent to its gasoline excise tax, bringing it to 33 cents per gallon. State lawmakers in 2017 approved a large, one-time excise tax hike with yearly, one-cent inflation adjustments.

In comparison, in June 2017, the state gas tax was 18 cents per gallon.

Indiana brought in $307 million in excise tax revenue between February and June, $12 million behind the 2021 projections. Johnston said Hoosiers were buying fewer gallons of gas in reaction to high prices, negatively impacting the per-gallon tax revenue.

Both taxes fund state and local road projects.

Help, at a cost

Unpopularly high gas prices have sent both parties scrambling for solutions.

Indiana Democrats have pushed for a suspension of state gas taxes, arguing a pause would make life easier for residents.

“Hoosiers are being DRAINED,” wrote Senate Minority Leader Greg Taylor on Twitter. “How much more will our residents have to pay before the gas tax is suspended to provide some small bit of relief?”

It’s a concept Democrats higher up support. On June 22, President Joe Biden called on Congress to suspend the federal gas tax for three months, and on states to take action as well. That could be state-level tax holidays or “helping consumers in other ways,” according to a news release.

“Holcomb should join the President by asking the General Assembly to pause the state gas tax that’s reached historic highs, because his one-time check is a band-aid to a larger problem,” said Indiana Democratic Party Executive Director Lauren Ganapini, in a news release following Biden’s announcement.

Republicans, meanwhile, plan to return some of the state’s surplus to taxpayers in $225 checks–worth several months of a gas tax suspension. The party holds supermajorities in the legislature.

But both ideas have garnered skepticism from economics experts.

“The calls to cut the gas tax by the Democrats is just bad public policy, and the rebates that are being proposed–and I’m sure will pass–are just bad public policy by the Republicans,” said Ball State University Economics Professor Michael Hicks. “Both of them would lead to inflation. Both of them would result in less available revenue to take care of a long standing problem that we have, which is underfunding of road maintenance.”

The economic cure for inflation is lower consumption, and saving or giving money to consumers extends the inflation, said Hicks, who leads Ball State’s Center for Business Economic Research. Hicks calculated that the billion-dollar return would alone add 0.08% to inflation in Indiana.

“We’re adding fuel to the inflationary fire,” he said.

Republicans said the impact would be negligible.

“People have raised that, but–and this is going to sound contradictory, because a billion dollars is a lot of money; there’s no doubt about it–but when you think about the trillions of dollars that are out there being spent in the country, that all influences inflation,” Johnston said. “It’s really a small, small component.”

“[There’s] a lot of—call it funny money or printed money out of thin air—federal trillions of dollars that are washing around,” Indiana Governor Eric Holcomb told reporters in mid-June. “But this is a much different case, in terms of money that was already earned and spent. We’re just returning it to those who rightfully should have it.”