DFL transportation deal includes tying gas tax to inflation, adding new 50-cent delivery fee, metro sales tax

A House-Senate conference committee has finally reached a deal on increasing funding for transportation and transit that includes inflationary increases in the gas tax, a 50-cent delivery fee, and hikes in the motor vehicle sales tax and annual car tab fees.

In addition, the deal brokered by the two DFL transportation committee chairs — Rep. Frank Hornstein and Sen. Scott Dibble — has a 0.75% metro-area sales tax mostly for transit but also for county-decided roads projects.

“I think we have before us a historic and transformative transportation bill that covers all modes of transportation in all regions of the state,” Hornstein said.

Added to an already passed metro-area 0.25% sales tax for housing programs and projects, the seven counties of Hennepin, Ramsey, Washington, Dakota, Scott, Anoka and Carver counties will see a 1% sales tax increase.

Taken together, the transportation tax and fee increases would raise an additional $1.48 billion for roads, bridges, transit and other transportation needs in the next two-year budget period and $2.22 billion for the following two-year budget.

The two Minneapolis DFLers have been advocating for increasing transportation taxes because unlike the state general fund, transportation taxes have been underperforming. That’s led to deficits in road and bridge maintenance and construction. While the gas tax is constitutionally directed toward transportation, it is fixed at 28.5 cents per gallon. While construction costs have increased, the gas tax hasn’t. In addition, better gas mileage and more electric vehicles on the road results in lower gas usage and lower tax collections.

The Minnesota Department of Transportation says the gas tax raised $893 million last year and is projected to raise $892 million in 2027. Transportation taxes collect about $2.5 billion a year in Minnesota, but MnDOT analysts say the pandemic impacted transportation taxes differently, and more negatively, than it did general taxes like income taxes, corporate franchise taxes and general sales taxes.

Blame lower car sales during the recession and then lower sales when chip shortages reduced supply. Blame less taxable gas purchases on factors like more efficient vehicles and a spike in gas prices that doesn’t benefit the state’s per-gallon tax.

The Minnesota gas tax rate was last raised in 2008, and doing so required a bipartisan override of a governor’s veto. Since then, Republicans have used it as a potent political weapon, reminding voters — especially when gas prices are high like they were last summer – that it was DFLers who voted to override then-Gov. Tim Pawlenty’s veto. The last time an increase was proposed — in 2018 by Gov. Tim Walz — it was quickly shot down.

“We had that discussion. Didn’t happen,” Walz said this week of his 20-cent increase over four years. “I’ve said all along we need to have an honest conversation about long-term, dedicated, steady financing for transportation.” Minnesota, he frequently notes, has the fourth most road miles among the states behind California, Texas and Illinois.

“The people of Minnesota understand you get what you pay for, and when it comes to roads we’re gonna have to figure out a dedicated source,” he said. Gas tax increases? “I’m open to it.”

The National Construction Cost Index measures increases costs of building roads and bridges and varies by state. Nationally, the index jumped 20% in 2022, according to the Federal Highway Administration, but was 13% in Minnesota. But in 2021 it fell by 3%.

Transit funding has been bailed out by cash grants by the Legislature and federal funds from pandemic relief legislation. But that runs out and, combined with lower fare box revenue from declining ridership, regional transit is headed for a cliff of deficits, Dibble said.

The regional sales tax can be used for operations and construction of rail and bus lines. 

MnDOT Commissioner Nancy Daubenberger said the funding package will go a long way toward filling a 20-year funding gap for maintaining and expanding the transportation system. The agency has estimated that it will be $27 billion short of transportation needs over the next 20 years.

She said the budget provides the matching funds for the federal infrastructure bill, and she said MnDOT appreciates the funding for multi-modal transportation and the electric vehicle infrastructure. 

“We’re very happy to be at this point, excited about the historic investment this has for transportation,” Daubenberger said. She was less happy about a number of highway projects that are directed in the bill — earmarks. MnDOT thinks projects should be chosen by the agency based on needs and timing, not by legislators.

Margaret Anderson Kelliher, the director of Minneapolis public works who is also a former House speaker and MnDOT commissioner, said she thinks the Legislature’s latest agreement on transportation is a bigger influx of funding than that 2008 gas tax increase and a regional transit sales tax that was added following the I-35W bridge collapse that killed 13 people.

“This will be an excellent bill for the future,” she said. “This will give people a lot more options. There is more of a focus on, I believe, regionalism in terms of future work between counties, the work of the Met Council and Metro Transit. So that is really, I think, a big leap forward.”

One difference between the 2008 package and this one is its focus on climate change, she said. “We’ve come a long way, right?, in terms of looking at everything from (vehicle miles traveled) to greenhouse gas reduction.” 

Rep. Brad Tabke, DFL-Shakopee, said the bill contains both the structure and funding — $2 million — for his plan to tackle crime and disruptions on light rail trains in Minneapolis and St. Paul. The interventions will begin with a social services emphasis to get help to people who are homeless or struggling with drug abuse or mental illness. But a law-enforcement element will follow to enforce a new code of conduct on trains. It will start as soon as the bill is signed.

The transportation bill also contains $195 million to match federal money to build passenger rail between the Twin Cities and Duluth, called the Northern Lights Express.

Republicans in the Legislature continue to oppose increasing the gas tax or other transportation-dedicated taxes and fees. They have supported shifting more of the general sales tax collected on auto parts to transportation, something that raises about $200 million a year. The conference report will set in motion a 10-year shift so that 100% of that revenue eventually moves to transportation uses.

House Minority Leader Lisa Demuth of Cold Spring connected the transportation tax increases to other tax hikes elsewhere in legislation.

“Democrats’ fixation on raising taxes on everyday Minnesotans has to stop,” she said in a statement. “We have a $17.5 billion surplus — tax increases of any kind should be off the table, but especially these regressive taxes that hurt lower income Minnesotans the most. While we know Democrats have been itching to raise the gas tax for years now — with Governor Walz being one of the most vocal proponents of it — no Minnesotan will ‘understand’ why this is necessary at a time when we have a record surplus.”

The Legislature’s transportation funding agreement at a glance:

Gas Tax: Statehouse rumors had included both a per-gallon increase and inflationary indexing. The penny or two hike did not show up in the conference committee report but the inflation provision did. It would have the state Department of Transportation reset the tax on Aug. 1 of each year, but the increase cannot exceed 3 cents a year.

The budget estimates that it would increase gas tax collections by $155 million in the first two year budget and $266 million in the following two-year budget.

The gas tax is distributed to state trunk highways, county state aid streets and municipal state aid streets.

Metro Sales Tax: Revenue from the 0.75% tax would be shared. The Met Council would get 83% of it for transit and “active transportation,” which includes biking, walking and rolling. The seven counties in the metro area would get 17% for wider transportation needs. The new sales tax would raise $766 million in the first two years, $973 million in the second two years. It took a strange path, passing the House at 0.75% but falling to 0.50% in the Senate. The conference committee restored it to the House level.

But it also contains a provision that prevents the Met Council from spending any of the money on Southwest Light Rail Transit until a task force completes its work on an examination of how the agency is governed. Both Dibble and Hornstein favor an elected, rather than appointed, Met Council but the task force will make that recommendation.

Met Council Chair Charlie Zelle called the money “robust” and “truly transformative for transit.”

Delivery Fee: This is a new tax in Minnesota, though it has been used in Colorado as a way to replace shrinking gas tax receipts. Initially passed at 75 cents per delivery, it faced vigorous opposition from retailers, restaurants and package delivery companies like Amazon. Now at 50 cents, it also exempts food deliveries and other deliveries costing less than $100. It lets small businesses with annual sales of less than $1 million escape collecting the fee.

If a product being delivered is sales tax exempt — prescription drugs, for example — no fee would be collected. The new fee raises $59 million in the upcoming budget and $130 million in 2026 and 2027. That is less than the $200 million a year that would have been raised when the fee was first proposed at 75 cents and covered more deliveries.

Still, members of a coalition that formed to oppose the fee were disappointed.

“Consumers and businesses don’t need an entirely new, complicated taxing system when we already have several existing mechanisms in place to raise funds for transportation,” said Bruce Nustad, president of the Minnesota Retailers Association. “This unpopular, unproven idea is wrong for Minnesotans and the businesses serving them. Calling the tax a ‘road improvement fee’ won’t fool Minnesotans.”

Car tabs and motor vehicle sales taxes: Increases in these existing taxes would raise about $350 million in the upcoming two-year budget.