State Gas Tax Holiday Not Likely A Credit Concern
Inflation, supply chain disruptions, and the war in Ukraine have combined to push up petroleum prices across the United States.
While the federal government appears unlikely to lower the federal gas tax, many states have set about finding ways to provide relief at the pump. These range from proposed rebates in California to gas tax holidays in Georgia, Maryland, Connecticut, and likely New York.
Lindsey Wilhelm, Senior Municipal Credit Analyst at Raymond James in New York, said, "We are not anticipating a widespread impact on credit quality as a result. However, there could be some variation depending upon the statutory/constitutional application of gas tax revenue, the magnitude of the disruption, and the mechanics of the legislation."
In general, gas taxes make up just a small portion of state revenue, and some states are considering using federal aid and/or surplus revenue to backfill any fiscal impact (particularly if the taxes are dedicated to road and bridge work), so Ms. Wilhelm does not expect any changes to credit. However, in some states, gas tax revenues are pledged directly to specific debt obligations, and this is where the legislative mechanics will come into play.
Two contrasting examples are New York and Connecticut. New York State's current budget agreement suspends the state's sales tax on motor fuels from June 1 to December 31. The sales tax is one of several revenue streams pledged for repayment on the Metropolitan Transportation Authority (MTA)'s Dedicated Tax Fund bonds (DTF) (/AA/AA), but it only represents about 3.7% of dedicated disbursements. In addition, the State budget includes a "hold harmless" provision for the MTA so it is unlikely to have an impact on credit quality.
Alternatively, the State of Connecticut (Aa3/A+/AA-/AA) suspended its 25 cents/gallon excise tax on gasoline from April 1 through June 30. The motor fuels tax is the second largest revenue source dedicated to Connecticut's Special Transportation Obligations (STO's), at an estimated 24% in fiscal 2022. At this point, the State has not pledged a replacement revenue source. The STO's have a strong 2.0x rate covenant and additional bonds test, so coverage is unlikely to be materially weak in fiscal 2022. However, part of the reason that the STO's are not rated higher than the State's GO obligations by Moody's or Fitch is that the State has periodically clawed back some of the dedicated revenue. While the 2018 voter-approved constitutional amendment dedicated specific revenue streams to the State's Special Transportation Fund, the legislature has the ability to adjust tax rates as they see fit, maintaining some political influence over the revenue. The motor fuel tax suspension is therefore unlikely to assuage these concerns.
