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Kentucky ready to tack another penny on gas prices

By Ryan Alessi
Lexington Herald-Leader

FRANKFORT, KY. – As if gasoline prices approaching $2 a gallon weren't bad enough for Kentucky drivers, the state is poised to add another penny a gallon in tax in July.

A 24-year-old law, passed when world oil prices were setting records, calls for a temporary increase in the state's gas tax when the wholesale price that stations pay averages more than $1.11 over a selected month.

Last month, that happened for the first time since 1981.

Preliminary estimates show that the average wholesale price in Kentucky during April was more than $1.27 a gallon.

Wendell Butler, a tax consultant in the revenue cabinet, said he is waiting for final figures from the U.S. Department of Energy before the 1-cent tax increase is official.

"But the data I have now is pretty conclusive that it's going to go up," he said.

Currently, Kentucky collects 16.4 cents a gallon on gasoline and 13.4 cents on diesel.

The increase, which would take effect July 1 with the next calendar quarter, is temporary. The tax could return to its current rate three months later if the average wholesale price fell to less than $1.11 during July. That is the next specified indicator month.

Or it could go up. Again.

Yesterday, oil prices hit the highest level in more than 13 years, based on turmoil in the Middle East. And speculators drove prices for gasoline futures to a 20-year peak.

Kentucky's temporary tax is capped at 1 cent a gallon per fiscal year regardless of how high wholesale prices go.

But July also is the start of a new fiscal year for the state.

So starting Oct. 1, motorists could start paying as much as 1 cent more if July's average goes up enough.

Last month was only the fourth time that Kentucky's wholesale gasoline prices have passed the $1.11 threshold. The first three were during 1981 when oil prices peaked. But the next year prices collapsed, and still remain shy of that level.

Drivers came close to seeing higher taxes in July 2001 and again last month, but the wholesale price of gas didn't hit the magic number.

The trigger mechanism was approved by the 1980 General Assembly under a then-prevalent theory that steeply rising gas prices would make consumers go to the pumps less often. That, lawmakers feared back then, would reduce the gasoline-tax revenues needed for road projects.

The theory has proven to be false, say the law's critics.

"When gas prices rise, that doesn't affect consumption," said Lilla Mason, spokeswoman for AAA Bluegrass Kentucky. "At the time when they made that law, we didn't think it was very effective."

Recent data support her claim.

The average price that Kentucky drivers paid for a gallon of regular reached $1.77 yesterday, an increase of 35 cents from May 2003, according to AAA's daily fuel gauge report.

But statistics from the U.S. Energy Information Agency show that despite rising prices, Kentuckians purchased more regular grade gasoline through February than in the first two months of 2003.

Mason said AAA will ask the General Assembly to repeal the trigger law during the next legislative session.

When questioned yesterday, state House and Senate leaders and the governor's office would not comment on the law or on repealing it.

Democratic House leaders are scheduled to meet with Republican Gov. Ernie Fletcher today to discuss a possible special session before June 30 to write a state budget. The General Assembly could take up changing the gas tax then.

But the choice could be difficult. A penny-per-gallon increase in gasoline and diesel taxes would put an additional $30 million into the cash-strapped state Road Fund over a year.

The taxes are the Road Fund's largest source of revenue, expected to bring in more than $458 million in fiscal 2004.

Kentucky $1.77 $1.42

Nation $1.82 $1.53

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