The Oregon Constitution exempts refunds and debt repayment from the limits on how revenue from taxing cars and fuel is spent

Note: What follows is a hypothesis and a question. What’s presented here is not a legal opinion, nor does it purport to be one. This commentary raises the question–which deserves a thorough examination in the legal process–as to what restrictions attach to the expenditure of funds raised by taxing cars and fuel in Oregon.

The 2019 session of the Oregon Legislature will convene shortly, and when it does, its expected to be hard at work on what’s called a “Clean Energy Jobs” bill.  A key aim of the bill is to effectively put a price a carbon pollution as a way of achieving the state’s adopted legislative goal of reducing greenhouse gas emissions. The bill would produce some additional revenues that could be used to help facilitate the transition to a lower carbon economy. But there seems to be a hitch: At least some of the revenue from the bill would be paid from taxes levied (at least indirectly) on automobile fuel, and there’s a widespread belief that such fuel taxes must be spent on roads. It would be a perverse and self-defeating policy if the Oregon Constitution were held to require that carbon fees be plowed back into road construction.

This belief apparently stems from a particular provision of the Oregon constitution which generally requires that funds raised from taxing cars or fuel must be spent on maintaining or improving roads. Sightline Institute’s Kristin Eberhard repeated this commonly accepted position in a depressing article about the prospects for using carbon tax revenues to encourage more environmentally benign forms of transportation:

Oregon’s Constitution holds a rude surprise for climate crusaders: Article IX prevents the state from investing revenue from transportation sector polluters—nearly half the potential climate pollution revenue in Oregon—in solar panels, bikes, and buses. The constitution funnels pollution revenue exclusively into the Highway Fund.

The particular provision in question is Section IX of the Oregon Constitution, which reads:

Section 3a. Use of revenue from taxes on motor vehicle use and fuel; legislative review of allocation of taxes between vehicle classes. (1) Except as provided in subsection (2) of this section, revenue from the following shall be used exclusively for the construction, reconstruction, improvement, repair, maintenance, operation and use of public highways, roads, streets and roadside rest areas in this state: (a) Any tax levied on, with respect to, or measured by the storage, withdrawal, use, sale, distribution, importation or receipt of motor vehicle fuel or any other product used for the propulsion of motor vehicles . . .

While people focus on the narrow restrictions contained in paragraph 1 of this section of the Constitution, they generally ignored the fact that the Constitution carves out clear exceptions to this restriction (as shown in the bolded language in the paragraph above).   The exceptions are for two broad classes of expenditure:  refunds and repayment of debts.  Let’s take a close look at each of the exceptions in subsection 2, and how they might provide a way to realize greater flexibility in using road or carbon taxes to achieve environmental objectives.

Refunds and Credits

Article IX, Section 3a, subsection 2,  provides that the the restricted funds may be used for “refunds or credits.”

(2) Revenues described in subsection (1) of this section:

(a) May also be used for the cost of administration and any refunds or credits authorized by law.

A straightforward reading of this section is that the Legislature may authorize that these monies be refunded to Oregonians according to some system provided for by law. The Legislature has routinely enacted a wide variety of tax credits, to incentivize and reward behavior and to achieve broad policy ends. For example, in 2015, the state issued $69 million in refundable earned income and working family tax credits to more than 250,000 households statewide. The refundable nature of these credits meant that in many cases individual households got more money back from the state than they paid in taxes.

In the context of discussions about a carbon tax or revenue from pricing carbon emission permits, this section of the Oregon constitution seems to clearly allow the legislature wide discretion to provide for rebates or credits of these funds to Oregonians. So, for example, the Legislature might authorize a uniform per person “carbon dividend” to be paid to all Oregonians out of the revenues from a carbon tax. Gordon Levitt and Tom Bowerman have made a similar argument in a brief for  Nothing in the constitution says that rebates or credits must be paid in proportion to the taxes or fees paid by individuals, nor that credits or rebates be paid only to those who pay the tax or fee.  The Legislature has wide latitude to pursue redistributive or other public policy objectives–such as minimizing the equity effects of taxes–by allocating credits.

Similarly, this authority to provide refunds or credits could be used to address the equity concerns that many have raised about the effects of road pricing. The state could use revenues from congestion pricing of freeways in the Portland area to provide tax credits as a kind of “transportation allowance.”

Debt Repayment

The second broad exemption to the use of car and fuel tax revenues is for debt repayment. Article IX, Section 3a, subsection 2 continues:

(2) Revenues described in subsection (1) of this section: * * *

(b) May also be used for the retirement of bonds for which such revenues have been pledged

The purpose of this exemption is straightforward: it is to assure potential creditors (i.e. purchasers of state bonds) that they state can tap any source of revenue to repay these debts.  Importantly, this applies not just to revenue bonds secured by the gas tax revenues (the Oregon Department of Transportation periodically issues such bonds to finance capital construction projects), but applies to any of the state’s bonded debt.  In the case of general obligation bonds, the state is telling bond purchasers that it will assure their repayment of debt out of any moneys it has, including gas tax revenues.  The reason that general obligation bonds can be sold at a lower cost to the state (at a lower interest rate paid to purchasers) is that the state has offered this very broad assurance.

One might argue that the state would only need to tap gas tax funds to repay general obligation bonds in the event that other sources of funding (for example, general fund revenues from the income tax) fell short of the amount needed to make debt payments due in some particular year.  While that may be the state’s practice, nothing in the constitution restricts the use of these funds to repaying debt only in the event of an actual or predicted shortfall in other funds, or a likely default on debt.  It simply says, that the restriction on the use of these funds doesn’t apply to using them for debt repayment.

What this appears to mean is that the Legislature could authorize some portion of the gas tax (or carbon fees or other revenues on fuels or automobiles) to be used to repay bonds, any bonds.  They might be bonds specially issued to be backed by these revenues; alternatively, they might be some other bonds that the state has issued:  the state has about $3 billion in outstanding general obligation debt.

As a sample of what might be done, the Legislature could provide that $100 million of revenue from a carbon tax (or the sale of carbon emission permits) be used to repay bonds issued for a green energy adjustment fund.  Nothing in the constitution appears to prohibit the state from using revenues gained from car taxes or fuel taxes or similar fees, they would be exempt as provided in Article IX, Section 3a(2).

There seems to be almost a folk belief that the Legislature’s hands are tied when it comes to spending monies raised by the gas tax (or, indirectly, through a tax on carbon pollution). But a straightforward reading of the exceptions laid out in the Oregon Constitution appear to provide a clear path for the Legislature to use revenues from the carbon tax or fees to fund a system of carbon dividends (to address equity concerns), and also to pay back debt. The Legislature should not let a paper tiger of folk wisdom persuade it not to take a close look at these alternatives, especially if it’s serious about about crafting an equitable, and environmentally sound “clean energy jobs” bill.