Cheating our state highways: Methods, estimates and policy implications of fuel tax evasion

Motor fuels tax evasion is a persistent drain on state resources earmarked for public transportation systems. This study discusses fuel tax evasion issues in the context of the Kentucky Road Fund in comparison to peer states in the southern region. The prevalent methods of fuel tax fraud are identified and described. Moreover, a basic model for estimating revenue loss from fuel tax evasion is demonstrated for the Commonwealth of Kentucky. The model estimates that as much as $16 million in motor fuels tax revenue was evaded in 1998. The estimates of evasion are also discussed in context of a proposed 10 cent tax hike on both gasoline and diesel fuels. Conservative estimates suggest this tax change may increase fuel tax evasion by 37.5% or an additional $6 million in lost revenues. Our findings remind policy-makers and administrators that enforcement efforts need to be stepped up when the incentives to evade are altered.