Eagle Ford Roads Impacted by Higher Traffic & Inadequate Funding – Tunstall

Current Tax Revenue Mechanisms Do Not Address Road Damage Caused by Development
I-37 Gravel Road Frontage in Live Oak County - TxDOT

I-37 Frontage in Live Oak County – TxDOT | Click to Enlarge

Roads in the Eagle Ford Shale are under intense pressure from the huge volumes of truck traffic that are regularly running up and down South Texas highways – literally hundreds of trips per day in many cases.

The traffic highlights a disconnect in the Texas political economy between how tax revenues are generated and how roads are then funded. With TxDOT’s recent announcement that approximately 83 miles of FM roads have been slated to be returned to gravel (66 miles of them in the Eagle Ford area), it’s worthwhile to examine road funding mechanisms in Texas.

How Is Road Construction Funded?

Let’s start with the state gas tax that we pay at the pump, which is a total of 38.4 cents. Immediately, 18.4 cents goes directly to the federal government, which leaves 20 cents for state use. However, 5 cents of that goes to public education. Only the remaining 15 cents is used to fund TXDOT projects directly. Texas motor vehicle fuel sales taxes are flat taxes that have not been raised since 1991 and are not adjusted for inflation.

The unprecedented activity on the roads in the Eagle Ford Shale area is having an impact that is overwhelming traditional highway funding sources. As an example, it takes nearly 1200 truck trips (equivalent to 8 million cars) to complete a single oil or gas well. Another 350 or so are estimated to be required for annual production.

So, what about other potential funding sources for roads?

Let’s look at sales taxes in Texas, which have a statutory maximum rate of 8.25%. Of that total, 6.25% goes to the state. Cities, counties, transportation authorities and economic development corporations can add up to an additional 2% to their sales tax rates. Some counties charge no sales tax, such as McMullen County, so the maximum rate there is 6.25%. Since city and county sales taxes in the Eagle Ford Shale area have increased significantly starting around 2010, it might seem to make sense for these entities to pick up the tab for increased road wear. In some cases, for example, county tax increases jumped between 300-500 percent in a single year. While this sounds like a lot of money, it pales in comparison to the cost of building roads.

In round numbers, county roads typically cost around $250,000 per mile to build. Farm-to-Market and Farm-to-Ranch (FM) roads cost twice that – about $500,000 per mile. State highway grade roads cost in excess of $1 million per mile. When county and FM roads are repaired to their current standard, the cost can be less – “only” $120,000 per mile – but heavy volumes of truck traffic can tear them back up in less than a year.

Karnes County Example

One of the most active counties in terms of Eagle Ford production is Karnes County. In 2010, county sales tax receipts were $837,038. By 2012 that number had risen to $7,961,495 – a huge increase by any measure. And yet, if every dollar of increased county sales tax revenue were applied to roads in the area, Karnes County would be able to build about 28 miles of county roads, 14 miles of FM-grade road, or only 7 miles of state highway-grade road. Clearly the orders of magnitude for the road impact as a result of oil and gas exploration and production activity is beyond the scope of county budgets.

One the most significant source of potential revenue for roads and perhaps the most applicable is the state’s severance taxes, which are imposed for the extraction of non-renewable natural resources, such as oil and gas. These taxes are on the rise because Texas is producing more oil than it has in over 30 years. In fiscal year 2013, Texas collected $4.5 billion in severance taxes. Overall, about $2.5 billion will go into the Rainy Day Fund (more formally known as the Economic Stabilization Fund) – most of that the result of increased severance tax receipts.

In fact, some of these severance taxes are being channeled to road projects. During the most recent legislative session, $1.2 billion per year was allocated from the Rainy Day Fund for roads across the state (pending approval by voters in November 2014). In addition, a one-time infusion of $225 million was allocated for road systems in South and West Texas areas affected by oil and gas production. And just this month, TxDOT announced that it had identified another $250 million from vehicle registration fees.

However, plans remain in place to convert the 83 miles of formerly paved FM roads to gravel in order to save money. TxDOT has held public hearings to address community concerns, but the larger issue has yet to be addressed. It is becoming clear that several aspects related to the costs of shale oil and gas production (roads in particular) will not necessarily be remedied by current tax revenue mechanisms. As such, any chance for a more permanent solution will be up to the Texas Legislature, which does not convene again until 2015.

The following two tabs change content below.
Tom Tunstall, Ph.D.

Tom Tunstall, Ph.D.

Thomas Tunstall, Ph.D. is the research director for the Institute for Economic Development at the University of Texas at San Antonio. He was the principal investigator for the Economic Impact of the Eagle Ford Shale studies released in May 2012 and March 2013.

Comments

  1. mark thomas says:

    I enjoyed the article. Is there any legal mechanism to directly charge identified industry users for specific road repair? Have industry companies voluntarily contributed for road repair?

  2. It would be nice to see just how much additional revenue the additional truck milage you referenced in your example of a single well being drilled and one years maintenance! Seems substantial to me. I do concur with the need to use rainy day funds to offset the extra needs but am reluctant to give austin any form of new Perminate flow of fund from us to them!!!

Add a Comment

*

MENU