(The Center Square) – Funding road construction and improvements with fuel taxes is becoming an outdated method, one economist says, and two Tennessee lawmakers are looking at alternative revenue sources.
The latest revenue report from the Department of Finance and Administration shows that fuel taxes are the only state tax that did not increase in August. Fuel taxes are down by 7.28%, an $8.2 million drop, when compared to August 2025. They are below projections by the same amount, according to the report.
The Tennessee Advisory Commission on Intergovernmental Relations approved a report on Wednesday of last week, reiterating what it said when it discussed a draft of the report earlier this year – Tennessee's transportation needs are in the billions.
"In fiscal year 2027-28, the state’s existing recurring sources of revenue are expected to bring in $2.6 billion," the report said. "This leaves a billion-dollar gap between recurring revenue and the $3.6 billion in funding needed. If the state continues to rely on existing revenue sources, this gap will likely grow."
About 40% of the Tennessee Department of Transportation's budget comes from the federal government, and 30% comes from the state's fuel tax.
Federal fuel taxes are 18.4 cents per gallon for gas and 24.4 cents per gallon for diesel. Tennessee's fuel taxes are 27 cents per gallon for gas and 28 cents per gallon for diesel, according to the report.
"But neither the federal fuel taxes nor the state fuel taxes are keeping pace with the increase in transportation infrastructure needs," according to the final report approved by the Tennessee Advisory Commission on Intergovernmental Relations. "Total revenue from these taxes is growing by approximately 1.5% each year, while construction costs have increased at a much higher rate, 12% annually from 2021 to 2025."
And there is no silver bullet to fix the state's transportation funding woes, the report's authors said.
"By way of example, to increase state transportation funding by $900 million solely by increasing the state’s existing fuel taxes would necessitate increasing the gas and diesel taxes to 56 cents per gallon and 60 cents per gallon, respectively," the report said. "Additionally, it seems unlikely that the federal government will increase recurring federal sources of revenue in the near future."
The funding problem won't be solved by adding more cents to the tax, according to Orphe Divounguy, chief economist of Quantitative Research Group and former economist at Zillow.
"States are going to have to have a broader conversation about road-use charges, electric-vehicle fees, tolls and other ways of asking drivers to pay for the infrastructure they use," Divounguy told The Center Square. "And on the other side of the ledger, they also have to deal with the rapidly rising cost of actually building and maintaining that infrastructure."
State lawmakers included $1.9 billion in one-time funds in the Tennessee Department of Transportation's budget during their 2026 session. It will be up to a new governor and a General Assembly with new members to decide how to tackle the issue in 2027.
Nashville Democratic Sen. Heidi Campbell and Rep. Aftyn Behn say the decline in gas tax revenues backs a need for their legislation that would use revenues from legalized marijuana to pay for road construction and repairs.
The two have introduced the "Pot for Potholes Act," which failed to pass the General Assembly in 2025 and 2026. Campbell and Behn plan to reintroduce it in 2027.
The bill creates regulations for adult-use legalized cannabis.
"This isn't a fringe idea – we are proposing a practical, bipartisan solution to a problem Republicans created and refuse to solve," Behn said in a statement. "With Pot for Potholes, Tennessee has an opportunity to support small businesses, grow our state economy and generate billions of dollars in revenue for our highways."
Campbell and Behn said Massachusetts is an example of how much money legalized cannabis could bring into Tennessee. In 2025, Massachusetts brought in $290 million, they said in a joint statement.
The bill has been blocked by Republicans, who hold a majority in both state chambers.
"The consequences of that neglect are being felt by drivers and small businesses every day: lost time, lost money and more wear and tear on our vehicles," Campbell said.