City Transportation Funding

Maintaining safe, reliable city streets is one of the core responsibilities of Kentucky’s municipal governments. With over 60% of Kentuckians living in one of the Commonwealth’s 408 cities, and 75% of the state’s economic activity and 80% of its jobs located in these areas, city streets support not only local mobility but statewide prosperity.

Meeting this responsibility, cities collectively spend hundreds of millions of dollars each year. In Fiscal Year (FY) 2023 alone, cities spent over $399 million to maintain local streets and roads, which is roughly 7% of total municipal expenditures. For FY 2019 – 2023, on average, cities contribute more than $350 million annually to this critical infrastructure.

Funding Sources for City Streets

To fund municipal public services, cities utilize federal, state, and local funds.

Federal transportation funding is typically awarded through competitive grants. These funds are project-specific, often come with matching requirements, and are not a predictable or flexible revenue stream. The state’s motor fuels tax is the primary source of state transportation revenue. This tax is distributed to state and local governments under a formula in state law.

Motor Fuels Tax Formula Breakdown

• 51.8% stays with the state, used to maintain highways, interstates, and other state-managed roadways.
• 48.2% is allocated to local governments, distributed as follows:

This means that for every dollar in motor fuels tax revenue, cities receive just 7.7 cents. Despite maintaining denser road systems and serving a majority of Kentucky residents, cities receive the smallest share of road funding.

When State Support Isn’t Enough

In FY 2023, Municipal Road Aid (MRA) payments covered just 14% of the $399 million cities spent to maintain their local streets. Despite the statutory allocation, the state’s contribution falls far short of meeting the growing infrastructure needs of Kentucky’s municipalities. Cities are left to make up the difference by relying heavily on local tax dollars, general funds, and reserves.

This growing imbalance strains municipal budgets, particularly for smaller cities that may lack the local revenue base to absorb such significant infrastructure costs. It also limits cities’ abilities to plan for long-term improvements, forcing them to defer critical maintenance, delay construction, and stretch already thin budgets even further.

A Shrinking State Revenue Source

The problem is made worse by a decline in the revenue source itself. Kentucky’s motor fuels tax is tied to the average wholesale price (AWP) of gasoline. When prices drop, so does the tax rate. Over the past two years, the tax has fallen by 12%.

Starting July 1, 2025, the gas tax will drop to 25 cents per gallon, reflecting a 1.4% per-gallon decline in FY 2026. As this key revenue source continues to shrink, the dollars available for municipal road aid will decline, further widening the gap between what cities receive and must spend.