Tax Analysts Blog

Virginia's Gas Tax Reform

Posted on Jan 16, 2013
Virginia Governor Bob McDonnell has proposed a somewhat radical plan to fund his state’s transportation infrastructure. The highlights of the plan are complete repeal of the 17.5 cent a gallon gas tax and the imposition of a .8 percent increase in the general sales tax. McDonnell also proposes various new and higher fees on drivers. But the thrust of the plan is swapping the gas tax for higher sales taxes. The one catch is that his higher sales taxes include the ability to tax remote sales.

McDonnell’s ideas were pilloried by the left. Carl Davis of the Institute on Taxation and Economic Policy (ITEP) noted critically that McDonnell’s plan abandons the benefits principle of taxation when it comes to paying for roads. The governor’s plan was slammed by conservatives as well. The Tax Foundation’s Joe Henchman noted numerous problems with the plan including its dubious reliance on increased remote sales tax revenue. The plan was also criticized by a bevy of anti McDonnell newspapers whose editors know little of good or bad tax policy.

McDonnell is right about one thing. The Commonwealth of Virginia cannot fund its transportation system under the current financing regime. The gasoline tax does not raise enough money. One of the great ironies of modern America is that the increasing fuel efficiency of our cars has left us unable to pay for our road maintenance. Virginia will spend nearly $5 billion on transportation – the gas tax raises only one fifth of that amount.

McDonnell does not want to raise taxes and pretends that this reform effort is not a tax increase. That is not true of course, particularly if the state can start taxing remote sales. Tax burdens will go up – a lot. But, as noted by Davis and Henchman, the real problem with the Governor’s plan is that it represents a philosophical shift away from the idea that governments should use benefits taxes when they can. The people who use the roads directly should pay for them. And the gas tax has been a good proxy for road use. The gas tax is inadequate for Virginia because it has not been raised to keep pace with the costs of road maintenance. By the way, ITEP has done some terrific work on this issue, highlighting the states that inadequately fund their transportation systems.

There is a cost to using the roads. With no or low gas taxes, people have the misperception that the roads are free and overuse them. Public roads need to be paid for directly. Tolls are great, but largely impractical. Mileage taxes are a possibility but the idea of government owned GPS collecting data on where you go should give everyone pause. Right now, the gas tax is the only viable – rational – option for funding roads.

Read Comments (1)

vivian darkbloomJan 15, 2013

"Virginia will spend nearly $5 billion on transportation – the gas tax raises
only one fifth of that amount."

I think it’s a little more complicated than that. Per the Virginia FY 2013
budget, the total transportation budget is $4.69 billion. However, of that
amount, only about $4.17 billion goes to the Dept of Transportation (generally,
highways). The rest goes to public transit, airports, ports, etc. While gas
taxes only cover about a third of that amount, other taxes on vehicles and
vehicle drivers cover much of the rest (aside from borrowing and a $1 billion
contribution from the Feds). Also, gas taxes partly fund part of the
non-private vehicle transportation system.

That said, I agree with the general idea that users should pay for what they
use, and raising the gas tax strikes me as a better way to fund roads than
general sales taxes. The same would apply, though, to public transport,
airports and ports. Since the cost of goods subject to Virginia sales tax
generally includes transportation on Virginia roads, it is not entirely
irrational to fund roads through the general sales tax, but that source is a
rather more blunt tool than the gas tax. Also, note that the gas tax is a gas
on a gallon of gas rather than the price of that gallon. As noted in the WAPO
article, Virginia has not raised its per gallon tax “for decades”. That’s more
important than fuel efficiency (I seem to recall studies that found when fuel
efficiency goes up, so do miles driven).

Someone has apparently figured out that when the price of consumer goods sold
rises with inflation, the sales tax revenues go up automatically. Not so with
a per gallon tax on gas, even though the price of building a mile of highway
that tax is supposed to fund has gone up with inflation.

Another interesting aspect of this is that the governor is a term-limited
Republican who is proposing to close the transportation budget deficit
primarily through higher taxes rather than lower transportation spending!

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