Wednesday, January 09, 2013

Virginia's Gas Tax: Ending A "Dinosaur Tax"

I don't know if the Speaker of Virginia's House of Delegates intended a double entendre when he referred to the state gasoline tax that Governor Bob McDonnell (R) just proposed eliminating as a "dinosaur tax".  He was certainly correct that this tax is rapidly becoming outmoded as its capacity to keep pace with necessary infrastructure investment fades with every EV, hybrid, or other efficient car that's sold.   In the Governor's remarks, he referred to the gas tax as a "stagnant revenue source." In a low-tax state like the Commonwealth, shifting the tax burden for transportation away from fuel taxes and toward registration fees and a higher general sales tax represents an innovative, though also controversial answer to a challenge that has concerned me for some time. 

The scope of the underlying problem should be uncontroversial: Like most states, Virginia's $0.175 per gallon gasoline tax is a holdover from an era in which fuel sales grew in tandem with road use, and both expanded steadily year after year.  I can personally vouch for Northern Virginia's traffic congestion, cited in this morning's Washington Post story on this issue. As in most states, Virginia's gasoline sales have been flat to declining since the recession that began in 2008, while the value of the fixed fuel tax has been further eroded by inflation.  These trends seem likely to continue for years, with recent new-car fuel economy improving sharply. The gas tax simply can't cover the cost of repairing and extending Virginia's highways without a large increase now, followed by periodic increases as future fuel sales fall. 

A key aspect of Governor McDonnell's proposal that appeals to me is that it doesn't rely on high-tech monitoring or low-tech inspections of actual miles driven, like many of the other solutions I've examined.  Instead of trying to fix the fuel-tied tax, he would eliminate it entirely and shift revenue generation to a combination of higher annual fees, especially for alternative fuel vehicles that currently pay little or no road tax, and an increase in the Commonwealth's 5% sales tax to 5.8%.  0.5% of the current sales tax is already dedicated to transportation.  The proposed shift exchanges one regressive tax for another, in a manner that recognizes that all Virginians stand to benefit from improved transportation networks, whether they personally use them or not. 

The current Virginia gas tax costs an average motorist around $100 per year, based on 12,000 miles of annual driving.  The rise in the sales tax would generate comparable revenue from $12,000 of annual spending subject to the sales tax.  That likely equates to little or no tax increase for low-income drivers, and an increase of up to a few hundred dollars a year for the better-off, while still leaving Virginia's sales tax slightly lower than those in Maryland and the District of Columbia. Motorists would continue to pay the federal gasoline tax, currently set at $0.184/gal.

I can envision various objections to the Governor's proposal, including concerns that cutting the gas tax might increase gasoline demand--and emissions--and reduce the incentives for higher fuel efficiency.  That seems unlikely in the current context for at least two reasons.  First, eliminating the Virginia gas tax involves a reduction in pump prices of less than 5% of last year's average price in the region, and more importantly represents less than a quarter of the total range of gas-price volatility we experienced in 2012. Moreover, fuel economy improvements are already mandated under the new federal Corporate Average Fuel Economy regulations that will increase fleet-average miles per gallon to 54.5 mpg by 2025.  Cars will continue to become more efficient, no matter what gasoline costs.

It will be interesting to watch how this proposal fares in Richmond.  The Governor's party may control the House of Delegates and effectively the Senate, by virtue of a tie-breaking Lieutenant Governor, but 2013 is an election year, and Mr. McDonnell is barred by term limits from seeking reelection. I wish him luck with this idea, even though its enactment would probably result in a small net tax increase for my household. I'm sure other states will be watching, too.


Anonymous said...

You forgot to mention his hippie punching tax on alternative fuel vehicles on the logic that those vehicles don't pay federal gas tax (while in the same sentence, he's wholesale eliminating the state gas tax). How many alternative fuel vehicles (nat gas and electric) are there in Virginia? What is he going to make there - $50,000? And how disingenuous is the idea that he cares who pays federal taxes?

Just ridiculous and he's incentivizing Hummers over hybrids because it helps his base (Southern VA) over NoVA and it sures up credibility to the big donors for his future Presidential campaign (oil companies).

Geoffrey Styles said...

Aside from the vitriol, your reaction would make perfect sense if you never expected EVs, NGVs and other alternative fuel vehicle to grow beyond a tiny niche. However, if they are going to become consequential in terms of saving oil and emissions, then we need to resolve their "free rider" status with regard to highway maintenance. An annual fee is one idea; there are others. Bottom line, the attractiveness of EVs, etc. should be based on their economic, performance and environmental aspects, not tax avoidance.

By the way, I don't customarily respond to anonymous comments. Blogger provides multiple ways to sign in to identify yourself; please avail yourself of one of them.

Tom Cunningham said...

Right - and don't Virginia's many tolls in part take care of that? Or higher registration fees for everyone (maybe raise fees by $30-40 rather than $15)? The bottom line is that when you remove the state gas tax, there's no free rider status in terms of highway maintenance for hybrids because everyone is a free rider - Hummers too. If you read the press release, McDonnell even has the hubris to claim that hybrids and alternative gas vehicles have free rider status against the *state* gas tax that he's proposing to remove within the same press release.

As to federal "free rider" status, are we really making the argument that someone who has the income to afford to buy a Nissan Leaf is not contributing to highway maintenance through federal gas taxes? If someone has free ridership vs. federal taxes, shouldn't that be fixed on the federal level? It's just a ridiculous argument that VA needs to tack on a state tax to hybrids because they have federal gas tax free ridership.

Removing the gas tax and adding a tax on alternative fuel vehicles is just stunningly bad policy - it's punishing good decisions and basically creating more externalities. I know McDonnell and his administration are denialists and don't believe that carbon emissions are a problem, but this is bad policy in terms of oil dependence as well.

Geoffrey Styles said...

Thanks for identifynig yourself. We clearly disagree here. Consider that your Nissan Leaf owner is already benefiting from a generous federal income tax credit--a non-refundable credit that requires a fairly high income to recieve its full benefit. That ought to be ample incentive without adding road tax avoidance. It's letting these vehicles off the hook for a road maintenance contribution that represents bad policy. As for oil dependence, EVs will contribute nothing meaningful there until they reach numbers at which the free-rider issue will become critical. The first million EVs will save just 35,000 bbl/day of oil.

There are certainly other alternatives to the one Gov. McDonnell has proposed, and I take it you'd prefer one of those, but suggesting that EVs and other AFVs shouldn't contribute to the maintenance of the roads they use can't remain an option for much longer.

Tom Cunningham said...

I agree with you that EVs and AFVs should pay their fair share, but I don't think McDonnell's policies accomplish that - they end up paying a tax for no reason - and highway repair is foisted into a sales tax which hits people that don't even use the highways (who bike, walk, or use public transit). There are plenty of ways to hit the people who actually use the roads but McDonnell's proposal is really an attempt to get NoVA to pay for Southern Virginia.

And I'm not suggesting that EV's accomplish oil independence - I'm saying the gas tax at least helps there by forcing people to consider cars with improved mileage. Gas taxes at least put a price on a negative externality, and Virginia could have raised their gas tax 6 or 7 cents and still have been less than MD or DC and not harmed VA gas stations.

PelinoC said...

Geoffrey, as I understood it from newspaper reports, the existing Virginia volumetric gas tax is very low compared to many surrounding states, and moreover has not been increased in many years, as it was not even tied to inflation. Assuming this information is true, then a logical first step to addressing the revenue problem in the short term is to simply raise the tax.

I agree that over the medium to longer term fuel economy and non-gasoline vehicles will erode the base for a volumetric gas tax, and alternatives will be necessary. However, scrapping a tax which is at least partly related to the use of roads in favour of increasing a general sales tax seems opposite to the usually justifiable "user pays" principle.

It strikes me, as a faraway observer, that a political program quite unrelated to the economic issue at hand is "driving" (sorry, I couldn't resist) the agenda.

Geoffrey Styles said...

Thanks for all your comments. I won't be surprised to hear similar concerns expressed when the General Assembly takes this up. As for those who bike, walk or use public transit, they all impose loads on the highways if they purchase groceries or other goods that must be trucked in, while mass transit users benefit directly from the state spending on transit that's funded form the same pool of road tax revenue.

Geoffrey Styles said...

Ha, ha! Still, it strikes me that deferring this problem by raising the gas tax seems analogous to deferring the reform of entitlements until the finances of those programs are in crisis. We can punt now, but by the time the issue comes up again, it will be much bigger, with more entrenched constituencies. Whether or not everyone agrees with the exact form of his proposal, I give the Governor credit for confronting these trends now.

Tom Cunningham said...

"As for those who bike, walk or use public transit, they all impose loads on the highways if they purchase groceries or other goods that must be trucked in"

How is this rationale for a sales tax though? If you think that commercial trucking needs to be charged, tax them. But the consumers are not free riders since the gas tax / toll costs from shipping are being priced into the products they buy.

"while mass transit users benefit directly from the state spending on transit that's funded form the same pool of road tax revenue."

Mass transit users pay a fee to use mass transit. They are not free riders. Eliminating the gas tax and raising the sales tax is clearly subsidizing cars and motorists over mass transit and walkers/bikers.

Geoffrey Styles said...

"Mass transit users pay a fee to use mass transit."
You simply haven't done your homework on this. I'm not aware of any mass transit system in the US for which fares cover the full cost of operations, maintenance and capital programs. A look at the Washington Metro Area Transit Authority budget for 2013 (large file) illustrates the point:

Skim through until you get to the pie chart, which shows that fares and parking pay less than 1/3 the cost of the system, with VA, MD and the District picking up nearly half, and the federal govt. a substantial share, though that was apparently cut last year:

And VA's substantial share comes from the same budget as road repair, funded from the same sources.

Jim Melendy said...

"As for those who bike, walk or use public transit, they all impose loads on the highways if they purchase groceries or other goods that must be trucked in"

They actually don't. Transporting those goods uses fuel which is taxed to pay for their share of the roads used to transport those goods. Bikes and pedestrians get a "free" ride in exchange for the inconvenience/cost/dangers of our society choosing a transportation system whose priority is motor vehicles.

Geoffrey Styles said...

I stand corrected. The statement you've highlighted would only be true if VA eliminated the per-gallon tax on diesel at the pump, which McDonnell hasn't proposed.

Jim Melendy said...

"The statement you've highlighted would only be true if VA eliminated the per-gallon tax on diesel at the pump ..."

I hadn't thought about that possibility. That is another reason not to shift the tax from fuel to sales. Such a shift would explicitly change the tax from favoring local production that doesn't require much transport to penalizing local production by making them subsidize the transport costs of goods that are shipped in.

I think the sensible thing to do is to require electric cars to include a meter that measures energy used, and require them to visit a drive-through facility to pay the tax in a way that IC powered cars have to get smog checks. Maybe the tax formula should include miles driven and GVWR. I'm betting that taxing vehicle energy used is the right way to go. It assesses a proportional penalty on inefficiency. The only thing wrong with it is that our legislators are so incompetent that they can't make even so simple a mechanism as that work properly. I don't have any confidence that the government can implement any other tax mechanism in a competent way.

Geoffrey Styles said...

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