Tax Break

Virginia plan to end gas tax quickly panned

January 9, 2013

Virginia Governor Bob McDonnell, entering his last year in office, offered on Tuesday a bold plan to finance badly needed road work and transportation expansion in the state.

His plan, to end the state’s 17.5 cent per gallon gas tax and replace it with a 0.8 percent increase in the state sales tax, was quickly booed by tax experts, however.

Their argument: removing the tax’s connection to gas would shift the burden of road repairs and upgrades to the broader population from the daily drivers who use roads most.

In a system where gas is taxed, there are incentives to buy cars with better gas mileage and to use mass transit. Those would also be lost.

“When it comes to highway policy, it’s important to follow the “benefits principle” of taxation: people who use the roads the most should be required to pay the most for those roads.  It’s a basic issue of fairness,” explained Carl Davis of the Institute on Taxation and Economic Policy (ITEP) in an email exchange.

There is little doubt that Virginia’s gas tax is falling short. The state has one of the most overcrowded road systems in the country, and the gas tax, which has not increased in 24 years, now provides less than a quarter of annual spending on road maintenance and other transportation.

In a critique of McDonnell’s plan published Tuesday Joe Henchman from the Tax Foundation, echoed ITEP’s criticism of the plan’s “free rider” problem, but also questioned McDonnell’s calculation that the new sales tax would raise $3.1 billion of additional funding for transportation.

Of that $3.1 billion, $812 million are funds diverted from other unnamed areas of the budget. Another $1.1 billion would come from collecting tax on online sales, something the state cannot currently enforce and won’t be able to until proposed (but not yet passed) Federal legislation opens the door, neither of which seem to Henchman to be fully reliable.

Besides McDonnell’s there are a number of legislative proposals for fixing Virginia’s tax being floated ahead of the state’s January 15 start to its legislative season. Some would increase the sales tax without cutting out the gas tax, others would increase the gas tax and, in one case also index it to highway usage.

Virginia is not the only state faced with inadequate gas tax revenue.  According to a 2011 ITEP  report,  rising fuel efficiency in cars and the fact that most gas taxes are not indexed to inflation or road usage, have left states without enough money to cover climbing road repair costs.  

Davis predicts that  in addition to Virginia, gas tax reform is likely to come up for debate this year in Iowa, Maryland, Massachusetts, Wyoming, Minnesota, Washington and Michigan.  

Any gas tax reforms, however, will ultimately depend heavily on trends in gas prices this year, said ITEP’s Davis. In the past high prices have short circuited reform discussions, lead to temporary gas caps, and generally acted as a short-term influence on a discussion that impacts a constant and long-term problem.

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