Cleantech Market Intelligence
Virginia Eyes Eliminating Gas Tax
Virginia Governor Bob McDonnell has proposed a new transportation infrastructure funding plan that is being described as bold. “Bold” is a compliment in the policymaking world, since big problems are assumed to require bold solutions. The transportation funding gap is indeed a big problem in Virginia, as it is throughout the United States. At Pike, we have written before that fuel efficiency improvements and alternative fuel vehicles (AFVs) are reducing gas tax revenues, the primary mechanism in many states and at the federal level for infrastructure funding. Since simply raising the gas tax still seems to be considered political poison, states are considering a variety of other options to address this problem, such as taxes based on vehicle miles traveled.
The Virginia proposal calls for eliminating the gas tax, which is currently $0.175 per gallon (it hasn’t been raised since 1987 and is one of the lowest in the country); increasing the sales tax instead to fund transportation; and increasing vehicle registration fees, including charging AFV drivers an additional $100 per year, with the revenue going to transit funding.
One problem with this plan is that it decouples transportation infrastructure funding from actual road use, instead making everyone pay for roads, whether they use them or not. This is not inherently a terrible idea, as this is already the case for other types of taxpayer funded programs, like schools. However, all taxes have perverse effects of some kind, and, as other critics of the plan have noted, higher gas taxes tend to result in behavior that helps the environment and reduces highway congestion. Sales taxes are also regressive, meaning they hit poorer taxpayers proportionately harder, while gas taxes are progressive: you drive more, you pay more. Shifting the tax to all retail spending takes away the benefits of the gas tax, and would encourage greater fuel consumption.
Alt Fuels Discouraged
The worst part of Governor McDonnell’s plan is to single out AFV owners by charging them a $100 fee. It seems like an idea borrowed from other states that are trying to make up the funding deficit from falling gas tax collections, like Washington state, which recently passed an EV fee of $100. This tariff is meant to rectify the fact that EV drivers are not helping pay for roads through the gas tax. I cannot see any good reason for taking away the gas tax that drivers of conventional cars pay, and then adding a fee that punishes EVs and other alternative fuel cars.
Another component of the proposal that seems counterproductive: maintaining the diesel fuel tax. Presumably that is meant to ensure that the state still collects revenue from truck drivers using Virginia roads. But it will also make Virginia a terrible market for another type of fuel-efficient vehicle – diesel cars. As I discussed in my Clean Diesel Vehicles report last year, the slightly higher price for diesel than for gas in the United States already discourages adoption of diesel cars. If the $0.175 state tax on gasoline disappears while diesel still gets taxed, this difference almost entirely wipes out the fuel savings that diesel drivers get from better fuel economy. While only 125,500 light duty diesel cars sold in the United States in 2012, demand is rising. The top seller was Volkswagen (here I am referring to VW and Audi combined; if we say only VW, the right percentage is 72%), with 78% of the market. VW is very bullish on diesel – and happens to have its American headquarters in northern Virginia.
In sum, the proposal lacks a broad framework on how to improve Virginia’s overall transportation system. Yes, it provides a consistent funding source, but it will also encourage more driving and more oil consumption. It would truly be bold to be honest with drivers that gas taxes are a sensible way to pay for roads, that $0.175 went a lot farther in 1986 than it does in 2012, and we need to pay for our infrastructure by raising taxes on old-fashioned, gas-powered vehicles.