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What to Do About the Gas Tax?

Two states, two different approaches for fixing how we pay for roads.
by | January 17, 2013
 

Every tax has its problems, but the state gasoline tax seems more deeply flawed than most. That's largely because the gas tax in most states isn't indexed to the rising cost of fuel; rather, it sits fixed at a per gallon fee. Meanwhile, cars are becoming more efficient and using less gas. In short, the gas tax has been going broke.

This year, gasoline taxes are on a number of state legislative agendas. But raising the tax is taking a backseat to newer approaches. One would use vehicle-miles-traveled (VMT) rather than gas consumed as the base for assessing road use. The other would get rid of the state gas tax altogether and replace it with an increase in the sales tax.

Oregon favors the first approach. It has been talking about its per-mile plan for more than a decade. Over that time, the state has run several pilot programs to work out some of the kinks and address some of the objections to the program. A bill is expected to be introduced in this legislative session that would impose a miles-driven tax on vehicles getting at least 55 miles per gallon starting in 2015.

Virginia, on the other hand, favors the latter approach. Gov. Bob McDonnell has proposed replacing the state's 17.5-cent gas tax with a hike in the sales tax -- from 5 percent to 5.8 percent. The increase would be dedicated to transportation needs. His plan also calls for increasing the vehicle registration fee by $15 for almost everyone and by an additional $100 for owners of alternatively fueled cars. The legislation has the backing of the Speaker of the House William J. Howell. If lawmakers approve the plan, Virginia would be the first state in the country without a gas tax.

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To get a handle on the economics of these diametrically opposed approaches, I talked to George Hoffer, a transportation economist at the University of Richmond. As a Virginian, he follows the Virginia plan closely, but he has also written at length about the Oregon approach. Here's an edited transcript of our conversation.

You've said the Virginia proposal is a "major, major break with the past." How so?

Traditionally, there's been a link between using roads and highways and paying for them, and Virginia has always financed roads with user fees. But it's a break in other ways. It takes us in a direction that's 180 degrees from where public policy has been taking us since 1974 when the federal government passed the first fuel efficiency standards. The proposal would charge owners of an electric vehicle or hybrid car an additional $100 for the annual registration fee. This would make sense if you were doing a fuel tax but not if you're doing away with the fuel tax.

What about the progressive versus regressive tax aspects?

The plan is progressive in the sense that it taxes new technology cars more and you have to have a high income to partake of these cars. On the other hand, since percentage-wise the less you make the more you spend, the sales tax is regressive. There's another regressive element: Everybody in Virginia who has a vehicle will have to pay an additional $15 more for their license plates. That $15 will go to Amtrak, Virginia railway express and Metro-services that mainly serve the wealthy enclave of Northern Virginia. Those who live in poorer, rural areas, who have no access to Amtrak or Metro, wind up subsidizing service for high income people.

What other issues concern you?

Out-of-state travelers pay nothing in user fees. You can travel 200-plus miles on Interstate 95 or 400-plus miles on I-81 through Virginia and not make any financial contribution to the highways. In addition, how many people in Maryland work at least once a week in Virginia? If you take 17.5 cents off the price of gasoline, how many Marylanders who travel once a week to Virginia will purposely fill up there because gas is significantly cheaper. Maryland becomes a big loser.

Another implication is that in an effort to improve emissions and get better gas mileage, more manufacturers of expensive cars are going to diesel. Diesel fuel stays on the fuel tax bill. So this makes the diesel car less attractive. It is progressive in terms of taxation -- higher income people buy diesel cars -- diesel engines are only in expensive cars. But the policy thwarts adoption of new technology.

Do you have some fixes for some of these issues?

The $15 extra licensing fee could be assessed only in those counties where you have access to Amtrak or Metro or light rail. On the out-of-state user issue, why not put a state 5.8 percent sales tax on gasoline? That way out-of-state users would pay for using the roads and gas would still be much cheaper -- people would still come to Virginia to fill up.

Oregon is going down a very different road. How do you assess that plan?

The Oregon Legislature should pass the vehicle-miles-traveled tax this year, but have it take effect 10 years from now. All new cars can incorporate the GPS technology for tracking so it becomes standard. Every car would have a GPS record of where you were and when you were there, and the state can send you a bill for having used the highway.

There are real, positive economic externalities to Oregon's approach. You would no longer have police chases-the police could cut off your car. If your car is stolen, the police could de-activate the car. If you don't pay your Department of Motor Vehicle fees, the DMV could cut off your car.

What about issues of privacy?

Most people don't realize the intrusion of technology in their car today. OnStar systems know where you are. Sirius XM knows where you are. When people drive on tolled express lanes, the miles are tracked and the tolls are collected automatically. People are concerned about privacy but they give it up when they make a cellphone call in a car.

We've had defacto metering for the last 90 years. The metering device has been gasoline-more use, more miles, more paid. But that metering device is coming to an end.

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