Virginia's Bold, New Transportation Funding Idea

Under a new proposal by Gov. Bob McDonnell, Virginia would become the only state without a gas tax.
by | January 28, 2013 AT 5:00 PM

Virtually the entire transportation community is watching Virginia, where Gov. Bob McDonnell is pitching a plan to shore up his state's transportation funding that's radically different from just about every other proposal out there.

The governor faces two stark realities in his state: As it stands now, Virginia doesn't have enough money to pay for its transportation needs going forward, and historically, its legislature has been unwilling to raise the gas tax. As a result, McDonnell wants to get rid of the gas tax altogether. In its place, he proposes to increase the sales tax and dedicate the new revenue to transportation.

For the uninitiated, that probably doesn't sound too dramatic. But the significance of the proposal cannot be overstated. If McDonnell's plan goes through, Virginia would become the only state in the country without a gas tax.

For decades now, public officials and transportation policy wonks have struggled with how to provide more funding for transportation initiatives. Usually the solutions involve hiking the gas tax, indexing it to inflation or shifting to a vehicle-miles-traveled fee. But those ideas, while viable on paper, are often not realistic politically.

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Now, many are looking toward McDonnell to see if his plan might be viable in Virginia and beyond. And even those who are skeptical of McDonnell's pitch say he's done something important just by offering a unique solution and raising the profile of the issue. "I would say no comprehensive transportation funding bill is going to be perfect," says Whitt Clement, the state's transportation secretary from 2002 to 2005. "But it is a bold plan and merits a thorough discussion."

McDonnell's plan would generate more than $3.1 billion over five years in new transportation funding. Here's how it would work: First, the state's 17.5 cent per gallon gas tax would be scrapped completely, which would result in a loss of $3.5 billion between 2014 and 2018. Second, to replace the lost revenue the state would hike the sales tax by .8 cents, with all the new money going exclusively to transportation. That equates to $4.1 billion in new revenue, for a net gain of more than $600 million.

Additionally, the portion of the existing sales tax that goes to transportation -- .5 cents -- would be increased to .75 cents. That means potential revenue that goes to the general fund would wind up being shifted exclusively towards transportation, pumping another $811 million to transportation over five years. Other proposed changes include a $15 hike in vehicle registration fees and a $100 annual fee on alternative fuel vehicles. McDonnell also has a plan -- entirely speculative -- that says if Congress votes to let states tax Internet purchases, some of that revenue will go towards transportation and ultimately make up more than a third of new transportation funding.

In announcing the plan earlier this month, McDonnell emphasized that if the state chose to stay with its existing funding mechanism, the gas tax, than Virginia faces perpetual (and growing) shortfalls to its transportation accounts. That, in turn, forces the state to take hundreds of millions of dollars pegged for new construction and defer them to maintenance every year. "The gas tax is a stagnant revenue source, and no changes to it will provide a reliable growth mechanism for transportation in the state," McDonnell said in a statement. "In short, if we stick to the same old means of funding transportation, we will find ourselves having the same debates and facing the same revenue shortfalls over and over again as inflation slowly eats away at the gas tax, cars get better mileage to meet [Corporate Average Fuel Economy] standards and more alternative fuel vehicles hit the streets."

The state's gas tax of 17.5 cents per gallon has remained unchanged since the legislature last increased it in 1986. And it isn't pegged to inflation, meaning its purchasing power declines with each successive year. But at the same time, Virginia lawmakers have resisted the idea of raising the gas tax. "There's no question that Gov. McDonnell is torn between the anti-tax orthodoxy that is so pervasive now in this country and the recognition that we must do something," Clement says. Indeed, the anti-tax group Americans for Tax Reform, led by Grover Norquist, calls McDonnell's plan a "massive tax increase that Virginia taxpayers cannot afford."

McDonnell, it appears, has made the political calculation that reducing the price of gasoline at the pump may be so popular that Virginians will be willing to swallow an increase in their sales taxes. That tradeoff could be prudent, since the sales tax would grow with the economy. "What we're looking at is something that's long term, that grows every year and it's politically palatable," says Jeffrey Southard, executive vice president of the Virginia Transportation Construction Alliance. Southard concedes that McDonnell's plan is outside the box, but he also says that given the unsustainable course of the gas tax, the governor is smart to recognize the need for a different funding mechanism. "We all know at some point in the time, the gas tax is going away," Southard says. "The governor has said, 'Why not now?'"

Critics of McDonnell's plan say he's destroyed the idea of the user fee, that those who use transportation the most should also pay the most for it. It is an idea that is almost sacrosanct to some in the transportation community. Many transportation advocates believe the concept of "user pays" is important because it makes it difficult for lawmakers to divert revenue earmarked for transportation to other sources.

Critics also contend that by relying on sales tax revenue, the plan could pit transportation against other state programs. Shirley Ybarra, who served as the state's Secretary of Transportation from 1998 to 2002, is skeptical that the proposal will survive the legislature in its current form since it could prompt a battle between transportation and education advocates for state money. Indeed, the debate about user pays raises the interesting question of which is better: An increasingly inadequate gas tax that at least is insulated from competing interests, or a sales tax that's sustainable but could face competition from other stakeholders? McDonnell is clearly betting on the latter.

Bob Chase, president of the Northern Virginia Transportation Alliance, which advocates for regional transportation improvements, says Virginia can't afford to give up the gas tax. "You're basically giving up a source that's capable of producing a billion dollars a year or more," he says. "In essence, you need both [the gas tax and dedicated sales tax]."

House Speaker William Howell has suggested some parts of the governor's plan are negotiable, but the idea of replacing the gas tax with a sales tax probably isn't, according to the Richmond Times-Dispatch. Political observers in Virginia say that, in reality, if the state enacts major transportation funding reform the end result will likely be a hybrid of ideas put forward by the governor and other state legislators. There are at least eight bills in the state legislature addressing transportation funding, according to The Washington Post. Among those are state Sen. John Watkins' plan to increase the sales tax on gasoline while reducing the lowest income tax rates, and state Senate Minority Leader Richard Saslaw's proposal to increase the gas tax by 10 cents over two years and index it to inflation.

Whatever the result, many transportation stakeholders are giving McDonnell credit simply for offering an idea that's different and recognizes political realities. "It's taken 25 years to get here," says Martha Meade, a spokeswoman for AAA's Virginia office. "Trying the same thing over and over again hasn't been met with success."

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