On Jan. 8, Gov. McDonnell announced a plan to restructure the way that Virginia funds its road expenditures. Of course, through the political process, we never get the first-best option for any problems which the citizens of the commonwealth face. But we can examine the governor’s policy prescription on the margin and determine whether it is at least a step in the right direction.
The governor has proposed that Virginia become the first in the country to abolish the state tax on gasoline. Currently, there is a flat tax of 17.5 cents per gallon sold. This tax remains constant and doesn’t change with gasoline prices. More gallons of gasoline sold results in more tax revenue. When the economy is active, more revenue streams in, and when the economy is lethargic, less revenue is collected. The cost of maintenance increases as more gas is sold and roads are used more intensively. McDonnell claims that this tax scheme no longer makes sense for funding due to increasing fuel efficiency.
To replace the gas-tax revenues, Gov. McDonnell has proposed a small increase in the state sales tax from 5% to 5.8%. The relationship between total sales and road use is not so strong. Because prices can increase while quantities do not, Virginians could end up paying more for roads even when there is not increasing wear on them. Similarly, quantity increases could outpace prices, and tax revenue would fall short of increased road use. The new plan does not tax according to road degradation.
Nor would the new tax be revenue neutral. The governor made a point of noting in his Tuesday press release that he seeks to increase tax revenues for funding transportation infrastructure. To budget hawks, this is bad in and of itself. But it may be the case that the increased revenues are the result of efficiency gains from replacing a bad tax with a not-as-bad tax. This claim would be dubious. User-targeted taxation disappears under the governor’s plan.
The new sales tax would subsidize the buyers of heavy and cheap goods, whose transport is hard on the roads and yet would pay a lower tax. It would be at the expense of buyers who purchase expensive and light-weight goods, who would pay a higher tax per their contribution to wear on the roads. Also, people who drive more and purchase less at the stores would enjoy the use of roads without paying for it.
The governor’s proposed tax has weak ties to maintenance requirements as we move forward. The current gasoline tax will become outdated when gasoline consumption becomes a poor indicator of road use. We are not there yet — nor will we get there soon. More hybrids will not affect this relationship. So long as gasoline is highly correlated to road use, the relationship holds regardless of the actual level of fuel efficiency. As vehicles become more efficient it is true that gasoline revenues will fall relative to miles driven. But this calls for a tax which taxes miles driven — a higher gasoline tax — not a tax which neglects road use altogether.
On economic efficiency grounds, privatization and toll roads would be a first best option. Public toll roads are a second best option. To the extent that gasoline use is still the greatest corollary of road degradation, it is the third best option to tax gasoline directly. Yes, we are traveling more miles per gallon of gasoline, but the relationship between gasoline use and road use will continue to be stronger than the relationship between road use and the value of total sales.
Gov. McDonnell’s plan, besides being a tax increase, promotes more driving, faster road degradation and less cost borne by the people who most contribute to that degradation.
City of Fairfax