Virginia’s Gas Tax: Ending A “Dinosaur Tax”

Virginia’s Gas Tax: Ending A “Dinosaur Tax”

By Geoffrey Styles

Ed. note: This piece first appeared on Energy Outlook, Geoffrey Styles’ blog.

I don’t know if the Speaker of Virginia’s House of Delegates intended a double entendre when he referred to the state gasoline tax that Governor Bob McDonnell (R) just proposed eliminating as a “dinosaur tax“.  He was certainly correct that this tax is rapidly becoming outmoded as its capacity to keep pace with necessary infrastructure investment fades with every EV, hybrid, or other efficient car that’s sold.   In the Governor’s remarks, he referred to the gas tax as a “stagnant revenue source.” In a low-tax state like the Commonwealth, shifting the tax burden for transportation away from fuel taxes and toward registration fees and a higher general sales tax represents an innovative, though also controversial answer to a challenge that has concerned me for some time.

The scope of the underlying problem should be uncontroversial: Like most states, Virginia’s $0.175 per gallon gasoline tax is a holdover from an era in which fuel sales grew in tandem with road use, and both expanded steadily year after year.  I can personally vouch for Northern Virginia’s traffic congestion, cited in this morning’s Washington Post story on this issue. As in most states, Virginia’s gasoline sales have been flat to declining since the recession that began in 2008, while the value of the fixed fuel tax has been further eroded by inflation.  These trends seem likely to continue for years, with recent new-car fuel economy improving sharply. The gas tax simply can’t cover the cost of repairing and extending Virginia’s highways without a large increase now, followed by periodic increases as future fuel sales fall.

A key aspect of Governor McDonnell’s proposal that appeals to me is that it doesn’t rely on high-tech monitoring or low-tech inspections of actual miles driven, like many of the other solutions I’ve examined.  Instead of trying to fix the fuel-tied tax, he would eliminate it entirely and shift revenue generation to a combination of higher annual fees, especially for alternative fuel vehicles that currently pay little or no road tax, and an increase in the Commonwealth’s 5% sales tax to 5.8%.  0.5% of the current sales tax is already dedicated to transportation.  The proposed shift exchanges one regressive tax for another, in a manner that recognizes that all Virginians stand to benefit from improved transportation networks, whether they personally use them or not.

The current Virginia gas tax costs an average motorist around $100 per year, based on 12,000 miles of annual driving.  The rise in the sales tax would generate comparable revenue from $12,000 of annual spending subject to the sales tax.  That likely equates to little or no tax increase for low-income drivers, and an increase of up to a few hundred dollars a year for the better-off, while still leaving Virginia’s sales tax slightly lower than those in Maryland and the District of Columbia. Motorists would continue to pay the federal gasoline tax, currently set at $0.184/gal.

I can envision various objections to the Governor’s proposal, including concerns that cutting the gas tax might increase gasoline demand–and emissions–and reduce the incentives for higher fuel efficiency.  That seems unlikely in the current context for at least two reasons.  First, eliminating the Virginia gas tax involves a reduction in pump prices of less than 5% of last year’s average price in the region, and more importantly represents less than a quarter of the total range of gas-price volatility we experienced in 2012. Moreover, fuel economy improvements are already mandated under the new federal Corporate Average Fuel Economy regulations that will increase fleet-average miles per gallon to 54.5 mpg by 2025.  Cars will continue to become more efficient, no matter what gasoline costs.

It will be interesting to watch how this proposal fares in Richmond.  The Governor’s party may control the House of Delegates and effectively the Senate, by virtue of a tie-breaking Lieutenant Governor, but 2013 is an election year, and Mr. McDonnell is barred by term limits from seeking reelection. I wish him luck with this idea, even though its enactment would probably result in a small net tax increase for my household. I’m sure other states will be watching, too.

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