Gas Tax Sanity: Just Index For Inflation
Virginia Governor Bob McDonnell has proposed to eliminate the state’s gas tax and replace it with an increase of 0.8% in the sales tax and other fees including $100 on alternate fuel vehicles. The idea has been roundly lambasted, most importantly economists who study transportation taxation. The most obvious reason this is a bad idea is that it unties road building and maintenance costs from those necessitating them; taxing fuel comes about as close as we can in taxation to directly charging the users of a government service for its cost.
McDonnell would be proud to be the first state to eliminate a gas tax, boosting his bona fides in the Republican party. But he should be just as proud to be at the vanguard of a logical, economically sound change that is long overdue in states across the country: indexing gas taxes for inflation. This means that as the general price level increases, including the costs involved in road building and maintenance, so does the tax rate.
Virginia’s gas tax is 17.5¢ per gallon, but other taxes bring the effective rate to 19.8¢/g. The tax in Maryland in DC is 19% higher. In North Carolina it’s 96% higher. So the decision to eliminate the tax here is not one of the tax being uncompetitive with other states, which is a usual argument for anti-tax advocates.
The reason that gas tax revenue is no longer sufficient to fund roadwork is not that the tax is inefficient, or because of tax avoidance, or any of the usual arguments. It’s because the tax has never been indexed to inflation, which is flat stupid. The tax is supposed to fund transportation funding. As the costs of those services increase through ordinary inflation, a tax that doesn’t increase with the price level will fail to keep up.
Fuel efficiency is also a part of the equation, as more fuel-efficient cars will use less gas (and pay less tax) for the same wear-and-tear on the roads. McDonnell’s proposal would ham-handedly impose a fee on alternative fuel and hybrid vehicles to address this. But he would not place the same levy on conventional-fuel vehicles that achieve better mileage through lighter weight or higher-efficiency engine designs. This is where much of the coming increase in efficiency will be. So those using turbo diesels, which offer higher efficiency without sacrificing the engine power Americans so value, would be the big losers. They would pay the higher sales tax rate and would also pay the state’s diesel fuel tax, which McDonnell would leave in place.
Increasing fuel efficiency has been less of a contributor to declining real revenue than inflation. Since 2000, inflation has been about 30% (the exact figure depends on which measure is used). Economy-wide fuel efficiency hasn’t increased close to this much (new car efficiency has increased, especially in the last two years, but these figures don’t account for older vehicles). So while indexing wouldn’t address future increases in fuel efficiency, it would address inflation, which is perhaps 75% of the problem.
Virginia should increase the gas tax to perhaps 25¢/g, and index that figure to inflation. To address the fuel efficiency increase, it should institute a state-wide registration fee. Virginia would immediately restore funding to a level equivalent to where it was 25 years ago, and the fuel tax rate would be close to Maryland’s rate of 23.5¢/g (which hasn’t been raised in 20 years and is likely to go up in the current legislative session) and far below North Carolina’s 38.9¢/g.
This is the simple, obvious, economically sound way to address the problem. Let’s see if it gets done.