Virginia drops retail fuel tax; states struggle with transportation funding

By Robbie Webber

When Governor Bob McDonnell signed HB 2313 into law, Virginia became the first state to completely eliminate the retail fuel gas tax. It will be replaced by a 3.5 percent wholesale tax on gasoline, a 6 percent tax on diesel, an increase in the cost to title a car, a $100 fee for hybrid and electric cars, and an additional .3 percent general sales tax, which will go toward transportation.  However, consumers will no longer pay a per-gallon tax when they go to the pump.

One of the features of the bill that few news stories have noted is that sales taxes are expected to climb across the country if Congress passes an internet sales tax. The additional .3 percent devoted to transportation will only fill the gap in funding if the Marketplace Fairness Act passes. However if that bill fails to pass, the wholesale gas tax will be hiked to 5.1 percent.

Many states have not raised their gas taxes in decades, and the federal tax has not changed since 1993. Virginia’s fuel tax had not changed since 1987, and gas taxes in Maryland will rise by 80 percent by 2016 under legislation passed in March, the first fuel hike in that state since 1992. All jurisdictions are seeing a decrease in revenues as driving drops and cars become more efficient, and inflation has substantially decreased what those dollars buy.

As revenues from per-gallon fuel taxes continue to drop, states are searching for ways to bolster their transportation revenues. Some states are simply raising the cents-per-gallon tax, but others are moving toward a sales tax on fuel, which would increase as the price of fuel increases. Others are changing the tax from a retail to a wholesale tax. Whether a wholesale tax will be more palatable to the general public or easier to increase without a political backlash remains to be seen.

States supplementing fuel taxes with general sales taxes or general purpose revenue are moving away from the “user pays” paradigm that has underlain the highway system for decades. This was one of the principal objections to Virginia’s proposal when it was first introduced.

The idea that electric and hybrid cars should pay additional fees is also catching on, although not everyone thinks those creating less pollution and easing the demand for oil should be singled out. However, regardless of what fuel is used, all vehicles contribute to congestion and the need for maintenance.

As each state struggles to find funding, researchers also disagree with how politically difficult it is to increase taxes and fees for transportation. While Gallup found little support for a 20-cent increase in the federal gas tax, the Mineta Transportation Institute has found less resistance, and local and state ballot measures generally pass. MTI researchers conclude that people are willing to pay more, but they want to know how the money will be used.

With a variety of taxes, fees, and revenue sources being discussed and implemented across the country, everyone agrees our transportation funding system is going to change, and no one is sure what it will look like in the future.

Robbie Webber is a Senior Associate at SSTI.