The Sales Tax: The New Way to Fund Transportation?

Engineers have been browbeating U.S. policymakers about the dire state of the country’s infrastructure for years. This year is no different. Last week the American Society of Civil Engineers gave U.S. infrastructure a barely passing grade of D+ and warned that “it’s time to stop duct-taping this problem.” Much of the problem has to do with how the country pays for its infrastructure, which does not raise enough revenue to keep up with the costs of needed repairs and improvements. But the engineers may finally have the ear of policymakers in one state, Virginia, who are making real changes about how the state funds its highways and roads.

The arithmetic is clear: the United States  should be spending more on its roads and highways. As the Renewing America Progress Report on transportation infrastructure lays out, the country’s roads and highways are nearing the end of their useful life. Needed repairs would cost about 60 percent more than what is already spent each year. Building new roads and improvements to keep pace with population growth would cost twice as much.

But even as the price tag goes up, revenue is falling off.

Blame the gas tax. The federal government and states have traditionally relied on a gas tax, usually a set cents-per-gallon amount instead of a percentage of the gas price, to raise revenue for roads, highways, and bridges. This “user fee” model seemed a fair way to tax drivers who were responsible for causing the wear and tear on the roads. But the gas tax is not working as well as it used to. The federal gas tax and most state gas taxes are not pegged to inflation, and the federal gas tax of 18.4 cents per gallon has not changed since 1993. Americans are also driving more fuel efficient cars and generally driving less. Attempts at raising gas taxes almost always fail. All this adds up to less gas tax revenue. The Federal Highway Trust Fund has been running deficits for several years on the order of many billions of dollars.

Virginia’s experience with gas tax politics and revenue shortfalls is among the worst. Its gas tax has been 17.5 cents since 1987, and its transportation construction fund is set to go broke by 2017.

It comes as no small irony that Virginia is now setting a new national precedent in how to fund transportation systems. A bill passed by the legislature in February will make it the first state to do away with the fixed cents-per-gallon gas tax entirely. In its place will be a new percentage-based wholesale tax on gas as well as a new dedicated transportation revenue stream created from an increase in the general sales tax. The changes, along with higher car registration fees and some regional tax hikes, will generate an extra $3.5 billion of funding over the next five years. Most of that extra money will come from the general sales tax, which has only an indirect connection to transportation use. Virginia is moving away from the long-sacred principle of “you use, you pay” transportation funding model.

Not all transportation experts are pleased. There are other ways to improve a user fee-based system, critics argue, and they usually point to a “Vehicle Miles Traveled,” or VMT tax, where cars are taxed not based on the fuel they consume but the distance they travel. Three bipartisan commissions have recommended transitioning at some point to a VMT system. The technology already exists to make it work. The system would more fairly share the costs of road wear across all cars, regardless of their fuel economy. European countries are experimenting with VMT taxes for trucks. Oregon has funded a big pilot study to explore the option.

But as appealing as a VMT tax is in theory, the country is years if not decades away from such a system. Privacy concerns have made the VMT tax dangerous political ground. After simply suggesting the possibility of a VMT tax early in his tenure, Secretary of Transportation Ray LaHood was instructed by the White House to retract his statement.

Viriginia’s diversification strategy seems the next-best-possible option. There is already an international precedent. According to the Eno Center for Transportation, no other country relies on a user-pay system as the main way to fund its transportation system. Europeans and Japanese pay astronomically high gas taxes compared to Americans, but the gas tax revenues go into general funds and are not dedicated back to transportation. Other states, including Massachusetts and Pennsylvania, are exploring using the general sales tax to fund transportation projects.

But whatever the method, Virginia should be lauded for making the political compromises necessary to raise revenue to pay for long-term investments in transportation.