Bumpy Road for Plan to End Virginia’s Gas Tax, Raise Sales Tax

Published January 10, 2013

Virginia Gov. Robert McDonnell’s proposal to end the state’s gasoline tax and replace it with a higher sales tax, higher vehicle-registration fees, and annual alternative-fuel car surcharge appears headed down a bumpy road.

McConnell estimates the state would take in another $3.1 billion over five years, including $1 billion in Internet sales tax revenue, if legislation now before Congress becomes law. Of that amount, $1.8 billion would go to highway construction spending.

“My 2013 transportation funding and reform package is intended to address the short and long-term transportation funding needs of the Commonwealth,” McDonnell said in a statement. “Declining funds for infrastructure maintenance, stagnant motor fuels tax revenues, increased demand for transit and passenger rail, and the growing cost of major infrastructure projects necessitate enhancing and restructuring the Commonwealth’s transportation program and the way it is funded. We simply cannot continue to do what we have always done and expect this problem to go away.”

Expanding Tax Collector’s Reach

The proposal has upset some of McDonnell’s political backers, who say it damages his conservative Republican credentials. Some of his opponents also are none too pleased.

“From the eBay perspective, we’re most concerned about leveraging any revenue from a federal Internet tax bill. We feel it is a huge violation of due process and the Commerce Clause [of the Constitution]” said Lauren Sholley White, eBay’s manager of federal government relations.

“It allows government to be as big as the Internet. State tax authorities no longer would be bound to stay in their borders. They’d be allowed to go anywhere” to collect sales tax on purchases made by state residents from retailers in other states, she said.

It’s not just representatives of companies that do business over the Internet who have problems with the proposal.

Good Idea . . . If Goal is Bigger Government

Ending the gas tax “is a good idea because gas taxes are an imperfect user fee. However, McDonnell proposes to replace the gas tax with a 0.8 cent sales tax that he says will generate more revenue than the gas tax. If your only goal is to make government bigger, then generating revenue is a good idea. However, if your goal is to have better roads, then even a gas tax makes more sense than a sales tax,” wrote Cato Institute transportation expert Randal O’Toole on his blog.

“As imperfect as the gas tax is, it generates feedback to highway agencies: if they build roads no one uses, they get no gas taxes. Sales taxes generate no feedback at all; the agencies get money whether anyone uses the roads or not,” O’Toole added.

Cato is a well-known think tank that leans libertarian and to the right of the political spectrum. But the proposal is also taking a beating on the political Left.

‘All Annoyance, No Benefits’

At the Left-leaning Slate.com, business columnist Matthew Yglesias wrote of the proposal, “If anything, it makes the tax structure even more regressive since the carless minority in the United States is disproportionately composed of poor people. The nice thing about a gas tax is that for all it annoys people, it does have environmental and highway congestion benefits. Higher retail sales taxes have all the annoyance but none of the benefits.”

C. Kenneth Orski, editor and publisher of the Innovation NewsBriefs transportation newsletter, predicted wide-ranging opposition.

Orski said McDonnell’s proposal “can be viewed both favorably and unfavorably. On the positive side, the proposal would provide a more generous dedicated stream of revenue for transportation than that offered by the gas tax—higher vehicle fuel efficiency standards will generate even less gas tax revenue in the future.

“On the negative side, the proposal does away with the concept of the ‘user fee,’ an integral part of the highway funding regimen since the Eisenhower era. Conservatives will decry it because a general sales tax would violate the cherished ‘user-pays’ principle, and liberals will condemn it because it would shift the burden to the general population, thus ‘punishing’ transit users and other non-auto users.”

Under the proposal, Virginia’s sales tax rate would climb from 5 percent to 5.8 percent. There’d also be a $100 annual charge for drivers who own alternative-fuel cars or trucks, with the money dedicated to transit services. Vehicle registration fees would increase by $15, with the extra money dedicated to intercity passenger rail and transit services.

Earlier Failures

Virginia legislators and governors have spent more than a decade trying to find ways to bring in more revenue to build more roads to reduce traffic congestion.

Under former Gov. Timothy Kaine (D) the state created unelected regional transportation authorities with wide-ranging powers to impose taxes, fees, and fines  in the Hampton Road and northern Virginia areas. The authorities generated fierce opposition from motorists and taxpayers, and the effort collapsed after the Virginia Supreme Court in 2008 ruled the authorities were unconstitutional. Kaine is now a U.S. Senator representing Virginia.

Under Kaine’s predecessor, Gov. Mark Warner (D), voters rejected a referendum that would have raised Virginia’s sales tax an additional 0.5 cents in eastern and northern Virginia with the promise the additional tax money would go toward $5 billion in regional transportation projects over 20 years.