The Virginia Tax Swap

by Reihan Salam

Gov. Bob McDonnell has proposed eliminating Virginia’s gas tax and replacing it with a 0.8 percentage point increase in the state’s retail sales tax and a series of other, smaller levies. David Alpert highlights one of the potential problems with the proposal:

Jim Titus suggested Virginia consider a variant of a proposal Maryland debated last year, to extend some or all of the sales tax to gasoline instead of raising the gas tax. Gas is exempt from the sales tax, which means that while the gas tax raises some revenue, the state’s general fund loses the revenue that would have come from taxing the sale of that gas just like it taxes housewares or computers or anything else.

McDonnell’s plan takes the opposite tack. He would eliminate the gas tax entirely, but also keep exempting gas from the sales tax. He said, “That’s right, no more gas tax at the pump. No sales tax at the pump either.”

The state would then collect no money at all on people buying gas, even though it collects money from people buying most anything else. It even has a sales tax on groceries, unlike DC and Maryland. This means you would pay something for buying grapes and ginger but not gasoline.

This is enormously frustrating to non-drivers, but of course non-drivers represent a relatively small share of the Virginia electorate and presumably an even smaller share of the state’s Republican electorate. McDonnell has, however, recognized a real problem, i.e., declining gasoline tax revenues in light of increasing fuel efficiency and changing commuting patterns, yet Virginia’s infrastructure needs have not decreased by a commensurate amount. Increasing density in northern Virginia in particular has led to increased congestion, with tends to depress economic growth and to undermine the quality of the local environment. 

One of the political foundations of the gasoline tax is the notion that it constitutes a kind of user fee. That is, gasoline tax revenues have traditionally been devoted to road maintenance and construction. There is a strong case for allowing gasoline tax revenus to be spent on other transportation projects, including mass transit. But the user fee concept is firmly rooted. This is why some of McDonnell’s critics prefer transitioning to a vehicle miles traveled (VMT) tax, an idea we have discussed in this space a few times.

Back in August of 2011, we discussed how a combination of VMTs and congestion charges might be the best approach to financing infrastructure, as it could more accurately reflect the wear-and-tear caused by different kinds of vehicles. Joseph Kile of CBO explained how this might work in testimony to the Senate Finance Committee:

If VMT taxes were intended to maximize or even significantly improve the efficiency of highway use, they would need to vary greatly by vehicle type, by time and place of travel, or both. For example, because pavement damage increases sharply with vehicle weight but decreases with the number of axles on a vehicle, the portion of VMT taxes assessed to maintain pavement could be small or nonexistent for passenger vehicles but substantial for heavy-duty trucks, particularly those with high weight per axle. Similarly, every vehicle would be assessed more to travel on crowded urban roads during peak hours than in off-peak hours or to travel on less congested roads at any time. The rates charged for peak-hour travel would be set in keeping with specific local or regional conditions, including the duration and severity of daily congestion, rather than on the basis of national averages. [Emphasis added]

Kile also identified a potentially attractive alternative to imposing a universal VMT on all vehicles:

Although only 4 percent of the nation’s fleet is made up of trucks (excluding light-duty trucks), they account for roughly 25 percent of all costs that highway users impose on others, including almost all of the costs associated with pavement damage. [Emphasis added]

That is, by focusing on only 4 percent of vehicles, we should reduce maintenance expenditures by a disproportionately large amount. 

Per James Whitty’s proposal, we could also make the VMT optional:

The system should offer motorists choices for reporting mileage driven and paying the tax. Some people may choose to report total mileage wirelessly from the vehicle’s odometer system. Others may use their own global-positioning systems, such as car-mounted navigation units or smart phones, to report mileage. (Yes, there will be an app for this.)

Some motorists may elect to bypass mileage metering altogether. They could pay a flat amount for unlimited annual driving or a variable amount based on an estimate of miles traveled. Those desiring simplicity could choose electronic reporting with automatic debits from a bank account.

The tax paid would depend on the per mile rate set by Congress for the federal portion and by state legislatures for the state portion. The combined federal and state tax rate would total about two or three cents per mile, depending on the state. [Emphasis added]

As a general rule, I like the idea of giving taxpayers more choices regarding how they pay taxes. Simply by giving taxpayers a choice, I suspect a VMT would go down much easier. 

There is yet another idea Virginia’s legislature might embrace to lower the cost of infrastructure maintenance: encouraging the use of pay-as-you-drive (PAYD) auto insurance, as proposed by Jason Bordoff and Pascal Noel in a Hamilton Project paper published in 2008:

If all motorists paid for accident insurance per mile rather than in a lump sum, they would have an extra incentive to drive less. We estimate driving would decline by 8 percent nationwide, netting society the equivalent of about $50 billion to $60 billion a year by reducing driving-related harms. This driving reduction would reduce carbon dioxide emissions by 2 percent and oil consumption by about 4 percent. To put it in perspective, it would take a $1-per-gallon increase in the gasoline tax to achieve the same reduction in driving. Unlike an increase in the gas tax, PAYD would save most drivers money regardless of where they live. We estimate almost two-thirds of households would pay less for auto insurance, with each of those households saving an average of $270 per car.

The problem, however, is that the immediate outlays associated with encouraging PAYD would represent a visible expense while the long-term cost savings, to taxpayers and to drivers, would weigh less heavily on the minds of legislators. That said, PAYD is a no-brainer as a cause for an enterprising state or federal elected official, as it promises substantial savings for most drivers.