Governor Bob McDonnell’s proposal for funding transportation in the Commonwealth of Virginia has been the subject of a flurry of discussion in the transportation community. The proposal would make Virginia the first state in the nation to eliminate its gasoline tax (although it would keep a tax on diesel, effectively meaning trucks, in place). His proposal would use an increase in the broad-based state sales tax to substitute for the gas tax, and would add a $100 registration fee for electric vehicles. The new sales tax increase would be revenue-neutral, meaning taxpayers would pay the same in sales taxes as they had been paying in gas taxes. Sales tax revenues are expected to increase at a faster rate than gas tax revenues, and therefore the proposal should provide increased funding for transportation investments in a state that desperately needs them.

Much of the criticism of this proposal from the transportation community has stemmed from the fact that Governor McDonnell is moving away from the “user-pay” system that transportation has relied upon for decades in this country. The potential demise of user-pay for gasoline-powered passenger vehicles in Virginia – and the possibility that it could be a harbinger of things to come in other states – makes transportation advocates very nervous. Many transportation professionals believe that user-pay is the best funding strategy, and it has been the most popular one in the U.S. However, Governor McDonnell’s proposal, and the increasing supplementation of user fees by general revenues at the federal level, may give us reason to question whether user-pay is working as well as we might hope.

The Efficacy of the User-Pay System

While the concept of user-pay via gasoline taxes is almost universally accepted in the U.S. as the best way to pay for transportation, it is not seen this way elsewhere in the world. In fact, preliminary research at Eno (we will be conducting a larger study along these lines) has yet to uncover another country that uses the user-pay system as the primary method of funding its surface transportation system. While most other countries have gas taxes, which are typically substantially higher than ours, they are not dedicated to transportation. One explanation for this anomaly is that when analyzed closely, it would appear our widespread acceptance of the benefits of user-pay might be based more on theory rather than practice. The primary benefits of the user-pay system of gas taxes are articulated, in theory, as follows:

• Provides a signal to users. The idea is that users will make more efficient transportation choices if they are the ones paying for the infrastructure.
• Provides a signal to providers. The amount collected in user fees can serve as a cap on transportation spending, thus preventing elected officials from spending more than necessary. It can also serve as a floor, protecting transportation funding from other budget priorities if user fees are firewalled and unavailable for non-transportation uses.
• Stable funding method. User fees are seen as a stable method of funding because as demand increases, the amount of user fees collected should also increase proportionally.
• Equitable. Since users pay into the system and also receive the benefits, user-pay is seen as a fair and equitable way to finance transportation investments.

While all of these benefits may exist in theory, they are rarely seen in practice with respect to gas taxes. For example:

• Provides a signal to users. In practice, gas taxes at the federal and state levels are set too low and are too opaque to have any noticeable impact on fuel consumption. Unless gas taxes are increased dramatically, which is highly unlikely, they are not going to provide a meaningful signal to users.
• Provides a signal to providers. In practice, Congress has ignored this signal. For years, they spent less than what was collected. More recently they have supplemented tax receipts. Also, several states have used gas taxes for non-transportation purposes either as a regular practice or through inter-fund transfers.
• Stable funding method. Gas taxes have become increasingly unreliable sources of revenue in practice due to a reluctance to increase them or tie them to inflation, greater fuel-efficiency, and stagnant Vehicle-Miles-Traveled.
• Equitable. In practice, users are rarely charged enough to even maintain, much less improve the transportation system. These unpaid costs are ultimately borne by all of society through reduced economic activity, increased air pollution, and more accidents.

Just because the gas tax is not working as well as a user fee in practice as we might have hoped does not necessarily mean that sales taxes will prove better. Sales taxes provide no signal to users of transportation and no signal to providers, and can be more regressive than gas taxes in some cases. They can be volatile when the local economy fluctuates, and they can impose an undue burden on those who do not use the transportation system.

However, sales taxes seem to have the advantage of being more politically palatable, as evidenced by several recent local referenda on sales taxes for transportation, which likely explains why Governor McDonnell has chosen to go this route. This may also be true at the federal level, as a 2010 survey by professors at San Jose State found. Sales taxes also have the advantage of being mode-neutral, meaning that no mode has an exclusive claim to them. Finally, sales taxes have the advantage of, unlike gas taxes, being a tax on goods that we want people to continue to buy more of indefinitely. 

Conclusions: Implications for Federal Policy

The issue of the efficacy of user fees at the federal level is becoming an increasingly academic debate. Gas tax revenues are declining in real terms every day, and there is no indication of a legitimate effort by Congress to increase them. Meanwhile hostility in Washington to a VMT-style fee continues to be fierce. Senators Mark Begich (D-Ala.) and John Thune (R-ND) weighed in on the day Secretary Ray LaHood announced he would resign to make unprompted statements that they would likely oppose any new nominee for Secretary who might favor VMT fees. Even if you think user fees were the way to go, they may be no more realistic an option than a gas tax increase.

A more realistic option to increase overall revenues for transportation could be for the federal government to play a larger role in incentivizing states and localities to raise their own funds. The existing federal program still funds over 40 percent of capital investment nationwide, but provides only a few small incentives for states to bring revenues to the table, such as the TIFIA program, match requirements for formula funds, and competitive grant programs. These are not particularly strong or widespread incentives, and much more could be done.

Even without more incentives, in the face of declining federal revenues, it is not surprising to see states trying to raise revenues for transportation in any way practical. Governor McDonnell’s proposal reflects this environment, with his emphasis on what he believes he might get through his legislature. Without stronger federal leadership, we are likely to see states trying any number of different strategies to raise revenues. Instead of focusing only on the user-pay principle, we should focus on creating a clear national policy that provides some amount of interoperability between states, gives states guidance, and helps states overcome political obstacles.