Gov. McDonnell’s Transportation Tax Plan a Bad Deal for Virginians

WASHINGTON, D.C., Jan. 9, 2013 — Yesterday, Virginia Gov. Bob McDonnell released his transportation funding plan. His proposal would eliminate the gasoline tax, making up for revenue losses largely by increasing the sales tax and redirecting general revenue. However, the Competitive Enterprise Institute (CEI) expressed concerns with the McDonnell plan, warning that it relies on fiscal sleights of hand and will ultimately harm Virginia’s transportation networks.

“The McDonnell plan is a step backward for Virginia, which has long led the nation in pioneering successful transportation policy innovations such as the public-private partnership model,” said Marc Scribner, Fellow in Land-use and Transportation Policy Studies at CEI. “Gov. McDonnell proposes to largely abandon the traditional user-pays/user-benefits transportation funding principle—in which users bear the cost of transportation enhancements—in favor of more speculative, and therefore risky, revenue streams.”

Gov. McDonnell justified his elimination of the gas tax on the grounds that it is a “stagnant” revenue source. McDonnell is correct, Scribner said, “New vehicle fleet and driving trends are quickly rendering the fuel tax obsolete. But abandoning the user-pays/user-benefits principle, which has long guided transportation funding in the United States, is not the answer,” Scribner argued.

“Strengthening the user-pays principle through all-electronic tolling and other mileage-based charges is the most prudent and fiscally conservative approach.”

The user-pays principle offers a number of benefits over non-user revenue collection:

1. Fairness: Highway users benefit from the improvements their user taxes or fees generate.

2. Proportionality: Users who drive more pay more. Users who impose disproportionate costs, such as heavy trucks, are charged more.

3. Funding Predictability: Highway use and therefore highway user revenues do not fluctuate wildly in the short-run.

4. Signaling Investment: Revenue roughly tracks use, which provides policy makers with an important signal as to how much infrastructure investment is needed to maintain a desired level of efficiency.

“Relying on non-user revenue sources, such as a sales tax, increases construction and maintenance risk, as revenue raised from sales of furniture and iPods is a poor proxy of transportation network use,” notes Scribner. “In 2000, the Massachusetts Bay Transportation Authority began relying heavily on a dedicated sales tax for revenues. Between 2000 and 2009, sales tax revenue grew at only one-third the rate initially projected. The user-pays principle has already been weakened in Virginia, but relying further on non-user revenue will lead to less stable and efficient transportation funding, which will ultimately harm users and the economy.”

Another problem with Gov. McDonnell’s proposal is its reliance on $1.1 billion in expected online sales tax revenue—which requires congressional action that may not occur—as well as an $812 million general revenue transfer. As the Tax Foundation notes, “Subtract those out and his plan actually raises only about $1.2 billion additionally over five years, less than half of what he claims.”

In light of the serious problems detailed above, CEI urges Gov. McDonnell to reconsider his transportation funding plan and to base his revised policies on sound, fiscally conservative principles—first and foremost, strengthening the user-pays/user-benefits relationship.