Monday, 25 February 2013

Virginia replaces fuel tax with fuel and general tax

I wrote in January about how Virginia Governor Bob McDonnell proposed replacing the state's fuel tax with an increase in sales tax, as a way of covering the desperate need to raise more revenue to pay for deferred maintenance and a range of capital projects.

Well, according to the Washington Examiner, the Virginia State Senate agreed on Saturday 23 February to a compromise solution, that effectively raises US$3.5 billion over five years with two rather peculiar solutions.   

It raises the state's general sales tax from 5 percent to 5.3 percent across most of the state and to 6
percent in Northern Virginia and Hampton Roads.   Effectively meaning that everyone buying anything in the state subsidises the roads, regardless of whether they drive, walk, stay at home or run a whole fleet of vehicles.  A blatant transfer from non-road users to road users, penalising those who use roads the least to reward those who use them the most.

The second step may on the face of it seem more sensible, that being to replace the 17.5c/gallon (4.62c/l) gas tax with a percentage gas tax of 3.5% on petroleum and 6% on diesel.  Sounds great right?  More money as prices go up, effectively inflation busting?  Well yes, it does become an escalator on the price, which is fine as long as prices go up.  If it drops, due to a combination of shale oil and the appreciating US$ (largely as it is treated as a safe haven in the short-medium term), then so does revenue.  Presumably the higher rate for diesel is some sort of attempt to reflect the higher damage that trucks cause to the roads, I'm guessing because there is no such thing as light diesel vehicles in Virginia and the fourth power rule (pdf note on this) is beyond the wit and wisdom of politicians.

Clever?  No, not really.  It really is public policy from the dark ages.  It is pure political expediency, because from tax policy and transport policy perspectives, it doesn't make sense.  The only economic merit will be how the money is spent, and unless a comprehensive long term asset management programme is put in place, and new capital works are measured purely against some form of independent cost-benefit analysis, you can't be sure of that either.

The economic effect of these measures will be incremental of course, it wont mean an increase in traffic or mode shift of any scale, but it sends a sign.  Virginia is happy to tax residents and businesses to prop up the highway system, and happy for road users to get subsidised use of it.  Presumably Virginia will start offering people cheap electricity paid for by an increase in sales tax, or maybe phone calls, or water. 

Whilst much of the United States and the world shifts towards road users paying to use the roads, and paying for the costs of maintaining and renewing the roads they use, Virginia is taking a step backwards, sharing the cost of a ubiquitous utility with everyone, regardless of how much they use it.  It's the sort of approach that some politicians would call socialism if it were applied to other sectors.

What it could have done may have required more political courage and maybe the ability to communicate some basic economics, but it would have been:

- Use tolls where it is feasible and makes financial and economic sense;
- Raise the existing gas tax by enough to combat inflation and avoid arbitrage behaviour (people shopping for fuel from neighbouring states);
- Undertake a comprehensive study on transport costs and charges, to determine the long term needs for public spending on highways, the existing gap between costs and taxes, and options to move forward.

You see the replacement of the gas tax can't be gas tax and sales tax, it has to be an option that involves charging vehicles for actually using the roads.  However, VMT/MBUF/distance based charging seems alien to the state.

Instead it adopted an approach that, from the outside, looks less rational and has little regard for economics at all. 

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