As the debate over tax reform stalls in Washington, the action has moved to the states, where several Republican governors are looking for ways to not only cut taxes but eliminate some entirely. Kansas, Nebraska, and Louisiana are all considering doing away with personal and corporate income taxes and replacing them with a higher sales tax.
A bolder experiment is under way in Virginia, where Republican Governor Bob McDonnell has proposed scrapping the state’s gasoline tax. Nine states already get by without income taxes, but all 50 tax gas. For decades, Democrats and even small-government Republicans have accepted gas taxes as the fairest way to build and maintain highways. Those who use the roads most end up paying the most. And because people keep driving in good times and bad, it’s a reliable stream of income.
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Virginia’s 17.5 percent gas tax, the 10th lowest in the country, is expected to bring in about $684 million in the next fiscal year. But the governor will need an estimated $844 million a year to complete an ambitious five-year overhaul of the state’s crowded roads and bridges. To get there without a gas tax, he’d raise the sales tax from 5 percent to 5.8 percent and—irony alert—put a $100 registration fee on fuel-efficient alternative vehicles. State Secretary of Transportation Sean Connaughton says that by pegging transportation funding directly to the sales tax, revenue will keep pace with the state’s growing economy. Between 2014 and 2018, the governor’s office projects the new sales tax will boost transportation funding by $4.1 billion, vs. $3.5 billion from the gas tax.
Why not just raise the gas tax? Republicans who control the house of delegates would block it, says Connaughton, who also points to a bigger flaw: The gas tax isn’t the moneymaker it used to be. Americans are driving more miles yet using less gas, thanks to more fuel-efficient cars. After President Obama announced new fuel-efficiency standards in August, mandating that cars average 54.5 mpg by 2025, the governor decided the state would be better off long term if he swapped gas taxes for sales taxes. “It’s completely unsustainable,” Connaughton explains. “We need a new solution.”
McDonnell says killing the gas tax will also give Virginia a price advantage over its neighboring states, which already have higher sales and gas taxes. His office points to a new study by Chmura Economics & Analytics, in Richmond, claiming gas prices in Virginia could fall 16.6 cents per gallon. Others are skeptical. State Senator Richard Saslaw, the Democratic minority leader, calls the proposal “nothing short of absurd.” Saslaw, who owns a gas station in Northern Virginia, says it may temporarily lead to lower gasoline prices in Virginia, but they’ll eventually rise as oil companies begin selling to Virginia gas stations at a slightly higher price, taking the margin for themselves rather than passing it on. “All you’d be doing is giving a windfall to the oil companies,” Saslaw says. “You honestly think they would allow a 38-cent difference between Virginia and North Carolina?”
McDonnell’s plan could be a tough sell. Democrats oppose it because sales taxes disproportionately hit the poor on basics such as food. And many Republicans who relish the idea of killing the gas tax don’t support the sales tax hike that would pay for it. Saslaw doesn’t like it for another reason: It would give a free ride to millions of out-of-state motorists, who drive 7 billion miles in Virginia each year, according to the state Department of Transportation. Without a gas tax, they’ll contribute to the state’s roads only if they purchase something else when they stop to fill up. To make up the difference, says Saslaw, “they’d have to buy a lot of Snickers bars.”