By Kathryn Watson | Watchdog Virginia Bureau
ALEXANDRIA — Proposals to pump up Virginia’s 17.5 cents per gallon tax by tying it to inflation are not new, but support to do so from Republican leaders like Gov. Bob McDonnell is.
McDonnell’s recent remarks on the tax, which has remain unchanged since 1986 when gas was 93 cents a gallon, indicate a potential shift from hard-line, anti-tax policies.
“I can tell you that every other major tax in Virginia — the sales tax, the corporate income tax, and the (personal) income tax — all fluctuate with economic activity, because they’re a percentage,” McDonnell said at a meeting with legislators and business leaders this week. “… We’re looking at whether or not … it should fluctuate with economic activity, like every other tax in Virginia.”
These statements starkly contrast with comments he made in a December appearance on WNIS Radio in Norfolk.
“It would kill the steady economic growth we have experienced,” the governor said of increasing the tax at the time.
Factors at play
A couple of factors are likely behind the shift, said John McGlennon, chairman of the Department of Government at Williamsburg‘s College of William and Mary.
“I do think the combination of the elections this year and last year, frankly, along with the growing acceptance of the need for more revenue in transportation has combined to make the governor and members of the Legislature willing to consider some kind of change in the tax structure,” said McGlennon.
McDonnell’s name did not appear on the 2012 Americans for Tax Reform pledge to not raise taxes — unlike the two Republicans vying for his job, Lt. Gov. Bill Bolling and Attorney General Ken Cuccinelli. Still, McDonnell did campaign on the platform of keeping taxes low. So, can he retain his approval rating of 53 percent while increasing the tax burden?
“I think the main reason to suggest this is you can package this in a way that looks less like a tax increase,” said McGlennon. “… If you can say what we’re doing with this is not raising the tax rate but we’re just raising the way we calculate the tax.”
Whatever bills go forward, increasing the gas tax to help fund roads and highways is expected to be an uphill battle with House Republicans, who continue to enjoy a two-thirds majority after the Nov. 6 election, said McGlennon.
“I think it’s going to be a real contentious issue,” McGlennon said.
But, it’ll be one legislators face by necessity, said state Sen. John Watkins, R-Chesterfield. The commonwealth is expected to run out of money for construction by 2017, and the state borrows about $550 million each year from its construction fund to pay for maintenance. The Northern Virginia Transportation Alliance, a private-sector group advocating for better transportation, estimates that Virginia needs to find and funnel an additional $1 billion a year to pay for maintenance and construction.
“I think the time has come,” said Watkins. “We need an additional revenue stream.
New revenue streams
Watkins, however, said it’s possible to raise taxes for roads and highways — while slashing state income tax burdens for the commonwealth’s poorest, but not the rest.
He wants to impose the state’s usual 5 percent sales and use tax at the pump — it currently doesn’t apply to gas — while reducing state income taxes on those earning $17,000 or less. That roughly $518 million saved by the state’s lowest earners is supposed to offset the higher price at the pump. Motorists still would pay the 17.5 cents per gallon tax on top of the 5 percent sales tax.
That way, the people who use the roads will be the ones paying for them, instead of legislators raiding the general fund, he said.
Watkins said his proposal will raise a desperately needed $773 million in its first year to loosen the backlog on highway maintenance and repair projects. Roughly two-thirds of the proceeds from the tax would be distributed locally, while the final third would support rail.
Watkins hasn’t filed his proposal officially for the 2013 session, which begins Jan. 9.
Delegate Vivian Watts, D-Annandale, said simply indexing the gas tax to inflation won’t make up for the roughly $8 billion the state could have collected since 1986, if the gas tax had been pegged to inflation all along.
“Indexing is an element,” Watts said. “It’s a small element, given our over a generation of not having touched the gas tax over 25 years. It’s something to be done, but it won’t address the problem.”
Watts wants to tweak and re-file a bill from the 2012 session, House Bill 422, which would:
- Impose a motor fuels sales tax of 5 percent;
- Increase the state sales tax in Northern Virginia by 0.5 percent for transportation projects only in Northern Virginia;
- Add an extra recordation tax, which is a fee charged to record a mortgage or a deed, in Northern Virginia of 40 cents per $100 of value.
Scott Drenkard, economist with the nonpartisan Tax Foundation’s Center for State Tax Policy, said the people paying for the roads should be the ones using them, so he’s wary of using general fund dollars raised from taxes elsewhere to fund roads and highways. And he generally favors tolls over taxes, since the connection between user and payer is so direct.
But, indexing the gas tax to inflation is better than robbing the general fund, he added.
“I approach this with a little bit of caution, but at the time, this is not the worst increase out there,” said Drenkard.
Of course, if states like Virginia would get rid of “carve-outs in the corporate (tax) code,” revenue for needs like transportation would be easier to come by, said Drenkard.
A November 2011 study by the Joint Legislative Audit and Review Commission, the watchdog arm of the General Assembly, revealed that the commonwealth handed out $12.5 billion in tax preferences in 2008, about $2 million short of the commonwealth’s overall revenue in the same year.
“It’s just spending, done through the tax code,” said Drenkard. “It’s economically the same thing, with less oversight.”
Contact Kathryn Watson at email@example.com.
— Edited by Therese Umerlik at Tumerlik@watchdog.org.