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McDonnell: Eliminate gas tax, raise sales tax for roads

By Chelyen Davis

Gov. Bob McDonnell today is proposing a sweeping reform of how Virginia raises money to pay for roads.

His plan would eliminate the state’s 17.5-cents-per-gallon gas tax (except for the tax on diesel fuel), and replace it partly by raising the state’s sales and use tax an additional 0.8 percent, to 5.8 percent from the current 5.0 percent. Food would remain exempt from the sales tax.

According to the governor’s staff, Virginia would be the first state to abandon a state gas tax.

The additional 0.8 percent sales tax would be earmarked for transportation, and McDonnell supports a “lockbox” for the transportation trust fund to ensure that money can’t be shifted to other state needs. His staff said even with a 5.8 percent sales tax, Virginia’s tax would be lower than the sales tax in neighboring states.

For weeks McDonnell has been promising a comprehensive transportation funding reform proposal. He says the state has “a math problem,” noting that the buying power of the gas tax — which has been unchanged at 17.5 cents a gallon since 1986 — is now half of what it originally was. Cars now get better mileage — or don’t rely on gasoline at all — and McDonnell expects that will continue, making the gas tax an ever-decreasing source of revenue while the costs to maintain and build roads increase.

Virginia law requires transportation money to first go toward maintenance of existing roads, and that is eating up all the money that could go to new construction. McDonnell has made it a priority in this, his last General Assembly session, to reform transportation funding. His proposal would generate enough money to eliminate the crossover between maintenance and construction, although not enough for major new construction projects.

While he wants to eliminate the gas tax, McDonnell’s plan keeps the 17.5-cent tax on diesel fuel. Staffers said that interstate trucking traffic accounts for 68 percent of the diesel fuel tax revenues in Virginia, and that trucks create 80 percent of the deterioration of state roads.

McDonnell’s proposal would gradually increase the percentage of the existing sales tax that goes to transportation, from 0.5 percent to 0.75 percent over the next five years. Last month his budget amendments included the first phase, raising the percentage to 0.55 percent, which he said would generate about $48 million a year.

McDonnell’s plan also includes raising the annual vehicle registration fee by $15, from its current $40.75 for passenger vehicles, and adding a $100-a-year fee for alternative fuel vehicles and hybrids. The alternative-fuel fee, said McDonnell staffers, is included because there is still a federal gas tax, which is not paid by those who drive alternative-fuel vehicles. There are about 91,000 alternative fuel vehicles registered in Virginia, and McDonnell is shifting the state’s own fleet of vehicles to alternative fuel vehicles.

The increase in the regular vehicle registration fee would go toward intercity and passenger rail, while the alternative fuel vehicle fee would go toward transit.

The governor’s proposal also anticipates passage of a federal bill that would allow states to collect sales taxes from online retailers. Current rules, based on a years-old court ruling, bar states from collecting sales tax from retailers without a “physical presence” in their states. Most states—including Virginia—require state residents to take the initiative to send the state the sales tax they should owe on purchases made on the Internet. But most people don’t do that. Virginia and other states say they’re losing out on millions of dollars in tax revenue that should be collected; McDonnell’s proposal anticipates that the state could collect more than $1 billion over the next five years if it could collect sales tax on Internet sales.

You can read more about the Market Place Fairness Act here.

Staffers said that McDonnell included anticipated tax revenue from internet sales in his roads plan because he wanted to stake out a claim on the money for roads and education if the federal legislation passes.

All told, McDonnell’s staff said the proposal would generate more than $3 billion in new money for roads over the next five years if the Marketplace Fairness Act passes, and about $600 million a year if it doesn’t. It would be revenue-neutral at first, but McDonnell’s administration anticipates that over the years, the sales tax revenue would grow, and grow at a larger pace than the gas tax would have.

According to figures from the administration, the 0.8 percent increase in the sales tax would generate $607 million over five years. Raising the percentage of existing sales tax put toward transportation would put $811 million over five years into transportation. The $15 increase in registration fees would generate $547 over five years, while the $100 alternative fuel vehicle fee would generate $66 million.

House Speaker Bill Howell, R-Stafford, is expected to be a co-sponsor of McDonnell’s transportation bill. Howell had said last month that he didn’t think there was time in a short session to enact a major overhaul of state transportation funding.

But in a press release for McDonnell’s proposal today, Howell called the plan “bold” and said it “makes a critical investment” in the state’s transportation system.

“It marks another major step forward in our efforts to continue to make Virginia attractive to businesses,” Howell said in the release. “This much-needed investment shows a commitment to upgrading and improving our state’s infrastructure that will help attract businesses to Virginia and create jobs,” Howell said in the release.

He said he was “enthusiastic” about the plan, but that more work needs to be done to “bring everyone together on a practical solution to this problem.”

In a briefing before McDonnell formally announced his plan, staff said they feel the proposal has something to please and displease everyone. Lawmakers who want to raise the gas tax should be appeased by the sales tax increase, while those who want to see more of the state’s general fund go to transportation should like that component.

Lawmakers were being briefed on the plan this afternoon.