Tax Principles to Consider When Modernizing Transportation Revenues: A Presentation to the Board of Transportation FAST Committee 

April 3, 2019

It is an honor to be with you this morning and offer some principles for future transportation funding. I’m here on behalf of the John Locke Foundation, where I’ve looked at transportation funding among other aspects of state taxes and spending for the better part of the past 14 years.

Observation: Math Wins.

There simply is not enough money to do it all. North Carolina has $600 million less than needed for maintenance of roads & bridges each year, meaning the state needs to spend 46 percent more on maintenance, even before adding in any new construction. And new construction is needed. The Strategic Transportation Improvement Plan showed $53 billion in projects by 2027 but only $9 billion in funds. Build NC added $3 billion, which still leaves a $41 billion hole. The federal gas tax would need to increase by $3 per gallon (more than 16x current rate of 18.4 cents/gallon) or more than $450 billion per year to cover the needs in the interstate system. All of these costs are based on the existing regulatory process, and I trust another committee is looking at how to reduce the complexity and cost of getting roads permitted and built.

Improving fuel efficiency does limit the ability of the gas tax to pay for roads, but this is about more than hybrids and electric vehicles. LMC Automotive projects electric vehicles will be just 5 percent of new vehicles by 2025. If you include hybrids, the share climbs to 22 percent. The bigger concern with electrics is not their effect on total gas tax revenues, but their potential to make the gas tax regressive as wealthier people choose electrics.

The unmet maintenance needs of our transportation system mean we have to consider the possibility that we may have built more roads than we need or can maintain. Don’t forget; transportation must compete with other priorities for the taxpayer’s overstretched dollars.

That leads to my First Principle: Identify the core needs.

Once we know the needs and not just the wish list, the question remains how to pay for it in a sustainable manner. My Second Principle: Make the user pay

Talking about road pricing inevitably raises equity concerns. It may surprise you that people with low incomes often support toll lanes. You can work from home or the coffee shop or show up late, but the person on the production line or in the kitchen must be at a set place of work at a set time every day.

The prices of our vehicles vary greatly with something that just about anyone can afford. Owning a car can mean anything—a 1996 Honda Civic, a rusted out Chevy Pickup, or a brand-new Tesla or Cadillac Escalade. How do we make road access price responsive without making it a luxury good or worse, have the poor subsidize access for the rich?

That takes me to my Third Principle: Subsidize the Person, not the system. Tolls can be a burden, even if they’re better than the alternatives of sitting in traffic or a gas tax that does not apply to Tesla owners. Individual subsidies can take the form of a combined allowance for housing and transportation or could mean discounts for high-occupancy vehicles to encourage shared rides just as people find roommates to offset the cost of housing.

We can find a useful example in higher education. Elite colleges and universities can cost $75,000 a year to attend. But many offer generous aid and many now promise admitted students they will be able to complete their degree debt-free.

Now that we’ve established our desire to make sure nobody is priced off the roads, we can go back to some thoughts on how to set prices.

Transportation funding already is essentially from user fees. Driver’s licenses, vehicle titles and registrations, highway use tax (the sales tax on cars), and the gas tax itself are paid by those who use the roads to build and maintain the roads. Concerns about the revenue effects of self-driving cars and lower car rates of car ownership, like those related to non-gasoline-powered cars, overstate the potential impact as vehicles would still need to be purchased and licensed to drive. The gas tax, which contributes $2 billion, more than half of the $3.8 billion in-state money for roads. The federal gas tax adds another $1.2 billion, bringing the total to $5 billion.

Our task today is not to discuss the uses of those funds, but I would just note here that almost $2.3 billion of that $4.7 billion (including almost all of the federal money) builds new roads while just $1.3 billion pays to maintain the roads and bridges that have already been built.

After real-world fuel economy for new-model-year cars bottomed out in 2004 at slightly less than 20 miles per gallon, it climbed more or less steadily over the next 13 years to reach 24.9 miles per gallon in 2017. This is may be more impressive if you consider that means the average car can cover 100 miles with 4 gallons of gas instead of 5 gallons. For a person driving 15,000 miles a year, that make an annual fuel savings of 150 gallons or 10 fill-ups per year. For North Carolina roads, this means $57 less in gas taxes per new car per year.

In addition, the value of the gas tax itself has fallen over time and is now one-third lower than the inflation-adjusted historic average of 55.4 cents per gallon. Each January 1, the motor fuels tax rate is set for the year at a flat rate of 34 cents per gallon multiplied by a percentage equal to one-quarter of three-fourths of the change in energy prices times the percent change in state population. The current tax is 36.2 cents per gallon.

But the gas tax is 3.75 cents (12 percent) higher than Georgia, 9 cents (34 percent) higher than Tennessee, 13 cents (58 percent) higher than Virginia, and 14.5 cents (70 percent) higher than South Carolina. People in the Charlotte region could save 14.5 cents per gallon on gas tax by purchasing in South Carolina instead of North Carolina. Why gas prices in South Carolina are not 14.5 cents less is a topic for another day.

The gas tax is an imperfect proxy for the wear-and-tear a vehicle imposes on the road, which is a function of miles traveled and vehicle weight, but hybrid SUVs can get the same mileage as lighter traditional sedans even though they weigh more. Heavy-duty trucks go through weigh stations to address the second question directly.

How can the state equitably and accurately assess fees for all drivers and vehicles on the damage they cause to roads?

Vehicle weight could be measured as Gross Vehicle Weight, like commercial trucks. Mileage could be done with a simple odometer check with a vehicle’s annual inspection before a vehicle can be registered, but would not far more noticeable to each owner/driver than the gas tax which gets paid incrementally over time

High occupancy/tolling with dedicated lanes or roads and congestion pricing are ways to make payment incremental and help ensure the quality of heavily traveled roads. Additional tolling capacity is relatively inexpensive with current technologies. The drawback, as we have seen with I-77 and NC540, is that tolling is unpopular. The state has put a priority on incorporating limited-access roads into the federal Interstate system for obvious short-term advantages. Federal restrictions on tolling, however, mean that only the southern and western portions of the Triangle’s 540 loop in the Triangle are tolled, leaving residents in those areas to feel they are paying for something others received for free. If tolling can only apply to newly constructed lanes or roads, it may no longer be a cost-effective solution. The Triangle Strategic Tolling Study may have some insights for the Board of Transportation on how to transition funding from the gas tax to tolling without unduly raising the tax burden.

Land developers and their eventual tenants or buyers are as much users and beneficiaries of transportation as the drivers, haulers, and passengers themselves. How can the state spread the costs of road construction and future maintenance to include those who benefit from proximity to the road, not just those who travel along it?

Cities impose impact fees on developers to offset the cost of providing services to a new neighborhood. Private rail companies have financed their operations with land acquisition that extended beyond their immediate right-of-way needs, which ensured a market for their transportation services and meant they could charge less per use. Development on limited-access highways happens at the exit. Could the Department of Transportation finance road development with land development instead of using new exits as an incentive or dealing with the costs of dislocation with nothing in return? Would the value of development already be included in the price of land at purchase? Should local governments be responsible for maintenance and construction of more roads through property and sales taxes?

Fortunately, you are not looking for answers this morning, just guiding principles. Because there is never enough money to do everything that everyone thinks should be done, the state needs to identify the core needs for transportation funding. In raising money, the state needs to reconsider what it means to make the user pay for transportation and to consider the equity implications of different financing mechanisms. The gas tax is becoming more regressive as wealthier people rely more on electricity to power their vehicles. Any subsidies should go to those people in need as much as practicable.

It seems likely that you and we will need to consider alternatives to the gas tax that more accurately cover the maintenance costs created by vehicles based on weight and miles traveled and how to implement those alternatives in ways that are not overly disruptive. You may also want to consider how to tap the value transportation access creates for existing property owners or from new development.

Thank you for the opportunity to address these important questions as you prepare to embark on a discussion with significant implications for North Carolina. I look forward to your questions and comments.