House and Senate leaders announced a deal Thursday to gradually cut a few pennies off the state gas and diesel fuel tax over the next two years – starting next week – and to cancel a much more substantial cut that would have cost the state Department of Transportation hundreds of jobs and more than $400 million in revenues.
North Carolina’s 37.5 cents per gallon fuel tax will fall to 36 cents Wednesday, 35 cents in January and 34 cents in July 2016, if the compromise legislation is approved by both chambers and signed by Gov. Pat McCrory.
The gas tax changes are combined with income tax law provisions in a single bill. House and Senate leaders also agreed to allow an income tax credit of up to $250 for schoolteachers who buy their own classroom supplies.
Besides setting fixed gas tax rates through the end of 2016, the legislation would get rid of a formula that moves the rate up or down every six months – to reflect changes in wholesale fuel prices, which have plunged since late 2014.
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“The old funding formula allowed for some pretty wild, volatile changes in what the tax rate would be – which made planning how you repair roads, repair bridges very hard,” said Rep. David Lewis, a Republican from Dunn.
Under the deal announced by House and Senate conferees after two weeks of negotiations, a new formula would take effect in January 2017 to adjust the tax rate up and down based on changes in two new measures: North Carolina’s fast-growing population and the national consumer price index for energy costs.
The energy inflation measure rises and falls from year to year, but legislators said it is less volatile than the wholesale fuel price. It would account for 25 percent of the tax rate adjustment, with population pushing the other 75 percent.
Since North Carolina’s population is growing steadily, the new formula would be expected to push the tax rate steadily higher.
But House and Senate members said these changes scheduled for 2016 and 2017 might never take effect. They could be canceled if the legislature can come up with a “long-term fix for transportation funding” that would make more sweeping changes in how the state generates money for its transportation needs.
“This provides a little bit of a safety net to make sure we can meet the needs we have, prior to the big fix,” Lewis said.
Republicans sprang into action in February after they realized that the fuel-price formula in current law would cut the tax in July to a projected 29.6 cents per gallon.
House and Senate leaders initially disagreed on the details, but both chambers sounded similar themes. They talked about “stabilizing revenues” rather than pushing the gas tax higher than it would be otherwise under current law. And they wanted to start by cutting a few pennies off the tax rate as soon as possible.
The Senate proposed originally to lay off 500 DOT workers and cut the tax to 35 cents on March 1, and make that the new minimum rate in future years. The Senate also proposed to recalibrate the fuel-price formula in order to push the tax rate higher in future years.
No DOT layoffs
The House called for a minimum tax rate of 36 cents, starting April 1, through the end of 2015. The House plan would have let the tax fall below 30 cents next January.
The compromise announced Thursday does not include any DOT layoffs, but 40 unfilled positions will be eliminated.
“We had to deal with what was approaching, a revenue crisis with respect to transportation funding,” House Speaker Tim Moore said Thursday. “It also gives immediate tax relief.”
McCrory praised the “spirit of cooperation” that produced the compromise.
“This proposal protects and stabilizes gas tax revenue so we can fund important transportation priorities that connect communities throughout our state,” McCrory said in a news release.
Gas and diesel fuel consumption are expected to decline even as North Carolina adds an expected 3.5 million residents over the next 25 years. Legislative leaders are looking for stable revenue sources to reduce the state’s reliance on state and federal gas taxes, which account for 66 percent of DOT’s $4.7 billion budget this year.
Federal automobile fuel efficiency standards will rise from 27.5 miles per gallon in 2010 to 51.3 mpg in 2025. As a result, DOT planners say, fuel tax collections could fall below $1 billion a year after 2028 – down from $1.9 billion this year.
Democrats who worked with the majority Republicans to craft the new measure agreed Thursday that it was a tax cut, even though it will keep taxes higher and generate revenues worth more than $400 million above what DOT had expected.
“It’s reasonable,” said Sen. Floyd McKissick Jr., a Democrat from Durham. “It helps us to meet our short-term needs. It guarantees that it will not drop below this 34 cents.
“And while that is good, it is not good enough,” McKissick said. “Everyone on both sides is committed to make sure there is a long-term fix that we can all feel good about.”