Vehicle Miles Traveled tax a common sense way to finance NC roads

The N.C. Senate has proposed a temporary gas tax cut followed by a significant gas tax increase that will net an estimated $1.2 billion for roads over the next four years. In no way, however, does this proposal represent a sustainable solution for how North Carolina finances road construction and maintenance.

Tighter Corporate Average Fuel Efficiency standards mean the more fuel efficient cars of the future will consume less gasoline, so our consumption of gasoline – and therefore revenues from the gasoline tax – will decline, even as North Carolina’s population grows. A new funding strategy for roads is necessary, where we shift from a tax on fuel to a tax on vehicles miles traveled.

First, let’s be clear about why we are in this predicament. The Great Recession and the higher gasoline prices of the past decade have led households to buy smaller and more fuel-efficient cars. As households switched to hybrids from SUVs, gasoline consumption has fallen significantly. This has put the state’s highway fund – which relies primarily on revenues from the gasoline tax – in dire straits.

The condition of the highway fund would be far worse, however, but for the peculiar way the state adjusts the gasoline tax from year to year. Because the gasoline tax is tied to the wholesale price of gasoline, the tax has risen dramatically over the past decade along with gas prices. But the steep decline in gas prices over the past six months will reverse this trend, motivating our legislature to action.

By imposing a 35-cent per gallon tax immediately, the Senate proposal would give North Carolinians modest tax relief over the next four months, but future gas taxes would be prevented from falling as far as they would otherwise. Combined with the proposed reformulation of the gas tax schedule that would begin starting July 1, future gas taxes are predicted to rise by as much as 7 cents per gallon by the end of the decade.

As a stopgap approach, raising the gasoline tax makes sense, but we should not delude ourselves that it represents a solution. To fund road construction and maintenance, additional tax increases will be necessary. Politically, I doubt there will be much support for these increases because the low pump prices we currently enjoy are unlikely to endure and the legislature’s ability to once again package a substantial tax increase as a tax cut seems doubtful.

Therefore, pivoting away from the gas tax as a way to pay for roads seems both necessary and appropriate. Many fees households pay for publicly provided services are proportional to use (water, electricity), so why not charge households a fee for road maintenance and repair proportional to how much they drive?

A Vehicle Miles Traveled tax that rises every year with inflation and depends on the size of the car one drives could add substantial revenue to the state highway fund that would not erode as households shift to more fuel-efficient cars. In this way, a VMT tax would be sustainable and represent a long-run remedy to our current revenue shortfall. Moreover, a VMT tax would better address social costs associated with driving such as local air pollution, congestion and accidents, which are proportional to how much we drive more so than how much gasoline we consume.

The current proposal to raise gas taxes is only a temporary fix and should not lead us to believe that further and more far-reaching action is unnecessary. Rather, now is the time for our elected leaders to act boldly and fundamentally reform the way we finance North Carolina’s roads.

Roger H. von Haefen, Ph.D., is the associate director of the Center for Environmental and Resource Economic Policy at N.C. State University.