Should West Virginia look to Virginia as a model for funding transportation?

The Charleston Gazette reported this morning that three West Virginia lawmakers are planning a trip to Richmond, Virginia to learn how they recently restructured funding for their ailing transportation system. According to a recent report by the Virginia-based Common Wealth Institute, there are several major flaws with the transportation funding package that was signed into law in Virginia this year. The major flaws cited in the report include  shifting the cost burden away from drivers, who benefit the most from the roads, tax increases that fall heavily on low and moderate income Virginians, and federal action that is unlikely to take place.

The major changes in Virginia’s transportation(HB2313) funding package included:

1) Replacing the 17.5 cents-per-gallon tax for a 3.5 percent tax on the wholesale price of gasoline and a 6 percent tax on the wholesale price of diesel fuel.

2) Increasing the statewide sales and use tax from 5 percent to 5.3 percent and to 6 percent in Northern Virginia and Hampton Roads.

3) Increasing the hybrid registration fee from $50 to $64 dollars on electric motor vehicles and establishes a new $64 fee on hybrid electric vehicles and alternative fuel cars.

4) Increasing the car titling fee from 3 percent to 4.15 percent.

5) The package also requires federal action to allow remote sellers in Virginia to collect and remit sales taxes on purchases by Virginia residents – also known as the Marketplace Fairness Act –  that would be diverted to the state’s transportation fund.  If federal action is not taken, the wholesale tax on gasoline increases from 3.5 percent to 5.1 percent.

6) Other regional provisions include implementing a “regional congestion fee” of 15 cents per $100 of property value and an increase in the hotel tax by 2 percent in Northern Virginia. In Hampton Roads, the whole sale tax on motor fuels would be increased by 2.1 percent beyond its current rate.

If Virginia’s transportation package works out how lawmakers intend, it would boost revenues by $6 billion over the next five years. Only 11 percent – $667 million – would come from driving-related revenues (whole sale tax on gasoline and diesel fuels) while over $3.2 billion would come from sales and use tax collections (statewide sales tax, remote seller legislation, and sales tax diversion). The increase in the hybrid registration fee only brings in $43 million while the car titling tax increase is expected to bring in $1.1 million. By replacing the cent-per-gallon tax and replacing it with a tax on the wholesale price fuels it stands to lose $847 million over the next five years. Relying so heavily on the sales tax for transportation funding – instead of the gasoline tax – Virginia is moving away from the longstanding tradition of using the benefits principle of taxation to fund roads.

As this Commonwealth Institute graph makes clear, these tax changes  would fall  heavily on low and moderate income families who struggling to make ends meet. For middle income households it would raise taxes by $80 statewide and by $150 for households in Northern Virginia and Hampton Roads region.

VA Road Package

 

So, what can we learn from all of this?

First, it makes little sense to rely so heavily on revenue that depends on the U.S. House of Representatives to pass the Marketplace Fairness Act. If the debt default debacle has taught us anything, it’s that getting the House to pass anything with bi-partisan support is not easy.

Second, shifting transportation funding from its heaviest users (gas tax) to those who do not use the roads as much (sales tax) puts an undo burden on folks that are carpooling, use transit, walking to work, and those that are deciding to live near where they work. Moving away from the gas tax also means that it lets out of state drivers mostly off the hook. This is really important in West Virginia where we have a high share of out-of-state drivers.

Third, Virginia is a much wealthier state than West Virginia. In 2012, Virginia ranked 8th highest in per capita income while West Virginia ranked 47th. West Virginia also ranked 49th in per capita GDP, while Virginia ranked 19th highest. As Sean has pointed out, West Virginia is already making a large effort in transportation funding compared to most states.

Lastly, Virginia’s plan shifts the burden on those with the least ability to pay. As readers of this blog may know, state and local taxes are regressive and they already take a larger chunk out of low and moderate income families income that higher income families. By relying more heavily on low-income people who are barley able to make ends meet we are exacerbating income inequality.

While Virginia should be applauded for investing in its transportation system, it’s important for West Virginia lawmakers to learn from Virginia’s experience (and mistakes) so that we can equitably fund our transportation system which provides a solid foundation for economic growth and improves the quality of life in our state.

So far, it appears that the Governor’s Blue Ribbon Task Force is headed in the right direction by ensuring that out-of-state drivers pay their fair share and that we continue to tie our transportation funding to those that use our roads  the most while not placing an undo burden on those with the least ability to pay.

___

 Correction: The hybrid registration fee for hybrid electric and alternative fuel vehicles is a new fee ($64), not one that was increased from $50 to $64 dollars. Thank you Bill Tracey for alerting me to this mistake.

 

Cuts to SNAP Would Affect Thousands of West Virginia Households

Budget Beat – September 20, 2013

House Votes to Cut Food Stamp Benefits to Millions

Yesterday, the House of Representatives voted to cut funding to SNAP, the food stamp program, by $40 billion over the next two years, kicking nearly four million people off the program. This bill would have harsh impacts for West Virginia families since almost half of SNAP households in the state have children. Read more about who else would be affected in Sean’s blog post.

There was a lot of data released this week including numbers on who lacks health care in West Virginia. With full implementation of Obamacare just around the corner, 100,000 uninsured West Virginians are expected to gain access to coverage through the Marketplace. Since fewer employers are choosing to offer coverage to their employees (a downward trend since 2000), their employees will have somewhere to go to get coverage. Read more in Brandon’s blog post.

Who is uninsured in West Virginia? Two out of three of them worked part- or full-time in 2012 but at low wages, according to data released this week. Read more about who is most likely to lack health care coverage in West Virginia here and more about how Obamacare will greatly reduce their numbers by 2016.

In the News

One in five West Virginian’s relies on the SNAP program to put food on the table. Cuts to this program will be especially devastating to West Virginia’s families. Read more in this week’s Charleston Gazette article.

New census data released yesterday show that the poverty rate in West Virginia has barely budged since the end of the Great Recession. Not only is poverty staying high, wages are staying low. Read more in this week’s Charleston Gazette.

There was national coverage this week on Senate President Jeff Kessler’s push to bring a Future Fund to West Virginia. Read more about his efforts to look to the future and learn from missed opportunities here from ABC News.

Policy Symposium Next Week

History will be made next week at the first-of-its-kind Our Children, Our Future: 2013 Policy Symposium, Tuesday September 24-25. The WVCBP is a proud sponsor and will host three strategy sessions during the event: increasing the minimum wage, creating the State Earned Income Tax Credit, and establishing Future Fund.

Can’t make it? Our presentations will be posted on our website and we will provide a full recap in next week’s Budget Beat.

Highway Spending – How Does West Virginia Stack Up?

The Governor’s Blue Ribbon Commission on Highways has begun its series of public hearings on how to close the state”s funding gap for state roads and highways, after releasing a report earlier this year that said West Virginia needs an additional $600 million to $1.23 billion in new funding for its highway system. With that in mind, it’s worth looking at how much West Virginia spends on roads and highways now, and how we compare to other states.

According to the 2010 Economic Census of State and Local Government Finance, West Virginia spent $1.23 billion on highways, in combined state and local expenditures. Below, I compiled a table with West Virginia’s highways spending ranking among the 50 states and D.C., as measured by several different metrics. Those metrics include as a percent of total spending, as a percent of GDP, per capita, per total vehicle miles traveled, and per mile of public road.

Untitled

When it comes to highway spending, West Virginia is already above average in several measures. We rank in the top 10 when it comes to highway expenditures as a percent of total expenditures, and as a percent of GDP. We also spend more on highways per capita and per miles driven than the national average, spending $667 per person, and $0.061 per mile driven.

However, the state ranks below average when it comes to spending per mile of public roads. According to the data, West Virginia spends about $32,000 per mile of public roads in the state, compared to the national average of $38,325. This figure suggests that rather than spending more than average on our roads, West Virginia has a high number of roads to maintain for a state of its size.

So what happens to our rankings if we add in an additional $600 million, like suggested by the Commission? The table below shows those results.

Untitled

By adding in an additional $600 million, West Virginia would jump into the top 5 for highways spending as percent of total spending, as a percent of GDP, per capita, and per vehicles miles traveled. But when it comes to highway spending per mile of public road, West Virginia would still only rank 16th, although above average.

All of this suggests that West Virginia faces some unique challenges when it comes to funding our roads system. For a small, relatively poor state, we have a relatively large amount of roads to take care of. The state already dedicates more of its resources to our highways, asking more of its citizens than most states, but we also have more to take care of than most states. And the governor’s commission has suggested that doubling our efforts is needed just to keep it all together. It will take creative and forward thinking solutions from our political leaders to solve this puzzle.

Download an excel file with the figures for all 50 states here – highway expenditures

How Should We Pay for Our Roads?

As we stated last month, West Virginia, like most states, is finding it increasingly difficult to pay for construction of its road and bridges because its gas tax can’t keep up with the growth of fuel-efficient vehicles and the increasing number of miles driven on state roads. And while a vehicle miles traveled (VMT) tax might be a better option in the long-run for the state, in the short-run we will need to find additional sources of revenue if we want to maintain our roads and bridges. As the chart below illustrates, total State Road Fund revenue is projected to decline over the next several years from $698.2 million in 2014 to $662.2 million by 2016. (The good news is that the projections from the Department of Revenue tend to be conservative.)

According to the WV Department of Revenue, the decline in revenue collections is driven primarily by a predicted decline in fuel consumption over the next several years. This is because the flat rate of the gas tax, 20.5 cents per gallon, will decline as consumers purchase less gas over the coming years. Meanwhile, the variable gas tax rate, which is equal to five percent of the average wholesale price, will become a larger share of motor fuel tax collections but will not be large enough to offset the declining power of the flat rate.

As mentioned in the previous post, WVU economist Tom Witt studied the financing of West Virginia highways back in 2010 and recommended several options, including raising the motor fuel flat tax rate by 1.6 cents, increasing the variable gas tax rate and the sales (privilege) tax rate from five to six percent, and indexing registration fees to inflation. Witt also recommended looking at bonding, Public-Private-Partnerships (P3s), and the transfer of more authority over the local government. All of these are sensible options, but, of course, face many political barriers.

While there are several options the state could pursue, the best approach might be a combination of smarter investments, efficiency, new revenue, and enhanced partnerships. 

Should West Virginia Adopt a Mileage Tax?

As the Gazette reported on Wednesday, the WV Department of Highways is pushing a bill to study the feasibility of replacing or supplementing the motor fuel tax with a vehicle miles traveled (VMT)  tax to help address the declining State Road Fund revenue which is partly due to more fuel efficient vehicles. The VMT tax would place a small fee on cars and trucks for each mile they drove – often referred to as “pay-as-you-drive” tax –  instead of (or to complement) the state gasoline tax, which is 34.7 cents per gallon of gasoline. Before we look at the mechanics and the advantages and drawbacks of the VMT tax, it is important to first delve into the fiscal problems facing our state road fund.

West Virginia State Road Financing

Currently, the State Road Fund is made up of four central revenue sources, including federal matching funds, motor fuel taxes, registration fees, and a 5 percent sales (privilege) tax. All together, the state is planning to appropriate $1.2 billion for the Department of Highways in FY 2014. While federal funds are the largest single revenue source ($470.4 million), the state gas tax ($430 million), sales tax ($175.5 million), and registration fees ($92.7 million) are the the the central state sources of revenue of the State Road Fund. These funds are used to match federal funds for interstate construction and maintenance and for other state road and bridge construction. The state also pays for roads through general obligation debt such as road bonds. In FY 2013, the total outstanding debt on road bonds was $245 million in 2013.  (The state also collects toll fees on the WV Turnpike ($82.1 million in FY 2012) operated by the WV Parkways Authority, but this money is solely used for the I-64 Turnpike and it does not receive federal matching funds or go toward other roads.)  

Over the last several decades, the sources of tax revenue to the State Road Fund has shifted away from registration fees and more toward the motor fuel taxes. From 1980 to 2014, fuels taxes have grown 417 percent, sales taxes by 332 percent, and registration fees by only 194 percent. In 1970, registration fees made up 30 percent of revenue and today it only comprises 13 percent.

Unlike most states, West Virginia is responsible for financing both state and county roads. According to 2010 study by WVU economist Tom Witt, the state is “responsible for over 92 percent of public highways while municipalities are responsible for about 5.5 percent and federal agencies for the balance.” According to Witt, the only other states that have jurisdiction over both state and county roads are Delaware, North Carolina, and Virginia. 

A look at the local spending on highways from the Census Bureau bears this point out. As the chart below highlights, local governments in West Virginia spent less than any other state on highways expenditures in 2010. Of the estimated $1.2 billion spent on West Virginia highways in 2010, local governments in the Mountain State spent only 7.5 percent or $92 million. The U.S. average was 40 percent. The other states that have jurisdiction over all state and county roads also saw their local governments spending less, with North Carolina local governments spending 17 percent, Delaware at 19 percent, and Virginia at 27 percent.

State Road Fund Revenues Lagging Behind Road Use

Over the last several decades, the state has found that its central revenue source, the motor fuel tax (which contains a flat rate of 20.5 cents per gallon and a variable rate of 5 percent based on the wholesale price of gasoline), cannot catch up to the increasing fuel efficiency of cars and trucks in the state. But as fuel efficiency has increased, so has the number of miles driven in the state, putting more stress on maintaining roads and bridges. According to the Federal Highway Administration (FHA), from 1980 to 2010, the number of miles driven per vehicle in West Virginia has grown from  8,141 to 13, 377 and the average miles per gallon has grown from 11.3 to 16.8. So, people are driving father on less gas, which means less revenue for the state. 

One way to look at the declining power of State Road Fund revenue to meet the increased use of roads is by looking at vehicle miles traveled (VMT) in the state. According to FHA, in 1980 the total VMT was 10.7 billion miles. By 2010, this number almost doubled reaching 19.2 billion.  The chart below looks at State Road Fund Revenue per VMT in West Virginia (FHA data) from 1980 to 2010. The blue line looks at inflation adjusted State Road Fund revenue using the CPI-U-RS (the standard inflation measure for urban consumers) and the red line uses the Producer Price Index (PPI) for highway and street construction  that was discontinued in 2010.

As you can see, the state is receiving less revenue per mile driven using either inflation measure. Using the CPI-U-RS (blue line), the state received about 5 cents per VMT in 1980 compared to about 3 cents per VMT in 2010. And the red line (using the more accurate measure of price changes in highway & street construction), shows that the state received about 4.6 cents per VMT in 1987 (the first year this inflation measure was available) compared to 3.2 cents in 2009 (the last year the PPI for highways was available). Either way you cut it, people are traveling more and the state is receiving less in revenue. Over this same time, the state has also seen a large growth in the number of trucks, growing from 387,000 in 1980 to 730,000 in 2010. Meanwhile, the total number of automobiles in the state has shrunk from 929,000 n 1980 to 703,00 in 2010. With more trucks on our state roads creating more stress, it is no wonder that the state is having trouble financing road construction.

So, with all of this in mind, should WV adopt a vehicle miles traveled (VMT) tax?

While the VMT tax is gaining momentum around the country, so far no state is using it to fund its transportation system. In 2006, the state of Oregon began studying the idea  and recently it tested the concept in a pilot program in the city of Portland, but it has not made plans to implement it statewide. Several other states are also studying the idea, including our neighboring states Pennsylvania and Maryland.  (This may partly explains why the WV DOH wants to study the concept as well. As we’ve talked about before, action at the state level usually encourages action at the federal level).  The federal government also been studying the idea for a number of years. Recently, the Congressional Budget Office (pdf) and the Government Accountability Office (pdf) examined the advantages and disadvantages of a VMT tax at the federal level and found that for the most part it was a good idea. The GAO concluded: “Mileage-­based user fee initiatives in the United States and abroad show that such fees can lead to more equitable and efficient use of roadways by charging drivers based on their actual road use and by providing pricing incentives to reduce road use.”

While there are distinct advantages to adopting a VMT tax in West Virginia, there are also several drawbacks.These include privacy issues, costs of implementation, how to charge out-of-state drivers, and how the VMT tax could discourage the use of more fuel efficient vehicles. A lot would also depend on how the state imposes the fees per mile on each vehicle. Would heavy trucks that cause more damage to the roads be charged more? Would we charge more during peak hours of traffic? Would we charge rural drivers the same as those that live in the cities? Lots of details to unpack. The table from the CBO report provides good comparison between the federal gas tax and a VMT tax.

Currently, most states looking at the VMT tax want to attach a GPS device to your vehicle in order collect mileage and charge you a fee. There have been numerous complaints about this from civil liberty groups and the general public. Nobody likes big brother in their car and I imagine this would not go over well in the Mountain State. The good news is that the WV DOH has talked about using state inspection stations (your local gas station, usually) to collect your odometer reading each year when you get your car inspected. While this would be a much less intrusive way to collect mileage, it remains to be seen if it could be done efficiently and what the costs will be. 

Perhaps the biggest hurdle would be how to collect mileage fees from out-of-state drivers who benefit from our state’s road system but would not have to pay. According to the WV Parkways Authority, only 24 percent of toll revenues from the WV Turnpike come from WV passenger cars (16%) and commercial vehicles (8%). Based on the 2010 annual mileage figures in West Virginia, a flat 3.3 cents-per-mile fee on vehicles traveled would have produce about $634 million in revenue in 2010 or about $441 annually per vehicle. However, if a large share of those vehicles are out-of-state drivers for whom we cannot collect fees from, than the mileage fee would have to be much higher to reach the same amount of revenue.

Another hurdle is fuel efficiency. As the CBO table highlights, VMT taxes would provide little incentive to purchase fuel efficiency vehicles. This could be partly overcome by implementing a “green fee” on vehicle registration and title fees as the Massachusetts Department of Highways has suggested in its 21st Century Transportation Plan. According the plan, “Under a ‘green fee,’ existing vehicle registration and title fees would be assessed additional fees based on a vehicle’s level of carbon emissions. Under a green fee scenario, owners of motorcycles and hybrid cars could pay an extra $15 every two years for registrations, car and hybrid SUV owners could pay an additional $30 every two years, SUV and light truck owners could pay an additional $60, and heavy truck owners could pay an additional $85. The fee would be adjusted to reflect the age of the vehicle and the anticipated emissions produced – higher polluting vehicles would pay more, while cleaner vehicles would pay less.”

Conclusion

West Virginia is not unique in that it is having problems shoring up its State Road Fund to pay for road construction and maintenance. All across the country, states are finding it increasingly difficult to fund their transportation systems with fuel taxes. While it is important that the state is looking at alternatives like the VMT tax, it could be decades until it is up and running unless the federal government adopts such a system. In the short-run, the state will need to find additional revenue if it wants to maintain its current infrastructure needs and they may want to look at other alternatives. In my next post, I will look what some of those alternatives could be.