Virginia’s Governor McDonnell gets devoured for massive transportation tax hikes

So McDonnell is the first governor to propose a complete repeal of the state’s gas tax and replace it with a host of other tax hikes. The primary fatal flaw is turning to a broad-based sales tax increase, some of which can be diverted to mass transit or elsewhere. Whereas, the gas tax is a tax on the primary users of the road, the broad-based sales tax is not.

By Terri Hall | March 7, 2013

Associated Press

Houston, we have a problem. Well, actually, it’s a nationwide problem. Gas tax, the primary user fee that funds our national Interstate Highway System, hasn’t been raised in 20 years. The same is true for the gas tax in most states, where gas tax is the primary source of revenue to fund each state’s highway system. Politicians refuse to raise or even index the gas tax to inflation, but Virginia Governor Bob McDonnell pushed through the legislature some solutions that have gotten him in hot water with taxpayers despite it involving the repeal of the state’s gas tax. It’s been called the largest tax increase in the Commonwealth’s history – $6 billion. Even worse for McDonnell is he ran on a ‘no new taxes pledge.’

Virginia was one of the first states to embrace massive tolling to solve the funding gap, especially turning to government subsidized public-private partnerships (P3s). After a decade of implementing controversial tolling projects, several of which hand public infrastructure over to a private, foreign company, now even Virginia has begun a retreat. Tolling and P3s haven’t solved congestion or the state’s road funding shortfalls.

So McDonnell is the first governor to propose a complete repeal of the state’s gas tax and replace it with a host of other tax hikes. The primary fatal flaw is turning to a broad-based sales tax increase, some of which can be diverted to mass transit or elsewhere. Whereas, the gas tax is a tax on the primary users of the road, the broad-based sales tax is not. Bringing the taxation further away from the user is not a good government approach and could be rife with abuses and pilfered for all sorts of non-road, ill-conceived projects that normally would never garner the public support to pass a public vote if it had to secure funding another way.

Indeed, giving transportation projects access to general revenue funds instead of dedicated road user fees is a huge step backwards. Less accountability and transparency only results in government bloat, waste, and abuse.

McDonnell’s package includes:

  • Sales tax hike from 5% to 5.3%
  • Personal property tax from 3.5 to 4.3%
  • Diesel tax hike from 17.5 cents per gallon to 6 percent tax on wholesale diesel, roughly a 5 cent per gallon increase
  • $100/yr tax on hybrids
  • Additional sales tax hike of .7 percent in Hampton Roads and Northern Virginia
  • 3 percent Northern Virginia hotel tax
  • and more…

There was once a time in the Commonwealth of Virginia when Republicans sought to reduce and eliminate the personal property tax on vehicles. Governor Jim Gilmore succeeded in the late 1990s but now it’s back with a vengeance thanks to a Republican governor who promised not to raise taxes.

Erick Erickson of RedState.Com fumed: “Virginia’s Governor Bob McDonnell thinks you’re an idiot.”

Tony Lee of Brietbart.Com declared that McDonnell’s tax hike “may be his George H.W. Bush moment.”

Tea Party activists rage: “This is outrageous and Tea Party activists are opposing the tax increase.”

The Editors at the National Review called it McDonnell’s Bad Transportation Deal, saying: “The resulting legislation must be regarded by conservatives as a black mark on the governor’s résumé. What remains to be seen is not whether this is a bad deal but how bad a deal it is.”

Some forecast that a mere 22% of the tax hikes will even make it to roads. But what’s lost from the entire conversation, due to all the distractions and bad policy in the bill, is how can we expect to build today’s roads with a 20 year old revenue stream?

Most states have turned to tolling and P3s, but tolling is not a one-size-fits-all transportation tool that works for most projects. Many states do not collect enough gas tax to even maintain their current system, and tolling cannot feasibly apply to road maintenance. Since the shortfall is decades long in the making, there is no painless way to make-up the shortfalls. In most cases, it would take draconian hikes in the gas tax or vehicle registration fees. Let’s look at the Texas example to give insight into some of the options states face.

A Texas-sized problem

The Texas legislature meets every two years and it’s currently in session and in the throes of just such a discussion. The state that boasts the largest road network in the country is at a crossroads as to how to build and maintain its system now that its maxed out the state’s credit card and continues to take the heat for its controversial P3s that will result in Texans being charged 75 cents a mile by a foreign corporation granted the power to tax to use Texas public highways.

Texas leads the nation in road debt – $31 billion in principle and interest. It was pay-as-you-go until the year 2001 when Texans foolishly voted to allow the state to start entering into debt to build roads – primarily toll roads, which amounts to a double tax. Now the state has tapped out its borrowing capacity which has eaten a $2 billion hole in the Texas Department of Transportation’s (TxDOT) biennial budget. The state has even taken on general obligation debt for roads that’s eating into general revenue to retire the debt. Texans have also been forced to bail out failing toll roads, like the Central Texas Turnpike System to the tune of $100 million in gas taxes.

State lawmakers have used debt to kick the can down the road every two years for a decade, only to come back to Austin to do it again the next time. It’s exposed a glaring, rudderless lack of leadership on how to fund a core function of state government.

Like Virginia, Texas was one of the early states to embrace P3s, but its last P3 for Hwy 183 in Irving that went out for bid came back with no takers. Again, P3s and tolling cannot work for most road projects, and it’s the MOST expensive and sovereignty-eroding way to fund roads. Georgia Governor Nathan Deal learned that the hard way. Georgia voters overwhelmingly defeated a one-cent sales tax increase to fund transportation.

So, what are the solutions moving forward? After Texas Governor Rick Perry’s failed presidential bid in 2012, many Texas politicians see a weakened Perry that’s bolstered their nerve to run against him, making them more apt to push back on the governor’s preferred method of funding and building roads – tolls and P3s. With a new Tea Party wave of freshmen legislators coupled with the last wave from 2011, nearly half the Texas House got elected on no-new-tax pledges. Although it would be far cheaper for drivers than tolling, raising the gas tax is out of the question, even fee hikes are considered taxes and considered untouchable. But that’s not the case with the more liberal Senate where the powerful Senate Finance Chairman Tommy Williams has proposed a registration fee hike. Even indexing the gas to inflation is also being soundly rejected by most House members.

There’s talk of dipping into the state’s Rainy Day Fund for another one-time infusion of cash, but that does not solve the long-term problem of the gas tax’s inability to properly finance (largely due to diversions) the building and maintenance of the highway system in a growing state. It also hampers TxDOT’s ability to engage in proper planning.

Federal planning rules require state DOTs to have a 25-year, long-range plan, Metropolitan Transportation Plan or MTP, that’s ‘fiscally constrained.’ This means the DOT must demonstrate what source of revenue it plans to use to pay for the project in the year it’s scheduled. Short of a funding source, no project can move forward. After 2015, TxDOT has no money for new capacity projects, period.

All three state leaders – the governor, lieutenant governor, and speaker – have also agreed to end the long-detested practice of diverting state gas taxes to non-road uses. But that will only yield between $650 million – $1 billion a year, when the state needs $3 billion a year more for new capacity and $1 billion more per year for road maintenance.

The leaders of the two transportation committees, however, are carrying companion bills that WILL solve the problem and do it with existing taxes. The vehicle sales tax in Texas will collect $3.3 billion this year and is expected to grow by another $600 million next year and go up from there. The free market sets the price of a car, which goes up on its own with inflation over time. So it’s a win-win for taxpayers and tax averse lawmakers, so what’s the hang-up?

The vehicle sales tax represents 13% of the state’s general revenues. So budget writers are locking horns with transportation committee members in a high stakes game of cat and mouse. When state spending has doubled beyond inflation and population just under Perry’s administration, Tea Partiers aren’t partying over a McDonnell-like plan or the prospect of tax/fee hikes to bail out a mess of politicians’ own making.

There’s a simple fix to TxDOT’s funding shortfalls using existing taxes – ending gas tax diversions and dedicating vehicle sales taxes to roads. But it’s certainly not an easy solution for politicians, particularly with the pressure for states to expand Medicaid. But in Texas, the tea party flexed its muscles with upsetting establishment front-runner Lt. Gov. David Dewhurst who was expected to win Kay Bailey Hutchison’s U.S. Senate seat easily, and instead ushered in Tea Party favorite Ted Cruz. So, the Tea Party has spoken and wants all existing vehicle-related taxes dedicated to roads first. It’ll be interesting to watch how the age-old battle over taxes versus holding-the-line unfolds in a new, more conservative Texas. It certainly didn’t bode well for McDonnell and may well cause his potential successor, Attorney General Ken Cuccinelli and Republicans, to lose the governorship, even though Cuccinelli opposed the tax hikes.

Terri Hall is the founder of Texans Uniting for Reform and Freedom (TURF), which defends against eminent domain abuse and promotes non-toll transportation solutions. She’s a home school mother of eight turned citizen activist. Ms. Hall is also a contributor to

SFPPR News & Analysis.