Politics & Government

North Carolina reconsiders its reliance on the gas tax

The North Carolina General Assembly is considering changes to the fuel tax and other ways of ensuring stable highway funding.
The North Carolina General Assembly is considering changes to the fuel tax and other ways of ensuring stable highway funding. cseward@newsobserver.com

Interstate 95 travelers know that South Carolina usually has the cheapest gas and diesel fuel on the East Coast, thanks to one of the lowest motor fuel taxes in the nation.

When Elijah Johnson set out last week for Florida, he left Rocky Mount with enough gas to get out of North Carolina. He filled up for the longer trip in Dillon, S.C., at a Sunoco selling regular for $2.069 a gallon – 25 cents below the North Carolina average that day.

“It’s much cheaper here, and I’m assuming it’s because the gas tax is much cheaper than North Carolina’s,” said Johnson, 60. “No one likes high taxes.”

Legislators in Raleigh have that sentiment in mind as they haggle over how to get more money out of North Carolina’s gas tax – already the sixth-highest among all states’ – while trying not to say that they would increase the tax. The state collects 37.5 cents per gallon now, more than twice South Carolina’s tax of 16.5 cents.

House and Senate conferees met a few times last week without resolving differences in their complicated proposals to change North Carolina’s gas tax law.

Both chambers aim first to ward off a precipitous drop in the gas tax rate later this year, which would cut a few hundred million dollars from the state Department of Transportation budget. Then they’ll consider whether it’s time to start weaning North Carolina from its risky reliance on the anemic, old-fashioned gas tax – and find more dependable funding sources to catch up with the state’s growing transportation needs.

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. 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.

A long-term fix

“It’s on us to make sure we sit down and come up with a permanent, long-term fix for transportation funding in this state,” state Rep. Charles Jeter, a Huntersville Republican, said during House floor debate on the bill. “The gas tax as it is currently written will not work.”

The Senate would set the tax at a minimum 36 cents per gallon starting July 1. Its proposal also would adjust a statutory formula that makes the tax rise and fall with the ups and downs of wholesale fuel prices – which have plunged in the past six months.

This revised formula would accelerate tax increases when the price of fuel rises in future years. If the Senate proposal were current law, North Carolina drivers now would be paying a state gas tax of 46 cents.

The House starts with a similar approach, setting the minimum tax at 36 cents through the end of December. But after that, the House would revert to the current formula, allowing the tax to drop in January to a projected 30 cents. That would force hundreds of DOT layoffs and curtail road-building and bridge repair projects.

House leaders swear they don’t want that to happen. They’re betting that a Dec. 31 deadline would give the legislature an urgent incentive to develop new or increased taxes or fees that could give DOT a steady, growing money stream for years to come.

“We are using a source of revenue that fluctuates wildly,” Rep. Bill Brawley, a Charlotte Republican who championed the House’s 36-cent plan, said in a committee meeting. “How can we realistically say that we can build a road in three years if we have no idea how much money will be provided for transportation over that three years’ time?”

Two-thirds of NCDOT funding

Gas taxes have long been the nation’s biggest single source of money for roads and bridges, buses, and bike lanes – adding up to 66 percent of federal revenue and an average 31 percent of all state transportation revenues, according to a Pew Charitable Trusts study. But even with more drivers on the road each year, improved automobile fuel economy and the spread of plug-in cars that don’t need gas have caused tax collections to decline.

That’s an especially big problem here. North Carolina depends more heavily than most states on state and federal gas taxes, which now cover 66 percent of the $4.7 billion DOT budget.

Many states can draw on a broader, more diverse revenue base to pay for transportation needs. That’s because they have more turnpikes that collect tolls, because they tap sales and property taxes and other sources to help pay for roads and bridges, or because they levy higher taxes on vehicle sales than North Carolina’s modest 3 percent rate.

And in most states, individual counties maintain the minor two-lane roads and pay for them with local sales and property taxes. In North Carolina, the state takes care of the county roads.

“We’re taking care of secondary roads in this state,” Rep. Bob Steinburg, an Edenton Republican, said in floor debate on the gas tax bill. “The other states are not responsible for doing that, and that is one reason our gas tax is higher.”

As gas tax collections flatline, several states have sharply increased their tax rates or changed how their gas taxes are calculated.

Even South Carolina is looking to end its cheap-gas status, with competing proposals to raise a tax that has not changed in 25 years. Gov. Nikki Haley wants to levy an extra 10 cents on every gallon, to bring South Carolina’s gas tax even with Georgia’s. A state Senate proposal would make that a 20-cent hike, to roughly match North Carolina’s gas tax.

In North Carolina, state and university researchers have warned for years that state and federal revenues are lagging behind the state’s growing transportation needs. DOT planners said in 2012 that the cumulative shortfall would reach somewhere between $34.4 billion and $94.4 billion by 2040.

Legislators ducked the issue until this year. They noticed that a big chunk of that shortfall will hit North Carolina in July, when the statutory formula is expected to drop the state tax to about 29.6 cents a gallon.

‘Stabilizing’ gas taxes

Both the House and Senate plans would prevent that with a tax floor of 35 or 36 cents. The Senate plan is projected to push annual gas tax collections $236 million to $352 million higher than they would be otherwise, under the current law.

But while Haley and other South Carolina leaders talk bluntly about raising taxes, the consensus euphemism around Raleigh is “stabilizing revenues.”

And, to nail down support from anti-tax fundamentalists in North Carolina, both House and Senate leaders propose to cut the gas tax for a few months, by a penny or two – before they raise it.

Gov. Pat McCrory was in sync with this talking-points paradox Monday when he testified before a U.S. House committee in Washington.

McCrory’s budget proposal depends on $475 million in increased gas tax revenues that will be available only if the legislature adopts the Senate plan or something similar. But when he spoke about the state’s need for more transportation money, he touted the legislature’s push for a short-term gas tax cut.

“I just supported an effort … to reduce the gas tax,” McCrory told the House committee, pumping his hand in a palm-down gesture to emphasize the point. “I supported an effort to stabilize the current funding source that we have now.”

Senate leaders have not said whether they’re willing to go beyond cutting the gas tax and then “stabilizing” it. But two House members are airing out some new ideas.

Rep. John Torbett, a Stanley Republican who oversees transportation spending for the House, wants to change the statutory formula so the gas tax no longer rises and falls with changes on the world market for petroleum. He proposes to peg the tax rate to two less volatile indicators: the consumer price index for energy cost inflation and North Carolina population growth.

“I’m looking at pulling it out of that volatility and putting it on a more sustainable path forward,” Torbett said in an interview.

On top of that, he proposes to make increases in North Carolina’s current transportation money sources, including motor vehicle fees and the highway use tax on car sales – enough to boost DOT spending by $1 billion a year.

“We’re going to work real hard on our roads – resurfacing and maintaining them, fixing potholes – and bring our streets up to the quality that the people I talk to expect but don’t feel they’re getting,” Torbett said.

Jeter, the Huntersville Republican, has filed a bill to get rid of the gas tax altogether. While acknowledging “imperfections” in his new approach, Jeter proposes to replace the gas tax with a flat “infrastructure access fee” on every car and truck – pegged at $201 per year to roughly match the lost gas tax receipts.

‘Good things’ cause problem

“The gas tax ... will only get worse over time,” Jeter said. “We’ve got to come up with a different, better system. To me the idea of a flat fee is the cleanest, easiest way to do it.”

While legislators work out how North Carolina will resolve its need for a more reliable source of transportation money, one House leader argues that this is a good problem to have.

“I’d like people to go out of here rejoicing because this problem is caused by three really good things,” Rep. Paul Stam, an Apex Republican and the House speaker pro tem, said at a committee meeting.

He spelled out three reasons why gas taxes are no longer a dependable, lucrative source of transportation money.

“Much lower gas prices – is that good or bad? Good,” Stam said. “Second, improved efficiency of gasoline mileage. ... And the third thing is, of course, you’ve got more vehicles going out there using up the roads without using gas.

“Is that a good or bad thing? Good.”

Transportation numbers

Each penny of gas tax: Costs the average driver $7.50 a year and generates $50 million a year for the state Department of Transportation.

Less gas per mile: Federal minimum standards for automobile fuel economy will increase from 27.5 miles per gallon in 2010 to 51.3 mpg in 2025.

More people on the road: North Carolina, now with an estimated 9.9 million residents, is expected to grow to 13.5 million by 2040.

Gas tax collections declining: Yearly fuel tax receipts could fall below $1 billion after 2028, down from $1.9 billion this year.

Per capita DOT spending: North Carolina spent $365 per capita on transportation improvements in 2010. At current tax rates and with the projected population growth, that number is expected to fall to $120 per capita in 2040.

Per capita transportation taxes: Adding up gas and car taxes, DMV fees, tolls, and sales and property taxes that support state and local government spending, North Carolinians pay $510 per person for transportation each year. The United States average: $657 per person.

The current gas tax formula: North Carolina’s gas tax is the higher of two numbers: Either 21 cents or 17.5 cents plus 7 percent of the average wholesale fuel price.

The Senate’s proposed gas tax formula: Either 35 cents or 17.5 cents plus 9.9 percent of the wholesale fuel price.

Sources: NCDOT, NCSU Institute for Transportation Research and Education, NC Go

Other ways to pay for it

With gas tax collections waning, North Carolina leaders have options for raising more transportation money. Here are a few of them.

Highway use tax on car sales: Car buyers pay a 3 percent tax on the sales price, lower than some of North Carolina’s neighbors. Raising this tax to the state’s general sales tax rate, 4.75 percent, would generate $297 million a year.

Highway use tax on short-term vehicle leases: This revenue now goes to the General Fund, where it’s used for non-transportation purposes. Moving it to the Highway Fund would give DOT $50 million a year.

Transfers to General Fund: A share of gas taxes and other transportation revenues is shifted from the Highway Fund to the General Fund. Ending the transfer would give DOT an extra $255 million a year.

Heavy truck fees: The federal government and several states tax heavy trucks by weight and annual mileage. In Oregon, this weight-mile tax generates $300 million a year.

Vehicle-miles-traveled fees: There are different opinions about whether states can effectively tax drivers by the mile without invading their privacy. A pilot program in Oregon this year will collect 1.5 cents per mile from 5,000 drivers. If all North Carolina drivers paid that rate, DOT would collect $1.4 billion.

Sources: NCDOT, NCSU Institute for Transportation Research and Education

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