New Proposals for Sales Tax Funding for Transportation

Post date: Jan 25, 2013 4:13:13 PM

One of the newer ideas being launched for dealing with the transportation funding crisis is greater use of sales taxes. In recent days, Governor Bob McDonnell of Virginia, Governor Deval Patrick of Massachusetts, and outgoing AASHTO president John Horsley have all put proposals on the table. They would all use the sales tax in some way, but the contents and effects of the proposals varies widely.

The McDonnell proposal, launched in early January, is the worst of the lot. The proposal, in brief, is to do away with the state’s motor fuels tax, and replace it with a bump in the sales tax. The good news is that it would increase the funding for transportation. Unfortunately, there are a number of drawbacks. The short list:

· The sales tax in general is a very regressive tax.

· Eliminating the motor fuels tax removes some (albeit small) incentives for driving economical cars, using transit, reducing miles traveled, etc.

· It severs the “user fee” link for transportation funding.

· Worst, it pits transportation uses directly against health, education, and other social needs, both now and in the future.

Governor Deval Patrick’s proposal has much more to recommend it. In his “state of the commonwealth” address, he proposed reducing the current sales tax from 6.25 percent to 4.5 percent and dedicating all of the proceeds to a “public works fund” for transportation, school buildings, and other infrastructure. The loss of sales tax revenue to the general fund would be offset by an increase in the income tax. The existing motor fuels tax would be retained, possibly with an indexing provision. The increased transportation revenues would be used to pay for a set of projects and programs outlined in Massachusetts DOT’s recently published transportation plan, The WayForward: A 21st Century Transportation Plan.

At the federal level, John Horsley, the retiring executive director of AASHTO, launched a new idea for sales tax financing at his “farewell” speech at the recent Transportation Research Board annual meeting. The gist of the proposal is the replacement of the existing federal motor fuels tax with a sales tax on fuels that would be set at a level which would “restore solvency” to the Highway Trust Fund and permit continued funding at current levels. He estimates that a tax rate of 8.4 percent on gasoline and 10.6 percent on diesel fuel would accomplish that. Good for John for tackling the big issue, but frankly I don’t see any advantage in replacing the motor fuels tax with the sales tax, other than the hope that it will somehow be “enactable.”

As I have said before, looking for alternatives to the motor fuels tax to fund transportation reminds me of looking for alternatives to a hammer to drive in nails. You may find something that works, but the best tool for the job is being overlooked.