RICHMOND, Va. (AP) - Gov. Bob McDonnell on Tuesday proposed a five-year, $3.1 billion transportation funding package that includes replacing the state's gasoline tax with a sales tax increase of nearly a penny on the dollar.
The Republican governor unveiled his plan for roads and transit on the eve of the 2013 General Assembly. If lawmakers approve, Virginia would be the first state to drop its gasoline tax.
McDonnell said the gas tax is no longer a viable revenue source for maintaining and building highways because of inflation and more fuel-efficient vehicles. State officials said the purchasing power of the gasoline tax has declined by more than half since it was last increased, to 17.5 cents per gallon in 1986. Also, fuel economy improved from an average of 10.3 miles per gallon in 1986 to 27.3 mpg in 2011.
"That's just an unsustainable trajectory," McDonnell told reporters and scores of business representatives and lobbyists who packed a news conference.
While the gas tax has been stagnant, sales tax revenues have continued to grow with the economy, McDonnell said. His plan to increase the state's 5 percent sales tax to 5.8 percent and dedicate all of the additional revenue to transportation would raise an additional $607 million over five years, he said. Eighty-five percent of the additional revenue would be spent on maintenance, the rest on construction.
The 17.5 percent tax on diesel fuel would remain unchanged because heavy trucks cause about 80 percent of the damage to Virginia's highways, the governor said, and most of those vehicles come from out of state.
The plan also includes McDonnell's previously announced proposal to increase the portion of the existing sales tax already earmarked for transportation. A half-cent already goes into the state's highway fund. The governor's proposal would increase that commitment to three-quarters of a cent over five years, generating an additional $811.5 million over that period.
When combined, the two sales tax changes would give transportation about one-quarter of sales tax proceeds.
Democrats have opposed proposals to allocate more of the sales tax for transportation, calling it a raid on public education and other priorities that are financed by the state's general fund. McDonnell said the state has been increasing education funding and ending each year with surpluses, so it can afford to shift a little more general fund money to transportation.
McDonnell said his plan is "politically viable" but acknowledged it won't be easy.
"There will be people up here who find some things they like, some things they don't like," McDonnell said of his proposal. "There has to be a series of tradeoffs."
While Democrats have opposed using a greater share of the sales tax for transportation, Republicans have repeatedly shot down proposals to increase the gasoline tax.
"I hope that after a lot of posturing and a lot of failed attempts we can get something done," McDonnell said.
The largest single item in McDonnell's plan depends on action by Congress. According to the governor, Congress this year is expected to pass legislation giving states authority to collect sales taxes on out-of-state online and catalog sales. Taxpayers already are supposed to pay these taxes as a use tax on their income tax returns, but compliance is low. McDonnell proposes earmarking a portion of this revenue for transportation, raising just over $1.1 billion over five years.
The governor also wants to raise $547 million over five years by increasing vehicle registration fees by $15. An annual $100 fee on alternative fuel vehicles would raise an additional $66.6 million.
McDonnell said his proposal will "make a game-changing investment" in the state's transportation system. Because state law gives highway maintenance priority for gas tax revenues, very little money has been available in recent years for new construction.
"Instead of building new roads, we're doing paving and potholes," he said, adding that his plan would end that problem by 2019.
House Speaker William J. Howell, R-Stafford, called McDonnell's plan bold and said he has long considered the gas tax "a dinosaur." Howell, Republican Del. Tim Hugo of Fairfax County and Republican Sen. Steve Newman of Lynchburg are sponsoring the legislation.
Del. Vivian Watts, D-Fairfax and a former state secretary of transportation, said she was "not impressed" with McDonnell's final effort to do something on transportation before his nonrenewable four-year term ends next January.
"It's not nearly enough money," she said. It also puts too much emphasis on highway maintenance, lets out-of-state motorists drive on Virginia's highways without paying their fair share and does not do enough for the heavily congested "urban crescent" from the Washington D.C. suburbs, through Richmond to Hampton Roads.
Americans for Tax Reform, the conservative organization headed by Grover Norquist, also criticized the proposal.
The group said in a statement, "The plan as it stands now fails in its goal to prioritize transportation spending while avoiding tax increases."
Full news release from the Governor's office:
With legislators and transportation leaders by his side, Governor Bob McDonnell announced today a plan that would provide more than $3.1 billion in transportation funding for the Commonwealth over the next 5 years, tying transportation funding to economic growth and replacing the state's outdated gas tax revenue model with a 0.8 percent increase in the state's sales tax dedicated to transportation. The proposal would make Virginia the first state in the nation to eliminate the state tax on gasoline, allocates additional general funds to transportation, capitalizes on revenues being lost on out-of-state sales, and creates a long-term revenue system to fund Virginia's highway, rail and transit needs. Virginia's current transportation maintenance funding shortfall means that in FY 2013 $364 million must be transferred from the state's construction account to pay for road maintenance. That transfer amount is anticipated to grow to $500 million by FY 2019 unless new funding is provided. In short, Virginia has to use money meant for construction for paving and potholes. The governor's plan fixes the problem by generating $844 million in new funding per year for transportation by FY 2018, eliminating the state maintenance crossover and contributing to construction, rail, transit and other priorities. By eliminating crossover and with proposed revenue growth, this plan provides an additional $1.8 billion for highway construction over the next 5 years.
"Transportation is a core function of government. Children can't get to school; parents waste too much time in traffic; and businesses can't move their goods without an adequate and efficient transportation system," Governor McDonnell said. "My 2013 transportation funding and reform package is intended to address the short and long-term transportation funding needs of the Commonwealth. Declining funds for infrastructure maintenance, stagnant motor fuels tax revenues, increased demand for transit and passenger rail, and the growing cost of major infrastructure projects necessitate enhancing and restructuring the Commonwealth's transportation program and the way it is funded. We simply cannot continue to do what we have always done and expect this problem to go away. The gas tax is a stagnant revenue source, and no changes to it will provide a reliable growth mechanism for transportation in the state. In short, if we stick to the same old means of funding transportation, we will find ourselves having the same debates and facing the same revenue shortfalls over and over again as inflation slowly eats away at the gas tax, cars get better mileage to meet CAFÉ standards and more alternative fuel vehicles hit the streets. Market forces clearly dictate that we have to change how we fund transportation. This is a math problem. The current revenues numbers do not add up to a safe, efficient and sustainable transportation network. The time is now for an innovative and sustainable plan to meet our transportation needs and grow Virginia's economy."
The governor's 2013 Transportation Plan proposes to make these fundamental changes:
Eliminate the current 17.5 cents per gallon motor fuels tax on gasoline: The viability of the gas tax as the state's primary revenue source for transportation has been eroded by greater vehicle fuel mileage, the introduction of alternative fuel vehicles and the impact of inflation. Once this provision is enacted, Virginia will become the only state in nation without a tax on gasoline and motorists will likely see a significant break in the price of gasoline at the pumps. The motor fuels tax on diesel will remain unchanged because heavy trucks have a disproportionately large impact on the deterioration of Virginia's highways.
Replace the current gas tax with a 0.8 cent increase to the Sales and Use Tax (SUT) dedicated to transportation: The SUT is a reliable, predicable and sustainable revenue source. For decades we have already had the policy that .5 cents of the sales tax goes to transportation. As the economy grows, the revenue from the SUT grows with it. As a percentage of the price of a product or service procured, the SUT inherently accounts for inflation. Virginia's SUT will remain below its neighboring states. Under the governor's plan, 85 percent of the increased SUT will go to the Highway Maintenance and Operations Fund and 15 percent will go to the Transportation Trust Fund.
Dedicate an additional .25 cent of the state's portion of the existing SUT to transportation: Transportation currently receives 0.5 cent of the SUT, and the governor proposes to phase in this share to 0.75 cent over five years. When combined with the 0.8 cent SUT increase, transportation will receive approximately one-quarter of SUT proceeds, thus ensuring a sustainable transportation revenue stream for the future. All of the revenues from the additional .25 cent will be dedicated to support maintenance and operations. During the first three years, however, up to $300 million will be committed to the Dulles Metrorail Extension Project, providing the reforms identified by the U.S. Department of Transportation Inspector General are implemented.
Increase vehicle registration fees by $15 and dedicate the revenue to intercity passenger rail and transit: There is a strong and growing demand for public transportation in Virginia, both within and between the state's regions. The successful passenger rail services to/from Washington, DC and Lynchburg, Richmond, and Norfolk, and the dramatic growth in transit in Virginia (especially in Northern Virginia and Hampton Roads) requires greater financial support from the Commonwealth. This need is anticipated to grow as passenger rail services are extended to Roanoke, light rail is extended to Virginia Beach, and Metrorail is opened to Dulles Airport and beyond. Revenues generated by the fee will be split between passenger rail and transit.
Impose a $100 annual Alternative Fuel Vehicle Fee and dedicate the revenues to transit: The governor is a strong supporter of alternative fuel vehicles. He has directed that Virginia's state fleet be converted to natural gas vehicles. And he knows that alternative fuel vehicles will only continue to grow in popularity and use in the years ahead. In fact, over the past four years, as gas prices have grown from less than $2 per gallon to as high as $4, more Virginians have turned to alternative fuel vehicles. There are over 91,000 of these vehicles currently registered in Virginia. This is a great development for energy security and conservation, but it does present a challenge to how transportation funding has been derived in America for the past century. Drivers of alternative fuel vehicles that use natural gas or electricity pay no motor fuels tax at the state or federal level and thus do not contribute to the primary means of funding roads. However, these vehicles still have the same impact on Virginia's roadways as conventional fuel vehicles.
While the governor's plan will eliminate the Virginia gasoline tax, the federal gas tax of 18.4 cents will remain and with more alternative fuel vehicles on the road, the less of a share Virginia will get of those federal gas tax revenues. Therefore, the governor's plan proposes an additional $100 fee for alternative fuel vehicles to ensure that these drivers continue to contribute something to Virginia's transportation networks, which they use every day. The revenues generated by this fee will be dedicated to the Commonwealth Mass Transit Fund to help fund the growing demand for transit and reduce congestion. Legislation passed during the 2012 session already required a fee for electric vehicles, and this measure applies the increased fee to all alternative fuel vehicles.
Adopt the Marketplace Equity Act now and dedicate projected revenues to transportation and education: The 113th Congress will consider the Marketplace Equity Act, which would grant states the legal authority to collect out-of-state sales taxes. This is a tax that is already imposed and required by law to be paid as a use tax on the taxpayer's income tax return. Unfortunately, compliance is very low and these are dollars we should be collecting. This proposal would conform the Code of Virginia to any changes in federal law, contingent upon the Marketplace Equity Act being adopted by Congress. Potential revenues will be dedicated to transportation, public education and localities. Governor McDonnell's 2013 Transportation Funding Plan will allocate a portion of these revenues not only to transportation, but also to other critical areas of need. First, 1.125 cents of the 5.8 percent sales tax will be dedicated to public education ($310 million over 5 years). Second, 0.5 cents of the 5.8 percent sales tax will be given back to the localities to use at their discretion ($138 million over 5 years). Third, 0.5 cents of the 5.8 percent sales tax will be given back to the localities for local transportation priorities ($138 million over 5 years). Finally, 3.675 cents of the 5.8 percent sales tax will be provided to the Transportation Trust Fund ($1.02 billion over 5 years).
In conversations with Congressional leaders, it is likely that this bill passes in congress. The bill has support from the National Governor's Association and both online and bricks-and-mortar retailers.
"Over the course of the next five years, this innovative plan proposed by Governor McDonnell will generate more than $3.1 billion in additional funding to be invested in the Commonwealth's transportation network," said Secretary of Transportation Sean Connaughton. "This will be the single largest increase in dedicated funding for transportation in a generation, and will provide a true long-term sustainable and equitable solution to fund today's transportation needs and to meet the future demands for a safe, efficient and economically viable transportation network. It will also end the unsustainable transfer of our funding for new transportation construction projects just to pay for maintenance. This crossover has taken more than $3.3 billion from construction projects to address maintenance deficits since 2002."
"This is a bold plan that makes a critical investment in Virginia's transportation system," said Speaker of the House William Howell. "It marks another major step forward in our efforts to continue to make Virginia attractive to businesses. This much-needed investment shows a commitment to upgrading and improving our state's infrastructure that will help attract businesses to Virginia and create jobs. I am enthusiastic about the solution we have put forward today and what it will mean for commuters, businesses and the Commonwealth. We have crafted a plan upon which we can build consensus, but there is more work to be done to bring everyone together on a practical solution to this problem. I look forward to working with Governor McDonnell and Senate leadership on this issue throughout the General Assembly session."
"There is no question that funding for Virginia's transportation needs is sorely lacking," said Delegate Tim Hugo. "I look forward to working with my colleagues in the General Assembly and Governor McDonnell in passing this legislation that will ‘stop the bleeding' of the Transportation Trust Fund and allocate almost half a billion dollars more to fix Virginia's transportation problems."
"Transportation funding is a critical need across the Commonwealth that must be addressed this year," said Senator Steve Newman. "I look forward to working with the Governor and my colleagues in the General Assembly to pass this balanced approach to solving this pressing need without burdening the working men and women of Virginia. I am also pleased that this plan eliminates a complete class of taxation by removing the state gas tax."
"We have known for years that the transportation budget hasn't been the priority Virginia needs it to be," said Attorney General Ken Cuccinelli. "Governor McDonnell has been creative and aggressive in his efforts to address transportation issues, resulting in a significant amount of work in progress across the Commonwealth. Nonetheless, it's past time that we reprioritize the money we spend in government as well as offer alternative approaches if we're ever going to solve this issue. I appreciate the governor taking the lead and putting some fresh and innovative ideas on the table. During the process of looking at each alternative and debating its merits, it's my job as attorney general to advise the governor and lawmakers of the legal intricacies of each proposal presented in this session, and I intend to be actively involved in doing just that. I hope that when the process is complete, Virginia will have meaningfully boosted its ability to improve our transportation system, thereby making our Commonwealth an even better place to do business and raise a family."
"I applaud Governor McDonnell for putting forth a detailed plan to address Virginia's transportation infrastructure needs," said Lieutenant Governor Bill Bolling. "The governor and I fully understand that transportation is a critical issue facing every region of our state and now is the time for action. I look forward to working with the governor and members of the General Assembly to pass a comprehensive and substantive plan this year that will enable us to build a transportation system for the 21st Century."
"Two years ago when the General Assembly adopted the governor's transportation bonding package, everyone acknowledged that a sustainable funding initiative was necessary to meet the Commonwealth's ongoing transportation needs," said Jeffrey Southard, executive vice president of the Virginia Transportation Construction Alliance. "This bill goes a long way toward meeting those needs. If all the provisions of this bill are adopted by the General Assembly, we will see almost $3.1 billion in new funding for our critical transportation needs over the next five years. This initiative will generate nearly 20,000 jobs, create more than $2.5 billion in economic activity in the Commonwealth and generate over $150 million in new tax revenues for economic growth. More importantly, this bill will improve mobility, reduce congestion, promote further economic activity and improve safety on our highways—all factors that will improve the quality of life in Virginia for today and years to come."
"Virginia's transportation infrastructure is vitally important to the Commonwealth's economic competitiveness. The state's transportation system supports business, tourism and economic growth," said Virginia Chamber President and CEO, Barry DuVal. "The governor's transportation proposal is a bold plan to ensure long-term, dedicated and sustainable funding is available that begins to address the Commonwealth's critical infrastructure needs."
The governor also announced the following transportation reform and innovation proposals:
Constitutional Lock Box on Transportation Funds: The governor supports legislation to send to the voters a constitutional amendment that will ensure that funds committed to the Commonwealth Transportation Fund are used solely for transportation purposes. This will help restore public trust that transportation dollars will be spent on transportation.
Streamlining VDOT Business Operations: Legislation to reduce bureaucratic hurdles and increase efficiency by giving the commissioner and VDOT greater authority over administrative issues, operational issues that principally involve the practice of engineering, and expanding stakeholder outreach and involvement.
Transit Funding Reform: If we are going to invest more funding in Virginia's transit systems, we must ensure that our transit providers are operating as efficiently as possible. The current transit funding formula – in place since 1986 – is broken. The formula is based on one single factor: operating costs regardless of size, efficiency, or type of transit service provided. In other words, the more you spend, the more you get. Using two-year-old data, a transit providers' funding is determined based on the proportion its costs bear to the total state transit operating costs. This system does not reward efficiency, and creates winners and losers by rewarding higher cost systems with more funding, while punishing those systems that achieve cost savings. The governor's plan includes a new performance-based funding formula for transit. The formula will be based 50 percent on system size and 50 percent on performance factors.
Improving the Competitiveness of the Port of Virginia: Finally, the governor's transportation plan will continue efforts to grow Virginia's economy and create jobs by implementing further reforms at the Port of Virginia. These reforms will focus on eliminating bureaucratic hurdles to better enable the VPA to compete with private companies in a highly competitive global marketplace. They will also expand the VPA's ability to act as a catalyst for economic development across the Commonwealth.