Cutting the Gas Tax: A Proposal
Brian Balfour
| August 12, 2008
Proposal: Permanently cut North Carolina’s gas tax by more than a third, while increasing funding for high priority projects such as urban loops and intrastate highways by $20 million.
Introduction
Families across North Carolina are struggling to make ends meet as the cost of gas continues to soar. Making matters worse, North Carolina currently imposes the second highest state gas tax in the Southeast – 15th highest in the nation. There are many long-term solutions to alleviate the high price of gas being discussed in the political arena, but short-term options within the control of state government are extremely limited.
The Civitas Institute has examined the North Carolina Department of Transportation budget and identified an opportunity for North Carolina lawmakers to provide instant tax relief for financially strapped citizens while actually increasing the amount of state dollars spent on high priority transportation projects. This paper details the specific measures that can be taken in order to significantly lower the state’s gas tax while not harming important road and highway construction appropriations. The numbers used are all taken from government sources, and cited in the endnotes included at the end of this document. The revenue impact is merely a static estimate; as the gas tax falls, more North Carolinians will choose to purchase their gas in-state creating a dynamic economic effect that would actually produce more revenue going forward than in the estimate provided below.
Why Should the Gas Tax Be Lowered?
- To provide North Carolina consumers an annual gas tax savings of more than half a billion dollars.
- To make small business owners in border counties more competitive. Entrepreneurs along the state border are losing substantial revenue as consumers opt to fill up at gas stations in South Carolina and Virginia – both states feature a gas tax more than 33% lower than North Carolina (Virginia’s is 10.5 cents lower, and South Carolina’s is 13.3 cents lower). Lowering North Carolina’s gas tax to become more competitive will bring more business –and thus tax revenue – back to the state.
- To better focus and prioritize the state’s transportation funding. Millions of scarce transportation dollars are being spent on no longer necessary projects and non-road construction items. Making matters worse, the FY 2008-09 Budget actually reduces spending on high priority urban loops and intrastate systems by $57 million.
How To Permanently Cut the State Gas Tax By a Third While Increasing Funding for High Priority Projects
- Phase out the unnecessary Highway Trust Fund appropriation for the out-dated and largely no longer necessary Secondary Roads Program.1
- A March 2007 Fiscal Research “Justification Review” Report recommended: “The General Assembly should reduce or eliminate funding for a secondary roads program.”
- In recognition of the fact that the Secondary Roads Program has outlived its original purpose, recent legislation determined that the program is to transition to from a secondary road construction program to a secondary road improvement program. There already exists, however, significant funding to local road improvement and maintenance. For example, the FY 2008-09 Budget appropriates more than $150 million in state aid to municipalities, $39 million in discretionary funds among the 14 transportation “divisions” and $21 million for small urban construction.
- The annual Highway Fund appropriation for the Program ($95.1 million in FY 2008-09) would remain in full.
- Fully eliminate the HTF and HF transfers to the General Fund now. As laid out in the FY 2008-09 Budget, however, the HTF transfer to the General Fund is scheduled to be reduced dramatically. Beginning this year, the transfer to the General Fund will be reduced to $147.5 million, with the other $25 million being directed to the Turnpike Authority. By 2010-11, the amount of money transferred to the General Fund will be $71 million, but the other $99 million will be diverted to the Turnpike Authority. Under this proposal, the additional $74 million in funds being diverted to the Turnpike Authority over the next two years would be taken from the HTF portion of the Secondary Roads Program – currently funded at $73.1 million.
- Shift financing of non-road building activities from HF spending to the General Fund where they belong. Legislators should do what they were elected to do – prioritize the spending of our tax dollars.2
- Rollback HTF administrative expenses to FY 2006-07 levels.
- Leverage the savings to implement a 35 percent decrease in the state’s gas tax, and still have enough remaining to shift $20 million to high priority highway projects.
The Details (see charts for reference)
- Eliminate HTF and HF transfers to General Fund to reduce appropriations by
- $17,600,000 million from Highway Fund
- $147,500,000 from Highway Trust Fund
- Phase out the HTF appropriations for the Secondary Roads Construction Program - but maintain the Highway Fund appropriation of the program.
- From the Highway Trust Fund: Phase out the Secondary Road Construction appropriation to finance the increasing transfer to the Turnpike Authority, which will grow by $74 million by FY 2010-11 – roughly the equivalent of the Secondary Road appropriation.
- From the spending cuts of the Highway Trust Fund, an additional $20 million will be available to direct to high priority needs such as urban loops and intrastate highways.
- Shift funding for nearly $400 million in non- road-construction activities (as detailed under “Supporting Financial Data” on following page) to the General Fund; saving $396.6 million from the Highway Fund.
- Reverse the FY 2008-09 Budget Bill, section 25.1 stipulation that increased the administrative appropriation for the Highway Trust Fund to 4.8 percent of total HTF spending. Roll the rate back to the 2006-07 rate of 3.8 percent – creating a savings of $10.7 million.
- The net result is as follows:
- Highway Fund spending cuts of $414,207,545
- Highway Trust Fund net spending cut of $138,071,548 – but $20 million more available for high priority projects.
- These savings can translate into a lowering of the gas tax by roughly 35 percent (10.45 cents per gallon).
- Total gas tax revenues for the Highway Fund are estimated at $1,184,540,000. A 35 percent cut in the tax would reduce revenues by $414,207,545 equal to the recommended spending cuts.
- Total gas tax revenues for the Highway Trust Fund are estimated at $394,850,000. A 35 percent cut in the tax would reduce revenues by $138,071,548 equal to the recommended spending cuts.
- Thus, the gas tax could be reduced by 35 percent (10.45 cents per gallon, based on the 29.9 cents per gallon levied during the collections period) and this proposal is revenue neutral (using static estimates; as noted earlier, the dynamic effects of cutting the tax will partially mitigate any decline in revenue).
Recommended Spending Cuts
| |
HIGHWAY FUND |
HIGHWAY TRUST FUND |
| Eliminate Transfer to G.F. |
$17,600,000 |
$147,500,000 |
| Secondary Road Construction (FY 2008-09 appropriations are $73,151,853) |
--- |
(future phase-out over next two years to account for transfer to Turnpike authority) |
|
Non road building activities, shift to General Fund |
$396,607,545 |
--- |
| Rollback administrative share of budget to 06-07 levels |
--- |
$10,710,400 |
| Additional Funding for High Priority Projects |
--- |
($20,138,852) |
| Total Spending Cuts/Retained Revenue |
$414,207,545 |
$138,071,548 |
Revenue Impact of 35% Cut in Gas Tax
| |
HIGHWAY FUND |
HIGHWAY TRUST FUND |
| Estimated Gas Tax Collections Available for FY 2008-09 |
$1,184,540,000 |
$394,850,000 |
| Less a 35% Cut in Gas Tax |
($414,207,545) |
($138,071,548) |
Supporting Financial Data:
APPROPRIATIONS3
| |
FY 2008-09 |
| Transfers to General Fund |
|
Highway Fund:
Highway Trust Fund:
|
$17,600,000
$147,500,000 |
| Secondary Roads Program4 |
|
| Highway Fund |
|
Construction Secondary
|
$95,121,924 |
| Highway Trust Fund |
|
Secondary Construction
|
$73,151,853 |
| Non-Road -Building Activities – Highway Fund |
|
Highway Patrol
DPI - Driver Training
Ferry Operations
Ferry Administration
Railroad Program
Public Transportation
Airports Program
Bicycle Program
Rail Division
Aeronautics
Reserve for Air Cargo
Reserve for Visitor Center
Transportation Services for trade shows
Subtotal |
$169,382,343
$33,949,682
$32,313,921
$1,256,511
$21,330,883
$83,593,512
$47,758,616
$1,105,756
$679,535
$2,036,786
$1,600,000
$400,000
$1,200,000
$396,607,545 |
REVENUE5
Motor Fuels Tax Collections Available for FY 2008-09
Highway Fund
|
$1,184,540,000 |
Highway Trust Fund
|
$394,850,000 |
Motor Fuels Tax Rate for collections period of July 1, 2006 through June 30, 2007 was 29.9 cents per gallon.
ENDNOTES
1“Highway Fund and Highway Trust Fund Secondary Roads Program,” Justification Review by the General Assembly’s Fiscal Research Division. March 2007. The report analyzed the Secondary Roads Program and questioned the legitimacy of continuing the program:
- Funding levels for the program are derived from “long standing statutory formulas and have not generally been the subject of discussion or change in the legislative appropriations process.”
- “The Department of Transportation has completed most of the secondary road construction program called for in the Highway Trust Fund legislation of 1989.”
- “ …miles paved and homes served have generally been declining as the highest priority roads have in most cases been built.”
- “The current approach divides the funds among counties but is not consistent with a statewide strategic plan that paves or maintains roads based on State priorities.”
- As far back as 1992, the Government Performance Audit Committee (GPAC) study recommended a reduction in the program. The 1992 Transportation Issue Paper recommended significant cutbacks in the program: “The HTF program should be further adjusted to eliminate the requirement to pave all unpaved secondary roads with total traffic volume of between 50 and 100 cars per day.” At that time, the program’s goal was to pave all state-maintained unpaved roads that carried 50 or more vehicles per day.
- Because the program has outlived its original intent, recent legislation has changed the program from a secondary road construction program to a secondary road improvement program. In spite of this change of focus, the Fiscal Research review still recommends reducing or cutting the program.
The Fiscal Research Report’s recommendation: “The General Assembly should reduce or eliminate funding for a secondary roads program.”
2Between shifting the non-road building priorities and ending the transfers, the General Fund stands to be burdened by roughly $560 million in new spending and revenue reductions. This amount may seem large, however put in context it only comes to 2.6% of the current year’s budget. Further, General Fund appropriations have risen by $5.4 billion in just four years - an increase of 34 percent. Average reversions and unappropriated funds from the previous year have averaged more than $240 million annually over the past five budgets.
3Source: Office of State Budget and Management, 2007-09 Certified Budget Volume 6 Transportation
http://www.osbm.state.nc.us/files/pdf_files/200709_BD307_Vol6.pdf
4Secondary Road Construction expenditures is an estimate of actual funds available for construction projects in the FY 2008 - 09 budget. A portion of the appropriation for those programs is dedicated to debt repayment and other priorities. Source: Phone conversation on 5/15/08 with Delbert Roddenberry, Secondary Roads Program Manager.
5Source: Governor’s Recommended Adjustments FY 2008-09 (pg. 52, 55)
http://www.osbm.state.nc.us/files/pdf_files/2008-2009_adjustments.pdf
6Source: Department of Revenue
http://www.dor.state.nc.us/taxes/motor/rates.html
