It’s budget season again and the new Republican majority in Raleigh is scrambling to come up with almost $4 billion to fill in the state budget hole. Budget items that are paid for by the General Fund, such as education, Medicaid and public safety are going to get the lion’s share of attention.
But legislators shouldn’t overlook the “other” state budget – one that recently imposed a tax increase and contains plenty of low hanging expenditures just ripe for cutting. This “other” budget is the nearly $3 billion the state spends every year on transportation.
When considering North Carolina’s transportation budget, it is best to start at the beginning: the source of the money. Nearly two-thirds of the state’s transportation spending comes from the Highway Fund.1 The fund started in 1921 with the creation of North Carolina’s first ever gas tax. The Highway Fund was established primarily to support highway construction and maintenance, then later began financing the State Highway Patrol and the Division of Motor Vehicles.
The other third of the state’s transportation funding comes from the Highway Trust Fund. The HTF is focused on financing North Carolina’s intrastate highway system, urban loops and local secondary roads.
In 1921 the state’s first gas tax was a penny per gallon2 and supported highway construction and maintenance.3 The current rate is 32.8 cents a gallon and supports a variety of projects, many of which are not highway related.
At 32.8 cents per gallon, North Carolina has the second highest gas tax rate in the Southeast and the 13th highest rate in the country.4 To put it in perspective, NC consumers pay almost double the 16.8 cents per gallon rate of South Carolina.5 The rest of North Carolina’s neighbors get a better deal too with rates of 19.7 cents per gallon in Virginia, 21.4 in Tennessee, and 20.8 in Georgia. Florida is the only state in the region that charges more, at a rate of 34.4 cents per gallon, and it doesn’t have an income tax.
The gas tax in North Carolina is partially tied to the price of gas. The tax consists of a flat rate of 17.5 cents per gallon, plus 7 percent of the wholesale price of fuel. So when gas prices go up, taxpayers pay more at the pump.
Several years ago, with gas prices on the rise, the state legislature implemented a tax ceiling, ensuring that the gas tax would not go above 29.9 cents a gallon, no matter the price of gas.
In 2009, the price of fuel fell, meaning less revenue for state government. Rather than let the tax fall with the price of gas, lawmakers turned the ceiling into a floor; ensuring that the state would make at least 29.9 cents on every gallon of gas sold in North Carolina. This move might have made sense if the money was going to meet the demand for more roads in high traffic areas, but in reality the opposite is true.
Today revenues from the gas tax fund projects like drivers education for teenagers ($34 million), ferries ($41 million), visitor centers ($400,000), bike paths ($1.1 million), and even transportation services for trade shows ($1.2 million).6 These kinds of transportation themed expenditures don’t fit with the original goal of the tax which was to place the burden of highway maintenance on users. Bike paths might be a worthy expense, but they should be paid for with local government funds rather than come out of money specifically designated for state highways.
Furthermore, the state’s method of allocating gas tax revenue— the part that does get spent on building and maintaining highways– doesn’t do a very good job of putting the money where the need is. The state’s equity financing formula allocates money by region rather than by need. Because of this formula, some rural parts of the state have unused four lane highways while cities like Raleigh and Charlotte have problems with highway congestion and are struggling to keep up with maintenance and population growth. North Carolina started using the formula in 1989 and more than 20 years later it is clearly not an efficient way to allocate the state’s highway funds.
Cutting non-highway projects and changing the allocation formula could save the state millions of dollars. Cuts don’t have to mean abandoning all that previous investment in highway infrastructure—the right priorities will actually allow the state to spend more on roads where they are needed and provide tax relief to citizens in the form of lower gas taxes.
The new majority in Raleigh’s General Assembly ran on a platform of fiscal responsibility and keeping down taxes. There is ample opportunity to fulfill these promises when it comes to transportation spending.
5 Rate data from 1/1/11 American Petroleum Institute report. http://www.api.org/statistics/fueltaxes/upload/State_Motor_Fuel_Excise_Tax_Update.pdf