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Conflicted Strategies Tangle Virginia, Maryland Transportation Funding

by Roger Lanctot | Mar 31, 2013

At a time when governments around the world are raising gas taxes to discourage driving and fund the maintenance and expansion of transportation infrastructure, the state of Virginia (my home) and Maryland (right next door) are proposing to reduce or eliminate retail gas taxes.  The proposals are a part of elaborate funding schemes intended to resolve financial shortfalls associated with local transportation initiatives, but the blindingly obvious folly cannot pass without comment.
At the core of the debate which, in Virginia, will come to a vote April 3rd, is the apparent severing of the transportation funding source from the greatest users of the resource via the gasoline tax.  This separation is important because, almost unspoken as part of the refinancing plan, is the fact that the existing billion-dollar-plus funding shortfall is growing as cars become more fuel efficient, people (in some cases) drive less and hybrid and full-electric vehicles catch on with consumers.
The shift to more fuel efficient vehicles has failed to reduce congestion (or highway fatalities), which is why funding for public transportation is part of the funding equation.  This is another source of ongoing and unresolved controversy – the diversion of highway funds to public transport.  Some feel strongly that buses should be given priority for this funding, others believe that public-private partnerships are the answer.  (Rail-oriented solutions are exceptionally unpopular in some circles due to high costs and perceived inefficiency.)
While fuel taxes around the world have skyrocketed, transforming driving behavior, retail fuel taxes in the U.S. have remained low and fixed. (See attached table.)
Virginia: Virginia is proposing to eliminate the retail gas tax, add a 3.5% (emphasis mine) wholesale tax on motor fuel (backup plan of 5.1% tax in case of shortfall); increase the sales tax on non-food items to 5.3% from 5%; dedicate more general fund revenue to transportation; increases sales taxes to 6% in Northern Virginia and Hampton Roads with revenue to go to transportion; double the annual fee for alternative fuel vehicles to $100 from $50 – since amended to $64/year.  (There are also provisions for a reduced motor vehicle sales tax and a reduction in a hotel occupancy tax.)
Maryland: Maryland is proposing to reduce the retail tax of gas by 5 cents to 18.5 cents and then index it to the Consumer Price Index; impose a 2% wholesale tax on fuel to be increased to 4% in 2014 (backup plan of 6%); index transit fares to CPI.
Both Maryland and Virginia are seen as appealing to consumers by reducing the gas tax.  But the shift to a wholesale tax looks like simple sleight of hand.  The strategy also goes against the findings of the Metropolitan Washington Council of Governments’ Transportation Planning Board study on the “Public Acceptability of Congestion Pricing” which found participants most accepting of maintaining or increasing gas taxes.
The TPB study gathered consumers and brainstormed around three potentially congestion-reducing scenarios:
1.      Priced lanes on all major highways
2.      Pricing on all streets and roads – ie. a road use tax based on GPS readings
3.      Priced zones – likely enforced with license plate readers
The study found the most support for priced lanes on all major highways and the least support for a road use tax enforced by an on-board device. (See attached table.)
The results are interesting because a rod use tax is the most often suggested alternative to the gas tax.  Some high profile tests have been conducted in The Netherlands and in the state of Oregon in the U.S.  Taxing road use directly is seen as an ideal funding mechanism since it accounts for alternative fuel vehicles that let their owners avoid the gas tax.
In fact, the state of Virginia clearly has alternative fuel vehicles in mind when it is proposing increasing the annual fee for electric cars.  Here, too, the Virginia approach is counterproductive and counter intuitive since it discourages the use of vehicles that are meant to reduce both harmful emissions and dependence on foreign oil.
The TPB study further uncovered the fact that consumers – after participating in the TPB forum - were not so opposed to gas tax increases. (See attached table.)
Participants in the TPB forum also opposed the perceived tradeoff between road use taxes and lower gas taxes. (See attached table.)
The rejection of the road use tax appeared directly tied to the required hardware – a GPS added to a vehicle.  The objections expressed included focused on concerns about privacy, complications and impracticality.
These findings have significant implications for the UBI development efforts in the insurance industry.  Insurers also want to mount devices on vehicles – usually using the OBDII diagnostic port, although sometimes via other means.
The Federal government is funding UBI program trials in the hopes of leveraging these programs for their ability to reduce the amount of driving overall and, thereby, emissions and congestion.  But overcoming the objections to privacy concerns and the complexity of device installation may be being underestimated.
Still, Strategy Analytics’ own survey of consumers in Europe and North America found a significant level of interest in the programs – even though participation rates remain low. (See attached table.)
Having visited Dallas last week I can say that it appears that the North Dallas Tollway Authority has figured this issue out in favor of Scenario 1 from the TPB study.  Most major roads in and around the area have an array of tolls intended to manage traffic using a combination of toll-tags and license plate scanners – and no tracking devices.
Transportation authorities are facing multiple challenges including:
1.    Reducing congestion
2.    Reducing emissions
3.    Increasing revenue for maintenance, infrastructure and public transportation
Gas taxes have been the preferred funding option around the world because it is a direct tax on the consumers of the resource.  The emergence of alternative fuel vehicles poses a significant challenge to future funding models.
While politicians may debate the merits of financing public transportation projects with funds derived from the use of highways, the rationale that public transportation increases the overall capacity of the network is reasonable.  It is also understandable that states may wish to charge a user fee for alternative fuel vehicles, as Virginia currently does, but this runs counter to the objective of encouraging the use of these vehicles (subsidized by Federal and/or state tax deductions, etc.).
The TPB findings that consumers are receptive to higher gas taxes and tolling point the way to an equitable resolution of the funding challenge facing the U.S.  And concerns regarding privacy are likely to create barriers to the wider acceptance of both road charging and UBI insurance. 
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