RALEIGH – The debate over gas taxes and North Carolina’s highway needs simmered for years in Raleigh. As 2006 began, however, a combination of factors – politics, gas prices, distrust of state government among them – heated up the issue enough that it boiled over, scalding many in the process.
The immediate controversy was a January 1 increase in the excise tax on motor fuels of nearly three cents a gallon. The legislature had not voted on the matter specifically. The state’s excise tax has both a fixed component and a variable component, the latter assessed as 7 percent of the average wholesale price and adjusted every six months. The system is, in other words, on autopilot. Turbulence intervened.
Supporters of the current system say that it makes sense for North Carolina’s gas tax to vary somewhat with price. That portion of the excise is basically like a retail sales tax. If the price of shoes rises by 10 percent, then all other things being equal the amount of tax collected on shoes will also rise by 10 percent. If, instead, the state levied a set tax of, say, $1 on every pair of shoes sold, the effective tax rate – the percentage of a sale confiscated by government – would actually decline as prices rose, and vice versa.
So what? Well, the gas tax has some peculiarities that, again according to supporters of the current system, argue for leaving the variability alone. For one thing, the price of oil affects not just gasoline but also oil-based components of highway construction such as asphalt. If oil is going up, the cost of building or resurfacing roads is also going up. Furthermore, since the proceeds of gas taxes, unlike most other state taxes, are earmarked for a particular purpose – roads – any reduction in the rate will result in delayed or foregone highway improvements, which most North Carolina motorists value more saving a couple of cents per gallon at the pump.
These are reasonable arguments, as far as they go. But there is another set of reasonable arguments on the other side.
They begin by taking seriously the notion that gas taxes are supposed to act as user fees for traversing North Carolina’s highways. As such, they shouldn’t be assessed according to the dollar value of sales. They should be assessed per gallon, which acts a proxy for miles driven (though a loose proxy, it should be noted, given the increased fuel efficiency of the vehicle fleet over time, which has reduced the amount collected per mile traveled). Because with few exceptions gasoline sales happen entirely because the state road system exists, it makes sense to devote all of the excise – not just some or most – to roads.
That is not what is happening now, contrary to the political rhetoric. For example, in the 2005-06 fiscal year the state will transfer nearly $140 million in gas taxes away from road needs to other expenditures, including airports, bike paths, railroads, ferries, the Global TransPark, and transit. To make road users finance other transportation assets in this way is inappropriate and a violation of trust. If all of these dollars were redirected to their best and proper use, to road construction and maintenance, that would entirely offset the expected revenue from the excise-tax increase that just took place.
The other point is, simply, that the public is overtaxed and tired of it. In all but one year since 2001, the governor and legislature have raised taxes. Once a low-tax state, North Carolina’s combined tax burden is now the highest in our region and near the national average, which is itself too high.
So I have a recommendation: let cooler heads prevail and call a truce on the following terms. First, maintain the current excise-tax structure on gas, but dedicate 100 percent of the proceeds to roads. And second, cut some other broadly applied tax, such as the state sales tax, to provide North Carolinians the financial relief they deserve.
As it happens, there is solid evidence that the public would accept and appreciate such an approach. A John Locke Foundation poll last year found that when asked whether state taxes on motorists – not only gas but also the sale of cars – should be devoted entirely to highways or shared among several uses, nearly 60 percent of North Carolina voters favored the highway-only option. More recently, a JLF survey of more than 600 business leaders across the state found an 83 percent majority in favor of strict earmarking.
Let’s fix our highways and cut taxes. Agreed?
Hood is president of the John Locke Foundation.