NC Budget and Tax Center

Gas tax plan to provide much needed resources for infrastructure, yet changes are needed to current proposal

North Carolina must reform the way it raises revenue for transportation. The existing funding structures are inadequate for addressing current and future transportation needs across the state. The Governor proposed bonding against future tax revenue to meet these needs while the Senate appears poised to push through changes to the gas tax. The bottom line is that policymakers must ensure adequate dollars are available to have a safe, modern transportation infrastructure that can support workers getting to jobs and business getting goods.

The gas tax is a major revenue source for transportation projects such as repairing bridges, repaving roadways, and building highways. The failure of the current gas tax (and other transportation funding sources) to support these important public services means that backlogs for both maintenance and repairs projects persist. The state Department of Transportation estimates that North Carolina faces a $60 billion shortfall for transportation improvements through 2040, and that the state needs to come up with $32 billion just to keep the status quo.

To address a small part of the gap between transportation needs and resource availability in the long term, Senate leadership pushed a bill through the Senate Finance and Appropriations committees yesterday that would change the structure of the gas tax beginning next month. This proposal is tucked into a larger bill that makes various conformity changes to federal tax law.

Current Law versus the Senate Proposal

The gas tax rate is currently 37.5 cents per gallon, with each penny of the gas tax yielding approximately $50 million annually. There are two components to the state’s gas tax: a flat tax of 17.5 cents per gallon, and a variable portion that is adjusted twice a year to equal 7 percent of the average wholesale price of gasoline over the previous six-month period. The gas tax is pegged to the wholesale price of gas because the cost of road maintenance and construction is linked to the cost of crude oil and petroleum-based materials such as asphalt.

The next adjustment to the gas tax rate under current law is scheduled for July 2015, with the expectation the gas tax will drop between 6 cents to 8 cents (or down to 29.5 cents to 31.5 cents). The Senate bill would not let the gas tax rate go that low. Instead, it would reduce the rate to 35 cents, making that rate the new minimum—or floor—compared to the existing floor of 21 cents. Going forward, the gas tax rate would only adjust once per year on January 1st versus the current practice of twice per year. But, the variable portion of the rate will no longer be equal to 7 percent of the whole sale price; the bill would raise it higher to 9.9 percent.

As a result of the proposed changes to the state’s gas tax, North Carolinians will pay less at the pump between March and July compared to current law. For the driver who fills up their average size gas tank once per week, (s)he will pay $5.60 less in total over that four month period. But, North Carolinians will pay slightly more at the pump after July compared to current law so that the state can make urgent infrastructure investments to support a growing economy.

The Senate Proposal Needs Minor Improvements

Reforming the gas tax in a way to help generate sufficient revenue to address growing demand and the current backlog of stressed roads, bridges, and railroads is a step in the right direction and important in light of the 2012 and 2006 decisions to arbitrarily cap the gas tax at a level too low to support infrastructure investment needed. Improvements, however, are needed before the Senate bill moves forward to ensure this proposal best supports the state’s transportation infrastructure:

  • Policymakers must identify a gas tax rate with an eye towards adequacy. Raising the gas tax floor—as the Senate proposal does—ensures that a minimum level of revenue is available to support transportation projections, allowing officials to better plan. Proponents of the plan argue that raising the floor will help address the problem of tax volatility. But to truly address volatility a cap could be placed on the variable rate (as opposed to a cap on the entire gas tax like done in the past). Adequacy principles should guide the level for the gas tax floor as well as the variable rate. For example, what level should the floor and variable rate be to help ensure planned projects and needed reforms are supported in an adequate way. It appears the Senate selected the 35 cent floor to accomplish the goal of raising $1.2 billion over the next four fiscal years—likely pitting this plan as an alternative to Governor McCrory’s recent push for a $1.2 billion transportation bond.
  • Policymakers should move the effective date of this policy change to July 1, 2015. Under this proposal transportation revenue and expenditures would be reduced by $33 million this fiscal year, achieved in part by firing 500 transportation workers and eliminating 50 vacant positions. Given the still slow jobs recovery, further reductions to employment opportunities or dollars available in this fiscal year will not serve to support the long-term growth of the state. One Senator suggested bill writers selected the March implementation date because they otherwise would not be able to sell the proposed gas tax changes to their caucus as a 4-month tax cut and move the bill through the legislative process.
  • Policymakers should reinstate a state EITC to offset the fact that the gas tax hits low- and middle-income taxpayers hardest. The state EITC was a key tool to ensuring that low-wage could keep more of what they earn and afford the costs of working, including gas and child care.  Reinstating a state EITC to ensure that the gas tax does not further increase the tax responsibility on working North Carolinians struggling to make ends meet is critical.

The Senate proposal to make changes to the gas tax is only a short term fix. Officials expect gas tax receipts to decline after 2020 as the shift toward more fuel-efficient vehicles accelerates. North Carolina will need to rely less on the gas tax as the primary means of financing transportation projects over the long term and be willing to consider new policies—like a vehicle miles traveled tax, for example—to plug the gap.  In the meantime, this welcome effort to ensure that the Good Roads state can truly be called such needs a few changes to ensure that it can truly deliver a positive contribution to the state’s economic growth.

One Comment

  1. LayintheSmakDown

    February 11, 2015 at 7:45 pm

    This whole thing is just a bait and switch scheme. What needs to be done is actually keep the gas tax funds for roads rather than raiding the fund to pay for government handouts. Then once the GA shows they can manage the funds correctly, maybe come back with something that is not quite the blatant tax increase and money grab that this scheme is. We all need to write our legislators to voice how bad this is for the people of NC.

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