3:06pm: Hotline with Dave Weekley

West Virginia fuel tax drops on New Year’s, but is it cause to celebrate?

CHARLESTON, W.Va. — West Virginia’s gasoline tax drops by another penny to 32.2 cents a gallon today, and that isn’t especially good news for the state’s roads.

As the price of gas has gone down and as many consumers driving more fuel-efficient cars buy less gasoline in the first place, West Virginia’s fuel tax isn’t exactly going the extra mile.

As fuel prices have trended downward, so has West Virginia’s fuel tax.

Other states in the same position have taken steps to change how they raise revenue for roads. Some have simply bumped up a flat tax on fuel. Others have switched to tax-calculation formulas that take into account factors like inflation, state population or increased fuel efficiency. And a few, like California and Oregon, have even experimented with taxing miles traveled instead of the price at the pump.

West Virginia already spends about $1.2 billion on transportation, and a Blue Ribbon Commission has identified an additional $750 million a year to take care of the highways system and another $380 million a year for expansion projects such as new 4-lane highways, state Transportation Secretary Paul Mattox said about a month ago.

“So we essentially need to double the amount of investment we have in our transportation infrastructure,” Mattox said.

Instead, the dip in the gasoline tax will cause a decline in the amount of money available for paving West Virginia’s roads and repairing bridges.

The state Highways Department had adequate warning that this would happen, so it has already factored in a drop of about $12.5 million dollars to its budget.

The gas tax, which is recalculated annually based on the average price of wholesale gasoline, has dropped three years in a row. Because of the multi-year downward trend, the Road Fund will be down $49 million compared to three years ago.

“That would have fixed a lot of bridges, paved a lot of roads,” said Mike Clowser, executive director of the West Virginia Contractors Association.

“Our roads keep getting worse, and our bridges keep getting worse. We believe if you invest in infrastructure, you create jobs. So I’m hoping there will be a new look this year — one, because of the need for maintaining our highways but also for creating jobs and economic development in West Virginia.”

West Virginia is one of nine states experiencing a fluctuation in its gas tax on New Year’s Day, according to USAToday.

Pennsylvania, our neighbor, will have the highest gas tax in the country at 50.4 cents a gallon. That’s up about 8 cents. The hike is expected to raise an additional $299 million in a year for Pennsylvania roads. On the downside, filling up the family vehicle will cost about a dollar more.

The other big increase is in Michigan, where where the gas tax is 30.54 cents a gallon. Starting today, drivers will pay 7.3 cents more per gallon. That’s because of a package of transportation-related tax hikes expected to provide $1.2 billion more for transportation each year when fully phased in in 2021.

More modest increases are here for Nebraska, Georgia, North Carolina, Indiana and Florida.

Reductions in the gas tax will happen in New York, going down by 0.8 cents a gallon, and West Virginia.

Since 2013, 19 states have made changes to the way their gas tax is calculated, said Carl Davis, research director for The Institute on Taxation and Economic Policy.

“There had been years and years and sometimes even procrastination in the states,” said Davis, who studies a variety of issues related to state and federal tax policy. “The costs we were facing to maintain roads had increased significantly.

“There were states that finally took a hard look. We saw states in rapid succession do very much the same thing on the gas tax either with flat increases or staged gradual increases linked to gas tax formulas. It’s worth paying a little bit  more in tax to have a more robust and efficient transportation network.”

For a model that other states might consider, Davis points toward Georgia, which instituted a new formula that calculates a fluctuating gas tax rate that takes into account factors such as inflation and vehicle fuel efficiency.

“Georgia used to have a gas tax that was actually very similar to West Virginia’s that was based on the price of gasoline,” Davis said. “But what Georgia did was, they found that linking the gas tax to the price of gas is actually a fairly volatile way to come up with a rate.

“They went with an entirely new formula. They levy a flat gas tax rate, calculated once a year based on inflation and fuel efficiency gains. It’s meant to maintain the purchasing power of the state’s gas tax over time.”

West Virginia seems ready to have to make some sort of change, Davis said.

“West Virginia has seen gas tax cuts enacted because of its formula for a few years in a row now, so it’s clear there’s a misalignment there between the revenue structure and the cost the state is facing. It’s worth taking a look in West Virginia at what can be done,” he said.

“Right now the state is not going to see significant additional gas tax revenue unless gas prices rise significantly. It’s an odd place the state is in right now, and it’s worth thinking through whether that’s the best structure for the state’s gas tax.”

West Virginia’s gas tax is actually made up of two components. The first is a flat 20.5-cent tax on each gallon sold. The second component is a variable tax of 5 percent based on the average wholesale price of motor fuel.

State law requires the tax commissioner to recalculate the average wholesale price of fuel in the state each year. This year, that was calculated at $2.340 a gallon. So the coming year’s gas tax was calculated at a rate of 32.2 cents a gallon.

This will be the last time the West Virginia gas tax goes down because it has bottomed out based on changes introduced during Joe Manchin’s administration.

State law introduced in 2009 by then-Governor Manchin and approved by state lawmakers was designed to stabilize the gas tax. The change to the law prevented the tax from increasing more than 10 percent from one year to the next. The law also set a floor so that the tax also cannot dramatically fall. That change was meant to prevent the Road Fund from being starved.

The peak year in terms of tax rate was 2014 at 35.7 cents per gallon.

“There’s no such thing as a Republican or Democratic pothole,” said Ted Boettner, executive director of the West Virginia Center on Budget and Policy, which would veer to the left to avoid a pothole.

Boettner, who likes what Georgia has done, suggests the state Legislature will have to take some action to meet increasing demands for road maintenance. But it’s still unclear what that might be.

“The good news is, it seems like they were interested in finding revenue to invest in our deteriorating roads and bridges,” Boettner said of state legislators.

During last year’s legislative session, the state Senate adopted a plan to raise an additional $316 million a year for road construction and maintenance.

As prices have trended lower and vehicles get better fuel efficiency, there’s been less money for the state Road Fund the past three years.

The Senate’s proposal was funded primarily through a 1 percent increase in the state sales tax that would be dedicated to highways. That was was expected to raise $200 million. The rest was a combination of fee increases at the Division of Motor Vehicles, plus a mechanism to raise the gas tax by 3 cents when wholesale prices are $2 or lower.

When the bill was assigned to the House Finance Committee, members weren’t willing to vote to raise taxes. So it never got out of committee.

“We’re just in a serious pickle here,” House Finance Chairman Eric Nelson said this past week.

“Collectively we will be down $50 million on an annual basis that will normally go into roads. Could we do something to adjust that floor? We could, but we can’t do anything until the session begins. We need to look outside the box to bring in some more funding mechanisms.”

One possibility is continuing to embrace public-private partnerships.

“The Department of Highways has used very successfully over the past five years public-private partnerships,” Nelson said. “I think there’s been some tremendous savings. We need to make sure we expand or extend it.”

He also suggested West Virginia could take advantage of generally low interest rates by increasing the state’s ability to use Grant Anticipation Revenue Vehicles, or Garvee bonds, which have their principal and interest repaid primarily by future federal-aid funds.

“I would be in the camp that we take a bigger slice of federal money and potentially up the limit on Garvee bonds and take advantage of our low interest rate right now,” Nelson said.

Any state Legislature that starts tinkering with its motor fuel tax faces a dilemma, said Richard Auxier, state and local public finance researcher for the Tax Policy Center, a combined effort of the Urban Institute and the Brookings Institution.

Because it’s clear that a fuel tax increase would improve roads, legislators can point to that when justifying hikes, Auxier said. But it’s still a visible increase: “It makes it easy for voters to get stressed about.”

“States have three options,” Auxier said. “One is, don’t spend the money. But that seems untenable. You can raise what you do spend on increased motor fuel taxes. And if you don’t do that, the money is going to come from somewhere else. Are you mad about the conditions on the roads, and do you want to pay more for the pump? Or do you want to take from education? Or do you want to establish tolls?”

He continued, “There’s no easy way out of this. There are tradeoffs, and you have to figure out how you want to spend your resources.”

Clowser, the executive director of the state Contractors Association, watched what happened last year in the Legislature and hopes it isn’t repeated.

“I’m hopeful we’ll make a conscious decision to improve our highways system this year,” Clowser said. “I think everybody realized there’s a problem. We have to invest in our infrastructure. So most of the people I talked to after the session ended, everybody realized we have some very deep problems, and we’ll have to figure a way to make sure West Virginia doesn’t get behind the curve with our surrounding states.

“The people I’ve spoken to are tired of replacing flat tires, they’re tired of bent rims, they’re tired of paying for alignments. If people can spend an extra $30 or $40 a year to drive on safe roads and good bridges, I think they’re ready to do that.”

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