Paying to Get from Here to There: Meeting North Carolina’s Transportation Revenue Needs in Difficult Times

By Steven Jackson
Public Policy Analyst

January 2009

EXECUTIVE SUMMARY

North Carolina’s transportation budget is in crisis. Revenue from the state’s main source of transportation revenue, the gas tax, has lagged far behind construction inflation, thanks to more fuel-efficient vehicles, fluctuating gas prices and the recession, which has prompted many people to drive less.

The recession has also caused a decrease in vehicle sales, and as a result receipts from the Highway Use Tax, the state’s sales tax on vehicles, are expected to be down over twenty percent in 2008-09 compared to the previous fiscal year. The third major piece of North Carolina’s transportation revenue system, vehicle registration fees, fails to take into account the damage heavier passenger vehicles do to the state’s roads, and as a result drivers of lighter cars are forced to help cover the costs of damage done by heavier cars.

Changing to a system that more directly taxes road use – based on the number of miles a vehicle travels – would be beneficial to revenue collections and could be designed to more fairly distribute tax responsibility. However, creating such a system is currently unrealistic because of administrative and technology hurdles.

Instead, North Carolina must take a close look at its current transportation revenue sources in order to make them more efficient and effective. First, it should remove the cap on the variable portion of the gas tax. North Carolina will miss out on $250 million in transportation revenue in the first six months of this year because of the cap.

North Carolina should also abolish the Highway Use Tax’s trade-in exemption, which is nothing more than a subsidy for auto retailers, and increase the rate of the HUT by a modest one percent. Together, these changes would add an additional $300 million to the state’s transportation coffers.

Revising the structure of our registration fees system to reflect the damage heavier vehicles inflict on roads would increase transportation revenues by upwards of $150 million per year.

Dedicating one-third of the new revenue created by these proposals would be sufficient to substantially fund a new state Intermodal Fund that could provide grants to local governments and entities for capital works in public transportation, ports, rail and bike and pedestrian facilities.

The fee increases recommended should be offset by an increase in the Earned Income Tax Credit for low-income households of 2% total, providing average relief of $32 to eligible households at a cost of around $27 million per year. This cost could be funded directly by the fee increases.