O'Malley's sales tax on gas is the right way to fund transport

Budget

O'Malley's sales tax on gas is the right way to fund transport

by Ben Ross • February 2, 2012 10:43 am

In his Wednesday state-of-the-state speech, Governor Martin O'Malley proposed ending the exemption of gasoline from Maryland's 6% sales tax. This is the best way for the state to get more money for transportation.

Gov. O'Malley speaking yesterday. Photo from the State of Maryland.

Ending the sales tax exemption, rather than increasing the gas tax beyond the current 23½¢ per gallon, accomplishes two things. First, sales tax revenue keeps pace with inflation. With the current structure of the gas tax, politically difficult tax increases are needed just to keep transit operations and road maintenance constant.

Second, we now have an opportunity to refute a widely believed myth about transportation funding. Once upon a time, drivers paid for roads through the gas tax. Most people think that's still true, but it's not.

Maryland's gas tax goes into the state's Transportation Trust Fund, along with the sales tax on car sales, fares paid on MARC trains and MTA buses, and revenues from BWI Marshall Airport and the Port of Baltimore. When the gas tax was last raised in 1992, the 23½¢ state tax was 33% of the pretax price of gasoline. The sales tax on other purchases was 5%. The heavy tax on gas could be described as a user fee paid by drivers.

Today, though, the state gas tax is a little more than 7% of the price of gasoline. When drivers buy gas, they pay 7% into the transportation trust fund and get 6% back from the state's general fund through the exemption of gasoline from the sales tax.

Ending the exemption would convert the gas tax back into a true user fee. Drivers would then pay a share of the cost of maintaining roads, just as transit riders pay a share of the cost of transit operations through their fares.

Many myths surround the subject of transportation funding, in Maryland as in other states. Transit advocates need to be vigilant as the legislature debates this issue to make sure that new funding builds transit lines and walkable grid streets rather than repeating the mistakes of the past. The better the public understands the realities of the state budget, the easier this will be.

24 comments

Tags: gas taxes, Martin O'Malley, Maryland, taxes, transportation financing

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Ben Ross is Vice-President of the Action Committee for Transit and chair of the Transit First! coalition. He is the author of The Polluters: The Making of Our Chemically Altered Environment and is writing a book about the politics of sprawl.

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I have this really insane idea: make people who use transit fund it through tickets.

by Michael Hamilton on Feb 2, 2012 10:50 am • link • report

Mr. Hamilton, the problem is that drivers are not the sole support for roads and highways. If they were, you would see a great many more tolls on the roads. They are not self-supporting.

The other problem with your comment is that YOU benefit when OTHER people take transit.

by Capt. Hilts on Feb 2, 2012 10:56 am • link • report

two things: (1) funds from the gas tax go to the transportation trust fund, but funds from the sales tax go to the general fund. Unless this is changed the funds from the gas sales tax will NOT go to transportation. (2) Sales taxes in general are regressive, hitting the poor hardest. And you think they should be extended?

by goldfish on Feb 2, 2012 10:58 am • link • report

Can you tell us the specifics of the 'once upon a time' when gas taxes along paid for roads? I doubt that was ever true.

Also, Maryland's Governor should be HONEST with the public if he wants support for this tax. If he could answer a simple questions: What % of that 6% tax will actually go to transportation and how much goes to fund Maryland's bloated state government and union contract? More than likely voters will find a far reduced amount actually goes to roads.

Just another 'trick' to make up for budget deficits in Maryland.

by Pelham1861 on Feb 2, 2012 11:01 am • link • report

I fully support a high gas tax.

Turning a gas tax into a percentage tax is not a half bad idea either, although I think the transit people knifed it last summer.

We've got to take a long look at why infrastructure spending is so expensive. I think a large part of it is lack of enginnering experience from the agency level -- they take whatever the contractors say as gospel.

by charlie on Feb 2, 2012 11:09 am • link • report

@charlie: Turning a gas tax into a percentage tax is not a half bad idea either, although I think the transit people knifed it last summer.
From a policy perspective it is a terrible idea, and let me explain why. Gas price goes down, tax revenues also go down. But as gas gets cheaper people drive more, meaning that more roads and more road maintenance are needed. OTOH, gas price increases and so tax revenues increase, giving the government more $ to improve and maintain the roads. But this is occurs when people are driving less (and thus fewer new roads are needed) because the gas price is up, and presumably smarting from the extra drain on their finances.

What the legislature must do is actually raise (or lower) the tax to keep up with conditions as they change. They have not been doing their job.

by goldfish on Feb 2, 2012 11:29 am • link • report

@ goldfish; I agree part of a good tax strategy is ensuring funding continunity. Don't rely on one vector.

But two pushbacks:

We've seen two price collapses in the last 20 years. The post 1982 one, and the current (post 2008) collapse. I doubt we'll see something like the 1980s again. Gasoline at $3 and up will be a constant. I agree there is more demand destruction going on in the US than recogonized.

Second, it isn't the cars that are creating road maintenance issues. It is trucks. Very different demand curves there. Cars create a demand for more roads and more lanes, but I suspect it is heavy vehicles causing the repair bills.

by charlie on Feb 2, 2012 11:37 am • link • report

@Charlie, yes the trucks are the main reason why roads wear out. That is why diesel taxes should be higher -- except, what do you do about cars that run diesel?

The other part of maintenance is wear from weather, which has nothing to do with vehicle weight.

About your gas price crystal ball: right now oil is at $100/bbl, basically propped up by unrest in Iran and Libya. How long will that last?

by goldfish on Feb 2, 2012 11:46 am • link • report

We've got to take a long look at why infrastructure spending is so expensive. I think a large part of it is lack of enginnering experience from the agency level. Sure, that's a part of it. And a part of it is excessive environmental regulation (applying the same level of scrutiny to public infrastructure projects that is applied to private industry is a recipe for waste), safety regulation, project labor agreements, set-aside and preference rules that encourage endless layering of contractors and subcontractors to game the system, and numerous other bureaucratic requirements that slow and complicate the process.

Simplify this morass, and we'd have a lot of savings to channel into multimodal improvements alongside each highway project.

by Arl Fan on Feb 2, 2012 11:48 am • link • report

@ goldfish; truckers pay other road related taxes other than fuel. diesel cars have been a small minority of vehicles in the US. It will grow, but continue to be small -- unlike europe where they may be a majority.

I don't see crude getting below $80 even with geopoliics, and the upside is higher. As I said, at these prices we are seeing demand destruction in the US; but how long will take to get over the increases from China?

by charlie on Feb 2, 2012 12:04 pm • link • report

Funding transportation through gas taxes sounds good and works well, up to the point where it doesn't.
I was a resident of Rhode Island in 2009 when the budget for the regional public transit system was gutted by a one-two punch of lower aggregate demand (unemployment, higher gas prices) and higher ridership (people trying to save money on gas).
Other transportation funds tied to the gas tax dried up too, which was a huge problem in a state that is constantly cited for having out of date and obsolete highway infrastructure.

by Alger on Feb 2, 2012 12:10 pm • link • report

@goldfish re:@charlie: Turning a gas tax into a percentage tax is not a half bad idea either, although I think the transit people knifed it last summer.
From a policy perspective it is a terrible idea, and let me explain why. Gas price goes down, tax revenues also go down. But as gas gets cheaper people drive more, meaning that more roads and more road maintenance are needed. <-- if people are driving more, don't they require more taxed gas, keeping revenue about the same as expensive gas + driving less/requiring less gas?

by RS on Feb 2, 2012 12:38 pm • link • report

@charlie: China has been flying high for some time now, and some think it is headed for a real-estate crash.

by goldfish on Feb 2, 2012 12:42 pm • link • report

@RS, driving habits are established over the long term and pretty inelastic. When the price falls by 20% (as it can do in a few days), people do not increase their driving by 20%. And vice versa.

by goldfish on Feb 2, 2012 12:46 pm • link • report

@goldfish oh.. then I must be misunderstanding your original comment. Somehow it seems like your original comment and this reply are in contradiction with each other:
"But as gas gets cheaper people drive more... OTOH, gas price increases... But this is occurs when people are driving less"
"@RS, driving habits are established over the long term and pretty inelastic."

I am wondering if over a long term (fiscal year), these fluctuations don't balance out?

by RS on Feb 2, 2012 1:01 pm • link • report

@RS: let me try again.

First review the US average gas price here. The price peaked at $4.12/gal in June 2008, and then crashed to $1.61 by Dec 2008, a 61% decrease. If the tax revenues were tied to the price, the collected amounts would fall by a like amount. But since these funds are used to pay for maintenance and construction, contracts that are let out long before the price dropped, the lack of money would be a disaster because the state governments were legally obliged to pay for the contracted work. I agree that this would be smoothed out somewhat over the long term, but the smoothing is not nearly enough. Government tax revenues are projected to a 1% and the spending planning is likewise finely tuned, out several years. They cannot handle large fluctuations, which would require contingency and "rainy-day" funds.

It is better to have a fixed per-gallon gas tax. Periodically over the long term the amount should be adjusted.

by goldfish on Feb 2, 2012 1:23 pm • link • report

We need commitment to fixing existing infrastructure, and rethinking a long list of road projects chasing sprawl before we should be supporting new revenues. Free flowing money to MDOT will build a lot of unnecessary highways with little accountability and little motivation to make choices that build sustainable communities. An indexed source of money like a sales tax means there's lots of money to fund every Senator's pet road project to serve more sprawl. A more constrained supply of money is a more accountable one. Business boosters of the ICC are now arguing for raising the gas tax saying we need money for repairs and transit. Instead of raising new revenues, the ICC was built with heavy borrowing and future toll increases. The Gov & legislature promised not to raise the gas tax then -- so we can raise it now, with tolls, and say its for repairs and transit. Free flowing funds for a long wish list of transportation projects will fuel sprawl development and undermine existing communities and transportation choices.

by sustainabletransport on Feb 2, 2012 1:30 pm • link • report

@goldfish - Thanks for explaining. I didn't consider that the funds would be essentially be spent prior to them actually being collected.

by RS on Feb 2, 2012 1:42 pm • link • report

@Ben Ross Second, we now have an opportunity to refute a widely believed myth about transportation funding. Once upon a time, drivers paid for roads through the gas tax. Most people think that's still true, but it's not.

Emphasis on "opportunity". If the extra money from the sales tax goes to transportation, which seems to be the plan, then the general fund will still be subsidizing the transportation trust fund. One needs to push MDOT to at least accurately state the source of funds.

@Pelham1861. Ii>Can you tell us the specifics of the 'once upon a time' when gas taxes along paid for roads? I doubt that was ever true.

It was closer to true in the 1960s, when the state gas tax was aboyt 4 cents of a gallon that cost 20 cents per gallon (i.e. a 20% tax) and the sales tax was only 3%. So back then, the sales tax subsidy was only 15% of the the total proceeds (3%/15%).

by Jim Titus on Feb 2, 2012 2:17 pm • link • report

How about a 1-2% gas tax increase every year for the next 5-10 years? It would give people a good, long-term price signal so that people could make good decisions when buying their next cars. It would also create a nice hybrid system in which road costs are paid both for miles driven and gasoline consumed.

by David G. on Feb 2, 2012 2:47 pm • link • report

I love Maryland, land of the rational. I would increase the gas tax even more, but at least people who think the state should give their ex-urban life style a free ride will begin to pay their fair share. It's not just the cost of roads, but the health of our kids and elderly with the emmisions gas produces. Add to that the impact on the Bay from fertilized two acre lawns, the inneficiency of infrastructure costs spread out over kingdom come, etc, etc.

by Thayer-D on Feb 3, 2012 8:13 am • link • report

Unfortunately, drivers will not be paying their fair share, because there will not really be a sales tax on gasoline in the ordinary sense of the word. Instead, there would be a "sales tax" on gasoline whose proceeds go toward paying for roads, bridges, etc.

by Jim Titus on Feb 3, 2012 12:08 pm • link • report

The Maryland Government has a history of raiding the gas tax and using it to make up for short falls in other areas to try to balance it's budget. In FY 2010 alone, they took 370 Million from the gas tax funds and used them for other purposes.

If the roads are truly the high priority the Govenor says they are why not just put the money back where it was supposed to be in the first place and cut your other spending accordingly?

Does anyone really, truly believe Annapolis, looking at large deficits in the future, would not find an even larger gas tax fund an even more convenient solve all?

by Michael H on Feb 3, 2012 6:53 pm • link • report

When will it end?
Every year this man, Gov. O'Malley, is a billion dollar broke. He's raised countless taxes; and again, he's still broke. [Deleted for violating the comment policy.]
There's talk about him becoming our next Senator. I say 'NO WAY!' Yeah, how smart would it be to get a blank check from Federal borrowing? We�re broke now as country and this man�s solution to everything are stealing more from our pockets.
[Deleted for violating the comment policy.]

by Imustbecrazy on Feb 6, 2012 1:56 pm • link • report