End Gas Tax? Yes! Pay for Roads with Sales Tax? No!

Virginia Governor Bob McDonnell wants his state to be the first to end the gas tax. This is a good idea because gas taxes are an imperfect user fee.

However, McDonnell proposes to replace the gas tax with a 0.8-cent sales tax that he says will generate more revenue than the gas tax. If your only goal is to make government bigger, then generating revenue is a good idea. However, if your goal is to have better roads, then even a gas tax makes more sense than a sales tax.

The key to the success of the free is feedback. As imperfect as the gas tax is, it generates feedback to highway agencies: if they build roads no one uses, they get no gas taxes. Sales taxes generate no feedback at all; the agencies get money whether anyone uses the roads or not.

We know from the transit industry what happens when transportation agencies are funded out of sales taxes and other general taxes rather than user fees. First, they build expensive monuments that please ribbon-cutting politicians but do little to solve transportation problems. Then they fail to adequately maintain those monuments or the rest of their transportation systems. That’s hardly a sound prescription for our highway systems.

Another problem with the gas tax is that there are cross-subsidies between users. It is likely that drivers in urban areas, where roads are much more heavily used, end up subsidizing drivers in rural areas. Auto drivers subsidize trucks and buses in many states. People who drive only during non-rush hours subsidize those who drive during rush hours.

A sales tax would only make this problem worse. People who don’t drive at all would end up subsidizing those who do. Hypothetically, someone could drive mainly in Virginia but shop in DC or Maryland, and be subsidized by someone who drives in mainly Maryland but shops in Virginia.

Instead of a sales tax, vehicle-mile fees are a real free-market solution. Like paying for individual items in a grocery store, vehicle-mile fees would allow users to pay for the roads they use, and not the ones they don’t. Moreover, such fees could eliminate congestion by varying the fees with the amount of traffic.

Someone always frets that vehicle-mile fees will allow the government to track where we are. But every single state experiment with vehicle-mile fees has preserved privacy: the devices used to calculate such fees don’t even record where or when people travel, only that they incur so much of a charge to use the roads. The charges would be split by road owners: cities, counties, states, and (in Virginia and a few other places) private owners; but again, these owners would not know when people used their roads, only that they paid to use them.

The feedback generated remains a little imperfect, as the Commonwealth of Virginia would not know whether someone drove on Interstate 66, 95, or another state-owned road (unless those roads were charging congestion fees). But it would provide better feedback than gas taxes and far better than sales taxes.

Vehicle-mile fees would also solve another problem: the lack of adequate funding for local roads and streets. As I’ve shown elsewhere, state highways do not face an infrastructure crisis, but county and city road departments must find $30 billion a year in general funds to support their roads, which tend to be more poorly maintained than state roads. Vehicle-mile fees would allow cities and counties to collect their fair share of user fees, and would also create a competitive atmosphere as state, county, and city roads offer users choices for getting from point A to point B at different prices and road standards.

Vehicle-mile fees are really a win-win solution. Highway users win because they will face less congestion. Taxpayers win because they won’t have to subsidize roads. People need to stop being paranoid about the non-problem of privacy and realize that paying for what you use, instead of letting others pay for what you use, is the American way.