John Hood’s Daily Journal
Flashback: Raw Deal on Transportation
By John Hood

November 09, 2010

Following up on yesterday’s flashback of a November 2007 column on transportation policy, here’s the next in the series — taking a closer look at why North Carolina is not a net beneficiary of the federal transportation program.

RALEIGH – Fuel prices are among the most visible economic indicators to the public. Not surprisingly, people tend to get agitated when these prices are persistently high, and often translate their frustration into a broader pessimism about the economy and strong disapproval of incumbent politicians.

North Carolinians have a better reason than most to be angry. About 48 cents on every gallon of gas they buy goes to federal and state government in motor-fuels taxes. That’s higher than in most other states and all of our neighbors. And North Carolinians get one of the worst returns on their gas-tax money in the nation.

Now, I’m not saying that gasoline taxes are the most egregious taxes North Carolinians pay. As a matter of fact, they ought to remember that one reason the state gas tax is higher than average here is that our property taxes are lower than average. In most states, local governments play a larger role in road finance. And when taxes on highway users (fuel plus vehicle taxes) are truly dedicated to highway needs and spent wisely, the public can derive significant benefits in time, money, and safety.

Unfortunately, North Carolinians get an extremely raw deal for the gas taxes they pay. Let me count the ways.

First, the convoluted federal system for financing transportation has never been in North Carolina’s interest. Taxpayers pay at the pump, the money flows to Washington, the politicians and bureaucrats pocket some shipping and handling charges for themselves and their constituencies, and then return some of the remaining revenue back to the states – but not in proportion to collection. Generally speaking, motorists in the Northeast and sparsely populated states in the West benefit at the expense of motorists in the Southeast and parts of the Midwest.

Jonathan Williams, author of an excellent new Tax Foundation paper on the gasoline tax, offers a handy summary of the data. From the inception of the federal interstate program in 1956 through 2005, North Carolina has received about 90 cents for every dollar sent to D.C. Only Indiana (89 cents) and Texas (88 cents) have been fared worse. In addition, by siphoning money out and then returning it as a federal grant, the system increases the cost of building roads by triggering various federal labor laws and regulations. The requirement to pay union-scale wages, for example, can jack up construction costs in right-to-work states such as North Carolina by nearly 40 percent.

Second, North Carolina state government itself violates the trust of highway users. Well over $100 million in gas-tax receipts flow each year into non-highway expenditures such as transit, rail, and ferries. Another amount, nearly $200 million a year in car-tax revenues, is famously transferred annually from the Highway Trust Fund to the General Fund. Dedicating all these highway-derived revenues to the expansion and maintenance of highways would go a long way to addressing some of the state’s pressing needs for safety improvement and congestion relief.

Third, even the highway revenues that are spent on highways are mismanaged and poorly prioritized. North Carolina spends more than $100 million a year paving rural routes and building out secondary roads that few vehicles will ever traverse. The state’s “equity formula” for distributing road dollars is highly inequitable, paying insufficient heed to where the tax dollars are collected and differences in traffic congestion. And problems within the Department of Transportation are legion, ranging from planning and engineering mistakes to political interference by an appointed Board of Transportation (which ought to be abolished or relegated to advisory status) and entrenched legislative insiders.

Because of technological change and gains in the average fuel efficiency of automobiles, there are fundamental problems with the old gas-tax model of funding North Carolina’s highways. State policymakers are right to consider solutions such as modern tollways and toll-lanes and charges per mile driven rather than per gallon of gas consumed.

But the motoring public will not and should not embrace these solutions so long as the money they are currently paying into the system is being gobbled by other states, diverted to other government uses, and squandered on low-priority transportation projects. Major reforms must come before any attempt to raise taxes or institute new fees.

North Carolinians are angry. They have a right to be.

Hood is president of the John Locke Foundation.