House and Senate negotiators agreed upon a transportation funding package that will raise $860 million a year for roads, bridges, rail and mass transit when fully implemented. Governor Bob McDonnell hailed the agreement, implying that he would sign the legislation if approved by the both legislative bodies.

The package includes the following key elements:

• Elimination of the fixed 17.5-cent-per-gallon gas tax, to be replaced by a 3.5% wholesale tax that will increase revenues as gas prices head higher.
• A 0.3 percentage-point increase in the sales tax.
• Diversion of $200 million a year in existing General Fund revenues on the logic that transportation is a “core function of government.”
• Imposition of a $100 million annual fee on alternative-fuel vehicles to ensure that they contribute toward the construction and maintenance of roads.
• A one percentage point increase in the sales tax on automobile sales, which currently enjoys a discount off the sales and use tax.
• The levying of a 6% wholesale tax on diesel.
• Designation of revenue, should it materialize, from the Marketplace Fairness Act, which would require online sellers to collect states’ retail sales tax.
• Creation of a dedicated revenue stream (not clear what as of this writing) for Northern Virginia and Hampton Roads transportation needs.

The tax restructuring would be revenue neutral to Virginians in the first year but would increase revenues gradually in pace with rising gasoline prices and increased volume of retail sales, thus addressing the stagnating revenues from the gasoline tax. The compromise also establishes a precedent for McDonnell’s contention that transportation is a “core function of government” that will in the future compete with education, health care, corrections and other General Fund budgetary priorities.

Bacon’s bottom line: In the round robin of congratulatory press releases from the Governor, Lieutenant Governor Bill Bolling and House Speaker William J. Howell, there is no indication that there is any unfinished business to take care of. In other words, there is nothing wrong with transportation policy in Virginia that more tax dollars won’t solve.

Guided by the essentially socialist principle that, hey, everyone benefits from roads, so everyone should help pay for them, the compromise makes a hash of the user-pays principle for transportation funding.

The only consolation that a believer in fiscal conservatism and free markets can extract from this atrocious piece of legislation is the knowledge that, yes, we do need more transportation funding and this bill will provide it. But there is absolutely no assurance that the money will be well spent. Virginia still has no objective criteria for prioritizing projects on the basis of Return on Investment. The McDonnell administration has done absolutely nothing, zip, zilch, nada, to tie transportation planning to land use planning. No one has lifted a finger to improve the transparency and accountability of the Public-Private Partnership process. Furthermore, there is no justification in economic theory or as a matter of fairness to ask Virginians who do not drive (or drive very little) to subsidize those who do.

These are first impressions. I will have more to say in future posts.

— JAB