By Michael Sluss

January 9, 2012

http://www.roanoke.com/politics/wb/318794

RICHMOND — Virginia's gasoline tax would be eliminated and its retail sales tax would increase from 5 percent to 5.8 percent under a transportation funding plan Gov. Bob McDonnell unveiled Tuesday.

The governor's proposal also would increase vehicle registration fees, impose a $100 annual fee on alternative fuel vehicles and shift revenue from the state's general fund to provide more dollars for roads, rail and transit. McDonnell said the complete funding package could generate more than $3.1 billion in additional transportation funding over the next five years.

Administration officials said part of the revenue from a proposed $15 increase in vehicle registration fees would pay for the extension of passenger rail service to Roanoke, though it's unclear how soon that would be available.

McDonnell announced his plan on the eve of the 2013 General Assembly session, his last as governor. Lawmakers in both houses have introduced major transportation funding proposals in advance of the 46-day session.

McDonnell said the state's transportation funding structure must be overhauled to account for a changing economy and the need for long-term, sustainable revenues for roads, rail and transit. Over the past decade, the state has shifted more than $3.3 billion in highway construction funds to cover rising maintenance costs.

"The bottom line is this: Virginia's current revenues simply do not add up to a safe, efficient and sustainable transportation infrastructure network in our state," McDonnell said at a Capitol Square news conference, where he was joined by key Republican legislators and state and regional business leaders. "And so I've told all these folks behind me that the time is now for action."

If lawmakers approve the plan, Virginia would become the first state in the nation to eliminate its gas tax, the administration said. McDonnell said the viability of the 17.5 cents per-gallon tax as a primary transportation funding source has been weakened by inflation, more fuel efficient vehicles and the introduction of alternative fuel vehicles.

To replace the gas tax revenue, the state would increase its retail sales tax by 0.8 percent and direct all of the new revenue to transportation. The tax increase would not apply to groceries, which are taxed at a rate of 2.5 percent.

The sales tax increase would generate $708.7 million in the fiscal year that begins July 1, $24.6 million more than the state's gas tax would produce, according to administration estimates. By 2018, the additional sales tax would generate nearly $870 million, about $183 million more than the gas tax.

Under McDonnell's plan, 85 percent of the new sales tax revenue would go to highway maintenance and the remainder to new construction.

Sen. Steve Newman, R-Lynchburg, the chairman of the Senate Transportation Committee, called McDonnell's proposal "a conservative approach to funding transportation." Newman will carry McDonnell's proposal in the Senate.

McDonnell's proposal to scrap the gas tax in favor of a higher sales tax is similar to a plan already introduced by Del. Tim Hugo, R-Fairfax County, who will co-sponsor McDonnell's legislation in the House of Delegates along with House Speaker Bill Howell, R-Stafford County. Howell said McDonnell has advanced "a truly bold plan."

"This is a plan we won't have to come back and revisit because it's taking an unstable, diminishing form of revenue for transportation — the gasoline tax — and it's converting it to a sales tax, which is a tax that is more sustainable and more growing," Howell said.

Supporters of a gas tax increase argue that the levy enables Virginia to collect taxes from out-of-state drivers who use the state's roadways.

The state still would levy a 17.5 cents per-gallon tax on diesel fuel. Officials said maintaining the diesel fuel tax would ensure that operators of heavy trucks pay for the deterioration their vehicles cause to interstate highways. About two-thirds of diesel tax revenues are paid by interstate trucking companies.

Democrats have voiced opposition to McDonnell's effort to shift more money from the state's 5 percent sales tax — which pays for services such as education and public safety — to pay for roads.

Right now, the state allocates .5 percent of the 5 percent tax to transportation.

McDonnell has proposed generating $48.1 million in new money in the next fiscal year by raising that percentage to .55 percent. He wants to gradually increase that share to 0.75 percent in five years. That would be in addition to the .8 percent McDonnell is proposing to raise the actual sales tax rate.

The politically divided state Senate rejected a similar change to the existing .5 percent allocation last year.

Sen. John Edwards, D-Roanoke, said McDonnell's plan represents a "radical" change from the state's traditional method of funding transportation and said he doesn't think the proposal could pass the politically divided Senate. Edwards, who has favored increasing the gas tax for transportation needs, said McDonnell's plan would give out-of-state drivers "a free ride" by eliminating the state fuel levy at the pump.

"It doesn't seem to make much sense," Edwards said.

The sales tax changes alone would generate more than $1.4 billion over five years. McDonnell said that would end the crossover of highway construction funds for maintenance by 2019.

About one-third of McDonnell's funding package will depend on action by Congress. The governor is banking on Congress passing the Marketplace Equity Act, a bill that would give certain states greater ability to compel online retailers to collect state sales taxes. McDonnell said Virginia could collect $1.02 billion for transportation over five years if the act is passed.

Even without that revenue, the governor said, the transportation package would generate enough revenue to stop the diversion of transportation construction funds to maintenance and provide new funding for passenger rail and transit.

Half of the revenue from a $15 increase in vehicle registration fees would go toward supporting and expanding passenger rail service, including the expansion of passenger rail to Roanoke. Secretary of Transportation Sean Connaughton said rail service could be extended to Roanoke "fairly soon," but could not provide a specific date.