Republican state lawmakers want to reduce North Carolina’s dependence on the gas tax to pay for roads and bridges, starting with the proposed budget released late Tuesday.
The budget calls for redirecting 2% of state sales tax revenue to the N.C. Department of Transportation in the fiscal year that begins July 1. The diversion would increase to 4% the following year and 6% each year after that.
The change would generate an estimated $193.1 million for transportation the first year, increasing to an estimated $628 million by year three. That money would otherwise go into the General Fund, the nearly $28 billion that finances most of the rest of state government.
The idea has wide support among business groups and transportation advocates. It provides new revenue for NCDOT by tapping into an existing tax at a time when the state enjoys a budget surplus, says Marc Finlayson, who heads NC Go, a coalition of groups that presses for improved transportation.
“This funding would help our state to modernize our sources of transportation revenue and provide a new, sustainable source,” Finlayson said in a written statement. “Best of all, there are no new taxes or fees involved.”
Finlayson said the state collects about $500 million a year in taxes on transportation-related purchases, such as tires, parts and repairs.
“It makes sense some of these funds should be used to meet transportation needs,” he said.
NCDOT spends about $5 billion a year, and gas taxes are its largest source of revenue. The state tax of 38.5 cents per gallon generates about $1.8 billion a year; the federal gas tax — 18.4 cents on unleaded fuel and 24.4 cents on diesel — accounts for most of the $1.25 billion NCDOT receives each year from the federal government.
But the gas tax has become a less dependable source of revenue as improved mileage means people pay less in taxes to drive the same distance. And with electric vehicles coming on to the market in large numbers, more drivers will be using the road without paying any gas taxes at all.
NCDOT set out to find alternatives to the gas tax in 2019 when it created the N.C. First Commission, comprising business people, politicians, economists and others. The commission’s final report in early 2021 included several ideas, including using sales tax revenue from transportation-related purchases.
The N.C. Chamber, a statewide business group, published its own reports on possible new sources of transportation revenue in 2015 and 2020, and noted that several states, including Virginia, devote general sales tax revenue to highways and other transportation.
When Republicans unveiled their budget proposal Tuesday, the chamber singled out the sales tax diversion for praise.
“As growing numbers of motorists adopt electric vehicles and vehicle manufacturers commit to ever-higher EV production targets, traditional funding options like the motor fuels tax are becoming less and less viable,” said Jake Cashion, who heads the Chamber’s Destination 2030 Coalition, which advocates for new transportation funding.
The chamber also said the additional revenue would help NCDOT deal with rising costs for fuel, labor and real estate.
Senate Leader Phil Berger’s office described the proposed sales tax transfer as “a first step to address declining transportation revenues,” suggesting other alternatives to the gas tax may be in the works. Fuels taxes account for about half of state revenue for transportation, while the rest comes from Division of Motor Vehicle registration fees and the “highway use tax,” which is a 3% sales tax when a vehicle’s title changes hands and an 8% tax on vehicle rentals.
It’s not clear how quickly electricity will displace petroleum on North Carolina highways. Zero emission vehicles account for only about 40,000 of North Carolina’s 8.6 million registered vehicles, according to the DMV, but in January Gov. Roy Cooper laid out plans to increase that number to at least 1.25 million by 2030.
Asked about the proposed use of sales tax revenue for transportation, Cooper’s office said only that he is reviewing the proposed budget.