SJR 378: Joint Subcommittee to Study Fuel-Efficient Vehicles and Transportation Funding

September 12, 2007

The joint subcommittee held its first meeting with Senator Frank W. Wagner as chair and Delegate G. Glenn Oder as vice-chair. Other legislative members of the joint subcommittee are Senators Patricia S. Ticer and John C. Watkins and Delegates Jeffrey M. Frederick, L. Scott Lingamfelter, Stephen C. Shannon, and Shannon R. Valentine. The two nonlegislative citizen members are Hugh Montgomery and Thaddeus J. Nowak. The Secretary of Transportation, Pierce R. Homer, and the Secretary of Finance, Jody M. Wagner, serve as the ex officio members.

Overview

The joint subcommittee is charged with studying long-term solutions for transportation funding that are not dependent upon revenues generated from a motor vehicle fuels tax, as well as exploring ways to promote the use of hybrid and fuel-efficient vehicles, including the possible development of tax incentives for use of these vehicles.

The staff provided a review of the key provisions of the Virginia Fuels Tax Act. The definitions and characteristics of motor fuels and alternative fuels; the tax rates for the four relevant motor fuels of gasoline/gasohol, diesel fuel, motor fuel blended with gasoline, and motor fuel blended with diesel fuel; as well as liquid alternative fuel and other alternative fuels were reviewed for the members.

An overview of fuel economy, alternative fuels use, and road use at the national level was presented based on The Fuel Tax and Alternatives for Transportation Funding, a report published by the Transportation Research Board of the National Academies. The report noted that although the present highway finance system can remain viable for some time, travelers and the public would benefit from a transition to a direct mileage-based user fee. To achieve this goal, the report offered a roadmap of short-term and long-term solutions. Short-term solutions included increasing the number of toll roads and toll lanes and increasing fuel taxes and registration fees. Long-term solutions included the use of mileage-based user fees, as well as time and location-based user fees.

Presentations

John R. Layman, Director/Chief Economist
Virginia Department of Taxation
Office of Revenue Forecasting
Mr. Layman, in his presentation "Motor Fuels Tax Revenues," discussed the three components of Virginia's motor fuels usage. Gasoline represents 66% of the total share of fuel consumption, diesel fuel represents 34% by mostly nonpassenger-carrying vehicles, and alternative fuel represents only slightly above 0%. He explained that the parameters that impact Virginia's motor fuel demand are population growth, economic growth, fuel prices, and driving habits and vehicle mix. Since 2000, the Commonwealth has had a slower population growth and appears to have begun a phase of decelerating growth in its economy. Mr. Layman noted the following:

• Gasoline prices have increased 80% since January 2004.
• The Energy Information Administration estimates gasoline prices will steadily decline over the next decade.
• There is a broad, long-term, but gradual movement to smaller vehicles with sales of large SUVs down 19% in 2005 and 26% in 2006.
• Gasoline demand is relatively inelastic over the short term, and research suggests it takes years for higher gas prices to meaningfully reduce consumption.

He also noted that gasoline demand is generally correlated to the demand for highways, because highway demand is the ratio of the number of vehicle miles traveled to the average vehicle fuel efficiency. Over the last 10 years, vehicle miles traveled in the Commonwealth and gasoline consumption have increased by 1.5%.

Mr. Layman discussed motor fuels tax collections and the components of the Commonwealth Transportation Fund (CTF). The 2007 CTF components consist of:

• 38% motor fuels tax collections.
• 27% motor vehicle sales tax collections.
• 22% state sales tax collections.
• 7% motor vehicle registration fees collections.
• 6% other revenue sources.

Over the last 20 years, motor fuels tax collections have increased at a steady pace and represented an average of 44% of total CTF revenues. Since fiscal year 1990, the average annual percent change in motor fuels tax collections has been 1.9%. Over the last three years, the average annual growth has been 0.5%. Adjusted for inflation, motor fuels tax collections are at levels seen in the early 1990s. More specifically, motor fuels tax collections have declined for three consecutive years when adjusted for inflation. Also, fiscal year 2007 collections of the motor fuels tax were 6.7% below the level recorded in fiscal year 1990 when adjusted for inflation. The official forecast for motor fuels tax collections, however, anticipates trend growth over the next few years. Mr. Layman noted that the transportation funding and reform included in House Bill 3202 in 2007 would help drive trend growth in CTF revenues in fiscal years 2008 and 2009.

Mr. Layman concluded his presentation by noting that long-term trends in motor fuel demand are difficult to predict, because of geopolitical events, weather patterns, worldwide economic growth, exploration efforts, energy prices, and technological advances. With respect to the cost of energy, crude oil prices are estimated to be $95 a barrel by 2030. Alternative vehicle technologies, including diesel, are expected to account for 28% of new light duty vehicle sales by 2030, compared to the 8% in 2005.

George E. Hoffer, Ph.D., Professor of Economics Virginia Commonwealth University
Professor Hoffer's presentation entitled "The Impact of New Technology Motor Vehicles on Virginia Highway User Fee Revenues" began with a discussion of the fuel-efficient vehicles that will be available in the next five years. More diesel-powered, light vehicles are expected in Europe, but the fate of such vehicles in the United States depends on the success of Ford's diesel light truck. Professor Hoffer predicted more full hybrids will come into the market as the price of these vehicles falls, making them more attractive, but he emphasized that tax credits on hybrid vehicles applied to too few units to make a difference in the full hybrid market. In contrast, Professor Hoffer explained that mild-hybrid vehicles are "more hype than anything." He noted that a third version of the hybrid, a plug-in electric vehicle, may have more of a real future, if the lithium-ion battery proves to be viable. Further, the United States market can expect more new technology gasoline engines and Class "A" and "B" vehicles, as fuel-inefficient truck-based SUVs retire over time.

Professor Hoffer proposed a model highway user tax system with the following three components:

• A fixed fee per month for the right to drive in Virginia, which is equivalent to the current registration fee and license plates.
• A variable fee based on the number of miles driven per month equivalent to the current motor fuels tax, which could vary by region, by type of roads traveled, and/or by weight of the vehicle. The fee would also be designed to cover highway growth and variable maintenance costs per mile.
• A variable congestion user tax, which would be a tax/fee designed to better utilize existing roads and cover the capital cost for new roads where excess demand exists. The fee would vary by time of day and day of use.

The highway user tax system would be GPS satellite-based with a monthly bill itemized by fixed charges, the number of miles driven, place and time of day traveled, and data on suggested driving alternatives.

Professor Hoffer listed some of the problems he felt existed in many transportation reform proposals, including:

• Higher gasoline taxes do not take into account an increase in fuel-efficient vehicles.
• Odometer mileage-based fees, as part of a state vehicle safety inspection, may be based on altered or fraudulent readings.
• Registration fees identifying new technology vehicles would discourage the sale of these vehicles and users purchasing the vehicles may choose to register in Washington, D.C., or an area outside of Virginia.
• Charging hybrid and plug-in vehicle owners with higher registration fees is inefficient, because the fees would not take into account miles driven and when and where driven.

Professor Hoffer concluded by noting that reasons for increasing taxes for diesel fuel users are that diesel-powered vehicles:

• Are heavier and more damaging to the roads.
• Get much better fuel mileage.
• Are driven by a great number of
• nonresidents.

Al Christopher, Executive Director, Virginia Clean Cities
Mr. Christopher testified before the joint subcommittee as to how he believes Virginia can help promote vehicle fuel efficiency and advanced technology transportation like hydrogen and hybrid electrics vehicles, as well as alternative fuels like biodiesel and ethanol. He stated that the first step toward the goal of fostering greater fuel efficiency, wider acceptance of new fuel-saving technology, and encouraging the use and production of renewable alternative fuels is for large fleet owners to lead by example by purchasing efficient vehicles and using alternative fuels.

For 15 years, the Clean Cities program has emphasized that government has a special obligation to lead and the capacity to help build early markets for fuel-efficient vehicles and alternative fuels, primarily just by using them. In Virginia, Executive Order 48 is an excellent promotion mechanism. Specifically, Executive Order 48 encourages state agencies to buy and use hybrids and other fuel efficient vehicles, as well as alternative fuels like biodiesel and E85, a high blend of ethanol, which can be used in flexible fuel vehicles or FFVs.

Mr. Christopher’s second step towards the accomplishment of long-term goals is to dedicate a source of funds so that it is possible to purchase fuel-efficient vehicles and use alternative fuels, even during negative economic conditions. In the short term, he suggested that Virginia might be able to obtain badly needed refueling infrastructure to make biodiesel and E85 available to state agencies and the public by incurring an opportunity cost, such as leasing out real estate to third party alternative fuel providers. Moreover, he noted that public access to the limited infrastructure is vital.

Virginia has in place a framework to foster a long-term solution to part of the petroleum addiction problem. The Biofuels Production Incentive Grant Fund and Program was established two years ago by House Bill 680 and amended last year by House Bill 3089. Mr. Christopher noted, however, that the producer incentive program lacks adequate and consistent appropriations. He explained that Virginia's fund is too small today to support one-year capacity production by the Commonwealth’s three biodiesel refiners, none of which have attempted to qualify, because production threshold criteria are set higher than current sales will support. The Virginia fund would need additional revenues in order to provide a full 10-cent per gallon incentive to an ethanol producer.

Mr. Christopher discussed Illinois' innovative rebate incentive program to encourage consumers to purchase hybrid electric and a limited number of other fuel-efficient vehicles. He concluded his presentation by noting that a dedicated source of money derived from new revenues produced by the alternative fuel industry itself is one option of providing a sustainable funding source that is large enough to compete with similar incentives offered by other states.

Next Meeting

The next meeting of the joint subcommittee has not yet been scheduled; details will be posted online on the General Assembly Calendar and the study website sponsored by DLS when available.

Chair:
The Hon. Frank W. Wagner

For information, contact:
Kevin Stokes, Patrich Cushing, DLS Staff

Website:
http://dls.state.va.us/FEV.htm

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