The Nail in the Gas Tax Coffin

The Charlotte Observer has an excellent piece on the editorial page from a couple of weeks ago about the gas tax and the state highway budget funds and how they are used. It gives a lesson of fairly recent legislative history that serves to shine a light on the ignorance of many critics of the gas tax and how the money is used by the legislature.

Revenues for roads/highways goes into one of two funds in the state budget. The Highway Fund is used to pay for general maintenance and repairs of state-owned roads. It also pays for some smaller construction projects and transportation programs. Revenues that support this fund come from the state motor fuel tax and vehicle registration fees. No money from this fund is transferred to the General Funds in the state budget.

The second of the two funds is the Highway Trust Fund. It is used to pay for large construction projects. Revenue from a 3 percent sales tax on motor vehicles along with 25% of the gas tax revenue is deposited into this fund. This is the fund that has transfers to the general fund.

Here's where the confusion comes in. When legislators created the Highway Trust Fund, they abolished an existing 2 percent automobile sales tax and replaced it with a 3 percent highway use tax collected when autos are sold or transferred. Until then, those revenues had gone into the General Fund, which funds teacher pay, universities, prisons and other general expenditures.

To avoid a large loss from that "raid" on the General Fund, legislators directed the annual transfer of $170 million from the Highway Trust Fund to the General Fund, about the sum the 2 percent tax had generated before 1989. In 2001, the Highway Trust Fund had a big surplus and legislators ordered adjustment of the annual transfer to reflect inflation, raising it to $252 million.

Some lawmakers carelessly refer to that transfer of Highway Trust Funds as a diversion of gasoline taxes to general purposes. That's not accurate, since most of the trust fund money comes from the 3 percent tax on auto sales and transfers. All the money sent to the General Fund comes from those revenues.

Some politicians also find it convenient to forget that they supported a 1986 law -- reaffirmed in 1995 -- that created North Carolina's variable-rate gas tax. The legislature agreed to a formula that reassesses the gas tax every six months, based on the preceding six-months' wholesale gas price. Sometimes it goes up, sometimes down.

It is important to understand why certain things are handled the way they are and the Observer did a good job of giving a brief history lesson on the two transportion funds. We have an election coming up and you can bet that there will be some mud slinging based on the gas tax hike aimed at those who wouldn't get behind a tax cut. We can now respond with a better understanding of the two transportation funds and why the transfers to the general fund are not taking money away from our roads.