The Increased Gas Taxes You Didn’t Know You Were Paying

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Virginia’s gasoline and diesel taxes will rise 7% on July 1, about three more cents per gallon when all the elements of the tax are combined. This is the inflation-driven cost of living adjustment which Governor Glenn Youngkin (R) and most legislative Republicans tried to short circuit, but which was preserved by a vote in the Virginia Senate last week.

The new gasoline tax will be 28 cents retail, 8.2 cents wholesale plus another 0.6 cents per gallon to fund a program for removing old underground tanks safely. That’s a combined tax of 36.8 cents per gallon. The taxes on diesel will be 28.9 cents retail, 8.3 cents wholesale plus the same tank fee, a total of 37.8 cents per gallon.

Most of the attention on Youngkin’s proposal focused on his effort to suspend the retail (but not the wholesale or underground tank) portion of the tax for 90 days. But both his regular session bill and the version he offered as a late budget amendment also reduced the coming inflation adjustment, or indexing, of the tax as of July 1. The version rejected last week capped the increase at 2%, well below the current levels of inflation.

When opponents complained of major financial impacts from the change, they were really talking about the revenue that would disappear without the indexing provision, which will be cumulative over the years. Inflation and then compounded inflation are powerful revenue enhancers for government at all levels, a tax all by itself.

Many in the Assembly were reluctant to give it up, just as they refuse to index income tax provisions that would lower family tax bills (such as the standard deduction or tax brackets). Inflation is a wonderful thing if your goal is to collect ever more taxes.

The new gas tax numbers below were shared by the Virginia Petroleum and Convenience Marketing Association, which just notified its members and encouraged them to be sure customers got the word. The tax is actually collected from the wholesale distributors who bring the fuels to the gas stations and convenience stores, not imposed at the pump.

The tables reproduced in its announcement came from the Division of Motor Vehicles, which has nothing about this on its website yet.

New retail tax rates, provided by Virginia Petroleum and Convenience Marketers Association, citing Virginia DMV. Note: This table is in cent per gallon.

The wholesale tax rate, also provided by VPCMA, citing DMV. It puts the tax in dollars per gallon, moving the decimal two places to the left.

New retail tax rates, provided by Virginia Petroleum and Convenience Marketers Association, citing Virginia DMV. Note: This table is in cent per gallon.

Caption for Wholesale gas tax table: The wholesale tax rate, also provided by VPCMA, citing DMV. It puts the tax in dollars per gallon, moving the decimal two places to the left.

The DMV, up to its old tricks, is still playing games with the numbers. A chart on the retail tax is presented in cents per gallon, but the wholesale tax table is presented in dollars per gallon. That moves the decimal two places and makes it look like the wholesale tax is way smaller than the retail tax. The illusion is probably not an accident.

And it is probably not an accident that no effort is made inform motorists of the total tax, which has been a subject of deception for years now. Democrats playing these games was bad enough. It is time for the new Republican administration to direct DMV to come clean and clearly communicate the total tax hit.

The video record of last week’s votes indicates all 20 Senate Democrats present and one Republican voted to kill Youngkin’s amendment. Here is how the House voted, with a few Democrats supporting the Governor’s proposal.

Perhaps that smattering of House Democrats sensed that their party’s leader, President Joe Biden, was about to side with Youngkin and against the majority of Virginia’s Democratic legislators. Wednesday Biden came out for a 90-day gas tax holiday, and not just at the federal level. He pushed states to do the same. He was one week late to help Virginia motorists.

Ironically, at the federal level quite a few Republicans are pooh-poohing the idea using exactly the same rhetoric that Democrats employed in Richmond. Voter confusion is assured. But there is one difference: The federal tax is not and has never been indexed to increase annually for inflation.

Come the 2023 election season, because of the indexing provision, those nays on Youngkin’s proposal may be (correctly) portrayed as votes to raise the state gas tax in the middle of a gasoline price inflation storm. And the state tax will rise again next July 1, just before the election, unless a future Assembly changes that rule.

A version of this commentary originally appeared on June 22, 2022 in the online Bacon’s Rebellion. Stephen D. Haner is Senior Fellow with the Thomas Jefferson Institute for Public Policy. He may be reached at steve@thomasjeffersoninst.org.

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More Rules for Virginia, Made in California

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Virginia’s auto industry overlords in California have a new set of proposed mandates for both electric and internal combustion vehicles which, once adopted, will automatically apply here in the Commonwealth.  They do not advance the date for banning the sale of new gasoline and diesel vehicles earlier than 2035 but do increase the incremental targets for percentage of EV sales in earlier years.

The California Air Resources Board regulatory process is well advanced, with a revised draft coming out soon, setting up a second round of comments and a final hearing in August.  Virginia’s dying news media cannot cover this state anymore, so don’t expect coverage of actions in Sacramento.  And, of course, the corporate media is now dominated by editors, writers and owners committed to the war on fossil fuels.

Adding to that, Virginia’s auto dealers themselves (big advertisers and campaign donors) played a huge role in supporting the decision by former Governor Ralph Northam (D) and the then-majority Democrats in the legislature to pass the 2021 bill putting Virginia under California’s control.  A 2022 bill to reverse that passed the House with its new Republican majority, but failed on a party line vote in a Senate committee controlled by Democrats.

Section 177 is a federal provision allowing states to opt out of federal vehicle fuel economy and emission standards and follow California instead. Source: California Air Resources Board.

A recent CARB PowerPoint slide deck on the proposal includes one showing all the states which have decided to follow California’s rather than federal vehicle regulations, and claims they account for 40% of all U.S. vehicle sales.  Starting with the 2026 model year, 35% of all new vehicle sales would have to be zero emission vehicles in Virginia, not the previous target of 26% under the current regulation.

Given the price differentials and the investment it is making in EV conversion, the auto industry is probably ecstatic.  The CARB claims that 300-mile range battery vehicles will achieve cost parity with the older technology by 2033, and offers illustrations of lower lifetime costs, but the initial sticker prices are likely to remain high and the industry really wants to sell the larger cars, SUVs and light trucks, too.  See what the Ford F-150 version costs.

If you have any skin in this game, the slide deck and an accompanying description of all the related regulatory proposals are important to review.  The depth and breadth of the proposal is impressive.  Responding to known elements of consumer resistance to EVs, the rules dive into charging technology, battery life and labeling, and maintenance and warranty requirements.

One goal is to maintain 75-80% of the initial range of the vehicles for their whole useful life, an admission, apparently, that many of the vehicles now being sold lose substantial range over time.  That doesn’t happen to a well-maintained internal combustion engine.

Plug-in hybrids will have to go at least 50 miles on a charge (they don’t now?).  And, recognizing that internal combustion vehicles will remain on the road for decades, California will impose new fleet standards on them and seek to reduce aggressive driving and cold starts, impose new design standards to prevent evaporation of fuel, and in general remake the industry to its liking.

Starting in 2025, the fleet fuel economy requirements will be calculated with EV’s removed from the equation, and they are totally disregarded from the calculation after 2029.  That will force changes with the internal combustion vehicles still being sold.

Even the towing industry is in for some changes.

The claim is that adopting this will reduce greenhouse gas emissions by 50% by 2040, which is conceivable only if the claim applies solely to motor vehicle emissions.  The slide also shows vehicle greenhouse gas (GHG) emissions going down about 20% in that period if these regulations are not imposed.  The regulations have even less impact on vehicle nitrous oxide (NOx) emissions, also dropping on their own.

California claims the savings to the state and consumers exceed the cost without considering “health benefits or the social cost of carbon.”  The health benefits are always exaggerated, if not imagined, and the social cost of carbon is definitely a made-up number.

There is an environmental justice component, “to reward direct automaker action.”  Plans include discounted EVs for community programs, lower retail prices, and more used EV’s being directed to participating dealerships.  Whether those elements of California’s plan will also apply in Virginia is not clear.  If they are tied into the carrot and stick methods California uses to manage dealer and automaker behavior, it is likely they will.

The 2021 General Assembly majority completely surrendered (some might suspect sold) the sovereignty of their constituents.  If they didn’t anticipate California was just getting started and would double down, they should have.  Bowing under federal regulations is one thing, as Virginians get to vote for members of Congress and the President.  No one in Virginia votes for California’s legislators or governor (or can sign a California initiative and referendum petition).

But we do vote on the Virginia legislature again in 16 months.

A version of this commentary was originally published June 21, 2022 in the online Bacon’s Rebellion. Stephen D. Haner is Senior Fellow with the Thomas Jefferson Institute for Public Policy.  He may be reached at steve@thomasjeffersoninst.org.

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You Just Paid More RGGI Tax, Virginia!

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Last week Virginia collected another $76 million in carbon tax dollars through the ongoing Regional Greenhouse Gas Initiative allowance auction. That was the sixth such sale since Virginia joined RGGI, and the state’s total tax take is now $378 million in 18 months.

 Do not for one minute allow yourself to be fooled into thinking this money is not coming out of the pockets of Virginia’s citizens or businesses. Do not fall for the ploy Dominion Energy Virginia is attempting by claiming it will charge it off to “base rates.” The pea is still under your walnut shell.

 In a few weeks several new members will arrive on the Air Pollution Control Board, perhaps changing the balance on this issue. It was the Air Board that issued the regulations imposing the RGGI carbon tax on Virginia’s largest fossil fuel power production plants, most of them part of Dominion. It is the Air Board that can amend or remove the regulation. This is the path Governor Glenn Youngkin (R) has chosen to keep his promise to get Virginia out of RGGI.

 The proposed regulatory language is not public yet, but the assumption is that it will suspend Virginia’s membership in RGGI upon publication. Then the lawsuits will begin, probably. RGGI’s supporters claim participation is mandated by state law, while others (me included) believe the statute is merely permissive. Some kind of carbon dioxide reduction scheme may be mandatory, but not the RGGI tax.

Anticipating the regulatory move, Dominion filed a petition with the State Corporation Commission asking to also eliminate its monthly bill adder which passes the RGGI tax on to consumers. It asked for the change to happen as of July 1. Everybody’s bills will soon reflect the recently exploding cost of fossil fuels and getting rid of the RGGI charge will lower the net impact (a bit).

 But the RGGI collection started late and was set low, meaning the money collected on bills through July 1 will fall short of the amount Dominion has paid. When the petition was filed, the figure of $178 million still outstanding was mentioned. That apparently included a projection for this most recent sale.

 Yes, it is a given that Dominion’s base rates remain excessive and are piling up cash on the books. It has the money. But if customers don’t pay it through a continued rate adjustment clause on the bills, that means $178 million less in excess profits Dominion might have to refund in a future rate case. It also reduces the risk that the SCC might order base rates to go lower due to overcollection. The math on what’s best for consumers gets complicated.

 The clever folks in the environmental community filed a response to Dominion’s petition that called its bluff. It proposed that any future carbon allowance costs also be charged to base rates, treated as an expense already built into those rates. Dominion’s petition only deals with the RGGI tax through this month. That idea is vigorously opposed by Dominion in its response to the responses, asserting it has every right to collect it in any manner it chooses.

 The Appalachian Voices petition is a quite cheeky, worth a read:

Dominion’s request proves that it could comply (and always could have complied) with the emissions reduction program without raising customer costs at all. In fact, this petition shows that Dominion had every opportunity to put these costs into base rates from the beginning but instead, at its own election, decided to raise customer bills through a rate adjustment clause….

 With this petition, however, the game is up. The Governor’s basis to repeal Virginia’s emissions reduction program is a proclaimed “emergency” arising out of the costs imposed by Dominion on its customers. Dominion, however, has now admitted that such an “emergency” only exists because of the cost recovery mechanism Dominion voluntarily chose to impose on its customers. In reality, the current petition makes clear that Dominion can comply with Virginia’s emissions reduction program without increasing bills at all.

 Appalachian Voices has a fair point that the $1 billion in unplanned fuel costs about to hit Dominion customers is far more of an emergency than the current RGGI tax. However, the group ignores the environmental movement’s role in constricting natural gas supply to raise those prices.

Meanwhile, on another front, the recent budget conference report approved by the General Assembly shows it has taken only one budget cycle for the RGGI tax dollars to inspire legislative greed. As the Virginia Mercury first reported, mission creep is evident and the original plans for the money are being ignored.  The legislators diverted $25 million to a new Resilient Virginia Revolving Loan Fund, and $11 million for flood relief in the Southwest Virginia town of Hurley. There is no sea rise in Hurley.

 Is anybody surprised? The people who believe RGGI will save the planet from Catastrophic Climate Change need allies in their holy mission, and cash works just fine in recruiting them. Playing politics with the money is just more proof we need to get out of this cap-and-tax scheme at the earliest possible moment. But the environmental community is building up for a major campaign to defeat Youngkin and protect the honey pot.

 This recently from Walton Shepherd at the National Resources Defense Council:

 Because RGGI was passed by the Virginia General Assembly with broad, bipartisan support, Youngkin has so far failed in his attacks. We need to keep it that way.

In only the first year of RGGI’s operation in our Commonwealth, it has already:

 Decreased carbon pollution so significantly that it will deliver Virginians $34 million in health benefits annually, through avoided hospital visits and more.

 Provided more than $110 million in funding to improve energy efficiency initiatives in low-income communities.

Allocated more than $100 million in climate resiliency funding for our coastal communities coping with sea level rise.

 In fact, Republican legislators had RGGI totally bottled up when they controlled both chambers, and the House this year voted to repeal it. RGGI has never had much bipartisan support (well, they like it in Hurley now). As to the claimed health benefits, nothing could be more bogus. But passions are running high.

 A version of this commentary originally appeared on June 5th in the online Bacon’s Rebellion.  

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Why Delay Food Tax Cut Until 2023?

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Everybody eats.  With all the money sloshing around the Virginia treasury for the General Assembly to play with, it is hard to see the logic in continuing the state sales tax on groceries an additional six months, delaying that particular tax cut until January 1.

The inflation on everything at the grocery store means more tax revenue is coming in from that source than was expected when the initial budget was prepared last year.  If they had allowed the tax cut effective July 1 rather than January 1, inflation on other items people buy (restaurant meals, furniture, electronics, clothing, non-food items) would protect the state’s spending in full (necessities and niceties.)

But no, under the budget conference report adopted by the General Assembly June 1, the state’s 1.5% tax on unprepared foods will continue through the summer and fall of 2022.  People will pay the full sales tax on their summer cookouts, packed school lunches and Thanksgiving and Christmas holiday meals.  What is an additional dollar or two per week for 26 weeks, after all?

Financially, it is not a huge thing.  Politically, it ought to prove a headache for legislators.

Frankly, it was probably just a power trip for the Democrats in the Senate, who held that position (no change until January 1) through the budget negotiations and think they won something by prevailing.  They are also proud of having totally protected the remaining 1% food tax, which goes directly to local governments.

On the other hand, a new sales tax exemption for pet medications will go into effect July 1.

As they always do, the people who staff the money committees at the Assembly have prepared excellent summaries of the conference report actions you might want to examine.  The House version is here and the Senate version here.

During the discussions at Wednesday’s session, advocates for the conference report claimed the various elements of tax relief will work out to about $1,100 saved in the coming year for the average Virginia family of four.  The biggest part of that is the one-time cash rebate expected to arrive later this summer ($500 for a couple).  The second largest part is the increase in the standard deduction, up from $9,000 to $16,000 for married taxpayers filing jointly, reducing their income tax this year and future years by $403.

Individual taxes were the focus, receiving the largest adjustments in this period of record state revenue.  Only a handful of tax changes to benefit business were made, although both business and individual taxpayers will benefit from the decision to fully conform with the Internal Revenue Service Code changes for 2022.

That conformity decision means the many small and large business that took money in the second round of the Paycheck Protection Program (PPP) and were able to convert the loan into a grant will owe no state tax on any of it.  That is a big improvement over 2021, when only the first $100,000 in PPP grants were exempted.

Legislators will crow about having eliminated the accelerated sales tax rules, requiring certain businesses to remit their July sales tax collections in June.  But that move doesn’t save anybody one dollar.  It is merely a timing issue, now moving the expense back into the proper fiscal year.  That one-time collection date acceleration is a favorite gimmick for quick revenue in a budget crunch (now primed to use again in the next one.)

And the conferees put $180 million in remaining federal grant funds into the Unemployment Insurance Trust Fund, enough to short-circuit what would have been a UI tax increase for calendar year 2023.  That and the PPP decision were about the only significant tax-related provisions for business, and the 2022 General Assembly did nothing else to reduce business taxes and make Virginia more competitive.

Nobody talks about it, but the state’s flush cash position can still be traced to the 2019 General Assembly session.  The full impact of the various federal tax changes under the 2017 Tax Cuts and Jobs Act (TCJA) was becoming apparent, but the Assembly (then a Republican controlled body) stubbornly refused to make serious adjustments in state tax rules to prevent the windfall.  It is that windfall which filled state tax coffers starting in 2020, along with other tax hikes approved under former Governor Ralph Northam (D).

With the standard deduction rising now to $16,000 for a couple (up from $6,000 in 2018), a substantial portion of the windfall paid by individuals will now be returned. Not so the TCJA windfall coming in from business income taxpayers.  Through ten months of this fiscal year, the state had collected $1.6 billion in corporate income taxes, double the less than $800 million at the same point four years ago.

There is much to praise in the final budget.   Conferees viewed much of the extra revenue as one-time money, perhaps unlikely to continue, which is certainly true of the flood of federal COVID-related grants. They used it to shore up the Virginia Retirement System with an extra infusion, replace some capital debt with cash payments instead, create a long-demanded school construction fund, and now expect a record $3.8 billion to be held in reserve by the end of the next cycle in June 2024.

Don’t doubt they could have found a hundred million or so to relieve Virginians of the state food tax a bit earlier, instead of making them pay the full tax all the way to New Year’s Day, 2023.  That was pure Grinch.

Stephen D. Haner is Senior Fellow at the Thomas Jefferson Institute for Public Policy.  He may be reached at steve@thomasjeffersoninst.org.

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Youngkin and House Prevail on Tax Issues, But Senate Imposes Delays, Conditions

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Do not be surprised if, by the time the next Virginia General Assembly elections roll around, the Democrats who are now complaining about the level of tax relief in the pending budget compromise switch positions, and campaign as champions of the deal.

The two key elements – a substantial increase in the standard deduction for income tax filers and a cut in sales and use tax on groceries for everybody – are ideas with long and bipartisan histories.  Only the reluctance of previous governors and General Assemblies to part with the revenue stood in their way. Both are logical, populist reforms many Democrats had also championed in the past.

The Thomas Jefferson Institute has long been an advocate for a higher standard deduction, and the proposed 78% increase from $4,500 to $8,000 per person (up to $16,000 for a couple) falls just short of the recommended 100% increase.  Remember, as recently as Tax Year 2018 it was only $3,000 (or $6,000 per couple) and raising it in 2019 was also a major recommendation of ours that was adopted.

This new amount will apply to this tax year.  So in two steps over three years, the standard deduction has risen by $10,000 for a working couple.  That 166% increase saves most of them $575 per year.

There is a catch: Trigger language tied to revenue growth.  Should the U.S. and Virginia go into recession, as many expect, and state taxes stagnate, the standard deduction could be reduced to just $15,000 per couple.  Following a massive, multi-year expansion of tax revenue, it will be the growth rate starting this July 1 that sets the trigger.

Another catch:  The sales tax reduction on unprepared foods and essential personal hygiene items will not go into effect until January 1, 2023.

The full General Assembly meets Wednesday, June 1, to vote on the budget compromise and on several other bills still in conference committees when the regular session adjourned.  Any compromises on those – with some substantial issues involved – may not be revealed until Wednesday.

The bulk of the credit on this tax reform progress goes to Governor Glenn Youngkin (R), who promised to double the standard deduction in his campaign, made it a priority accepted by the House of Delegates in its version of the budget, and stuck with the idea through the long stalemated negotiations with the tax-happy Senate of Virginia. (And the resistance came from some Republicans in the Senate, too.)

If the increase isn’t as large as it could have been, in large part that is because of the other tax changes Youngkin also proposed and stuck with through the negotiations.  Removing the sales tax on food and providing one-time cash rebates from the surplus were so popular after Youngkin proposed them, Democrat Ralph Northam put them in the proposed budget he introduced in December.

It appears the approach on the sales tax will be as Northam proposed and the Senate adopted, delayed by six months and only eliminating the state share of 1.5%. That leaves it up to localities to decide what to do with the 1% local sales tax on unprepared foods and might create an issue for the next round of local elections.

Absent from the scene though he is, Northam also deserves credit for the acceptance of his proposal to convert Virginia’s Earned Income Tax Credit (EITC) for the lowest income earners into a refundable tax credit.  Instead of simply wiping out any lingering tax liability on their small salaries, the EITC now will provide a cash rebate.  It will be coupled with the similar federal benefit.

This is an anti-poverty program with bipartisan roots of its own, dating back to Republican President Richard Nixon.  (Fifty years?  That’s about right for ideas to come to final maturity in Virginia.)  It was not a priority of the Jefferson Institute because it really isn’t tax policy, but it is a valid approach to supplementing income.  Only people who work get it (and as wages rise, its value decreases.)

The other major element of the deal, which had bipartisan and bicameral support through the 2022 process, is a major income tax subtraction for military retirement pay, starting at $10,000 for this year and rising to $40,000 in tax year 2025.  It will be available only to those 55 and older.

Youngkin had also focused on fuel taxes, with two proposals. Tactically, they probably found themselves competing for wind  in their sails and reduced each other’s chances of success.  First, he offered (and the House approved) a one-year suspension of the most recent increases in the tax, and then he tried to get a 90-day suspension of the entire tax.  Neither was adopted by the budget conference committee.

From an economic standpoint, either was of minor and short term benefit. The standard deduction and sales tax changes should prove to be permanent.  It is hard to imagine a future General Assembly reversing them.

The legislative process on the new budget, which takes effect July 1, has one more step.  Youngkin can propose governor’s amendments to these bills, just as with other bills.  Any final changes he proposes need simple majorities in both chambers to be adopted, still a challenge in the Democratic-controlled Senate, but he is likely to try that avenue.

For most Virginia tax filers using the standard deduction, and most do, the increased level will save them $201 each or $403 on a joint return.  Eventually the state will adjust withholding tables so the benefit will accrue weekly, but for others it likely means smaller quarterly payments or a larger refund.  Large portions of the wealthiest Virginians still itemize their deductions, and this provides no benefit there.

The resulting state budget, absent these tax revenues returned to the workforce, will still be setting records for spending and surpluses held.  The revenue grand total, general fund and non-general fund fee revenues, is about $166 billion over two years.  After the tax changes, that is still a 17.5% increase over the same point two years ago, and almost a 41% increase over 2018’s $118 billion.

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