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The State of Transportation Funding in NC: Understanding the Highway Use Tax

Failing to adequately invest in our transportation infrastructure, like failing to invest in home upkeep, can add up to major problems down the road. And North Carolina’s motor fuels tax – our primary mechanism for generating transportation revenue – is simply not growing funds at a rate that can support the maintenance and growth of our network. Fortunately, the NC Chamber is leading an alliance of businesses and business-minded organizations, the Destination 2030 Coalition, in a series of discussions aimed at thinking beyond the motor fuels tax to explore more sustainable transportation solutions for our state. The next meeting of the coalition will take place on Friday, Oct. 23 at 11 a.m. via Zoom. Don’t miss out on your chance to join this important conversation – click here to add your organization the Destination 2030 Coalition today.

A new report sponsored by the NC Chamber Foundation and conducted by N.C. State’s Institute for Transportation Research and Education (ITRE), Modernizing North Carolina’s Infrastructure Through Sustainable and Diversified Revenue Streams, is one of several important sources helping to lay the groundwork for the coalition’s efforts. In this update – part two of a four-part series – we’re diving deeper into one of the major recommendations outlined in the report. We started this series by explaining why the motor fuels tax is quickly falling by the wayside as an outdated funding mechanism. Now we’ll explore one of three options the report recommends implementing if we are to begin phasing out this antiquated tax: an improved and restructured Highway Use Tax.

In 1989, North Carolina switched from a traditional vehicle sales tax to a Highway Use Tax (HUT), a one-time charge imposed any time a vehicle title is transferred in the state (in this way, the HUT can be considered an alternative vehicle sales tax). Today, North Carolina’s HUT is charged at 3 percent of a vehicle’s net retail purchase price, generating an average of $372 for every vehicle purchased and covering roughly 16 percent of the Department of Transportation’s annual budget. With all revenue from the HUT going to the Highway Trust Fund – which principally funds major expansion projects – the growth of North Carolina’s transportation network is highly dependent on this funding mechanism. Despite this dependence, however, North Carolina’s HUT accounts for the lowest effective vehicle sales tax rate among neighboring states (both Georgia and Tennessee, for instance, see an average of $868 from every vehicle purchase) and the second lowest in the nation.

For North Carolina, the failure to fully leverage an asset like the HUT is a missed opportunity to generate additional transportation revenue at low cost to the average motorist. This problem is compounded by a misallocation of revenue from vehicle rentals. Currently, drivers who rent or lease a vehicle in North Carolina are charged an Alternate Highway Use Tax (AHUT) at a rate of 3 percent of gross receipts for long-term rentals and 8 percent for short-term rentals. While revenues from the long-term AHUT are deposited in the state’s transportation account, most of the revenues from the short-term AHUT (which generated roughly $84 million in 2019) are instead deposited into the General Fund ($10 million in short-term AHUT revenue is allocated annually to airport improvements, an important priority we must continue to protect).

The Chamber Foundation report outlines several recommendations to modernize North Carolina’s HUT and AHUT and ensure more of the revenue these sources generate will go directly to transportation funding. Consistent with an issue brief released by the NC First Commission in October 2019, the report recommends raising North Carolina’s HUT from 3 to 4 percent, a change that would generate approximately $275 million in additional transportation revenue. (It should be noted that many states cap their HUT to ensure it generates adequate revenue without growing beyond a reasonable limit.) North Carolina, the report also notes, could increase annual transportation revenue by another $74 million if all the proceeds from the short-term AHUT were directed toward transportation funding. These changes alone could create roughly $350 million in additional transportation revenue for the state; moreover, increasing revenue from the HUT and AHUT, which, unlike the motor fuels tax, are not immediately impacted when fewer drivers use the roads, would make our funding model more resilient to revenue shock from events like hurricanes and pandemics.

Improving North Carolina’s Highway Use Tax is just one route that could potentially converge on a more modernized transportation revenue formula for our state. In the coming weeks, we’ll explore two additional recommendations put forth in the Chamber Foundation’s new report: the implementation of a road user charge program and the dedication of a portion of North Carolina’s statewide sales tax to transportation funding. In the meantime, it is important to remember that numerous options remain on the table, including many not explored in the report. One thing is clear, however: With our state at risk of falling behind our neighbors in securing a competitive transportation funding model, the business community must come together around a set of transportation priorities we can support in 2021 and beyond.