Innovation NewsBriefs- Searching for Novel Approaches to Transportation Funding
January 22, 2013
Searching for Novel Approaches to Transportation Funding
“If we stick to the same old means of funding transportation, we will find ourselves having the same debates and facing the same revenue shortfalls over and over again as inflation slowly eats away at the gas tax, cars get better mileage to meet CAFE standards and more alternative fuel vehicles hit the streets.”
—- Virginia’s Gov. Bob McDonnell
As we enter the New Year (and begin our 24th year of publication), the debate about transportation funding is taking a new turn. Talk of raising the federal gas tax has become muted and even the efficacy of the gas tax itself is being questioned. And no wonder: vehicles are becoming more fuel efficient, CAFE standards are becoming more stringent, vehicle use is leveling off, and hybrids and electric vehicles are expected to slowly but surely increase their market penetration. All these trends spell a reduced flow of fuel tax revenue both at the federal and state levels. There is a growing sense that the gasoline tax can no longer serve as a reliable long term source of highway and transit funding—indeed, that it has become something of a “dinosaur” in the words of the Speaker of Virginia’s House of Delegates, William Howell. It’s not surprising therefore that a growing number of states have begun to look for alternative approaches to funding their transportation programs.
Shifting the burden from the gas tax to the sales tax
By far the most unconventional and attention-getting of those ideas is Virginia Governor Bob McDonnell’s proposal to abandon the state’s 17.5 cent per gallon gasoline tax and replace it with a 0.8 percent increase in the sales tax — from 5 percent to 5.8 percent — with the increase dedicated to transportation. The move would make Virginia the first state in the country without a state gasoline tax. The Governor’s plan also calls for increasing transportation’s share of the existing state sales tax from 0.5 to 0.75 percent, increasing vehicle registration fees by $15 and an annual $100 fee on alternative fuel vehicles. McDonnell claims the switch would add $500 million annually to Virginia’s transportation budget and enable new construction projects, long delayed by the funding shortfall.
Critics have swifty condemned the proposal as violating the time honored “user-pays” principle of sound tax policy. They point out that the highway system should be treated just like other public utilities. People should be charged for the use of roads just as they are required to pay for the consumption of water, gas, electricity and telecommunications services. Critics further point out that shifting the burden from the gasoline tax to a sales tax would unfairly impact or “punish” transit users, telecommuters and other Virginia residents who do not drive. Defenders of the Governor’s plan reply that this criticism ignores the fact that everybody benefits from a road system: “groceries don’t just magically appear on the supermarket shelves,” one commentary noted.
There is no doubt that there would be winners and losers under the Governor’s plan. One unintended beneficiary would be out-of-state motorists refueling while in transit through the state. Another beneficiary would be motorists from the neighboring state of Maryland and the District of Columbia who would cross the river in large numbers to fill up and take advantage of the lower priced gasoline.
So far political opposition to the proposal has been minimal. As more than one state legislator have remarked, Gov. McDonnell deserves praise for recognizing that the State needs additional transportation revenues and for trying to do something concrete about it. The public also seems to have taken the Governor’s proposal in stride. Most of the objections have come from the policy establishment who consider the Governor’s proposal as a violation of the sacred “user pays” principle.
The Governor has presented his funding reform proposal to the mostly sympathetic 17-member Commonwealth Transportation Board. His funding package is now pending in the House (HB 2313) and the Senate (SB 1355). With the Board’ support, the proposal stands a good chance of gaining legislative approval— proving that when it comes to raising money, bold and unconventional ideas will sometimes trump established approaches.
Converting to a Sales Tax on Fuels
Another approach to using the sales tax has been proposed by the retiring executive director of the American Association of Highway and Transportation Officials (AASHTO) John Horsley. In a January 16 speech before the Transportation Research Board, Horsley proposed to convert the federal cents-per-gallon fuel tax to a percent sales tax on motor fuels. Revenues from a sales tax would be less sensitive to stagnating levels of fuel consumption and would benefit from a long-term trend of rising price of oil. But they would also be subject to frequent and unpredictable fluctuations in value.
Sales tax rates would be set at a level that restores solvency to the Highway Trust Fund. This would be accomplished by setting the initial sales tax rate at 8.4% for gasoline and 10.6% for diesel. The former should generate $37.7 billion in 2013 and the latter $14.7 billion according to Horsley. Together, the sales tax would bring $52 billion which is approximately the current level of federal spending on surface transportation (or, strictly speaking, the FY 2012 level of federal obligation authority for surface transportation). At the proposed rate, the cost per vehicle would increase by around $45 per year according to Horsley’s calculations.
Mileage-based User (VMT) fee
The mileage-based user fee (popularly known as the vehicle-miles travel or VMT fee) has been a perennial favorite of the policy establishment as a long-term replacement for the fuel tax . The concept was prominently featured among the recommendations of the the National Surface Transportation Infrastructure Financing Commission (2009), and has been a topic of discussion and debate at transportation conferences ever since—most recently at the January 2013 annual meeting of the Transportation Research Board. VMT fee field tests have been conducted in Oregon and several other states.
Recently, the VMT fee received added visibility from a General Accountability Office (GAO) report (Pilot Program Could Help Determine the Viability of Mileage Fees for Certain Vehicles, GAO-13-77, December 13, 2012). The report concludes that “mileage-based user fees initiatives in the United States and abroad show that such fees can lead to more equitable and efficient use of roadways by charging drivers based on their actual road use and by providing pricing incentives to reduce road use.” To replace current federal fuel tax revenues ($38 billion/year) drivers of passenger vehicles with average fuel efficiency would pay $108 per year in mileage fees compared to the $96 these drivers currently pay in federal gasoline tax, according to GAO.
But the report added a note of caution: “Mileage fees for passenger vehicles continue to face significant public concerns related to privacy as well as cost challenges. … Implementing a system to collect fees from 230 million U.S. passenger vehicles is likely to greatly exceed the costs of collecting fuel taxes.”
While a GPS-based VMT system is being successfully used for truck movements in Germany and Austria (the Toll Collect system), its future in this country is still uncertain. According to GAO, “few states reported that they are likely to introduce such fees in the next 10 years.” A nationwide federally-administered system is even more problematical. GAO has recommended federally-led field tests of mileage fees for commercial trucks to see if the VMT concept might hold promise for that class of vehicles.
Advances in electronic toll collection technology have made highway tolling not only convenient for motorists but also politically acceptable as a mainstream transportation revenue option. There is ample opinion survey data that the public prefers tolling over higher gas taxes to pay for highway improvements. With MAP-21 giving states increased flexibility to use tolls to finance new road capacity, tolling is likely to grow both to support state transportation budgets and to finance transportation bond issues. In a few jurisdictions toll revenue is partly diverted to finance transit. For example, the majority of toll revenue generated by the New York Port Authority’s bridges and tunnels is used to fund public transportation. Similarly, most of the toll revenue collected on the Dulles Toll Road in Virginia is being used to fund the rail line to Dulles Airport.
On January 9, the International Bridge, Tunnel and Turnpike Associations (IBTTA) officially launched “Moving America Forward” an awareness campaign “to highlight the fundamental role of tolling in helping to solve the transportation infrastructure crisis.” “It’s about time policy makers at all levels of government took a serious look at tolling as an effective alternative to traditional funding options,” said the announcement . “With weak public and political support for raising any tax in this struggling economy, tolling continues to stand out as the way to go.”
No doubt, the use of tolling will increase in the days ahead, especially in the context of toll financing of new highway capacity and new bridge construction. Whether tolling of existing Interstates —the end goal of toll advocates and the ultimate solution to all highway funding problems –will become a reality, remains a big unanswered question.
Refocusing the Federal Highway Program
Another approach to restore the integrity of the Trust Fund would be to refocus it solely on highway and bridge programs. Robert Poole, transportation director at the Reason Foundation, who is the author of this proposal, estimates that such a refocusing would add $9-10 billion/year to the highway program and make periodic supplements of the Highway Trust Fund with general revenue unnecessary (Funding Important Transportation Infrastructure in a Fiscally Constrained Environment, Reason Policy Brief No. 102, January 2013).
Eligible activities would include preserving and modernizing the Interstate highway system and upgrading certain portions of the larger National Highway System to interstate standards. Responsibility for all other highways, and for the numerous non-highway programs that have been added to the HTF over the decades (urban transit, recreational trails, pedestrian and bike improvements, and other “enhancement” activities) would be shifted to state and local governments. While this approach would return the Trust Fund to its original purpose, it would generate fierce opposition from the many interest groups that have acquired a stake in the Trust Fund over the years (“hitchhikers” in the words of Senator James Inhofe, R-OK). An attempt by House Republicans to divest the Trust Fund of its Transit Account as part of the 2012 reauthorization bill was soundly defeated, suggesting that such far-reaching changes in the federal transportation program are politically out of bounds.
Looking Beyond MAP-21
Virtually all the current efforts to raise transportation revenue and to explore novel sources of funding are taking place at the state level. Among the states that are actively pursuing new fiscal strategies are Pennsylvania, Massachussetts, Wisconsin, Maryland, Michigan, Oregon, Washington State, Missouri, Kentucky and Wyoming.
At the federal level, a search for new transportation revenue has yet to begin. With MAP-21 dollars assured for a period of two years, transportation reform is likely to take a back seat in the 113th Congress— notwithstanding self-serving warnings from public works lobbyists and liberal activists about “crumbling infrastructure” and disaster-like consequences if federal infrastructure funding is not vastly increased.
Even if the 113th Congress in its waning days finds the time to renew the transportation program before the law expires in October 2014, few observers expect the next surface transportation bill to be a massive multi-year measure funded with hundreds of billions of dollars. More likely, the next transportation authorization will take the form of another short-term bill funded at current spending levels. Those levels (an average of $52 billion/year in FY 2013-14), a senior state DOT official told us, will be generous enough to allow most states to maintain and preserve transportation infrastructure in a state of good repair. However, they will leave little money for capacity expansion. The Highway Trust Fund no longer can provide capital for major new infrastructure.
A permanent transition to short-term bills would do away with the specter of the Highway Trust Fund repeatedly running out of money, a senior government fiscal analyst told us. Short-term bills such as MAP-21 could continue to be funded out of the Trust Fund with the existing tax revenue stream and would need only modest levels of support from the general fund—especially if states were willing to step in with increased contributions of their own. A six-year bill, on the other hand, would require an injection of $84 billion in general revenue to maintain current (FY 2013-14) spending levels (assuming six-year HTF revenues of $228 billion and six-year outlays of $312 billion). It’s a sum of money that even the Democrats consider excessive and politically imprudent.
“It’s a different world we live in today,” a veteran lobbyist told us. Long-term authorizations and their contract authority made sense “when we were in the building mode” he said, — planning large, multi-year public works projects requiring multi-year funding commitments. But those days are largely over. Today, maintenance, preservation and reconstruction constitute the bulk of state DOT programs, and these needs can be handled on an annual or bi-annual basis. In other words, long-term authorizations may have outlived their purpose.
To the extent that multi-year infrastructure megaprojects still figure on the drawing boards of state DOTs —and they do: e.g. the I-495 Beltway Hot lanes project in Virginia, New York’s Tappan Zee Bridge replacement, the San Francisco Bay Bridge Eastern Span replacement, the I-5 bridge across Columbia River between Oregon and Washington, the two Ohio River bridges in Louisville, a joint venture of the Indiana and Kentucky DOTs— they can, and indeed will, be financed through public-private partnerships, tolling and credit instruments such as TIFIA and state infrastructure banks.
A growing number of analysts seem to agree: the most practical way to build future megaprojects, they are saying, will be through project financing rather than by funding them through the regular congressional appropriations process— thus rendering long-term transportation authorizations less compelling.
— Posted on July 18, 2013 at 7:43 pm by Ann