NARC Transportation Policy Memo
To:NARC Transportation Committee Members
From: Megan Zadecky, Transportation Director
Date:June 14, 2007
Subject: Basic Overview of Financing Options to Fund the Transportation System
Summary Overview
The future financing of our country’s transportation system is in question as funding for transportation infrastructure is not keeping pace withdemand. More drivers and freight shipments are taking to our nation’s highways everyday. Freight shipments are projected to double in volume over the next 10 years. In addition, there is a greater demand for public transit and other transportation options as congestion continues to increase on urban and rural roads.
For years, the national Highway Trust Fund has served as the federal government’s primary vehicle for funding our country’s transportation infrastructure. The federal government’s share of transportation funding is approximately 45 percent with state and local governments contributing the remaining share of funds. The current federal fuel tax is 18.4 cents per gallon. Of this, 15.44 cents if dedicated to the Highway Trust Fund and 2.86 cents if dedicated to the Mass Transit Account.Diesel fuel is taxed a 24.4 cents per gallon with 21.44 cents directed to the Highway Account and 2.86 cents directed to the Transit Account. With inflation and the rising cost of transportation, the Highway Trust Fund alone will no longer be an adequate source of revenue to maintain a transportation system to serve us in a global, competitive world. The various studies are projecting an ever widening funding gap for transportation infrastructure with one recent survey forecasting a $1 trillion cumulative funding deficit by 2015[*].
Federal, state and local lawmakers are beginning to explore sustainable funding options for transportation infrastructure. SAFETAU-LU established the National Surface Transportation Policy and Revenue Study Commission to report on transportation and infrastructure funding and weigh in on the debate on alternative financing options. Originally required to report back to Congress in July 2007, the Commission’s deadline will be extended by six months to January 2008. In addition to the Commission, who is considering testimony from all private and public transportation stakeholders, everyone in Washington and beyond is beginning to discuss potential options to finance transportation.
To shape NARC’s position in this debate, we want to begin talking with all of you about the financing alternatives being discussed. The following memo provides a basic outline of the various funding strategies. This is a complex issue and does not lend itself to a single solution. A sustainable financing scheme will be the result of a coordinated federal, state and local effort that supports a combination of alternatives that best meet the needs of state and regional governments.
Fuel Tax Increase
A federal fuel tax increase would raise the tax paid per gallon of gas; congress would be responsible for determining the increase. Individual state legislatures have the capacity to raise fuel taxes on a state-wide basis. Many states have made modest increases in fuel taxes in recent years. The last national fuel tax increase was in 1993 when Congress passed a 4.3 cent tax increase on fuel. From 1993 until 1998, however, this increase was dedicated to deficit reduction. Beginning in 1998, the increase was reinvested into the trust fund. It is estimated that by 2009, the highway program will be in crisis with budget shortfalls project to accelerate beyond 2009. Under these projections, obligations under SAFETEA-LU will not be met.
Regional Impacts –The gas tax has proved to be a reliable federal funding source for infrastructure. Providing a steady source of substantial revenue, the gas tax is also easily paid by consumers and administered by the government. The rising costs of construction together with other factors such as adjustable rates,decreases in fuel consumption and alternative fuels are decreasing the federal purchasing power of the Trust Fund. Modest fuel tax increases would provide a short-term solution to begin restoring the Highway Trust Fund’s purchasing capacity.
Current Initiatives and Support–There is widespread support among many transportation interest groups, including NARCfor maintaining the Highway Trust Fund as one element of the transportation financing scheme. Many proposals suggest modest increases in the gas tax are necessary to restore the Fund’s purchasing capacity.
The American Association of State Highway Transportation Officials (AASHTO) is proposing a series of gas tax increases to restore the Trust Fund’s purchasing power and to support a higher level of capital investment beyond 2009. AASHTO projects that with no increase in 2009 there will be an $800 million reduction in the highway program, and by 2010 there will be an $18.2 billion program reduction. The solution that they are offering is a total 10 cent increase in the gas tax between 2009 and 2015 with a 3 cent increase beginning in 2009 and an additional 7 cent increase beginning in 2010. A 3 cent increase in 2009 would sustain the program at guaranteed SAFETEA-LU funding levels of $244.1 billion. The additional 7 cents would restore the program’s purchasing power and maintain the federal governments share in transportation investment.
It should be noted that increasing taxes is often an unpopular political tactic, and for this reason politicians may be reluctant to significantly raise fuel taxes. NARC and its members need to weigh-in on this and potentially other proposals as they stand or develop alternatives as appropriate. Regional advocacy and education on this issue in support or opposition will be an important part of the legislative process.
Indexing
In recent years, inflation and other impacts have eroded the purchasing power of the gas tax. Indexing the fuel tax would adjust the rate to factors such as changes in inflation and fuel consumption. The gas tax could be tied to number of indexes including the consumer price index, construction cost index, gross domestic product, wages and fuel prices. In weighing each option, growth and volatility must be factored into the decision.
Regional Impacts–Indexing applied to state and federal gas taxes would restore purchasing capacity of money collected through the gas tax. Other notable benefits of indexing include an established, systematic collection mechanism and project delivery reliability. One of the primary drawbacks of indexing is that it will not generate enough revenue to support our transportation funding needs. In addition, purchasing power could continue to be eroded as consumers purchase more fuel efficient vehicles and economize on their vehicle miles traveled.
Current Initiatives and Support- Several states have variable fuel taxes. Connecticut, Florida, Kentucky, Nebraska, North Carolina, Wisconsin and Pennsylvania are included among the states that are currently or have previously used an indexed fuel tax. Indexing is a sensitive political issue since many legislators are reluctant to increase taxes especially when the specified increase is outside of their control. The federal gas tax is not indexed to any particular rate. There is, however, discussion about indexing as a means to make up for shortfalls in the highway trust fund.
Regional Taxing
Regional tax initiatives are sales tax measures imposed by regional governments and voted on by local citizens. The exact amount and duration of the tax is decided on by the voters. Revenues raised through the taxes are directed toward regional highway and transit projects.Regional taxing represents a collaborative effort between various local entities interested in transportation infrastructure and is flexible enough to be tailored to garner support and approval from local voters. Outreach and marketing are key components to garnering support for regional sales tax initiatives.
Regional Impacts –Regional taxing for transportation is a sustainable source of funding that provides increased revenues to invest in projects. In addition, one of the greatest benefits of regional taxing initiatives is local authority. In generating revenue for transportation projects, regional governments together with their partners and constituents have the capacity to prioritize projects and make decisions based on regional needs.
Regional taxing initiativeshave some drawbacks. Chief among the disadvantages is the perception that local governments who generate enough money to cover their transportation needs do not need federal support for projects. Other issues to overcome include different philosophies among local partners and potential delays resulting from the coordination of various policies, protocols and procedures among the stakeholders.
Current Initiatives and Support – In recent years, transportation measures have shown up at the ballot box and are being passed in record numbers by the electorate. The passage of these measures signals the voters’ interest in and support for infrastructure investment, as well as a belief that investment in transportation will have a positive impact on them and their community. NARC’s members are leading the way in regional taxing initiatives. Among the regions raising money for transportation infrastructure investment are the San Diego Association of Government, the Pikes Peak Area Council of Governments, the Maricopa Association of Governments and the Pima Association of Governments.
VMT Fees
A vehicle mils traveled (VMT) fee is a distance-traveled, per mile charge to be paid by vehicle owners and operators using the road system. These non-fuel based fees would represent a departure from current transportation financing mechanisms. In determining the per mile rate to charge users, program policy could include congestion pricing charges that would apply to areas with the most congested roads and at the most congested times based on the number of miles a person drives. The implementation of VMT fees would require systematic changes for program administration including mileage recording techniques, fee collections and other issues.
Regional Impacts –The VMT fee offers a sustainable, long-term funding source. VMT fees could be developed to replace the gas taxas the principle transportation funding source.Other benefits of road fees include their ability to connect vehicle use the road system and the fuel efficiency erosion factor.
Factors to consider when developing a VMT program include procedures for gathering information, tax collection, start-up and operations costs, collection enforcement and the technology necessary to successfully implement the program. All systems must be designed so that users’ privacy is respected and maintained at all times. Road fees represent a long-term approach to transportation finance; the work to create the systems and technology to drive a VMT program on a large scale cold take years to develop.
Current Initiatives and Support –For the past few years, the state of Oregon has been testing a mileage-based user fee. In the OR pilot program, several trial participants are paying a mileage fee instead of the gas tax. A final report on the state’s trial program is forthcoming. If road-based fees are the future of transportation financing, then a large scale implementation of VMT fees must occur. Multi-state or national implementation of such a program will require broad political support at all levels of government.
Tolling and Pricing
Tolling and pricing practices implement user fees for designated roadways and bridges. These strategies are being considered as viable, non-fuel based options to finance transportation.State, regional and local governments determine the practices and protocols for tolling and pricing practices on new roads and lanes added to existing roads. In addition to providing funding for transportation projects, congestion tolls and pricing can be implemented to help control traffic during peak times.
Regional Impacts –As a non-fuel based source of revenue, tolling and pricing practices are not subject decreases in gas tax revenues resulting from fuel efficiency and other technologies that reduce the country’s consumption of gasoline. In addition, there is a positive role for regional governments in these practices since decision-making about tolling and pricing is carried out at the state and regional level. This authority provides a strong voice for regional governments in matters pertaining to transportation finance.
One concern associated with tolling is that flat fees do not account for the impacts of different vehicles on the roadways. With this, a compact car will pay the same amount as a truck carrying a heavy load. Another issue pertains to the technologies in place to collect tolls to ensure that they do not have a negative impact by slowing traffic, specifically on highly congested roadways. Public – private partnerships may also have negative consequences on tolling practices. This concern will be explored in more detail in the next section.
Current Initiatives and Support -
Some states are employing tolling and other pricing measures onat least some new highways.For example, Texas is relying on tolling as a source of revenue across the state, funding new limited-access highway capacity, at least partiallythrough tolls. States not implementing tolling are likely considering the option as a viable source of revenue to fund transportation. The politics of tolling can be tricky. With the public currently paying the gas taxes and other user fees, they may unwillingly support additional fees.
Public Private Partnerships
Public-private partnerships (PPP) are defined as contractual agreements formed between a public agency and private sector entity. These agreements give private sector entities greater participation in planning and delivery of transportation projects. Previously private sector involvement in transportation planning has been limited to specific planning, design or construction projects on a fee for service basis as directed by the participating public agency. Now, public-private partnerships are being explored as a sustainable source of funding for transportation projects. PPPs can be arranged for a various projects that cross all modes, some of which include project conceptualization and origination,design, financial planning and finance, construction, operation, maintenance, toll collection and program management. The contracts and terms guiding PPPs vary from project to project and facilitate different financing approaches.
Regional Impacts –PPPs provide substantial sums of money to government entities to invest in transportation infrastructure needs. In addition, many public entities transfer the responsibility of maintenance and upkeep for certain highways and bridges included in the PPP over to the private interest partner. This transfer of this responsibility relieves state and local governments of the burden and uncertainty surrounding preservation needs.
State and local governments should be aware of potential negative impacts that PPPs can have on the transportation network. Contracts outlining the terms on conditions for the PPP should be well understood and carefully reviewed as these contracts will dictate the future roles and responsibilities for both the public and private agencies involved in the partnership. In defining these roles it is essential that public entities ensure partnerships provide a return on investment to private sector partners while advancing the public interest, respecting the transportation planning process and enhancing the safety, mobility and capacity of our transportation system.
Public sector government agencies need to make certain that PPPs do not undermine state, regional and local authority over transportation planning in the public interest.While still in the early stages of what will be continuing agreements, the long-term impacts of PPPs is yet to be determined. There are emerging, however, lessons to be learned in structuring these deals.
Current Initiatives and Support - Some states, including but not limited to Texas, Florida and Indiana are engaged in PPP agreements to leverage funding for public infrastructure. Other states are considering PPPs as a viable option to meet demands for infrastructure maintenance and future capacity. While the decision to enter into a PPP is reserved for states with input from regional and local transportation officials, Congress is weighing-in the on the debate warning governors, state and local transportation officials on the pitfalls of PPPs. In May House Transportation and Infrastructure Committee Chairman Oberstar (D-MN) together with Representative Peter DeFazio (D-OR), Chairman of the Highways and Transit Subcommittee issued a letter and a report outlining the negative aspects of PPPs and detailing issues that should be taken into account before agreements are finalized.
[*] The $1 trillion dollar figure likely includes funding shortfalls for all modal programs including aviation and maritime. Highway and Transit programs, however, comprise a lion’s share of the deficit.