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Transportation Revenue Needs
Adjusting the Fuel Tax—A Mechanism to Help Accomplish What Is Needed
While the need for adjusting Federal fuel taxes to restore the program’s purchasing power is technically quite clear, the political challenge remains. We should also bear in mind that the past two times federal fuel tax rates were adjusted, it was done for deficit reduction rather than explicitly to increase transportation funding or restore the program’s purchasing power.
There is a mechanism which seems to work well in the field of military base closing which might be a model for what is needed for the Highway Trust Fund. There is another used to set postal rates which might also apply. The Base Realignment and Closure Commission is convened periodically to review the needs of the Department of Defense and to recommend base closures where facilities are no longer needed. An appeal period is provided. However, once the final list is submitted to Congress it is considered on an up or down vote. No amendments are allowed.
AASHTO believes Congress should create an impartial board called the Transportation Revenue Advisory Commission (TRAC). Its mission would be to periodically review whether the rates of Federal fuel taxes and other fees supporting the Highway Trust Fund were set at levels sufficient to sustain the program at the levels needed. Once the Commission’s recommendation is made, after an established review period, the recommendation would take effect unless Congress voted during the review period to reject it. The TRAC’s technical reviews of the funding levels needed would build on the work of the SAFETEA-LU Commissions.
Recommendation
Congress should create an impartial board called the Transportation Revenue Advisory Commission (TRAC). Its mission would be to review periodically whether the rates of Federal fuel taxes and other fees supporting the Highway Trust Fund need to be adjusted to levels sufficient to sustain the program at the dollar levels needed. Once the Commission’s recommendation on rate adjustment is made, after an established review period, the recommendation would take effect unless Congress voted during the review period to reject it. The TRAC’s technical reviews of the funding levels needed would build on the work of the SAFETEA-LU Commissions.
The Freight Challenge—Funding from Outside the Highway Trust Fund
The past several decades have witnessed dramatic growth in freight demand, driven by economic expansion, global trade, and revolutionary changes in business logistics. Today, the nation is entering the early stages of a freight transportation capacity crisis.
The tonnage of freight moved in the United States is forecast to double between 2005 and 2035, from 16 billion tons to 31.4 billion tons. Trade with Canada is up. Oil imports and expanding trade with Mexico and Latin America have resulted in major increases in trade through Gulf Coast ports and across the U.S.–Mexico border. International container cargo coming primarily from Asia and Europe grew from 8 million units in 1980 to 40 million units by 2000 and is expected to explode to 110 million units by 2020. This is placing enormous pressure on West Coast and East Coast ports and the highway and rail distribution systems in between.
State and local transportation officials are confronted with the challenge of providing infrastructure to address large and shifting traffic increases generated by ports, inland terminals, and mega-distribution centers.
The nation benefits from free trade, but the burden of meeting the demand is borne by the states and localities at gateways and on trade corridors. The nation needs freight railroads to make the capacity improvements required so they can continue to carry their current market share of the increase in freight expected. AASHTO’s studies show that freight rail will be unable to do so without public funding in the range of $2.65 billion annually for the next 20 years.
The effects of growing demand and limited capacity are felt as congestion, upward pressure on freight transportation prices, and less reliable trip times as freight carriers struggle to meet delivery windows. Over time these costs add up to a higher cost of doing business, a higher cost of living for consumers, and a less productive and competitive economy.
Since 80 percent of freight in the United States is carried by truck, improving our highways should be the highest priority. The states, the Federal government and the private sector should collaborate to reaffirm the importance of investing in highway trucking capacity. States should be provided the authority and resources necessary to provide truck-only lanes or truck-only-toll lanes where demand warrants. States should create and the Federal government should support multi-state/regional institutions to coordinate, manage, and guarantee the performance of economically important highway freight corridors which cross more than one state. Finally, the Federal government should support efforts by states to focus highway programs on significant supply-chain bottlenecks at interchanges, gateways, intermodal connectors, and international borders.
However, whether the problem is the need for better intermodal connections to ports, airports, or railroads, or the expansion of railroad capacity itself, the scale of investment needed is beyond that which can be met from the Highway Trust Fund. The United States needs to find ways to significantly increase freight-related investment using new sources of revenue.
Dedicating 5 percent of customs fees to port intermodal connections via rail and highways would bring in $2 billion per year by 2015. Another idea being explored in California is the imposition of container fees of $30 to $50 per container, which would be placed in a trust fund dedicated to freight-related improvements nationwide, if done nationally. It is estimated that this could generate in the range of $1 billion per year. The Association of American Railroads is urging Federal investment tax credits for rail improvements which improve capacity. In 2005, Senators Jim Talent (R-MO), Ron Wyden (D-OR), Norm Coleman (R-MN), and Jon Corzine (D-NJ) introduced a “Build America Bonds” program which would have made $50 billion in tax credit bonds available through a transportation finance corporation. AASHTO had developed and supported a very similar concept.
Recommendation
From resources outside the Highway Trust Fund, additional federal government financing should be provided for freight-related investments, including freight gateways, connectors, corridors and border crossings. With state involvement, incentives for new investment in freight-rail infrastructure by rail companies through Federal investment tax credits and depreciation adjustments should be developed. Federal funding should be provided to states for participation in public-benefit rail improvements. Revenue measures such as dedicating 5 percent of customs fees to transportation freight projects and providing assistance financed through tax credit bonds should be enacted.
All levels of Government Must Maintain Their Shares of the Increased Investment Required
Over the past 10 to 15 years the Federal share of highway and transit capital investment has averaged around 45 percent. For the immediate period ahead when the policy objective is to restore the purchasing power of the program, AASHTO’s estimate is that Federal highway assistance will have to increase from $43 billion to $73 billion and federal transit assistance to increase from $10.3 billion to $17.3 billion. If state and local governments are to generate their corresponding 55 percent shares, their highway capital investment would have to increase to $89 billion and their transit investment increase to $21 billion. Compared with the increase in highway and transit capital investment state and local governments were able to achieve over the past 25 years, this is a challenge of similar proportions. But no matter how you look at it, the increases are enormous.
Because preservation will use up nearly all of the revenues that can be generated at the state and local levels by traditional forms of taxation, to add the capacity which will also be needed in the years ahead, states and local governments are going to have to look for alternative sources of revenue.
Tolls and Public–Private Ventures as a Supplement to Traditional Sources of Revenue
Tolls are currently collected on 4,600 miles of roads in 25 states. There are approximately 25 Interstate toll roads and 65 significant non-Interstate toll roads in operation. Toll-generated revenues increased to $7.7 billion in 2005. In 2005, that represented 5 percent of total highway revenues.
Over the past 10 years the rate of toll road development, measured in centerline miles, has increased significantly. This is especially true in the creation of new roads. Thirty percent to 40 percent of the approximately 150 miles per year of new expressways built in this period have been financed through tolling. Because so much of tax-generated revenue will be required to fund the backlog of highway preservation needs over the next 20 years, the percentage of new road capacity funded through tolls is likely to increase.
The pattern observed over the past 15 years is that toll-generated revenues nationally have been increasing, but at approximately the same rate as the overall increase in funding for highways by Federal, state, and local governments. Since 1991, highway capital investment overall has nearly doubled. So even though tolling has increased, the percentage of revenues generated by tolls has remained at between 4 percent and 5 percent of the total.
Recently interest in tolling has been further sparked by three developments. First, public–private ventures, such as Chicago receiving $1.8 billion for a 99-year concession on its Skyway, and Indiana receiving $3.85 billion for a 75-year concession on the Indiana Tollway, have generated intense interest. These projects involve equity provided by foreign and American investors, in return for a long-term return on investment provided through tolls.
The second development has been the growing popularity of HOT lanes, High Occupancy Toll lanes. This concept was pioneered in the variably priced demonstration project on Interstate 15 in San Diego, California, in the 1990s when drivers of single-occupant vehicles were allowed to pay a toll and use an eight-mile stretch of an HOV lane. San Diego County now plans to expand this initial eight-mile segment to a hundred-mile system that will not only pay for the new lane capacity, but generate funding for transit as well. Several HOT-lane projects have been built or are about to be built in Texas, Virginia, Minnesota, and elsewhere.
The third development is open access toll roads for which stopping at toll booths has been totally eliminated. Electronic tolling, such as EZPass, has already reduced the inconvenience of paying tolls for drivers whose cars are equipped with transponders, and no longer have to stop to pay at a collection point. Toronto’s new 407 ETR, Electronic Toll Road, has totally eliminated toll booths. The use of all-electronic tolling could increase convenience to customers, reduce traffic slowdowns, and increase the attractiveness of using toll facilities.
Analysts who have specialized in the potential of tolling, believe that tolling’s market share of highway funding could be increased from 5 percent to as much as 7 percent over the next 15 years if it receives strong policy support from Congress and State Legislatures. They have observed that, “if major growth states like Florida, California, and Texas, continue on their aggressive path of developing most new upper-level centerline miles as toll roads, toll revenues could gradually contribute a greater share and increase toward the $10 billion level. Significant increases in toll funding longer term will depend on liberalization of tolling on the Interstate, and other states adopting a similar tolls-for-major-capacity-expansion-policy.” Opposition from some trucking and automobile user groups remains a challenge, however. AASHTO has taken the position that every state should be given all options possible in the areas of tolling and public–private ventures so those states can determine for themselves what is in the best interests of their citizens. AASHTO has also embraced a bold goal of increasing toll-supported projects to 9 percent of the total nationally, beyond the level some experts believe is feasible.
Recommendation
Federal policies should enable and encourage the capitalization of highway and transit improvements through innovative finance mechanisms and through public–private ventures supported by tolls and other revenues. Federal limitations on the ability of state and local governments to raise revenues should be removed.
Another key revenue question Congress directed the Commission to assess, which is especially important for the next 15 to 25 years, was “whether the amount of revenue flowing into the Highway Trust Fund is likely to increase, decrease, or remain constant, taking into consideration the impact of possible changes in vehicle choice, fuel use, or travel alternatives.” The Commission was asked to build on related analysis such as the recent TRB study on alternatives to the fuel tax to support highway program financing.
Prior to the Commission being created there was speculation that the fuel efficiency of the vehicles on America’s highways was increasing so fast and the use of alternative fuel advancing at such a rate that the fuel tax is a source we can no longer rely on to support the Highway Trust Fund. A review of current studies shows that that speculation is not supported by the facts and that fuel taxes will be a viable source of transportation funding for at least one and perhaps two decades or more into the future.
The 2006 TRB Study titled, The Fuel Tax and Alternatives for Transportation Funding, concluded that fuel taxes would continue to be a viable source of support for the Highway Trust Fund, “for at least the next 15 years.” The Environmental Protection Agency in its July, 2006 Report, Light-Duty Automotive Technology and Fuel Economy Trends: 1975 Through 2006, showed that the fuel economy measured in average miles per gallon for the light-duty automotive fleet, which is made up of automobiles, light trucks and sports utility vehicles, actually has declined 5 percent over the past 19 years from 22.1 mpg in 1987 to 21.0 mpg in 2006. The President’s 2007 proposal to increase Corporate Average Fuel Economy (CAFE) standards 4 percent annually through 2017 should begin to increase fleet efficiency.
U.S. DOT in its latest Conditions and Performance Report in early 2006, estimated that highway vehicle miles traveled would increase 2.07 percent annually through 2022. A 2003 National Cooperative Highway Research Study on alternative fueled vehicles, such as those fueled by hydrogen, electricity, and compressed natural gas (CNG), forecast that the market share of these vehicles is not expected to exceed 0.02 percent until 2020. In 2005, the Congressional Budget Office projected a 3.3 percent annual increase in Federal gas revenues from 2005 to 2015.
What these studies show is that fleet fuel efficiency has gone down not up. If anything it is flat. Highway travel is expected to grow at over 2 percent for the next 16 years. Hybrid sales hit just over 1 percent of total automobile sales for the first time this year. Vehicles fueled by hydrogen, electricity, and CNG will not be a real factor until well after 2020. The Federal Agencies we rely on to forecast revenues expect fuel tax revenues to grow by 2 to 3 percent annually for the next 10 years. Ten and fifteen years further into the future in the 2030 to 2035 time frame, fuel efficiency or alternate fuels may begin to erode fuel tax generated revenues, but for the near term this does not appear to be a real problem.
Revenues for 2020 and Beyond
AASHTO recommends a four-phase approach to increasing revenues to the levels needed. In Phase 1, Congress should take action in FY2009 to preserve highway funding at the levels authorized by SAFETEA-LU, and avoid cutting the program $11 billion from $43 billion to $32 billion. In Phase 2, Congress should restore the program’s purchasing power by increasing highway assistance from $43 billion to $73 billion between 2010 and 2015, and transit assistance from $10.3 billion to $17.3 billion. In Phase 3, from 2015 to 2025, Congress should increase the program toward meeting the “cost-to-improve” goals, estimated in U.S. DOT’s Conditions and Performance Report, but adjusted to year of expenditure dollars by AASHTO using the Consumer Price Index (CPI). For example, U.S. DOT estimated a “cost-to-improve” annual highway capital investment level of $118.9 billion in 2002 dollars. Adjusted using the CPI to 2020 the “cost-to-improve” figure would be $189 billion. In Phase 4, Congress should use a vehicle miles traveled tax to supplement or replace fuel taxes.
To restore the purchasing power of the highway program by increasing it from $43 billion to $73 billion would require an increase in the Federal fuel tax rate of approximately 10 cents. To move from that point upward toward the cost to improve goal, could be achieved in several ways. We have established that fuel taxes will continue to be a viable source of revenues to at least 2020, and perhaps to 2030. For the 15 year period between 2015 and 2030, the options include simply raising fuel tax rates periodically, indexing the fuel tax to a measure such as the Consumer Price Index, so it rides up with inflation, or changing the form of the tax from one based on fixed cents per gallon to a sales tax on gasoline. Table 3 is a matrix which outlines the revenue generating potential of several alternatives.
For the period of 2030 and beyond, increasing fleet fuel efficiency and the increasing use of alternative fuels may render the fuel tax less effective as the core support for the Highway Trust Fund. By 2020, enough research should have been conducted on a vehicle miles traveled tax to determine how it can best be configured to supplement or replace the cents per gallon fuels tax.
Recommendation
Congress should take a four-phase approach to increasing revenues to the levels needed. In Phase 1, Congress should take action in FY2009 to preserve highway funding at the full level authorized by SAFETEA-LU. In Phase 2, Congress should restore the program’s purchasing power. In Phase 3, from 2015 to 2025, Congress should increase the program toward meeting the “cost-to-improve” goals, estimated in U.S. DOT’s Conditions and Performance Report. The fuel tax can be adjusted through indexing, periodic increases, or by changing it to a sales tax. In Phase 4, from 2025 on, Federal fuel taxes should be supplemented or replaced with a vehicle miles traveled tax.
Revenue Options
The following revenue mechanisms represent ways in which the Federal government could generate revenue to meet the program funding levels proffered in the scenarios described in this report (Table 3).
Table 3. Options to Generate Federal Transportation Revenue
