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Background on Federal Transportation Revenues and Needs

Three questions need to be answered before we can explore in greater detail, viable short-term federal revenue options that can sustain highway and transit programs at the levels needed:

First, what are the current sources of revenue supporting the Highway Trust Fund? Second, what revenues are they forecast to produce over the next 10 years? Third, is the viability of the federal gas tax as the primary source of revenue for the Highway Trust Fund being eroded by increasing fleet fuel efficiency and alternatively fueled vehicles?

Sources of Revenue Supporting the Highway Trust Fund and Revenue Forecasts

The current Federal gasoline tax rate is 18.4 cents per gallon, of which 15.44 cents is dedicated to the Highway Account of the Highway Trust Fund, and 2.86 cents is dedicated to the Mass Transit Account. The tax rate on diesel fuel is 24.4 cents, of which 21.44 cents is deposited to the Highway Account, and 2.86 cents to the Transit Account. One-tenth of a cent of both gasoline and diesel fuel taxes goes to the Leaking Underground Storage Tank Trust Fund.

According to the U.S. Treasury, federal Highway Trust Fund revenues will have grown from $22.2 billion in 1995 to $39.7 billion in 2007, a 12-year increase of 79 percent. In 1998, fuel tax revenues from the 4.3 cent increase was recaptured by the Highway Trust Fund. While the increase was passed in 1993, Congress had used the funds for the national deficit reduction. The 4.3-cent increase is one of the factors which enabled the significant increase in revenues over this period.

Figure 1. Federal Revenue Components
Revenues to the Highway Account of the Highway Trust Fund, 2002

In 2007, $26 billion in revenues is expected to come from gas taxes and $9.8 billion from diesel taxes. So 90 percent of Highway Trust Fund revenues is expected to come from fuel taxes. The remaining 10 percent is expected to come from commercial vehicle taxes and fees including a sales tax on trucks, tire taxes, and a heavy vehicle use tax. Highway Trust Fund receipts are forecast to increase from $39.7 billion in 2007 to $48 billion by 2017.

The chart below from the U.S.Treasury estimates future revenues for 2007 by source.

Table 4. U.S. Department of Treasury
Forecast of Excise Tax Receipts to Highway Trust Fund, 2007

Erosion of Fuel Tax Revenue Because of Increasing Fuel Efficiency and Alternative Fuels Is Not an Immediate Problem

A key revenue question Congress directed the Commission to assess is “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 Transportation Research Board 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 was advancing at such a rate, that the fuel tax could no longer be relied on to support the Highway Trust Fund. A review of current studies shows that that speculation is not supported by the facts.

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 report stated, “The risk is not great that the challenges evident today will prevent the highway finance system from maintaining its historical performance over 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 mpg in 2006. (Figure 2.)

Figure 2. Fuel Economy Stagnates

According to the new fuel economy ratings instituted by the Department of Energy for 2008 models, of the top 20 best-selling vehicles in the United States in January 2007, 11 got gas mileage ratings of 19 miles per gallon and below. According to EPA, 50 percent of the 2006 light duty automotive fleet is made up of light trucks and SUVs.

The U.S. DOT in its 2004 Conditions and Performance Report, released in early 2006, estimated that highway vehicle miles traveled would increase 2.07 percent annually through 2022. The number of vehicles on the roads grew from 65 million in 1956 to 246 million today and is expected to continue its growth. A 2003 National Cooperative Highway Research Study on alternative fueled vehicles, such as those fueled by hydrogen, electricity, and compressed natural gas, forecast that the market share of these vehicles is not expected to exceed 0.02 percent until 2020.

What these studies show is that fleet fuel efficiency has gone down, not up. Highway travel is increasing as are the number of cars and trucks on the road. Hybrid sales hit just over 1 percent of total automobile sales for the first time in 2006. Vehicles fueled by hydrogen, electricity, and compressed natural gas 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 approximately 2 percent annually. Further into the future, in the 2025 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.

Needs Assessment Summary

AASHTO’s February 2007 report titled, “Future Needs of the U.S. Surface Transportation System,” made the following findings:

The future needs of the U.S. surface transportation system are great and the costs to provide them are increasing. Much of the system of highways, bridges, public transportation, and railroads built during the past century is getting older and needs to be rebuilt or replaced. Our population grew by 130 million over the past 50 years, and is expected to increase by 140 million over the next 50 years. Highway demand measured in vehicle miles traveled (VMT) has increased five-fold over the past 50 years, from 600 billion VMT to three trillion VMT, and is expected to continue to grow by over 2 percent, annually. Because of a strong economy, which is increasingly dependent on international trade, freight demand is increasing. Truck freight is expected to double by 2035, and rail freight to grow by more than 60 percent.

The amount of highway mileage added over the past 50 years, especially that provided through the construction of highway arterials, was substantial. However, the increase in travel has been so great that most of the capacity and redundancy planned when the system was built has been used up.

Over the past 50 years, to reduce costs and increase productivity, railroad track miles have been reduced from 380,000 to 175,000 miles. However, current demand on railroads has resulted in a capacity shortage. As a consequence of these factors, congestion on the highways and on the railroads is a growing problem in nearly every region of the country.

The costs of preserving and modernizing the system in place, as well as providing the capacity needed for the future, are substantial. Because of a spike in commodity prices for steel, concrete, asphalt, petroleum, and construction machinery over the past three years, skyrocketing construction costs are eroding the purchasing power of the funding being provided by federal, state, and local governments and the railroads. So the United States faces three challenges.

  • As never before we are engaged in an intensive competition in the global economy with Japan and Europe and emerging economies such as China and India, all of which are investing massively to modernize their transportation systems.

  • Our current levels of capital investment for highways, transit and rail fall 40 to 50 percent short of the levels needed.  

  • The purchasing power of the funding currently provided is being undercut by rapidly increasing construction costs.

Meeting Surface Transportation Needs by Increasing Revenues

In its February 2007 report on surface transportation needs and its March 2007 report on surface transportation policy recommendations AASHTO made three key points:

  • Surface transportation investment needs to be increased to the levels required to keep the United States competitive in the global economy and meet America’s 21st Century mobility needs. In the immediate period between 2010 and 2015, that means restoring the purchasing power of the programs currently being funded. That requires increasing highway capital investment overall to approximately $160 billion by 2015, and transit investment to nearly $40 billion. In the intermediate term between 2015 and 2025, it means increasing highway and transit funding toward the “cost-to-improve” goal estimated by the U.S. Department of Transportation. Expressed in “year of expenditure dollars” the 2025 goal for highways would be $242 billion and transit would be $49 billion.

  • The only way those levels of funding can be achieved, is for all levels of government—federal, state, and local—to continue to fund their historical shares of what is needed. Over the past decade the federal government has provided approximately 45 percent of highway and transit capital funding, while 55 percent has been provided by state and local governments.

  • Meeting America’s surface transportation needs will require a multi-modal approach which preserves what has been built to date, improves system performance, and adds substantial capacity in highways, transit, freight rail, intercity passenger rail, and better connections to ports, airports, and border crossings. Meeting several of these multi-modal needs will require sources of revenue outside the Highway Trust Fund.

 

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