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State and Local Government Revenue Options

What we have just outlined are revenue options at the federal level. AASHTO believes that if we are to achieve the increase in funding needed, state and local governments must do their part as well. That means for the period between now and 2015, state and local highway capital investment would have to increase to approximately $89 billion, and their transit investment increase to around $21 billion.

The good news is that they have done it before. As the General Accounting Office (GAO) reported to Congress June 18, 2003 in its report on Trends in Federal and State Capital Investment in Highways, “While the nation’s total capital investment more than doubled, state and local highway capital investment increased at twice the rate of federal investment over the past 20 years.”

In 1981, highway capital investment was a total of $19.7 billion, $11.5 billion in federal funding and $8.2 billion state and local. By 2005, it had increased to $75 billion, up 280 percent, that included $33 billion federal, a 187 percent increase, and $42 billion, state and local funding, up 412 percent. (Figure 8.) If state and local investment increases at the same annual rate for the ten years between 2005 and 2015, as it did for the 24 years between 1981 and 2005, it will increase to $89 billion. To restore the system’s purchasing power overall, the federal government will also have to fund its share of the increase needed.

During the 23-year period from 1981 to 2004, transit capital investment increased by 290 percent, from $3.4 billion to $14.2 billion. It is significant to note that in the period from 1990 to 2005, state funding for transit increase from $3.7 billion per year to $9.5 billion per year.

Many States Are Increasing Transportation Funding

In the period from 2004–2007, Washington state increased its construction lettings from $725 million to $1.1 billion. They did so by increasing their gas tax by 14.5 cents over a 5-year period. Remarkably, when the voters in Washington State were given the chance at the polls to repeal 9.5 cents of the increase in 2005, by a 53 percent majority they voted to keep it in place.

Figure 8. Highway Capital Expenditures Increased 280% in 24 Years

Over the same period, Georgia has increased its construction program from $911 million to $2 billion. In large part, they did so through a sales tax on gasoline which has brought in more revenue as gas prices have increased. They have also used some bonding.


Texas is one state that is using toll revenue to address its highway needs, such as the construction of this interchange between State Highway 45 and Interstate 35.

Figure 9. State Revenue Components
State and Local Revenues for Highways, 2002

Texas has increased its construction program from $3.8 billion to $5 billion. They are using several techniques. In part, they depend on traditional resources such as federal aid and state fuel taxes. They are using tolls to fund the expansion of most of their new capacity, and have developed the concept of the TransTexas Corridors which will open the door to private investment. The first project they launched was TransTexas Corridor 35, which will bring in an initial investment of $7 billion in Spanish and American investment, on a corridor which goes from Mexico to Oklahoma. The investors will be paid back over time through toll revenues.

California increased its program from $7.9 billion to $9.6 billion between 2004 and 2007. In addition to this, in November 2006 voters approved $19.9 billion in transportation bonds which will be invested in highways and transit over the next 10 years. Five self-help counties in California were successful in passing half-cent sales tax measures in 2006. These county ballot measures had to receive a two-thirds majority to pass. Statewide, the 18 self-help counties which have passed such measures will bring in $50 billion in revenues for transportation over the next 30 years.

To be fair, there are other states which have been unable to significantly increase transportation revenues.

Over the past two years, transportation measures nationally have done well at the polls. In the 2004 Elections, 76 percent of transportation ballot measures passed. In the 2006 elections, between statewide measures and city, county, and transit proposals, $40 billion in new funding for transportation was approved.

Table 7: Potential Contribution of Short-Term Funding Mechanism to Federal, State, and Local Highway and Transit Needs
Year of Expenditure Dollars

State and Local Transportation Revenues

At the state level, where gas taxes average 28.4 cents, fuel excises taxes and sales taxes generate around 35 percent of transportation-related revenues. (Figure 9.) Other transportation user charges such as vehicle registration fees bring in an additional 13 percent of revenues. General funds provided through sales taxes, property taxes, and other state and local fees provide 45 percent of revenues.

Between 1992 and 2002, legislatures in 28 states voted to increase state gas taxes. In 2003, Ohio increased its rate by six cents. In 2005, North Dakota increased its rate by two cents. Some states have attempted to overcome motor fuel tax inelasticity problem by indexing rates to inflation. At least six states—Florida, Kentucky, Maine, Nebraska, New York, and North Carolina—have some from of “variable rate” tax linked to inflation. Florida and Maine link their gas tax increase to the Consumer Price Index. In addition to the flat per gallon excise tax rate imposed by most states, at least 10 states also levy a sales tax on fuels or a gross receipts tax as a percentage of the retail price of motor fuels.

Three recent reports offer detailed analysis of future revenue options at the state and local level.

Summary of Key Points

Because the main focus of the National Surface Transportation Policy and Revenue Study Commission is on revenues at the federal level, this report does not go into detail on what can and should be done at the state and local level. But there are several significant points to be made.

  1. A key finding of the NCHRP Study Future Financing Options to Meet Highway and Transit Needs, was that closing the funding gap between current levels of transportation investment and what is needed, “will require a concerted effort at all levels of government.”

  2. State and local governments must balance their budgets each year. The budgets of state governments are under intense pressure from the rising costs of health care and the rapidly increasing numbers of elderly in need of health care. States also face the increasing costs of the K-12 education system, higher education, prison populations, and social service costs.

  3. Shifting the share of costs currently funded by the federal government to the states is not a real option, if the objective is to keep pace with both costs and demand.

  4. The cost of preserving the current system is so great it may require nearly all the revenue that can be generated through traditional taxes and fees. In order to meet their needs for new capacity, many states may have to consider toll funding as an option.

 

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