Investing to Achieve the Vision

Imagine a transportation system based upon “what America can achieve,” rather than the minimum we can afford.

In 2007, America finds itself at a crossroads. Funding needs have been consistently outstripping resources. Meanwhile, our competitors in the global economy, Europe, Japan, and emerging economies like China and India, are committing massive resources to modernize their transportation systems to strengthen their economic competitiveness. At the Federal level, we have reached a point where the Highway Account of the Highway Trust Fund will be bankrupt in FY2009 and the Transit Account will follow within a few years if nothing is done.

If we are to have a national transportation system, it is imperative that the Federal government play a strong role in the financing as well as the direction of the system.

In the near term, action will be required to preserve the solvency of the Highway Trust Fund. Unless corrective action is taken by Congress, the federal highway program faces a cutback of $2.5 billion in FY2009. A short-term solution to deal with this problem can be achieved by limiting exemptions, capturing Highway Trust Fund interest earnings, and other measures. The following year, however, the program will face a cutback of approximately $18 billion unless sufficient revenues can be generated. The equivalent of a three-cent increase in fuel taxes will be needed to stem the collapse of the Highway Trust Fund in FY2010.

In 2009, another problem will also need to be addressed. By 2015, the purchasing power of the current 18.4 cent gas tax will be 30 percent of what it was in 1993. The equivalent of an additional seven cent increase in fuel taxes will be required to raise enough funds to sustain the current highway and transit programs.

Of all the interest groups who would be called on to pay higher user fees, it has been the American Trucking Associations who have been the first to talk the most sense. In 2005, despite the fact that diesel prices that year surged from $2.00 to $3.00 per gallon, truckers achieved the best profit levels in the history of the industry. They know that for them to succeed in the future, highway capacity will have to expand. Through their national association they have come to the conclusion that they would gain more by agreeing to pay their share of what it takes to expand system capacity, than they would lose by paying higher taxes.

Governors, state legislators, city and county officials, the business community and the construction industry, organized labor and citizens groups must unite to convince Congress to provide the revenues needed by offering a compelling vision of the value the country will receive. To achieve this vision, Congress must increase the highway program from $43 billion to over $73 billion by 2015, and the transit program from $10 billion to over $17 billion.

A fundamental approach Congress and the new Administration must continue in 2009, is for the Federal government, in partnership with state and local governments, to provide the funding necessary for highways and transit. Over the last 25 years that partnership had succeeded in increasing highway and transit capital investment by close to 300 percent. Looking forward to the increases needed for the future, the only way to succeed is for all levels of government to continue to fund their share—the Federal government at around 45 percent, and state and local governments, the remaining 55 percent.

New Resources to Meet Growing Needs

In order to provide the quantum increase in transportation investment needed, net new resources from outside the Highway Trust Fund will be required. To keep America competitive in the world economy three new sources of funding should be authorized.

Critical Commerce Corridors. To help ensure U.S. global competitiveness, a national freight and logistics program funded with new resources is needed that is complementary to the existing Federal-aid highway and transit programs. The Critical Commerce Corridors Program is a 25-year initiative to develop and fund a national surface transportation freight system. Funded from freight-related user fees from outside the Highway Trust Fund, it will enable states to fix freight bottlenecks, improve intermodal access to ports and distribution centers, fund international gateways (i.e., ports, airports, and border crossings), add capacity to priority trade corridors, and develop truck-only lanes to allow for increases in truck size and weight and improve freight productivity. The system is to be designated through a process where the Federal government, in consultation with trucking, railroads, ports, and shippers, and the involvement of affected communities, provided coordination to achieve specific national performance targets. States, localities, and MPOs have the responsibility for planning and extension of the network throughout the region.
Tax Credit Bonds. Another funding resource is tax credit bonds, long-term debt issued by a Federally-chartered, non-profit Transportation Finance Corporation (TFC). Instead of interest payments, investors would receive an annual tax credit which they could use to offset their Federal tax liabilities. Over a 20-year period, $220 billion in bonds could be issued for transportation projects of national significance such as intercity passenger rail service, transit new starts, and major highway projects. What is required is a source of revenue to pay off the cost of the annual tax credits to the Treasury. With the flow of international goods through our ports increasing at between 5 and 8 percent annually, placing a significant burden on the transportation system, Congress should agree to dedicate 10 percent of annual Customs fees to support the Tax Credit Bond program. This would be a sufficient level of support to enable the $220 billion program to go forward.
Investment Tax Credits. The railroads are seeking enactment of Federal investment tax credits for rail improvements which improve capacity. This legislation provides incentives for investments in capacity enhancing freight rail infrastructure through both tax credits and tax deductions. States have indicated support for the concept, providing that a satisfactory mechanism for determining public benefit could be mutually determined with the railroads. It is estimated that this measure could generate new private investment capital of $6 billion over a five-year period, or the equivalent of $1.2 billion per year.

Photo courtesy of Florida Turnpike.Tolling and public–private partnerships are important tools in meeting future transportation investment needs.

Additional Revenue Solutions

There are several additional steps that can be taken to fund transportation needs over time.

Increase Highway Trust Fund revenues toward the costs to improve goals. In 2015 and beyond, Congress should increase revenues for the Highway Trust Fund toward the “cost to improve” goals documented by U.S. DOT in its Conditions and Performance Reports and AASHTO in its Bottom Line Reports. For example the U.S. DOT 2004 Conditions and Performance Report cost to improve estimate for highways was $119 billion and for transit was $24 billion. Adjusting these “constant dollar” estimates to “year of expenditure dollars” would show a cost to improve estimate by 2020 of $214 billion for highways and $44 billion for transit.

Assuming that the federal program continues to provide its 45 percent share of highway and transit capital investment, the “cost to improve” goal for the federal program by 2020 would be $96 billion for highways and $20 billion for transit. The options for increasing Highway Trust Fund revenues toward meeting those goals include simply raising fuel tax rates periodically, indexing the fuel tax to measures such as the Consumer Price Index, so they ride up with inflation, or changing the form of the tax from one based on fixed cents per gallon to a sales tax on gasoline.

Tolling and public–private partnerships. Tolling and public–private partnerships have proven to be key niche elements of the overall investment picture and both are needed to be used where they were appropriate and effective. In executing long-term leases of existing assets, the use of the funds generated need to be limited to reinvestment in transportation. With supportive Federal and state policies, the percentage of highway revenues produced through tolls can increase from 5 percent in 2005 to over 7 percent by 2015.
Funding innovation at the state and local level. Currently available mechanisms such as municipal bonds, GARVEE bonds, TIFIA, Private Activity Bonds, and State Infrastructure Banks continue to be needed, as well as new tools. The states have continued to innovate with respect to new funding approaches and such leadership should be fostered wherever possible. For transit this should include transit joint development and tax increment financing which involves the capture of increased real estate value.
A Commission to Adjust Rates. While the need for adjusting federal fuel tax rates 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. The Base Realignment and Closure Commission (BRAC) 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.

If Congress chooses not to index rates or impose a sales tax, there is an alternative which might help. Congress could 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 are set at levels sufficient to sustain the program at the levels needed. Once the Commission’s recommendation is made, and after an established review period, the recommendation would take effect unless Congress voted during the review period to reject it. The Postal Regulatory Commission process for setting postal rates is another possible model.

Funding for Development of Alternatives to the Fuel Tax

Even in the short-term it is critical to begin preparing for the long-anticipated decline in the effectiveness of the fuel tax as a user-based mechanism of generating revenue for transportation. While recent studies show that the decline associated with alternative fuels and fuel efficiency is still some time off, it is imperative to begin the work now in the form of research efforts to prepare for the future.

Photo courtesy of Idaho Department of Transportation.

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