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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 2 Present Finance Arrangements The first two sections of this chapter describe features of the finance system for highways and transit in the United States today, including the fees and use-related taxes that users of the facilities pay; levels of spending; sources of funds; responsibilities of federal, state, and local governments; and decision making on budgets, project selection, and operations. As explained in Chapter 1, the concern that adherence to the original principles of the finance system has eroded over time has been one of the motivations to seek finance reforms. Therefore, the final section of the chapter examines developments that may affect the viability of the finance system. These include trends in the share of highway user fee revenues applied to purposes other than highways, adjustments of user tax rates to allow for inflation and changes in costs, devolution of transportation responsibilities to local governments, reliance on revenues other than user fees, and revenue adequacy and stability. Examination of the workings of the present finance system is a necessary first step toward designing improvements. If the present system is producing unsatisfactory results, the structural sources of problems should be identified, and if the system is performing well, it may be possible to build on its strengths. Chapter 3 will consider the problem of evaluating the performance of the finance system. HIGHWAY FINANCE This section presents aggregate nationwide data on spending for highways, fuel taxes and other taxes and fees paid by highway users, and other sources of funds for highway programs. The data and definitions are mainly from the Federal Highway Administration’s (FHWA’s) annual compilation in the Highway Statistics publication series. The final two subsections briefly outline administration and
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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 decision making in the federal-aid program and state highway programs and the historical origins of the present system. Spending Governments spent $136.4 billion to construct and operate highways in the United States in 2004 (FHWA 2005a, Table HF-10). Highways are predominantly an activity of state governments: 60 percent of all spending and 72 percent of all capital spending are by the states (Table 2-1). Highways accounted for 9 percent of state and 4 percent of local general government direct expenditures in 2003 (U.S. Census Bureau 2005a). The capital spending share of total expenditures has declined since the 1960s and 1970s. Since at least the 1980s (earlier data are not available), the fraction of construction expenditures that is classified by the states as new construction (that is, substantially new roads rather than reconstruction or upgrades of existing roads) has declined. For capital expenditures by state governments on roads other than local roads, 39 percent was new construction in 1981, 33 percent in 1991, and 19 percent in 2004 (FHWA 1997, Table SF-212A; FHWA 2005a, Table SF-12A). Funding Sources State and local governments dedicate, by law, certain revenues from highway user fees and other taxes to pay for highways. They also receive federal grants designated for highways and issue bonds with the proceeds dedicated to highways. These sources of funds are described below. If they fall short of highway spending, the difference is charged to general funds. Identifying the sources of funds for specific government expenditures is inherently ambiguous because revenues are fungible. To say that highway expenditures come from a particular revenue source may be taken to mean that TABLE 2-1 Highway Spending by Level of Government and Function, 2004 (Percent Distribution) (FHWA 2005a, Table HF-10) Federal State Local Total Capital outlay 1 37 13 52 Maintenance and traffic services – 11 16 27 Administration, research, and law enforcement 2 12 8 22 Total 3 60 37 100 NOTE: Payments of interest on debt and bond retirements are excluded. Spending does not include grants to other levels of government for highway purposes.
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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 when revenue from the source increases, spending increases, and that spending falls when revenue falls, in like amounts (possibly with a time lag when there is a trust fund, but eventually keeping spending and revenue in balance). The connection between legally dedicated revenues and spending usually is imperfect in the highway program and in similarly funded government activities. For example, it will be seen below that when highway user fee revenues fell sharply in the 1970s, highway spending slowed, but governments made up part of the shortfall from other sources. The structure of transportation finance is best understood as the result of two independent policy decisions: first, how users of transportation facilities should be charged; and second, what connections should be established between the revenue raised from users and the level of spending on facilities and services. User Fees Total receipts of highway user revenues as defined by FHWA were $106.8 billion in 2004. FHWA defines this quantity to include revenue from any tax or fee paid by owners or operators of vehicles that use public roads, as a consequence of their use of the roads, and that is not paid by others. For example, FHWA classifies revenue from motor fuel taxes that apply only to fuel consumed on public roads as a user revenue, but not sales tax collected on gasoline if the state collects the tax at the same rate on all gasoline sales regardless of use. The definition does not consider whether the revenues are dedicated to road expenditures (FHWA 2004, IV-4–IV-5). In this chapter the FHWA definition is used. Box 2-1 explains how the term “highway user fee” is used in this report. Fuel taxes are the major user fee and account for nearly two-thirds of the total (Table 2-2). The share of user fee revenue derived from fuel taxes has been stable over the past 40 years except for a dip in the late 1970s to early 1980s. Most revenues in the “other user taxes and fees” category in Table 2-2 are from vehicle registration and operator license fees. The majority of state and local user fee revenues are from fuel taxes. However, 13 states, including California, Illinois, Michigan, New Jersey, and Texas, collected more in registration and license fees than in fuel taxes in 2004 (FHWA 2005a, Tables MV-2, MF-1). Tolls are collected on roads, tunnels, or bridges in 33 states, although 38 percent of all tolls paid in 2003 were collected in two states, New York and New Jersey. Nearly all toll facilities in the United states are operated by publicly controlled special authorities. The large discrepancies between the share of user fees collected by level of government and spending shares by level of government (shown in Table 2-1) reflect intergovernmental transfers and application of funds other than user fee revenues to highway purposes. The federal government distributes nearly all its revenues to the states and local governments through the federal-aid highway program and federal mass transit assistance, and states distribute a portion of their user fee revenues to local governments.
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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 BOX 2-1 Highway User Fees FHWA defines the term “highway user revenues,” in part, as follows (FHWA 2004, IV-4–IV-5): [Revenues generated by] taxes and fees imposed on the owners and operators of motor vehicles for their use of public highways are … highway-user revenues…. The clearest example of a highway-user tax or fee is a toll…. Most motor fuel taxes are classified as highway-user taxes…. For motor fuel revenues to qualify as a highway-user revenue …, a motor-fuel tax must be levied per unit of volume…. It must also apply only to motor fuel [as] opposed to all petroleum products, … or provide a separate rate for motor fuel…. Motor-vehicle registration fees, certificate-of-title fees, driver-license fees, and other miscellaneous vehicle fees are all highway user taxes…. Weight–distance taxes, oversize–overweight permits and trip permits are even more directly related to highway use…. Those taxes and fees that target a broader base than highway users are considered to be a part of the general tax structure of the State, and are not considered to be highway user taxes…. State sales taxes imposed on motor vehicle sales typically are not highway user revenues…. When motor vehicle sales are charged a separate tax rate from that imposed on general sales transactions, the motor vehicle sales tax is considered highway user revenue. Definition of highway user revenues or of highway user fees (as the payments are sometimes called) is complicated by the great diversity of federal, state, and local tax provisions that must be taken into account. The correct definition depends on the reason that importance is placed on motorists paying directly for their use of highways. If user fees are seen as a means of promoting economic efficiency, the definition should be that user fees are payments that function to some degree like market prices (i.e., payments that reflect the cost of providing service and thus provide an incentive to avoid wasteful use of highways). Historically, the user fee–based highway finance system was not created with this efficiency consideration in mind, but rather because it was seen as a stable and equitable mechanism for raising a desired level of revenues. Payments are related to use of roads and to costs occasioned, but the correspondence is very imperfect.
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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 Most kinds of payments listed in the FHWA definition of highway user revenues (exceptions include tolls and trip permit fees) are taxes. It may be objected that the term “user fee” (which is employed in this report) is a mischaracterization of the special taxes charged to road users because it implies a greater government obligation to road users than actually exists. A fee is a payment in return for receipt of a service, while a tax can be defined as a mandatory payment to government for public purposes, in return for which the government does not commit itself to provide any specific service to the payer. By these definitions, postage stamps and tolls on government-operated roads are fees rather than taxes. In the case of motor fuel excise taxes, the government has no contractual obligation to provide road services in return for tax payments, although it is commonly argued that a commitment in the form of a political understanding at the time of enactment does exist (Patashnik 2000, 2). Federal and state budgeting rules that tie highway spending to user fee revenues reinforce this supposed commitment. This report accepts the FHWA classification of payments qualifying as highway user revenues and refers to these payments as highway user fees. By this classification, highway user fees include all excise taxes paid on highway fuels, vehicles, and parts that are not paid on similar purchases for nonhighway use; highway vehicle registration and permit fees; driver’s license fees; and tolls. For some state taxes, the FHWA classification may be questionable; however, the amounts involved in such cases do not appear to be important. The classification does not depend on whether the revenue from the tax is dedicated to any particular use. TABLE 2-2 Highway User Revenues by Level of Government and Source, 2004 (Percent Distribution) (FHWA 2005a, Tables HF-10, SDF, LDF, FE-10) Federal State Local Total Fuel taxes 31 32 1 64 Tolls – 6 2 8 Other user taxes and fees 3 24 1 28 Total 34 63 4 100
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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 In the past 40 years (a period nearly matching the history of the federal-aid highway program in its present form), some marked swings have occurred in finance patterns, particularly in the late 1970s and early 1980s (Table 2-3). In those years, constant-dollar user fee collections fell precipitously as a result of high inflation, slow growth in highway travel caused by high fuel prices and recession, and improvements in fuel economy caused by regulation and high fuel prices. Spending fell in the same period, especially state government capital spending, at least partially as a result of reduced revenues, although the capital spending decline may also reflect the completion of major components of the Interstate system in the period. Congress increased federal excise tax rates in the 1982 highway act, and many states increased rates in the same period, so by 1991 the ratio of revenues to expenditures had returned to its level of the 1960s. Since the late 1990s the ratio has been declining. The predominant role of state governments in highway finance and the ratio of federal aid to total spending have not changed greatly over the period shown in Table 2-3. The ratio of federal highway aid received by state and local governments to total highway expenditures has been 20 to 25 percent for most of the period. The ratio of federal aid to highway expenditures (22 percent in 2004; see Table 2-3) is smaller than the ratio of federal highway user fee revenue to total user fee revenue (34 percent in 2004; see Table 2-2) because the federal government devotes a larger share of its user fee revenue to transit than do state and local governments. Federal excise tax rates are 18.4 cents per gallon for gasoline and 24.4 cents per gallon for diesel fuel (FHWA 2005a, Table FE-21B). Until 2005, gasohol (a blend of gasoline and ethanol) was taxed at a rate of 13.2 to 15.4 cents per TABLE 2-3 Historical Trends in National Highway Spending, User Fee Revenue, and Highway Travel (FHWA 2002; FHWA 2005a; FHWA 1997) 1961 1971 1981 1991 2001 2004 Expenditures ($, billions) 11 21 40 74 123 136 Expenditures (2001 $, billions) 52 75 71 90 123 128 State govt. expenditures (percent of total) 69 69 60 62 64 60 Capital outlay (percent of expenditures) 64 59 49 50 53 52 Federal aid (percent of expenditures) 25 24 27 20 23 22 Highway user fee revenues (2001 $, billions) 44 64 46 77 99 100 (User fee revenues)/expenditures (percent) 84 85 66 85 80 78 Highway travel (vehicle miles, trillions) 0.7 1.2 1.6 2.2 2.8 3.0 NOTE: Payments of interest on debt and bond retirements are excluded. Price index is gross domestic product implicit price deflator (BEA 2002, 135; BEA 2005, 188–189).
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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 gallon, depending on ethanol content. The gasohol excise is now collected at the same rate as the gasoline tax, and gasohol producers are paid a rebate from the general fund. In addition, federal excise taxes are collected on tires, large trucks, and trailers, and trucks pay the annual federal heavy vehicle use tax. Sales-weighted average state fuel tax rates in 2004 were 19.2 cents per gallon for gasoline and 20.0 cents per gallon for diesel fuel (FHWA 2005a, Table MF-121T). Most states tax gasohol at the same rate as gasoline. Registration fees and miscellaneous other federal, state, and local taxes and fees (that is, all user fees except fuel taxes and tolls) averaged $125 per registered vehicle in 2004 (FHWA 2005a, Tables SDF, LDF, FE-210, VM-1). The average of all user fees paid per vehicle mile of highway travel declined (in 2001 dollars) from $0.06 per mile in the 1960s to $0.03 per mile by 1980 (Figure 2-1). The average fee has recovered somewhat, to $0.034 per mile today, but remains well below the peak of the 1960s. Trends in tax rates are examined in the final section of this chapter. State and federal tax and fee schedules discriminate between light and heavy vehicles in an effort to collect revenues from different kinds of vehicles proportionate to relative responsibilities for highway costs. At the federal level, a 12 percent FIGURE 2-1 Average user fee, 1961–2004. (Sources: FHWA various years, Table HF-10; FHWA 1997, Table HF-210.) Price index is gross domestic product implicit price deflator (BEA 2002, 135; BEA 2005, 188–189).
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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 excise tax on trucks over 33,000 pounds gross weight and on trailers and a per pound excise on tires are credited to the Highway Trust Fund, and trucks over 55,000 pounds gross weight pay an annual federal fee of from $100 to $550 depending on weight (FHWA 2005a, Table FE-21B). States also impose higher fees on trucks, and a few states charge trucks a tax based on mileage. Large trucks pay higher average fuel tax per mile than light vehicles because they have lower fuel efficiency. According to the 1997 U.S. Department of Transportation (USDOT) highway cost allocation study, the average total user fee per mile paid to all levels of government is six times higher for a combination truck than for an automobile. Combination vehicles, which account for 5 percent of all vehicle miles, pay 19 percent of all user fees in the USDOT estimates. The cost allocation study estimates did not count federal motor fuel tax revenues not credited to the Federal Highway Trust Fund as user fees and so understate user fees according to the definition used elsewhere in this chapter (USDOT 1997, Tables II-6, IV-8, IV-11). Proposals for better aligning average fees with costs for automobiles and trucks are described in Chapter 6. Other Revenue Sources State and local governments legally dedicate the revenues from particular taxes in addition to highway user fees to pay for transportation programs. Such taxes are most commonly local property taxes and state and local sales taxes (Goldman and Wachs 2003). Revenue from taxes dedicated by law to highway use, other than highway user fees, was $15.4 billion in 2004, 11 percent of all highway spending (FHWA 2005a, Table HF-10). This ratio has been nearly constant over the past 40 years, although the portion derived from taxes other than property taxes, including dedicated state sales taxes, has been growing. In addition to the revenue of legally dedicated taxes, state and local governments appropriate funds from general revenues each year for spending on roads. Comparing these general fund appropriations with total spending is difficult, because many jurisdictions deposit some part of their highway user revenue into their general funds and then make appropriations for highways out of general funds. Also, the federal government distributes about $1 billion per year from general fund appropriations to state and local governments for highway purposes through grant programs of various agencies (FHWA 2005a, Table FA-5). Highway user fee revenue (whether dedicated to highways or not) equaled 78 percent of highway spending in 2004, and revenue from dedicated taxes other than user fees equaled 11 percent, so the net contribution from general revenue may be defined as the remaining 11 percent. Debt Finance Highway finance in the United States is commonly described as a pay-as-you-go system, which is to say that debt finance is little used (except for toll roads)
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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 and spending tends to track revenues. The revenue figures in Tables 2-2 and 2-3 exclude bond issue proceeds, and the spending figures exclude interest payments and debt retirement. State and local government bond issue proceeds for highway uses in 2004 (excluding notes with maturities of 2 years or less) were $15.8 billion, equal to 12 percent of spending. The volume of bonds issued for highways has fluctuated over the past 40 years, but this is a typical ratio for the period. Interest payments and bond retirements in 2004 were $13.8 billion (FHWA 2005a, Table HF-10). Toll facilities are major issuers of bonds. Federal and State Highway Program Structure The federal-aid highway program distributed $28.3 billion to the states in 2004 for spending on highway construction, equal to 21 percent of all highway spending that year (FHWA 2005a, Table HF-10). The rules of the program affect thetotal of highway spending, the projects selected, and the performance of the highway system. The main features of the federal-aid program are as follows (FHWA 1999): Periodic federal surface transportation acts provide multiyear funding authorizations for federal highway and mass transportation capital grant programs and set program rules and highway user taxes. Federal rules include standards with regard to design, maintenance, and safety for projects making use of federal aid. The amounts authorized for each year in the surface transportation act are distributed annually to the states. Most funds are apportioned according to formulas specified in the act, within categorical programs. [The 2005 reauthorization legislation—Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU)—funds six program categories receiving $1 billion per year or more each and several smaller ones.] Apportionment formulas include such factors as each state’s shares of highway lane miles, vehicle miles of travel, and Highway Trust Fund revenue collections. The surface transportation acts provide contract authority, that is, state spending that incurs a federal obligation may take place as soon as funds are apportioned each year. This is in contrast to most federal programs, in which amounts authorized may not be used until Congress enacts a second law appropriating funds to pay for authorized spending. Federal-aid funds are available to the states for 4 years after they are distributed, but Congress regularly enacts annual limitations on thetotal amount of federal-aid funds that may be obligated in the year, so states may not be able to use the entire amounts authorized. The provision of contract authority in multiyear surface transportation acts, together with the annual obligation limitations, is regarded as granting the states greater certainty and flexibility than would reliance on annual appropriations.
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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 Funds are appropriated annually to reimburse the states for the federal share of expenditures (80 or 90 percent for most kinds of projects, specified in the law) that the states have made on eligible projects. The highway user taxes collected by the federal government are deposited in the Federal Highway Trust Fund (divided between a highway account and a mass transit account), and payments to states are withdrawn from the fund. The Highway Trust Fund is a bookkeeping device to make apparent the relation of user fee collections to spending. Authorizations in the surface transportation acts are limited by the balance in the fund and the projected deposits from user tax revenues. The balance in the highway account of the fund stood at $14.6 billion in 2004, the equivalent of about 6 months of disbursements (FHWA 2005a, Tables HF-10, FE-210). Because the states are directly responsible for most highway spending, state procedures with regard to programming and budgeting have great importance for the performance of the transportation system. Most states have finance arrangements analogous to those at the federal level, including trust funds and dedication of user tax revenue to highway uses. Only Alaska, Georgia, New Jersey, and the District of Columbia credit most highway user revenues to general funds rather than earmarking them for highways, transit, or other special purposes (FHWA 2005a, Table DF). Federal-aid highway program capital grants plus required matching funds equal approximately 52 percent of all state and local government highway capital spending. Federal-aid rules do not dictate state project selection (with the exception of certain projects specifically identified by Congress, as described below), but they do influence the process. The mechanisms of influence include the following: As a practical first priority in budgeting, states must provide sufficient matching funds, by program category, to ensure that all available federal aid is obtained. The federal government imposes design standards on federal-aid projects and oversees design and construction. Each federal-aid project must be listed in the State Transportation Improvement Program (STIP) for the state. Federal regulations define the content of the STIP, a multiyear capital program that lists all federal-aid highway and transit projects by year and in priority ranking, with costs and funding sources identified. The STIP must show that the spending program for federal-aid projects is consistent with expected sources of funds. Federal-aid projects in metropolitan areas must be from improvement programs approved by the local metropolitan planning organizations. Projects must be shown to be in conformity with the State Implementation Plan for attaining federal air quality standards, and the STIP must list non-federal-aid proj-
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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 ects that could affect air quality (USDOT 2003; Wisconsin Department of Transportation 2004). Although only construction, reconstruction, and certain major maintenance activities are eligible for federal aid, federal law requires states to maintain roads constructed with federal aid to specified standards. States also are required to have management systems for pavements, bridges, congestion, and safety (23 USC 303). These involve systematic collection of data on physical condition and performance and formal procedures for planning and evaluating maintenance and construction schedules. Despite federal requirements, a state with funds for capital spending in excess of federal-aid matching requirements has a degree of flexibility to minimize the impact of the rules on its ability to carry out projects according to its own priorities (TRB 1987, 49–64). Projects that have no federal-aid funding do not have to comply with many federal requirements (for example, design requirements), and the smaller the federal-aid share of total state spending is, the less importance the division of federal aid into the various program categories has for actual state spending priorities. The effects of the federal-aid program rules on state spending and project selection have never been comprehensively studied. Some possible impacts are discussed in Chapter 3. TRANSIT FINANCE Most transit services in the United States are operated by special-purpose authorities controlled by local and state governments. Transit was primarily a private-sector industry until the 1960s, but publicly owned systems carried 50 percent of all passengers by 1967 and 94 percent by 1980 (APTA 1981, 27). The industry’s major sources of funds are passenger fares; other revenue related to transportation operations (e.g., from advertising and chartered buses); revenue from special taxes dedicated to transit; and other federal, state, and local government aid (Table 2-4). Federal grants are about one-sixth of all funds expended; the federal share has declined from a high of nearly one-third in the early 1980s (Table 2-5). Most federal funding depends on revenue from the federal highway motor fuel tax, including the $0.0286 per gallon share dedicated by Congress to the Mass Transit Account of the Highway Trust Fund as well as funds in certain categories of the federal-aid highway program that states and localities can transfer to transit. Federal assistance includes formula grants for capital and operating expenditures apportioned among urbanized areas according to population and transit service characteristics and discretionary capital grants (in the New Starts and Bus Capital programs) distributed to specific projects selected by Congress or the Federal
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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 services they want and are willing to pay for. However, devolution of transportation programs may lead to finance and governance problems if revenue sources remain oriented toward state-level programs. One popular way to fund expanded local transportation responsibilities has been adoption of new special taxes, with revenues dedicated for a specified term to a specified set of projects. Such taxes often require approval in statewide or local referenda. A study by the Surface Transportation Policy Project identified 41 such referenda on ballots in 2002: nine at the state level that would have authorized $77 billion of spending and 32 local referenda for $40 billion. (Not all were approved.) Most revenues were to be derived from dedicated taxes other than user fees. Such special taxes typically fund both transit and road projects. The growth in local dedicated taxes has been driven in part by growing local expenditures on transit and the absence of secure funding sources for transit analogous to the state and federal highway user fees dedicated to highways (Ernst et al. 2002, Goldman and Wachs 2003, McMillan 2004). Nationwide, for highways only, the local government share of spending has averaged around 35 percent since the 1960s and shows no consistent trend (Figure 2-8). The ratio of highway user fee revenues to highway expenditures over the same period also shows no trend (Figures 2-9 and 2-10). Local governments FIGURE 2-8 Ratio of local government highway, road, and street expenditures to total U.S. highway, road, and street expenditures, 1961–2004. (Sources: FHWA various years, Table HF-10.)
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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 FIGURE 2-9 Ratio of highway user fee revenues to highway expenditures, 1961–2004. (Sources: FHWA various years, Table HF-10; FHWA 1997, Table HF-210.) account for most spending not supported by user fee revenues. In 2004, local user fee revenue plus local highway grant receipts that derived from state and federal highway user fees equaled 32 percent of local highway spending (FHWA 2005a, Table HF-10). As a percentage of local spending, local user fee revenue plus grants from states has been declining slowly since the 1970s. Local governments’ lack of reliance on user fees is the result of historical and practical circumstances. Local jurisdictions may lack legal authority to impose fuel taxes or vehicle fees, and motorists can easily avoid a local fuel tax if neighboring jurisdictions have lower rates. In general, fiscal competition among local governments makes them more susceptible than state governments to loss of a tax base when they try to increase revenue by increasing tax rates independently. In some instances, a local property tax assessment dedicated to streets or infrastructure may function essentially as a user fee—for example, in a suburban residential community where the streets to be maintained are primarily for local access, there is little through traffic, and household characteristics are somewhat uniform. Such taxes may be an entirely satisfactory means of paying for local streets, since replacing them with a fuel tax or a mileage fee might have negligible effects on street use or expenditures.
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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 FIGURE 2-10 Highway user fee revenue and highway expenditures, 1961–2004. (Sources: FHWA various years, Tables HF-10, FE-10a.) Price index is gross domestic product implicit price deflator (BEA 2002, 135; BEA 2005, 188–189). National totals obscure substantial state-to-state variation in relative local government shares and in the trend in state and local shares. Comparison of local government shares of transit plus highway spending in 1991 and 2002 in the United States and in the six states with the most spending illustrate the variation (Table 2-9). As the two lines labeled “United States” in the table indicate, in 2002 state governments nationwide retained responsibility for 62 percent of highway spending (100 percent minus the 38 percent local share) and 51 percent of total highway and transit spending. In the United States as a whole and in five of the six states shown (all except Illinois), the local share of highway spending fell over the decade. For the total of highway and transit spending, the local share rose slightly nationwide (from 47 to 49 percent) and in three of the six states (California, Illinois, and Texas). The magnitude of local government transportation responsibilities has led to calls for greater direct local control of revenue. For example, a 2004 paper published by the Brookings Institution (Puentes 2004), arguing for increased direct
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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 TABLE 2-9 Total Spending and Local Shares for Highways and All Transportation, United States and Selected States, 1991 and 2002 1991 2002 $ billions Percent Local $ billions Percent Local State and local spending, highways United States 72 39 124 38 California 8 50 12 48 Florida 3 45 7 37 Illinois 3 34 6 46 New York 5 59 9 50 Pennsylvania 3 33 6 24 Texas 5 41 9 38 State and local spending, highways plus transit United States 88 47 157 49 California 10 59 18 63 Florida 3 51 8 45 Illinois 5 53 8 60 New York 10 77 18 75 Pennsylvania 4 34 7 34 Texas 5 45 11 48 NOTE: Amounts include capital and operating expenditures and exclude debt service. Local transit spending includes all transit spending except direct state mass transit activities as defined in FHWA 2004, Table MT-1A. Direct state mass transit spending for 1991 is estimated. Local highway spending includes expenditure of grant funds received from states. SOURCES: FHWA 1992, FHWA 1993, FHWA 1994, FHWA 2003, FHWA 2004; Tables HF-2, LGF-2, SF-2, MT-1A, MT-2A, MT-2B. local government control of federal grants, observes: “Metropolitan areas make decisions that dispose of only about 10 cents of every transportation dollar they generate even though local governments within metropolitan areas own and maintain the vast majority of the transportation infrastructure.” However, considering only highways, state governments in 2003 owned and operated roads that carried 64 percent of all vehicle miles of travel, and state government direct spending on highways was 64 percent of all highway spending (FHWA 2004, Tables HM-81, VM-1, HF-10). Thus by this measure at least, state and local resources may appear, on average, to be in line with state and local infrastructure responsibilities. As Table 2-2 shows, state governments collect nearly all nonfederal highway user revenues, but a third of these revenues are devoted by the states to local government grants or other local purposes (FHWA 2005a, Table DF). It is only when the state and local shares of transportation-generated revenue
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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 (mainly derived from highways) are compared with their shares of total highway and transit spending that an apparent imbalance emerges. In summary, when nationwide aggregates of highway spending and highway user-derived revenues are examined, neither devolution of responsibility to local governments nor decline in the ratio of user revenue to expenditures is evident. However, there may be a trend toward devolution of responsibility for the total of transit and highway spending in some states. Revenue Adequacy To many critics of the present finance system, the culmination of its structural flaws has been failure to generate sufficient revenues to keep up with growth in traffic and to replace aging facilities. Illustrating this view are two comments, the first by a Senate Environment and Public Works Committee staff member and the second by the president of the Motor Freight Carriers Association: “There’s a growing recognition that we need to begin to move to new approaches for financing…. The pay-as-you-go user fee that we’ve had in place since 1956 is not really up to the task” (McNally 2004) and “The inability of Congress to tax or not to tax, to toll or not to toll, makes it impossible to pay for a core program” (Wlazlowski 2004). The AASHTO Journal (2004) reports the conclusion of the Federal Highway Administrator in an address that the current fuel-tax-based system of financing highways is likely to fall short of covering identified needs, and a Brookings Institution study of fuel tax revenues concludes that because of stagnant revenues, “states do not have the financial wherewithal to address a wide variety of transportation concerns” (Puentes and Prince 2003). To clarify the basis for these concerns, this section describes aggregate trends in highway spending and highway system expansion compared with highway use, and contrasts these trends with experience in other industries. As Chapter 1 explained, the committee did not interpret its task as finding revenue mechanisms that will support an increased level of spending for transportation. However, if the present funding arrangement has structural features that are causing its effectiveness as a means of raising revenue to decline, its viability would be questionable. From the late 1940s to the 1960s, constant-dollar capital expenditures for highways grew at least as fast as did highway travel; since that time, while annual vehicle miles have steadily grown, the long-run trend in real capital expenditures appears nearly flat (Figure 2-11). This trend has been interpreted as evidence of chronic revenue inadequacy (e.g., CTI 1996, 16–17; Consdorf 2003). However, a constant rate of capital expenditures can yield growth in capacity if assets are long-lived. Economic measures of the capital stock of highways have been developed by the Bureau of Economic Analysis (BEA) (Katz and Herman 1997) and FHWA (Fraumeni 1999). The measures are derived from data on all past capital
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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 FIGURE 2-11 Highway capital expenditures and vehicle miles traveled, 1936–2004. (Sources: FHWA various years, Tables HF-10, VM-1.) Price index is private nonresidential structures (BEA 2005, 188–189). expenditures on streets and highways by all levels of government (expressed in constant dollars) and estimates of rates of depreciation (or of decline in productive capacity). The measures are intended as indices of capacity, in which different kinds of facilities are aggregated by weighting them according to the relative costs of providing them. The measures from both these sources indicate that the stock of highways is growing. The BEA measure shows an average annual growth rate of 2.1 percent for capital stock between 1985 and 1995. The average annual growth rate for vehicle miles in the same period was 3.2 percent. The FHWA measure, which uses a definition somewhat different from BEA’s, indicates that net capital stock (defined as the sum of all past investment, less retirements, adjusted for efficiency decline of the stock as it ages) grew at an annual rate of 1.7 percent from 1985 to 1995, 1.3 percent from 1975 to 1985, and 5.1 percent from 1955 to1975 (Figure 2-12). Much highway capital expenditure today—for example, projects to widen lanes, improve roadway geometry, or improve traffic control—increases capacity but is not reflected in gross indicators of physical capacity like road miles. A Transportation Research Board study of freight transportation capacity (TRB 2003, 54–55) pointed out that the pattern of an increasing ratio of output to infrastructure capital is not unusual in U.S. industry. The ratio of output to net capital stock of structures has been rising in the railroad industry, and another network industry, electric utilities, shows a similar trend. In the rail and electric utility industries, these trends are interpreted as productivity growth. Changes in ratios of output to infrastructure capital in the three industries from 1959 to 1995
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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 FIGURE 2-12 Net capital stock of highways and streets; annual vehicle miles, 1936–1996. (Sources: FHWA various years; Fraumeni 1999.) were as follows (Fraumeni 1999; Katz and Herman 1997; EIA 2002, Table 8.5; Wilson 2001): Industry and Ratio Change (%) Highways [annual VMT/(productive capital stock)] +16 Railroads [annual ton-miles/(structures net capital stock)] +360 Electric utilities [annual electric energy consumption/(utility net capital stock)] +200 This comparison suggests that relatively lackluster productivity growth in the highway industry may merit concern. Highway productivity could be increased by concentrating investment in the most valuable projects; improving traffic management through better engineering or through pricing; and adopting more cost-effective design, construction, and maintenance practices. Trends in spending, investment, and capital stock relative to traffic volume are useful as indicators of changes in underlying economic and political factors that drive transportation system development but cannot by themselves provide guidance on appropriate levels of spending. An investment rule that called for increasing capital spending, capital stock, or lane miles of roads at the rate of increase of traffic would yield poor results, since such a rule would fail to take intoaccount the circumstances that determine the return on highway investment. These circumstances include the capacity and condition of the highway system at the outset of the period under consideration (e.g., whether it was over- or underbuilt), the possibility of economies of scale as the system expands,technological progress and
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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 improvements in operating practices that allow growth in the productivity of infrastructure, and rising costs of providing infrastructure. As the cost of incremental expansion of capacity increases, providing levels of service that were considered normal in the past may lose economic justification. Chapter 3 will examinethe available evidence on whether highway investments that would yield worthwhile benefits are not being made for lack of funds. Revenue Stability The transportation finance system has also been charged with failure to provide stable funding, because revenues depend on unpredictable external events like petroleum market developments and automotive fuel economy trends (Giglio and Williams 2001, 200). A more common view may be that stability and predictability are among the strengths of the user fee–trust fund mechanism compared with funding dependent on annual legislative appropriations, even though lags between changes in the external factors affecting fuel tax revenue and legislative adjustments of rates have at times disrupted funding. Constant-dollar highway capital spending declined severely from the mid-1970s through the early 1980s but recovered later (Figure 2-11). The same trough is evident in trends in the rate of growth of capital stock (Figure 2-12), in constant-dollar highway user revenues and the ratio of revenues to spending (Table 2-3), and in the average highway user fee per mile (Figure 2-1). These disturbances resulted from the impact of high inflation on constant-dollar fuel tax revenue, rising motor vehicle fuel efficiency driven by fuel economy regulations and fuel prices, and slower growth in driving as a result of higher costs and economic recession. State legislatures and Congress eventually responded with increases in nominal tax rates (Figure 2-6). Reducing the risk of unintended funding disruptions in the future might be a worthwhile goal of reforms to the transportation finance system. REFERENCES Abbreviations AASHTO American Association of State Highway and Transportation Officials APTA American Public Transit Association and American Public Transportation Association ARTBA American Road and Transportation Builders Association BEA Bureau of Economic Analysis BTS Bureau of Transportation Statistics CBO Congressional Budget Office CTI Commission on Transportation Investment (California)
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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 EIA Energy Information Administration EPA Environmental Protection Agency FHWA Federal Highway Administration FTA Federal Transit Administration GAO General Accounting Office HUF Highway Users Federation IWR Institute for Water Resources TRB Transportation Research Board USDOT U.S. Department of Transportation AASHTO Journal. 2004. Peters: Demand-Based Financing for Highways Needs Consideration. Jan. 16. AASHTO Journal. 2005. West Virginia Fuel Tax Increases. Vol. 105, No. 3, Jan. 21. Ang-Olson, J., M. Wachs, and B.D. Taylor. 2000. Variable-Rate State Gasoline Taxes. TransportationQuarterly, Vol. 54, No. 1, Winter, pp. 55–68. APTA. 1978. Transit Fact Book: 1977–1978 Edition. May. APTA. 1981. Transit Fact Book: 1981 Edition. Oct. APTA. 1992. Transit Fact Book. Oct. APTA. 2004. Public Transportation Fact Book(55th ed.). March. APTA. 2005. Public Transportation Fact Book(56th ed.). ARTBA. 2004. State Gas Tax Report. July. Baker, B.E. 2003. Receipts and Expenditures of State Governments and of Local Governments, 1959–2001. Survey of Current Business, Vol. 83, No. 6, June, pp. 36–53. Barnes, T. 2005. Rendell Lobbying to Rescue Transit. Pittsburgh Post-Gazette, Jan. 30, p. A-1. BEA. 2002. GDP and Other Major NIPA Series, 1929–2002:I. Survey of Current Business, Aug., pp. 123–146. BEA. 2005. Survey of Current Business, Aug. BTS. n.d. Government Transportation Financial Statistics 2001. CBO. 1998. Innovative Financing of Highways: An Analysis of Proposals. Jan. CBO. 2002. Future Investment in Drinking Water and Wastewater Infrastructure. Nov. CBO. 2005. Budget Options 2005. Feb. Consdorf, A. 2003. America’s Congestion Crisis: The Decade Mobility Died. Better Roads, Feb. CTI. 1996. Final Report. Jan. EIA. 2002. Annual Energy Outlook 2001. EPA. 2003. Water and Wastewater Pricing: An Informational Overview. Ernst, M., J. Corless, and K. McCarty. 2002. Measuring Up: The Trend Toward Voter ApprovedTransportation Funding. Surface Transportation Policy Project. Farrell, S. 1999. Financing European Transport Infrastructure: Policies and Practice in Western Europe. Macmillan. FHWA. 1987. Highway Statistics Summary to 1985. FHWA. 1992. Highway Statistics 1991. FHWA. 1993. Highway Statistics 1992. FHWA. 1994. Highway Statistics 1993.
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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 FHWA. 1997. Highway Statistics Summary to 1995. FHWA. 1999. Financing Federal Aid Highways. Aug. FHWA. 2001. Highway Statistics 2000. FHWA. 2002. Highway Statistics 2001. FHWA. 2003. Highway Statistics 2002. FHWA. 2004. Highway Statistics 2003. FHWA. 2005a. Highway Statistics 2004. FHWA. 2005b. SAFETEA-LU: Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users. www.fhwa.dot.gov/safetealu/. Fraumeni, B.M. 1999. Productive Highway Capital Stock Measures. Federal Highway Administration, Jan. FTA. 2005. SAFETEA-LU. www.fta.dot.gov/17003_ENG_HTML.htm. Revised Sept. 7. FTA. n.d. a. Data Tables for the 2000 National Transit Database (NTD) Report Year. www.ntdprogram.com/NTD/NTDData.nsf/DataTableInformation?OpenForm&2000. FTA. n.d. b. 2002 Transit Profiles. www.ntdprogram.com/NTD/Profiles.nsf/ProfileInformation?OpenForm&2002&All. GAO. 1995. Highway Funding: Alternatives for Distributing Federal Funds. Nov. Giglio, J.M., and J. Williams. 2001. Strategic Alternatives for Financing the Highway System. In Conference Proceedings 24: Second National Conference on Transportation Finance, Transportation Research Board, National Research Council, Washington, D.C., pp. 199–203. Goldman, T., and M. Wachs. 2003. A Quiet Revolution in Transportation Finance: The Rise of Local Option Transportation Taxes. Transportation Quarterly, Vol. 57, No. 1, Winter, pp. 19–32. Hecker, J.Z. 2002. Testimony before the Committee on Finance, U.S. Senate: Highway Financing: FactorsAffecting Highway Trust Fund Revenues. General Accounting Office, May 9. Hu, P.S. 2004. Summary of Travel Trends: 2001 National Household Travel Survey. FHWA, Dec. HUF. 1983. The Surface Transportation Assistance Act of 1982: A Summary. Jan. HUF. 1987. The Surface Transportation and Uniform Relocation Assistance Act of 1987: A Summary. April. IWR. 2004. Inland Waterways Trust Fund Analysis. Feb. 5. Katz, A., and S. Herman. 1997. Improved Estimates of Fixed Reproducible Tangible Wealth, 1929–1995. Survey of Current Business, May, pp. 69–92. McMillan, T.W. 2004. Making Do or Finding New: Revenue Enhancement Opportunities in the San Francisco Bay Area. Presented at 83rd Annual Meeting of the Transportation Research Board, Washington, D.C. www.innovativefinance.org/events/resources_trb.asp. McNally, S. 2004. Trucks Don’t Pay Enough for Roads, Says Senate Aide. Transport Topics, Feb. 2, p. 28. Montgomery, L. 2004. Ehrlich Urges Vehicle Fee Increase for Transportation. Washington Post, Feb. 14, p. B1. Patashnik, E.M. 2000. Putting Trust in the U.S. Budget: Federal Trust Funds and the Politics ofCommitment. Cambridge University Press, Cambridge, United Kingdom. Peters, M. 2004. Bush Considers Better Options Than Gas Tax. (Letter to the editor.) USA Today, June 23, p. 12A. Puentes, R. 2004. Cement and Pork Don’t Mix. Brookings Institution, May 10. Puentes, R., and R. Prince. 2003. Fueling Transportation Finance: A Primer on the Gas Tax. Brookings Institution, March. Road User Fee Task Force. 2003. Report to the 72nd Oregon Legislative Assembly on the PossibleAlternatives to the Current System of Taxing Highway Use Through Motor Vehicle Fuel Taxes. March.
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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 Roth, G. 2005. Liberating the Roads: Reforming U.S. Highway Policy. Cato Institute, March 17. Toll Roads News. 2005. Vinci, Eiffage, Abertis Bids Accepted for French Gov Stake in TRs. Dec. 14. www.tollroadsnews.com. TRB. 1987. Special Report 214: Designing Safer Roads: Practices for Resurfacing, Restoration, andRehabilitation. National Research Council, Washington, D.C. TRB. 2003. Special Report 271: Freight Capacity for the 21st Century. National Academies, Washington, D.C. U.S. Census Bureau. 1976. Statistical Abstract of the United States: 1976. U.S. Census Bureau. 2005a. State and Local Government Finances by Level and Type of Government: 2002–2003. Revised May 5. www.census.gov/govs/www/estimate03.html. U.S. Census Bureau. 2005b. Statistical Abstract of the United States: 2006. U.S. Census Bureau. Various years. State and Local Government Finances by Level of Government and by State. 1991–1992 to 2000–2001. www.census.gov/govs. USDOT. 1991. A Summary: Intermodal Surface Transportation Efficiency Act of 1991. Dec. USDOT. 1997. 1997 Federal Highway Cost Allocation Study. Aug. USDOT. 1998. TEA-21: Transportation Equity Act for the 21st Century: A Summary: RebuildingAmerica’s Infrastructure. July 21. USDOT. 2003. The Metropolitan Transportation Planning Process: Key Issues. USDOT. n.d. 2002 Status of the Nation’s Highways, Bridges and Transit: Conditions and Performance:Report to Congress. Utt, R.D. 2004. Yes, Mr. President, Veto the Highway Bill. Backgrounder, No. 1725, Heritage Foundation, Feb. 13. Wilson, R.A. 2001. Transportation in America: Statistical Analysis of Transportation in the United States:With Historical Compendium 1939–1999(18th ed.). Eno Foundation, Washington, D.C. Wilson, R.A. 2002. Transportation in America: Statistical Analysis of Transportation in the United States:With Historical Compendium 1939–1999(19th ed.). Eno Foundation, Washington, D.C. Wisconsin Department of Transportation. 2004. Environmental Procedures Manual. March. Wlazlowski, T. 2004. Highway Funding System Nears Crossroads, Lynch Says. Transport Topics, April 5, p. 31.
Representative terms from entire chapter: