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A Lasting Solution to the Transportation Funding Crisis

Posted by Ken Orski on Monday, July 13th, 2015

Innovation Newsbriefs
Vol. 26, No. 6

With less than a month left until the  the current highway bill expires, it looks like Congress will have little choice but to pass another short term extension  (the 34th in recent years), most likely through the end of the year — leaving the transportation community in a state of continued uncertainty over long term funding.   

A series of recent hearings by the House Ways and Means Committee and the Senate Finance Committee  (June 17-18, 24-25)  revealed a continued impasse over how to  pay for a long-term transportation bill with its projected $85-90 billion shortfall. A bipartisan majority in Congress is firmly opposed to raising the gas tax —as reaffirmed by Chairman Paul Ryan at the June 17 hearing.(“We are not raising gas taxes, plain and simple”) and by Senate Majority Leader Mitch McConnell on July 8. At the same time, Senate Finance Committee chairman Orrin Hatch has declined to endorse the Administration’s proposal for a tax on the accumulated overseas corporate earnings calling it “not a serious proposal to pay for a long-term highway bill.”  Another potential solution, a practical mileage-based road user fee, is “a decade away” Robert Poole told the House committee.

Nor is it feasible to pass a  comprehensive tax reform bill—another proposed source of funds for transportation—within the brief period of time left before  the current transportation law expires. As stated in House Ways and Means Committee  release, tax reform will be a matter of bipartisan negotiations over “the next year and a half” and its outcome is uncertain. (“Getting Things Done: Fixing a Broken Tax Code,” Ways and Means Committee, July 2, 2015)  

Restoring Trust Fund Self-Sufficiency

But this does not mean that it is not within the legislators’  power to end the current uncertainty over long term funding.  Congress could do so by gradually bringing Trust Fund spending into balance with incoming fuel tax receipts, thus placing the Trust Fund once again— as it was until 2005— on a self-sustaining basis. (It is only since 2005 that Congress has begun deliberately to overspend Trust Fund income, initially in the name of drawing down a large accumulated fund balance. Baseline budgeting has perpetuated this practice ever since). 

Trust Fund spending could be curtailed by progressively shifting funding responsibilities for local transportation to the States and localities and limiting Trust Fund expenditures to projects and programs that represent core federal responsibilities or are of truly strategic or national significance. 

As discussed below, such a shift in funding responsibilities has now become possible because states, having concluded they can no longer count on Federal money for stable long term funding, are taking matters into their own hands. Close to thirty states have introduced measures to raise transportation revenue this year —with some state legislatures approving significantly higher levels of funding than in years past. (For the latest status of state funding initiatives see the attached summary and the latest report of the American Road and Transportation Builders Association (ARTBA) at ) 

While some might regret seeing the federal role in transportation thus diminished, the fiscal realignment would offer some undeniable  benefits in terms of restoring the Trust Fund’s fiscal integrity, eliminating the current fiscal uncertainty over long term funding and  providing a permanent solution to the transportation funding crisis. 

States are using a variety of means to raise transportation revenue.

Over the past three years, 16 states have increased their fuel or sales taxes for transportation, eight of them this year.  They are Wyoming (2013), Virginia (2013), Maryland (2013) , Massachusetts (2013), Pennsylvania (2013), Vermont (2013), New Hampshire (2014),  Rhode Island (2014),  Iowa ( Feb 2015), South Dakota (March 2015)  Utah (March 2015), Idaho (April 2015), Georgia (May 2015), Nebraska (May 2015). Washington State (June 2015) and Michigan (July 2015, pending).

Other ways states have been raising revenue include increasing reliance on highway tolls (350 miles of new toll roads have been added since 2011 according to the International Bridge Tunnel and Turnpike Associations ); financing large-scale construction projects with bonds, TIFIA loans, and other forms of long term credit (such as the proposed tax-exempt “Move America Bonds”); and entering into public-private partnerships (P3) that utilize private equity capital, “availability payments,” and highway tolling concessions. Nine P3 procurements have closed since 2013 and more are expected in the days ahead, reports the publication Public Works Financing.

…and can assume greater responsibility for local infrastructure

Collectively, these measures are raising billions of additional dollars (about $6.5 billion according to ARTBA) enabling states to assume greater responsibility for maintaining local infrastructure and paying for transportation improvements of local benefit. Shifting these activities and other expenditures of lower federal priority (e.g., STP Program, $10 billion/year, Congestion Mitigation and Air Quality (CMAQ) Program, $2.2 billion/year, Transportation Alternatives program, 0.8 billion/year) out of the Highway Trust Fund could eventually bring Trust Fund spending into balance with incoming gas tax receipts—-and fulfil one of the goals of the recently adopted joint congressional Budget Resolution (See, Conference Report on Concurrent Resolution on the Budget for Fiscal Year 2016,  April 29, 2015). It also would restore the Trust Fund to its primary function of serving as a source of funds for programs  that are clearly of federal concern or national significance—-notably, maintaining and upgrading the Interstate Highway network and the National Highway System, fixing aging bridges and modernizing critical transit infrastructure. 

Most importantly, aligning Trust Fund expenditures with incoming Trust Fund receipts would place the Highway Trust Fund once again on a self-sustaining basis. It would end the need for periodic transfers of general funds, do away with the search for illusory offsets (or “pay-fors”) and put an end to the constant lurching from one funding crisis to another.  

As Robert Poole pointed out in his June 17 testimony before the House Ways and Means Committee, a Government Accountability Office analysis of FY 2013 Highway Trust Fund spending found that of the entire $50.7 billion total, only $24 billion —less than half—was spent directly on roads and bridges. “To me,” Poole said, ” this finding cries out for Congress to rethink and revamp how HTF monies are being used.” (Rethinking the Highway Trust Fund, testimony by Robert W. Poole, June 17, 2015, quoting Report GAO-15-33, October 2014).  

A “Judicious Rebalancing of Federal-State Responsibilities”

Restoring fiscal soundness to the Trust Fund does not require  “devolution,” a concept that calls for phasing out the federal gas tax and transferring all authority over federal highway and transit programs to the states.  “What we need is a judicious rebalancing of federal-state responsibilities,” a senior state Republican lawmaker told reporters. “States feel they have no choice but to assume more responsibility because they are not convinced they can rely on Congress for adequate and reliable funding. But there should be no doubt that the federal role in transportation should continue and that the federal gas tax should remain an integral part of the highway funding equation.” 

And indeed, the Congressional Budget Office projects a predictable stream of  federal gas tax receipts extending well into the future at a steady rate of  $40 billion per year ($35 billion is credited to the Highway Account, $5 billion to the Transit Account, see CBO Baseline Projections of Highway Trust Fund Accounts, March 2015). This should put to rest any alarmist notion that the Highway Trust Fund is about to  “go broke,”  become “insolvent” or “run out of money.” 

An annual federal-aid transportation budget of $40 billion, extending over a period of six to ten years, would go a long way toward restoring and improving the nation’s core surface transportation infrastructure. As proposed in a recent paper by Stephen Lockwood, a $35 billion Highway Account would allow to address unique federal interest responsibilities such as maintaining and upgrading a national system of “Highways of National Significance” and funding federal responsibilities for highway safety, R&D and roads on federal lands. A $5 billion Transit Account would continue providing resources for a program of essential transit modernization (A Constrained Federal-Aid Highway Program, by Stephen Lockwood, Eno Center  Newsletter, January 2015). A “constrained” $40 billion program would still be able to provide states with certainty and continuity to pursue large capital intensive infrastructure projects that require funding over multiple years.

Because of prior obligations that have not yet been liquidated, the transition to a self-sustaining program would need to be gradual.  As reported by CBO’s Joseph Kile at the June 18 Senate hearing, at the end of FY 2014, $65 billion in contract authority had been obligated but not spent and another $26 billion  was still available  but not yet obligated, for a total of $91 billion in contract authority.  (The Status of the Highway Trust Fund, testimony by Joseph Kile, June 18, 2015). During the transition period additional general funds would need to be authorized to cover the outstanding obligations. However, once these obligations have been liquidated, the Trust Fund could maintain solvency and self-sufficiency by limiting outlays to $40 billion/year—and the transportation funding crisis would pass into memory.

2015 State Transportation Funding Initiatives  

The following states have introduced measures to raise transportation revenue this year: At press time (early July), only a few of the listed states have not yet completed legislative action on their funding proposals. 

Iowa:  The Iowa legislature approved a 10-cent per gallon gas tax increase in February 2015. The increase will allow $700 million in spending on state highway projects and $200 million in local projects annually. Utah:  The Utah legislature passed a bill in March that will increase the gas tax by 5 cents/gallon, add a 12 percent tax on the wholesale price of gasoline and permit counties to seek voter approval for a local sales tax for local transportation projects. A large number of cities have passed resolutions in support of putting the tax increase on the ballot. North Dakota: Gov. Jack Dalrymple signed into law a bill that will provide $450 million for state highway improvements. Another bill, known as the Surge Funding Bill will dedicate $1.1 billion from the state’s Strategic Investment and Improvement Fund for critical infrastructure  projects.  South Dakota: The state legislature approved a fuel tax increase of 6 cents per gallon in March. The bill also raises vehicle license fees and gives local governments authority to levy their own road improvement fees. The measure is expected to generate over $80 million/year for state and local programs. Ohio: The House-Senate conference committee approved a $7 billion transportation budget for the next two years and sent the bill to the Governor. Mississippi: The Mississippi legislature voted to raise $200 million in bond financing to pay for transportation improvements, most of them targeted at structurally deficient bridges. The measure takes effect July 1. DOT Secretary Melinda McGrath linked the legislature’s action to lack of action by Congress. Idaho: The Idaho legislature passed a compromise $94.1 million transportation bill in April, funded with a 7-cent increase in the fuel tax and vehicle registration fees.  Minnesota: The Minnesota legislature passed a $5.5 billion, two-year transportation bill in May, essentially keeping transportation funding at current levels..  Georgia:  Georgia Governor Nathan Deal signed into law a  bill in May that will increase transportation funding by $900 million per year through increases in fuel taxes and vehicle fees. Georgia thus joins Idaho, Iowa, South Dakota and Utah to have increased their gas tax to generate recurring transportation revenue. The measure also allows local governments to increase transportation-related taxes.  Atlanta voters approved a $188 million transportation infrastructure bond. Massachusetts: Gov. Charlie Baker signed in April a $200 million road bond bill. State transportation officials proposed roughly $3 billion in capital transportation projects in fiscal year 2016 for highways, small airports and transit according to press reports. Nebraska: The Nebraska legislature approved in May, a 6-cent/gallon gas tax increase over the next four years, eventually expected to generate $76 million annually. The FY 2016 State Highway Program will be funded at $505 million and the Local System Program at $334 million, it was announced in early July.  South Carolina:  The South Carolina House approved a 10 cent/gallon (or 60 percent) gas tax increase that will provide at least $370 million for transportation projects. The measure needs to be reconciled with a Senate bill that would generate $800 million. Pennsylvania: The state House passed a measure that will provide up to $2.3 billion in annual transportation funding for highways($1.3 billion)  transit. (500 million) and local road maintenance. The measure raises revenue mainly by removing a cap on the franchise tax paid by fuel distributors. The Senate is expected to take up the measure next. Vermont: Gov. Peter Shumlin signed a $616 million transportation bill authorizing funds for FY 2016. The bill includes $116 million for bridges and $100 million for road resurfacing. New Hampshire: Gov. Maggie Hassan signed into law on May 24 a bill to increase the state gas tax by 4.2 cents/gallon. The funds will be used for reconstruction of roadways, bridges an Interstate 93. This legislation provides the first state gas tax increase in 23 years. California:  California’s Senate is considering a bill that would raise the state gas tax by 10 cents/gallon and increase vehicle sales and registration taxes. The bill is projected to generate more than $4 billion annually.In the lower house, Assembly Speaker Toni Atkins proposed to create a road user fee to raise $2 billion over five years. A compromise state budget plan is yet to emerge.  Texas: Gov. Greg Abbott signed three transportation-related bills that, in his words, provide “a historic amount of funding” to build roads. The bills include a measure that ends about $1.3 billion in diversions of gas tax money for non highway items and a provision for a November referendum to approve amending the state constitution to dedicate $2.5 billion of the general sales tax and a portion of future motor vehicle sales taxes to the highway fund. The combined pieces of legislation provide more than $4 billion a year for transportation. Oregon: July is the launch of the state’s new voluntary road usage charge program (OReGO) that proponents view as a potential transportation funding model for the nation, replacing the motor fuel tax. North Carolina: Gov. Pat McCrory has proposed a  $2.85 billion bond initiative (Connect NC) to finance his 25-year statewide multimodal  “Vision for Transportation.”   The proposal includes a  $1.37 billion highway bond that would fund 27 highway construction projects and 176 paving projects in 64 counties throughout the state. If approved by the General Assembly, the bond proposal will be placed on the ballot in November. New Mexico: Gov. Susana Martinez signed a $294 million infrastructure construction bill largely paid for with bonds and cash reserves.The measure includes more than $70 million for highways and $45 million for major critical road projects. Virginia: The Virginia Commonwealth Transportation Board approved a six-year $13.3 billion Transportation Improvement Program. Of the total, $9.9 billion will go toward highway construction projects, with the remaining $3.4 billion dedicated to rail and transit.The FY 2016 state budget contains nearly $2 billion for highway construction and an equal amount for highway maintenance and operation.The budget  represents a 21 percent increase over FY 2015. Maryland: Gov. Larry Hogan announced in June $1.97 billion in funding for transportation across the state. Of that, $845 million is for major highway construction projects  and $500 million for bridge repair, while the remaining $625 million is for maintenance and preservation. Also announced was a commitment of $168 million as state contribution to the Washington Metro’s Purple Line. Louisiana: Gov. Bobby Jindal signed two bills on June 29 that increase state funding for roads and bridges by about $100 million a year starting next year. Delaware:  The Delaware Legislature approved an increase in motor vehicle fees for an additional $23.9 million/year for the state’s Transportation Trust Fund. The revenue generated by the fee increase is expected to be matched by $24 million in borrowing over the next six years. Earlier, the legislature approved a $1 weekend toll hike to generate $10 million/year for transportation funding. Connecticut: The Connecticut General Assembly approved $2.8 billion in transportation bonds for the next five years.The law provides $795 million for the next two years and $2 billion for the following three years. This would be the largest investment in transportation in the state’s history, Governor Dannel Malloy announced. Washington: House and Senate transportation leaders reached agreement on June 28 on a $15 billion transportation revenue package funded in part by an  incremental 11.9 cent/gallon  increase in the state fuel tax. The plan has been in negotiation for months.  “The current plan is the most positive movement that we’ve seen on transportation in this state for many, many years,” said Sen. Joe Fain, Vice Chairman of the Senate Transportation Committee.  Michigan:  The Michigan Senate approved a plan on July 1 to boost the current 19-cent/gallon state gas tax by 15 cents/gallon over three years and redirect revenue from the general fund to generate a total of  $1.5 billion per year in transportation funding.  The gas tax increase alone will generate $822 million/year when fully phased in according to the Senate Fiscal Agency. The Senate action still needs to be reconciled with the House proposals before going to the Governor for signature. In mid-June, the state House of Representatives had approved a series of measures  that would increase the gas tax and diesel tax to 34 cents/gallon by 2017; and index them for inflation.  If approved, Michigan would become the 8th state to increase the state gas tax in 2015. Maine: The Maine legislature approved and Gov. LePage signed a bill to place an $85 million bond proposal  for road and bridge reconstruction on the November ballot. Wisconsin: The Wisconsin state legislature voted $850 million in borrowing  to pay for transportation in the new budget approved on July 2. The measure represents a $450 million cut in Gov. Walker’s $1.3 billion proposal. 

Sources: ARTBA’s Transportation Investment Advocacy Center news bulletins;   AASHTO Daily Transportation Updates; T4America’s survey “State Legislation to Raise  Transportation Revenue;” official press announcements.    

C. Kenneth Orski is a public policy consultant and former principal of the Urban Mobility Corporation. He has worked professionally in the field of transportation for over 30 years, in both the public and private sector. He is editor and publisher of Innovation Newsbriefs, now in its 26th year of publication.

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