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States’ Transportation Revenue Initiatives Help to Compensate for an Absence of Congressional Action on Long-Term Funding

Posted by Ken Orski on Tuesday, July 15th, 2014

Innovation Newsbriefs
Vol. 25, No. 9

While transportation stakeholders and the Washington press corps focus on the impending insolvency of the Highway Trust Fund and bemoan the fact that the House-Senate agreement to replenish the Trust Fund provides only short-term funding ($10.8 billion) through May 2015, they are ignoring developments outside the Beltway that go a long way toward compensating for an absence of congressional action on long-term funding. For in fact, individual states, far from sitting idly by, are responding to the fiscal uncertainties in Washington by stepping up and raising additional revenue to meet their transportation needs. 

Twenty-eight states have launched transportation-related revenue initiatives according to surveys by the American Road and Builders Association (ARTBA), the National Council of State Legislatures and the American Association of State Highway and Transportation Officials (AASHTO) (For the latest listing, see Appendix

Some states have increased local fuel taxes (MD, WY, MA, VT, NH). Others have found new ways of raising revenue such as taxing fuel at the wholesale level (e.g. PA), enacting dedicated sales taxes for transportation (e.g. VA, AK) or boosting tolls (e.g. DE, TX). Still others have floated toll revenue bonds (e.g. OH, MA). In the words of Sen. Roger Wicker (R-MS), states have become veritable  “laboratories for fiscal experimentation.”

In addition, last November voters approved four local bond referenda and 12 measures to increase local transportation sales taxes. More such grassroots initiatives and several statewide transportation ballot measures are expected this coming November according to Ballotpedia, a non-profit organization that tracks ballot measures nationwide. 

Collectively, these measures are generating billions of additional dollars for state and local transportation programs, thus reducing the pressure to come up promptly with a lasting solution to the Trust Fund’s recurrent funding shortfalls.

State officials we have talked to are quick to remind that “we cannot do it all” and that all levels of government, including the federal government, should share in the cost of maintaining and improving the nation’s highways.  But they concede that the recent revenue initiatives in various state legislatures are helping to relieve concern about a slowdown in highway construction and promise to cushion the impact of any eventual reduction in federal funding.   

Financing Major Transportation Investments

To further make themselves fiscally independent, many states have  have turned to financing large-scale construction projects with long term credit—that is, they are borrowing front-end capital and repaying it over extended periods of time with dedicated sources of revenue.To raise capital, they are using a variety of financing tools such as TIFIA loans, Private Activity Bonds, toll revenue bonds and private equity contributions.  As many as 22 jurisdictions have done so in the last several years.  

An outstanding example is the new Tappan Zee Bridge across Hudson River in upstate New York, which served as a backdrop for President Obama’s May 14 appeal for more federal infrastructure spending. Ironically, the bridge will not use federal grant money. It will be financed with state bonds and a TIFIA loan, both of which will be paid off through bridge tolls.

In turning to long-term credit to finance costly construction projects, states are following in the footsteps of  the private sector. All of the nation’s privately owned infrastructure— railroads, pipelines, telecommunications networks, power plants and refineries— are funded with loaned capital. So are many transportation facilities at the local level. Thirty-five billion dollars’ worth of municipal bonds are sold annually to finance local transportation.  Now, state roads and bridges are joining the ranks of local and private infrastructure projects that are financed with long-term capital.   

Another way in which states are seeking to gain fiscal independence is by entering into public-private partnerships. These allow states to shift the burden of  financing costly construction projects to private contractors and concessionaires.  In the last two years, six states have entered into such partnerships, with private contractors funding the design, construction and maintenance of major infrastructure projects up front and getting repaid over time with so-called “availability payments.” More such partnerships are expected in the future as states gain familiarity with this type of financing arrangements.  

In sum, states are not waiting passively for Congress to come to the rescue. Instead,  Governors, state legislatures and local governments are taking aggressive steps to make themselves less dependent on federal transportation aid.  They are  increasing  fuel taxes, passing local bond referenda, financing large-scale construction projects with long term credit, and entering into investment partnerships with the private sector—while eliminating or deferring low-priority projects from their construction budgets. 

Shifting Capital Expenditures Out of the Trust Fund

Will the states’ growing fiscal independence —this de facto devolution as some call it —make the Highway Trust Fund superfluous? It will not –at least not in the foreseeable future. Federal fuel taxes will continue to play an essential part in maintaining the nation’s highways and transit systems.

Taxes at current rates will keep earning the Trust Fund an estimated $39 billion in annual income ($34 billion for highways and $5 billion for transit). This revenue stream should be sufficient to help states keep the Interstate Highway System in a state of good repair according to transportation analysts.

But the regular Trust Fund revenue will no longer be required to fund big-ticket capital investments. Costly projects will be financed increasingly with long-term loans and availability payments. At least that’s the scenario envisioned by some visionaries looking for a permanent solution to the Highway Trust Fund crisis.  

Shifting major capital expenditures out of the Trust Fund, they contend, would reduce future draw-downs from the Fund and align spending more closely with incoming tax revenues, as proposed in the FY 2015 House Budget Resolution. This, in turn, would put an end to the recurrent Trust Fund shortfalls of the past decade, eliminate the need for periodic general fund bailouts and make the Trust Fund structurally sound in a permanent way. 

As for the states, greater fiscal independence will help them gain a substantially enhanced role in transportation and more freedom and flexibility to manage their transportation programs on their own terms, free from burdensome federal oversight.

It’s a solution where everybody ends up a winner.

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 25th year of publication.

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