Planning May 2015

Road (Funding) Rage

The nation needs to rejigger the federal gasoline tax — or take the consequences.

By Jon Davis

Like the avalanche that seems to start in slow motion but ultimately sweeps away everything in its thundering path, the U.S. faces a highway funding crisis that is gathering speed. Put another way, the gap between authorized expenditures and their main revenue source is widening fast.

Since 2008, thanks to fewer overall vehicle miles traveled and a collective vehicle fleet whose average gas mileage is finally improving, the federal gasoline tax of 18.4 cents per gallon (24.4 cents for diesel) has failed to fund the National Highway Trust Fund's authorized expenditures. Unchanged since 1993, the gas tax buys 28 percent less today than in 1997, according to a May 2014 report from the Washington, D.C.-based Institute on Taxation and Economic Policy.

While Congress has plugged the annual gap with general revenue — at least $53.3 billion since 2008 — as of this writing the latest plug gets pulled in May, and there is no sign that Congress is prepared to do anything except — perhaps — slap another fiscal Band-Aid on the problem.

The most recent multiyear transportation law, MAP-21 ("Moving Ahead for Progress in the 21st Century"), expired on September 30, 2014. Although Congress approved a $10.8 billion plug at the end of July 2014 to cover the fund through May of this year, no replacement was seriously discussed or considered before the November 2014 mid-term elections.

Not much has changed since the 114th Congress convened in January or since February 2, when President Obama unveiled his 2015–16 federal budget plan. That plan proposes to authorize $478 billion over six years in highway and transit investment funded by the gas tax ($240 billion) and a mandatory 14 percent tax on earnings held overseas by U.S. corporations ($238 billion).

While some congressional committee leaders initially signaled willingness to consider raising the federal gas tax, that notion was subsequently nixed by both House Speaker John Boehner (R-Ohio) and Senate President Mitch McConnell (R-Kentucky). In the absence of congressional action, the nation and its planners may soon face a repeat of last July, when Congress approved the current plug just before recessing for August, less than a month before the fund would have run out of money.

At risk is "a potential loss to states and municipal regions of nearly $47 billion that would jeopardize the nation's future economic growth," according to "The End of the Road? The Looming Fiscal Disaster for Transportation," a report issued last fall by Transportation for America, a coalition advocating for more investment in transportation infrastructure.

"There's no optimism about Congress doing anything that will substantially bolster the Trust Fund," says Stephen Schlickman, executive director of the Urban Transportation Center at the University of Illinois at Chicago. "They may stabilize it, but the funding levels will be static." Moreover, he notes, the failure to fix what's broken is bipartisan. "There's just no political will on either side of the aisle that will stabilize the fund and allow it to grow as it has in the past," Schlickman says.

But Joung Lee, policy director at the American Association of State Highway and Transportation Officials, says that there is, in fact, congressional movement on this problem. "The glass-half-full perspective [is] that everybody recognizes the direness with transportation funding, especially with the Highway Trust Fund," Lee says. "The glass half-empty is that although we all know what the problem is ... how to close that revenue gap is really a political issue. There's no secret about the technical mechanisms to close that gap."

AASHTO recommends 38 such mechanisms, from a 10-cent hike of the federal gas tax to increasing myriad freight- and vehicle-related fees and a vehicle-miles-traveled fee on all vehicles — which, incidentally, would raise the biggest chunk of new potential revenue: $246.31 billion between now and 2020.

States are going it alone

Given Washington's semipermanent gridlock, many states are doing what they can with their own fuel taxes, from considering raising them to a mishmash of taxes, fees, and local initiatives, to trying new revenue models like a VMT charge. Glances at AASHTO's news headline feed since the beginning of 2014 showed:

  • Iowa Gov. Terry Branstad in February signed a bill raising the state's gas tax by a dime, to 32 cents per gallon. The new rate took effect on March 1 and is expected to raise an additional $215 million for state and local road projects. (Some legislators had suggested the state legalize and tax marijuana and fireworks instead.) It's the first rate hike since 1989.
  • Minnesota Gov. Mark Dayton urged the state's business community to lobby for increases in the state's wholesale gas tax and license plate fees to raise $5.8 billion over 10 years to pay for highways, and a new half-cent sales tax in the Twin Cities metro area for transit.
  • The Transportation Coalition of Tennessee formed to push for an increase in the state's gasoline and diesel fuel taxes, which have been 21.4 cents and 18.4 cents per gallon, respectively, for at least two decades.
  • Utah's legislature approved a five cent hike to the state's 24.5 cents per gallon gasoline tax (unchanged since 1997), starting in 2016. (The Salt Lake Tribune reported that an attempt by the Utah Transit Authority to win authority for counties to hold local sales tax hike referenda that would support transit expansion projects "died in the final minutes of the election-year session.")

And in March:

  • Georgia legislators haggled over a proposed bill that would switch the state's gas tax from a sales tax to an excise tax constitutionally dedicated to transportation (24 cents on gas and diesel in the senate version, 29.2 cents in the house's). The latest iterations would let local governments add their own sales taxes and eliminate a $5,000 tax credit for electric cars. In mid-March, the state senate approved an amended version of the house bill, so reconciliation was pending at press time.
  • California officials and legislators studied steps to close a $5.9 billion state list of highway needs, including (possibly) a $1 per week fee on drivers, a temporary hike in the state's gas tax rate — which will actually drop from 36 cents to 30 cents per gallon on July 1, thanks to a state law mandating annual adjustment of that rate — along with converting highway carpool lanes into toll lanes, or diverting money from debt service to highway repair.
  • Kentucky legislators canceled a 5.1-cent decrease in the state's 26.2 cents per gallon gas tax that was scheduled for April 1 because it would have blown a $150 million hole in the road fund on top of a $129 million cut made in January.

The ASHTO Journal (and, subsequently, The Hill) noted that at least four states are pausing projects thanks to the trust fund's uncertain fate.

Elsewhere, Oregon is experimenting with a vehicle-miles-traveled fee. Under the OReGO pilot program to be launched in July, the state is seeking 5,000 volunteers to pay a user charge of 1.5 cents per mile while driving on public roads instead of the 30 cents per gallon state fuel tax. (See the sidebar on page 35.)

In Michigan a state constitutional amendment on the May 5 ballot would (among other revenue-related measures) exempt gas and diesel from the state's general sales and use taxes for a calculation based on 14.9 percent of the fuels' average wholesale prices, defined as a 12-month rolling average.

If the amendment is approved by voters, the state's current fixed taxes of 19 cents per gallon for gas and 15 cents per gallon for diesel would rise on October 1 to 41.6 cents and 46.4 cents, respectively, for the first year of the new system. The legislation also includes an "inflation adjustment mechanism" to limit the effects of price volatility; the levy increase is capped at five cents per gallon above the rate of inflation, and it can't fall below the lesser of the initial rate as adjusted for inflation or five percent per year.

Officials say this would raise an additional $1.2 billion for roads and $100 million for transit, although a large portion of the initial increase would first be used to pay existing debt.

Virginia in 2013 replaced its previous 17.5 cents per gallon fuel tax (a rate that hadn't changed since 1987) with a 3.5 percent wholesale tax on gasoline (six percent on diesel) pegged to inflation, which meant a bump up to 5.1 percent in January. The state also hiked its five percent sales tax to 5.3 percent, tweaked its vehicle "titling tax," created a new $64 fee for "alternative fuel" vehicles — repealed in February 2014 after public outcry — and created new regional sales taxes in Hampton Roads and Northern Virginia, boosting the overall sales tax in those areas to six percent, with the additional revenue earmarked for local transportation projects.

The new law is expected to provide an additional $3.4 billion statewide, $1.5 billion for Northern Virginia and $1 billion for Hampton Roads over five years. The law also established the Commonwealth Transportation Board to prioritize projects by weighting them for accessibility, congestion mitigation, economic development, environmental quality, and safety. Working with stakeholders to develop those weights and other measures is an ongoing process, says Tamara Rollison, communications director for the Virginia Department of Transportation.

A new report from Transportation for America issued in February, "Capital Ideas: Winning State Funding for Transportation," makes a case study of Virginia's initiative, along with steps taken in recent years by Indiana, Massachusetts, Pennsylvania, Vermont, and Wyoming either to hike state gas taxes, rework them, or find new sources of transportation infrastructure funding.

The report also finds seven common threads that led to those initiatives' success, even across political divides: support for local priorities, accountability and transparency, bridging the urban-rural divide, gubernatorial leadership, building broad coalitions to support the initiatives, creating new funding mechanisms, and developing effective messages and messengers.

Still, the report keeps Congress on the hook. Its only sentence offset in boldface: "It is important to note that all of the states that have acted thus far, and those working to do so this year or beyond, are doing so in expectation of ongoing federal support."

AASHTO's Joung Lee agrees. He points out that some in Congress say the Highway Trust Fund should be devolved to the states and the program shut down, but he says that's just not feasible; every state's overall transportation funding plan relies on the federal gas tax. "The federal tax is going to be a piece in all of their plans. If you can't provide that piece, their plans fall apart," Lee says.

Brief history of the gas tax

Gas taxes predate the Interstate Highway System. Oregon was the first state to tax gasoline — in 1919. Within 10 years, all of the then 48 states and the District of Columbia had them in place. The first federal gas tax, one cent per gallon, was enacted in 1932 to help close the federal budget deficit.

The Highway Trust Fund was created along with the Interstate Highway System in the federal Highway Revenue Act of 1956, which pegged the gas tax at three cents per gallon to support construction and maintenance costs. That went to four cents per gallon in 1959. There it stayed until 1983, when it was raised to nine cents per gallon. But the Highway Trust Fund now had to share a ninth of its revenue with the newly created "Mass Transit Account." From 1983 to 1993, the gas tax rose incrementally to its current 18.4 cents per gallon.

(An additional one-tenth of a cent per gallon has been levied since 1987 for the "Leaking Underground Storage Tank" Fund. That pays for cleanup and remediation of petroleum storage containers.)

Rubber began leaving the road a decade ago, when Congress authorized the highway expenditures in SAFETEA-LU (the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users) while assuming the gas tax revenue would be there to support them through 2009. The gap arrived in 2008.

Congress has since plugged that gap annually with general fund money, but gas tax revenue goes first to projects for which the federal government is already committed.

Future tense

As of this writing, no one would predict what Congress will do about the gas tax and Highway Trust Fund, although there seems to be agreement that there will be some sort of stopgap funding measure. But if policy remains a hostage to politics, at least two observers in Washington, D.C., sense a possibility that Congress could act either to raise the gas tax or openly begin the debate on what replaces it.

The drop in gasoline prices in late 2014 and early 2015 "has really motivated some public discourse on it, which is a big change," says Adie Tomer, a senior research associate and associate fellow in the Brookings Institution's Metropolitan Policy Program.

David Goldberg, communications director for Transportation for America, agrees. "It's really interesting," he says. "First of all, there's a consensus that action really will need to be taken. I think there's a pretty strong likelihood that we will begin to see a path to more stable funding emerge this year."

Transportation for America's "The End of the Road?" report offers as potential remedies increasing the gas tax and indexing it to inflation, a sales tax on gas, or a per barrel charge on oil. Its two main recommendations are $30 billion annually for transportation projects "from a stable, dedicated revenue source" and that the MAP-21 successor bill "should focus on programs and policies that spur local initiative and innovation through competition and incentives." (The Institute on Taxation and Economic Policy also recommended raising the gas tax and "restructuring the gas tax rate so that it grows over time" to alleviate future inflationary pressure.)

Goldberg says the biggest current obstacle to a gas tax solution is a basic congressional divide between those who see infrastructure as a legitimate federal spending program and those who don't want any more spent than is coming in.

"Now there's nowhere to hide. Leadership in both houses have declared that this will be a 'can do' Congress," Goldberg says.

Tomer says a gas tax hike "is the only elegant solution we have" to the funding shortfall. If one isn't pushed through, then other solutions like the gas tax being part of broader corporate tax reform measures "become much more complicated in the short term and the long term," he adds.

Beyond the immediate funding crisis, however, looms an existential one, Tomer says. If the gas tax's main purpose was to build the Interstate Highway System, that's done; so what comes next? More highway lanes? Fixing pinch points? Developing a national freight policy? Finally developing a national high-speed rail network? Stronger local and regional transit support? And is the gas tax in its current form enough to maintain the system while that debate takes place?

"The major construction program really is done and there's a big question as to what the new big capacity projects are. What's the modal type, where are they going, and for what end?" Tomer says. "If we want to spend more on infrastructure, what wins the day?"

More immediately, Tomer adds that the history of transportation funding bills continuing to move through Congress despite the gridlock of the last six or seven years gives him optimism that a solution will be found again, especially with the 2016 presidential and general election looming. "It's something that any member from any state can take home to their district and show people that, even if a project is not complete, there is work going on," he says.

Goldberg, too, says 2015 is likely to see a larger "what now?" debate as part of the argument over the gas tax. The likeliest immediate results will be rolling back gas taxes "which would be going to a maintenance only program, and that for roads only"; finding new revenue either from a gas tax hike or corporate tax reform that would infuse some money for between two to six years "and hope that that's long enough to figure out what the next mix of revenue sources is"; or "biting the bullet and raising the gas tax" enough to match the country's needs.

"The most likely outcome is some sort of stopgap," Goldberg says, adding "I think this will be a year when the debate over the future of the federal program comes to a head."

Seeking closure

AASHTO's Lee says the gas tax and Highway Trust Fund will be addressed at some point, whether as a stand-alone issue or part of a broader package that addresses other items like tax reform, the debt ceiling, or perhaps as part of a commission that reports back with take-it-or-leave-it recommendations.

So what can planners do other than wait and see?

"You have to be able to set up a few scenarios ... and quickly adapt to whatever transpires," Lee says.

Moreover, he adds, the transportation community must continue doing a better job of selling Congress and the public on the notion that new investment in transportation infrastructure is vital.

"Congress definitely has this in their hopper — that the transportation funding challenge has to be addressed," Lee says. "Transportation doesn't seem to be the number one issue on the national agenda, but again, given that the administration and congressional leaders are all talking about it, we have good reason to believe we're up there."

Jon Davis is a freelance journalist in Chicago.


AASHTO's daily news feed:

AASHTO's suggested transportation revenue matrix:

Transportation for America's "Capital Ideas" Report:

Virginia's Commonwealth Transportation Board:

Fueling the Future

By Tina Quigley

Like many growing metropolitan areas, Las Vegas is looking for ways to fund transportation projects without relying solely on the shrinking federal Highway Trust Fund. In 2013, the state legislature, Gov. Brian Sandoval, and the Clark County Commission enacted Fuel Revenue Indexing in Clark County. This initiative, now generating hundreds of millions of dollars for critical transportation projects, allows a portion of what drivers pay at the pump to be tied to the rate of inflation from January 2014 to December 2016 and costs the average driver about a dime a day.

After years of flat or declining population growth, plus double-digit jobless rates during the recent economic downturn, Las Vegas is again experiencing an influx of new residents looking for basic services. This growth underscores the needs of many new and existing neighborhoods, among them streets, sidewalks, pedestrian crossings, traffic lights, and expanded public transportation.

All southern Nevada municipalities, including Las Vegas, North Las Vegas, Henderson, Boulder City, and Mesquite, are located in Clark County, an 8,000-square-mile area with a 2013 population of over two million. In October 2014, the state demographer's office at the University of Nevada–Reno predicted that southern Nevada's population could grow by 328,000 residents in the next 20 years.

As the region's metropolitan planning organization, transit authority, and regional traffic management agency, the Regional Transportation Commission of Southern Nevada is leading efforts to ensure the transportation infrastructure meets the needs of a growing valley. The RTC also recently became the administrator of the Southern Nevada Strong Regional Plan, a road map to connect good jobs with affordable housing, quality schools, and reliable transportation throughout the valley.

For the first time, southern Nevada has a federally recognized regional plan to guide its development, uniting the collaborative efforts of 13 regional partners, including the RTC, each local jurisdiction, and water, housing, health, school, and conservation districts. The regional plan outlines ways to address the region's top priorities: improving economic competitiveness and education, investing in complete communities, and increasing transportation choice.

A cornerstone of the regional plan is increasing mobility by enhancing transportation infrastructure. A major strategy is Fuel Revenue Indexing funding — estimated to be $700 million through 2016 — to address critical transportation infrastructure and growth needs. Facing deep budget cuts for roadway projects, the RTC was a key supporter of indexing. Without it, the RTC forecasted the area's local transportation revenue at $22.4 million a year over the following decade — enough for just one interchange, one mile of roadway in each jurisdiction, or one beltway segment without bridges.

FRI is now funding 199 roadway projects and adding about 9,000 jobs through 2016. FRI-funded construction includes beltway bridges, downtown street initiatives, and new traffic lights in growing residential neighborhoods. Thanks to FRI, 83 design and construction contracts totaling $164 million were awarded by the end of 2014. These contracts have put 53 local small businesses to work, creating about 2,100 jobs thus far.

Meanwhile, Las Vegas's eight-mile Resort Corridor, encompassing Downtown Las Vegas and the Las Vegas Strip, attracted a record-setting 41.1 million visitors in 2014. Add 110,000 daily commutes to the busy Resort Corridor and transportation challenges abound. Future development includes the Las Vegas Convention and Visitors Authority's development plans for the Las Vegas Global Business District; a 20,000-seat arena that is under construction on the south end of the Strip (to be completed in 2016); and a 22,000-seat venue that broke ground five miles away on the other end of the Strip as part of a $1.4 billion hotel and shopping project. Congestion will only get worse.

Together with the Las Vegas Convention and Visitors Authority, the business community, and private and public transportation companies, the RTC is examining the existing transportation system, future demand, and potential growth opportunities within the Resort Corridor. The result will be the Transportation Investment Business Plan, a blueprint for development and maintenance in and around the Resort Corridor as a key element of the Southern Nevada economy.

The RTC took the lead in spring 2014 to create the plan that will analyze emerging trends affecting the Resort Corridor's economy and propose logistical and financial solutions. Development and maintenance of a multimodal transportation network may be included. In southern Nevada, that could mean fixed rail to enhance the existing transit system and monorail.

Tina Quigley is the general manager of the Regional Transportation Commission of Southern Nevada.

Oregon's Gas Tax Is Running Out of Gas

By Chris Clair

Oregon's reliance on gasoline tax revenue may be coming to an end. This July the state will launch OReGO, a program allowing 5,000 volunteers to pay a road user charge instead of the state's 30 cent per gallon gas tax.

"From the planning perspective, the road usage charge should provide more stability to the funding stream," says Erik Havig, planning section manager for ODOT's Transportation Development Division. "It will not be as susceptible to technological changes, fluctuations in gas prices, or changes in fuel standards."

Through OReGO, volunteer drivers will log the number of miles they travel on Oregon public roads and pay 1.5 cents per mile. They will receive a credit for the equivalent amount they pay in gas taxes. ODOT spokeswoman Michelle Godfrey says the state wants up to 1,500 vehicles rated at less than 17 miles per gallon and a maximum of 1,500 vehicles rated at between 17 and 22 miles per gallon. The rest will be vehicles getting more than 22 miles per gallon. Oregon began seeking volunteers through its website in January.

Drivers will connect a small device to their vehicle's on-board diagnostic system — either one with GPS or one without. The GPS devices will log miles traveled on Oregon public roads. The non-GPS devices will log all miles traveled, and the user will manually log miles traveled on non-Oregon and non-public roads and file with the state for reimbursement. A third-party vendor will track miles and handle revenue collection.

As in other states, Oregon's road officials are looking for funding options, partly because the Oregon gas tax is not tied to inflation, and because it buys less than it used to. ODOT says it can only build half as much road today as it could in 1993 for the same money.

ODOT figures show that revenue declined from $446 million in 2011, when the legislature set the tax at 30 cents per gallon, to $441 million in 2013. Revenue was up in 2014 and early 2015, thanks to lower gas prices. But gas prices can rise, and in any event Oregon wants to reduce that volatility risk.

Money collected from the gas tax — and now the road usage charge — goes into the State Highway Fund, along with weight-mile taxes on commercial trucks, title and registration fees, and driver's license fees. The highway fund is a dedicated fund, separate from the state's general fund. It pays for construction, improvement, maintenance, operations, and use of public highways, roads, streets, and rest areas. Part of the revenue is used to build and maintain bicycle and foot paths.

The state keeps half the gas tax revenue and sends 30 percent to counties and 20 percent to cities. Some local governments also levy their own gas taxes.

Andrew Singelakis, AICP, director of land use and transportation for Washington County — in southwest and west suburban Portland — says gas tax revenue increased when gas prices dropped, but it isn't keeping up with inflation. The county gets about $25 million annually in state gas tax revenue, he says, but it has an ongoing shortfall of about $7.5 million for road maintenance. In November, county voters rejected a $30 vehicle registration fee that would have covered the shortfall. Singelakis says he hopes OReGO succeeds, but he seeks a broader funding strategy.

"The next thing we'll be hearing about is how people are driving less," Singelakis says. "Even with a vehicle-miles-traveled tax, there still needs to be some base payment into the system to maintain a level of revenue."

What's realistic? Voters dislike increases in gas taxes or vehicle registration fees. People tend to drive less when the economy is bad or when gas prices rise. Federally mandated increases in mileage standards and growth in the use of hybrid and all-electric vehicles could mean drops in federal and state gas tax revenue. In the OReGO program, drivers of more fuel-efficient cars will pay more in fees than they would have in gas tax. The state offers a calculator at allowing drivers to compare the two costs.

Portland city commissioner Steve Novick, who heads the city's transportation bureau, says one thing is certain: Fees should be indexed to inflation. "There aren't too many popular ways of funding transportation," Novick says. "VMT isn't any more reliable than the gas tax. If you're not indexing it for inflation, you're in trouble."

Chris Clair is a freelance writer based in Frankfort, Kentucky. He has spent the past 14 years covering the hedge fund industry, first as a reporter for Crain's Pensions & Investments and most recently at Reuters's HedgeWorld.