Pumping up the fuel tax
Federal role in transport investment changes as revenue stream diminishes.
By Eric Kulisch
Many lawmakers say they want to take steps to improve the nation’s freight infrastructure because of its role supporting jobs throughout the economy, but new efforts to document freight volumes and address challenges won’t increase efficiency unless the federal government makes substantial investments, logistics industry officials say.
Meanwhile, policy experts say a paradigm shift is underway that will make it more difficult for Washington to foot the bill for more than $500 billion in maintenance and improvements at the federal level through 2020.
During the past 30 years, traffic volume on the nation’s highways has increased 150 percent, but capacity has only increased 15 percent, according to transportation officials.
At a hearing in April held by a House select committee on freight transportation, five industry representatives were united in their willingness to pay higher diesel taxes to help pay for upgrades if there is a guarantee the money would go for highways and related facilities that aid goods movement.
“Our transportation system up until the last decade was a model for the world. The problem is it’s been allowed to atrophy,” with spending on infrastructure down from 4 percent of GDP in the 1960s to 1 percent today, Fred Smith, the founder, chairman and chief executive officer of FedEx Corp., said. “We either fix it, improve it, modernize it and expand it or we’ll have a lower standard of living and a lower national income.”
MAP-21, last summer’s two-year reauthorization of the Federal Aid Highway Act, provided $105.2 billion for surface transportation construction and safety programs, compared to $286 billion in the six-year SAFETEA-LU Act of 2005. In between the expiration of SAFETEA-LU in 2009, Congress passed 10 short-term extensions that kept funding levels at the same level even as obligations to states for completed projects increased. MAP-21 stabilized the transportation system and compelled the Department of Transportation to institute a series of reforms to streamline programs and make them more performance driven, but disagreements on how to raise additional revenue during a period of fiscal constraint prevented passage of a long-term bill. President Obama opposed raising motor fuel taxes after the recession because of the economic burden it would pose on lower and middle-income people and Republicans in Congress have made lowering taxes and spending the overriding theme of the most recent two legislative sessions, during which budget austerity has colored almost every policy debate.
The Highway Trust Fund is broken because more fuel-efficient vehicles, changing driving habits and higher unemployment since the recession have reduced receipts, while the need to repair or expand highways and bridges which are near the end of their design life remains. Compounding the problem is the fact that federal gasoline (18.4 cents per gallon) and diesel (24.4 cents per gallon) taxes have not been increased since 1993. Since they are not indexed to inflation, the buying power of the HTF has fallen by more than a third. The situation will only get worse as tougher federal fuel-efficiency standards kick in.
“No nation in the world can run a 2013 surface transportation system on a 1993 budget,” Edward Wytkind, president of the Transportation Trades Department of the AFL-CIO, said in written testimony.
DOT is projected to spend $21.2 billion more over two years for highway aid to states than the HTF receives in the form of gasoline and diesel taxes, and truck excise taxes. It has contract authority for $40 billion this year, but revenues are expected to total about $33.5 billion, according to the Congressional Budget Office. The federal government is meeting obligations to states by shifting money from the general fund and a trust fund for remediation of leaking underground fuel-storage tanks to cover the shortfall.
By the expiration of MAP-21 on Oct. 1, 2014, the HTF could become insolvent, bringing highway and transit programs to their knees unless Congress acts. Spending authority for federal aid to reimburse states for highway projects will drop from $40 billion to $6 billion if the balance in the HTF is used as the only source of revenue, budget experts say. Spending authority for transit programs would drop from $11 billion to $3 billion.
How dire is the situation? Consider that current revenues actually liquidate prior obligations. If new spending from the HTF was cut off, it would take three or four years of dedicated revenues to pay off construction projects. That’s the delta between what has been promised by the government and cash flow, according to Congressional Budget Office analyst Sarah Puro, who spoke on a panel at the Transportation Research Board’s annual meeting in January.
Raising the fuel tax is the quickest and most efficient way to raise needed revenues for the highway system, industry leaders said.
Derek Leathers, president and chief operating officer of Werner Enterprises, said the trucking industry is ready to pay about 15 cents more per gallon (and index the fee to inflation) to keep its vehicles moving freely, a position articulated by the American Trucking Associations for several years.
Although motor carriers have become some of the railroads’ largest customers for longer hauls, the hearing also revealed some of the underlying tensions between the two industries. Truckers should pay substantially more in fuel taxes because of the disproportionate amount of damage trucks do to roads, Charles “Wick” Moorman, chairman, president and CEO of Norfolk Southern railway, said. Railroads argue they are at a competitive disadvantage because they have to invest in their infrastructure network themselves, while trucks get the benefit of using a public utility for a low cost.
Leathers, speaking on behalf of the ATA, strongly urged Congress not to consider taxing vehicles based on miles traveled or tolls as revenue solutions for infrastructure investment. Only 1 percent of fuel taxes are spent to cover collections, while up to 50 percent of vehicle-mile traveled (VMT) or tolling mechanisms could go toward administrative overhead, he said. That’s because the fuel tax is collected by the Internal Revenue Service from a few hundred wholesale fuel distributors compared to a VMT fee that would have to be collected from tens of millions of drivers
Collection costs for Germany’s truck VMT tax system are 23 percent of revenue, according to Transportation Research Board study in 2011cited by Leathers.
A VMT system is not necessary for at least 20 years and cars will be the first users of electric engines or other non-petroleum fuel technologies. “Therefore, it would be illogical to require trucks to transition to a mileage-based fee before passenger vehicles,” he said.
Tolling the interstate highway system would force many truckers to take alternative routes on smaller roads not suited for heavy truck traffic, increasing safety risks. Congress should eliminate the existing pilot programs which provide tolling authority to states for existing interstates and refrain from authorizing additional tolling flexibility, he added.
Several alternative taxing schemes for raising HTF revenues and financing tools to supplement traditional funding have been recently proposed. In January, the American Association of State Highway and Transportation Officials called for replacing the motor fuel tax with an 8.4 percent sales tax on gasoline and a 10.6 percent sales tax on diesel. AASHTO said its proposal would collect $350 billion for highway and transit programs over six years, compared to $236 billion if excise taxes were relied on, and reduce the federal deficit by eliminating transfers from the general fund.
Sens. Ron Wyden, D-Ore., and Jon Hoeven, R-N.D., have authored a bill to authorize a $50 billion tax credit bond program supported by Customs fees that would distribute $1 billion over six years to every state for transportation investments.
Rep. John Delaney, D-Md., is the sponsor of a new innovative financing proposal that would capitalize a $50 billion infrastructure fund with repatriated offshore profits. The “Partnership to Build America Act” would give U.S. companies favorable tax terms for bringing home profits earned overseas. Under the plan, an infrastructure bank would sell 50-year bonds not guaranteed by the federal government that pay 1 percent interest. U.S. corporations would be allowed to repatriate a certain dollar amount, determined by auction, in overseas earnings tax-free for every dollar they invest in the bonds. The fund will then provide loans or loan guarantees to states and municipalities to finance $750 billion worth of transportation and other types of infrastructure projects. Assuming a company repatriates $4 tax free for every $1 in infrastructure bonds purchased, a company’s effective tax rate to repatriate those earnings would be about 8 percent and the $4 could be spent by the company as it chooses, according to Delaney.
House Transportation and Infrastructure Committee Chairman Bud Shuster, R-Pa., has floated the idea of siphoning funds from a trust fund for offshore oil leases.
New Funding Norm. Experts say the federal role in transportation is going to be very different from when the interstate system was built or the Intermodal Surface Transportation Efficiency Act was enacted in 1991. Back then, fuel use increased on par with vehicle miles traveled, which was sufficient to keep HTF revenue rising and allowed officials to increase spending on surface transportation without increasing taxes.
The stagnation of federal funding in recent years has slowly led to a paradigm shift in how the federal government invests in transportation infrastructure, according to Emil Frankel, a visiting scholar on transportation issues at the Bipartisan Policy Center and an assistant secretary of transportation for policy from 2002 to 2005.
The federal role is changing to one of greater support for financing rather than funding projects and the user-fee model that has philosophically underpinned the highway aid program has begun to erode, Frankel said during a policy conference held by the University of Virginia’s Miller Center in Washington on April 29.
Congress in MAP-21 provided an eightfold increase in lending capacity to the TIFIA (Transportation Infrastructure Finance and Innovation Act) loan programs to $1.75 billion from the previous authorization, as well as increasing the cap on qualified public activity bonds.
TIFIA provides loans, loan guarantees and standby lines of credit to finance surface transportation projects of national and regional significance. It was created because state and local governments that sought to finance large-scale transportation projects with tolls and other forms of user-backed revenue often had difficulty obtaining financing at reasonable rates due to the uncertainties associated with these revenue streams. Tolls and other project-based revenues are difficult to predict, particularly for new facilities. Although tolls can become a predictable revenue source over the long term, it is difficult to estimate how many road users will pay tolls, particularly soon after construction of a new facility. Similarly, innovative revenue sources, such as proceeds from tax increment financing, are difficult to predict. TIFIA credit assistance is often available on more advantageous terms than in the financial market making it possible to obtain financing for needed projects when it might not otherwise be possible.
Eligible applicants include state and local governments, transit agencies, railroad companies, special authorities, special districts, and private entities. The credit program is designed to fill market gaps and leverage substantial private co-investment by providing supplemental and subordinate capital. Since each dollar of budget authority can leverage about $10 in TIFIA credit assistance, DOT estimates it will be able to offer $17 billion in financing and support up to $30 billion in transportation infrastructure investment.
Private activity bonds allow private investors the same bond rates as a public agency if the work is for a public purpose. President Obama’s infrastructure plan would increase the amount of tax-exempt private activity bonds issued for surface transportation projects from $15 billion to $19 billion. Privately-owned airports, ports, wharves and commuter transport facilities are eligible for the preferred financing under Obama’s plan.
Obama and several lawmakers have also proposed the formation of a national infrastructure bank that will make loans based on merit-based criteria.
All three programs are ways “to shift the funding burden to state and local resources,” Frankel said.
The $55 billion in bailouts of the HTF by the end of fiscal year 2014 have undermined the user-fee principle, he said. Proponents say user fees make for stronger public support because there is a direct link between what one pays and the service provided. The HTF is protected from diversion for other uses by a legal firewall, but the firewall has now been breached in reverse by taking in general taxpayer money. And some states have already begun to deemphasize user fees by raising sales taxes and dedicating the new revenue for transportation.
Obama has talked about the importance of infrastructure investments more than most of his predecessors, but has not proposed any funding mechanism that would bring his vision to reality, Frankel said, acknowledging the economic doldrums, budget deficit and hyper-partisan politics made it difficult to do so and that President Bush didn’t offer a comprehensive, long-term transportation package either.
Obama has proposed $50 billion in frontloaded transportation infrastructure investment aimed at deferred maintenance to spur job creation, but the money would come from the general fund, not user fees, Frankel noted.
Without public clamor for improving the nation’s physical superstructure it is difficult for politicians to make bold plans that cost taxpayers a lot of money.
“Most people seem to be willing to put up with an aging, deteriorated, congested transportation system,” which creates tremendous economic, fiscal and political constraints on the president to exercise leadership, Frankel said.
Two-thirds of Americans oppose states raising the gas tax by up to 20 cents to pay for roads, bridges and mass transit, according to a Gallup poll in early April.
Nonetheless, several states, including Maryland, Wyoming and Virginia, this year have enacted increases in fuel taxes and others are considering it to help meet their infrastructure needs. (Virginia actually shifted to a sales tax on fuel and general sales tax increase that are expected to bring in more than a per-gallon tax.)
MAP-21, despite the modest amount of money it provided for infrastructure construction, “moves us, I hope, eventually towards recognizing that constrained funds means we have to make better choices about how we invest,” Frankel said. “Federal policy needs to drive state transport agencies, transit agencies and metropolitan planning organizations to make even wiser, more thoughtful decisions based on benefit-cost analysis, on comprehensive strategic programs that prioritize projects through synergies between investments and operations. . . .
“There are elements of this new paradigm that are good and should be applied even in times of ample resources.”
Complaints about the length of time it takes for the federal government to get serious about transportation investment are not new, Mortimer Downey, a former U.S. deputy secretary of transportation and now senior advisor to engineering firm Parsons Brinckerhoff, said at the Miller Center event.
A road inquiry bureau recommended transportation improvements in 1892, but it wasn’t until 1916 that Congress passed legislation to improve rural post roads. And even though President Dwight D. Eisenhower gets credit for pushing the $25 billion, 13-year Federal-Aid Highway Act of 1956 authorizing construction of the interstate system, the idea originated 20 years earlier with President Franklin D. Roosevelt. Eisenhower wasn’t that involved in the final outcome because of health reasons and Congress’ decision not to follow recommendations from his transportation commission, Downey said.
“Presidential leadership comes in to link transportation policy to broader national goals. That’s what we should look to, not have a technician in the White House who’s going to write a transport bill or show up on the Hill to deal with people in the conference, but to set the framework” for national requirements, he said.
Obama has a greater challenge to motivate the public and lawmakers because there are no new frontiers to break, Downey explained.
“Optimizing return on investment is not as easy to line up people behind as building a transcontinental railroad or the interstate system,” said Downey, who worked as an advisor on Obama’s transition team following his election in 2008. “I think we need to take it a step further and say we’re trying to build an economy that works and a nation that works, urban areas that work, a freight system that works.”
Presidents are episodically involved in transportation issues because other priorities command their attention and they are only making incremental updates to existing transportation policy, Downey said.
Obama during his two terms has been focused on health care, immigration reform, the national debt and sequestration, and gun control.
With no more grand missions, the impetus for transportation investment now needs to percolate up from the bottom, Downey and Robert Puentes, director of the Metropolitan Infrastructure Initiative at the Brookings Institution, said.
“The leadership has to be there at the local level and what we can provide is a set of tools and process for them whereby they can define a future vision and use these federal dollars to achieve it. If they can’t define the vision then one wonders why we are doing this at all.
“One place where we have that opportunity is the freight system because we have a lot of people who understand what it means to their business, to their bottom line to have a system that works. We can engage the players. And I think there’s a degree of national prescription involved because many of the things we need to do are at the national level and the benefits are very diffuse,” Downey said.
Innovation on project delivery, Puentes added, is happening in states and metro areas where officials have to deliver for their constituents. Techniques that prove successful there can get support from Washington and serve as lessons for other jurisdictions.
States like Virginia, for example, have taken on more responsibility for investment because officials fear harm to their economies by waiting for increased federal support.
Frankel agreed federal policy needs to drive better planning so that localities think strategically about modes, land development and freight, not just about individual projects.
“This is national money, so national goals should be achieved. The national government should be prescriptive on the goals, but there should be absolutely broad discretion for how that money is used” by states and local governments, “as long as they can establish their programs are moving toward the achievement of national goals,” he said.
Frankel and Marcia Hale, president of Building America’s Future, added raising revenue for transportation infrastructure needs to be part of any grand bargain between the White House and Congress over how to resolve the long-term debt and reform the tax structure. Previous negotiations over taxes, spending, and entitlement reform have failed to produce a compromise, nearly led to a government shutdown in 2011 and resulted in an automatic 5 percent spending cut across government this year.
The Simpson-Bowles Commission on debt reduction in 2010 recommended increasing the gas tax by 15 cents per gallon over three years and dedicating the money to transportation.
Congress is currently operating under internal rules that don’t permit the use of earmarks for lawmakers’ pet projects. Downey suggested they could come back in the near future as a way to gain a compromise, but should be restricted to one per lawmaker.
Earmarks got out of control, beyond just a tool to grease the skids, in the SAFETEA-LU Act, with more than 6,000 projects sponsored by lawmakers.
“Not all earmarks were bad. The problem is that all earmarks were unanalyzed,” Frankel said, noting the Projects of Regional and National Significance program properly funded the CREATE project to address railroad congestion in the Chicago area, but also allocated 2.5 times more to build a circumferential highway around Bakersfield, Calif., that the California DOT had no interest in pursuing. Cal DOT never built the beltway, but the authorization tied up money that could have gone to other projects.
“The key is, whoever is doing this, whether it’s the Congress or the administration, needs to analyze these projects” to make sure they are productive, he said.
Downey agreed, adding, “I wouldn’t rule out some deal making if that’s what it takes to get policy change, but let’s figure out the policy change first.”