Below are the first 10 and last 10 pages of uncorrected machine-read text (when available) of this chapter, followed by the top 30 algorithmically extracted key phrases from the chapter as a whole.
Intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text on the opening pages of each chapter. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.
Do not use for reproduction, copying, pasting, or reading; exclusively for search engines.
OCR for page 179
The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 7 Conclusions and Recommendations The committee has assessed the future revenue-generating prospects of present highway user fees. It has considered possible threats to the viability of these revenue sources from a decline in the tax base and from declining adherence to the user fee finance practices that were basic to the system at its origin. The committee also identified reforms for the highway and transit finance systems that are worthwhile regardless of the future revenue potential of the present system of highway user fees. In considering options, it focused on how finance arrangements can affect the performance of the transportation system through their influence on the decisions of travelers and on government investment and management decisions. The committee gave special attention to methods of charging fees that could be directly related to the cost of providing services, in particular, tolls and mileage charges. The conclusions presented below address the viability of present revenue sources, the merits of present transportation finance arrangements, and the potential value of various reform options. The committee’s main conclusions are italicized. The recommendations propose immediate changes to strengthen the existing highway and transit finance system and actions to prepare the way for more fundamental reform in the long term. CONCLUSIONS 1. Viability of Revenue Sources As the term is used here, a viable funding arrangement is one that will retain the capacity to fund transportation programs at an inflation-adjusted rate comparable with that of the past 20 years. In that period, revenues were sufficient to fund growth in highway spending and capacity and some improvements in service but not to prevent growing highway congestion.
OCR for page 180
The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 According to this definition, the failure of the arrangement to raise revenue sufficient to fund any defined level of needs (for example, as identified in the highway needs studies of the states and the federal government) is not in itself evidence that the arrangement is not viable. Tax rates and total revenues generally reflect the judgments of legislators and voters about priorities, and the existing set of user fees would have been suitable for generating substantially higher or lower revenue in the past if legislators had chosen to do so. However, if the present funding arrangement had structural features that were causing it to become ineffective as a revenue-raising mechanism, its viability would be questionable. The committee considered the gravity of two kinds of possible structural problems that may pose threats to the viability of the established funding arrangement. They are, first, that changes in automotive technology, rising fuel prices, or new energy or environmental regulations may greatly depress gasoline and diesel fuel consumption and therefore revenue from fuel taxes and, second, that the user fee finance principle that has been the basis of highway finance may be eroding in practice, as indicated by a proliferation of new applications of user fee revenues and growing dependence on revenue from sources other than user fees. Loss of the Tax Base A reduction on the order of 20 percent in average gallons of fuel consumed per vehiclemile by the light-duty vehicle fleet is possible by 2025 if fuel economy improvement isdriven by new regulations or large and sustained fuel price increases. Offsetting the revenue effect of a gain of this size would not require fuel tax rate increases that wereextraordinary by historical standards, although the willingness of legislatures to enactincreases may be in question. In the absence of new regulations, fuel price increases alone probably will stimulate only a small improvement in fuel economy in this period. After 2025, large market shares for hybrid electric and fuel cell–powered vehicles, and consequently greater reductions in gasoline consumption, are possible, if driven by government intervention or high fuel prices. This assessment of prospects for fuel economy improvement may seem too modest in light of recent circumstances. Sharply higher fuel prices in 2005 added to concerns about energy supplies and the environmental cost of fossil fuel combustion. At the same time, promising technological developments, including commercially popular hybrid vehicles and progress on fuel cell power, create a potential for a substantial reduction in gasoline consumption in the long term. (For example, in the fuel economy projections and scenarios reviewed in Chapter 4, a 25 percent improvement in fleet average fuel economy is achieved sometime after 2025.) The committee based its conclusion on its review of projections from several sources that considered the state of automotive technology and the history of response of consumers to fuel price changes and technological advances. Three factors will constrain the rate of progress on fuel economy. First, consumers have
OCR for page 181
The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 shown strong preferences for maintaining or enhancing the performance and size of the vehicles they buy, and they take advantage of the savings afforded by fuel economy improvements during periods of fuel price stability by buying larger, better-performing vehicles. Second, new vehicles that offer performance and cost close to today’s vehicles with significantly lower fuel consumption will require time to be brought into production. Finally, the stock of vehicles on the road turns over slowly (about 6 percent of the fleet is retired annually, although high fuel prices may accelerate turnover). From 1971 to 1991, a period that saw the energy crisis of the 1970s, dramatic spikes in fuel prices (e.g., a doubling in current dollars from 1978 to 1981), and the implementation of rigorous new federal fuel economy regulations (starting with 1978 model year cars), fuel consumption per mile for the light-duty fleet was reduced by 33 percent. A reduction of this magnitude was possible because the automobiles of the day were relatively inefficient. Similar events would be unlikely to provoke the same amount of saving today. The Department of Energy projects that by 2020 world oil producers will be able to expand output by 30 percent and that U.S. motorists will be able to increase travel by 33 percent without forcing the price of gasoline much above the $2 per gallon level (in 2004 dollars). This is consistent with projections of petroleum prices from other sources. The rationale of the projections is that the rate of oil price increase since 2003 will not continue. Large supplies are available from multiple sources that can be developed and brought to market at lower cost than the 2005 price, and maintaining the price of oil too high is not in the long-term interest of the major producers since it encourages conservation and stimulates development of alternative sources. The projections take into account rapid growth in oil consumption in China, India, and some other developing economies. For example, in the Department of Energy’s reference case projection, oil consumption in China grows at more than twice the world rate and China’s share of world oil consumption increases from 8 percent in 2004 to 11 percent in 2020. This outlook does not factor in the risk that political events will disrupt supply. Energy forecasts are speculative. However, there are grounds for expecting that, even if the relatively high prices of 2004–2005 persist, output will increase sufficiently to moderate the long-term price trend. Fundamental changes in fuel economy and engine technology are possible in the next two decades. Nonetheless, the implication of the projections the committee reviewed is that if such changes occur, they are more likely to be the result of government intervention than of energy market developments. Erosion of Established Finance Practices Government transportation finance practices have been remarkably stable and resilientsince the creation of the present federal highway program in 1956. However, somepotential sources of stress are evident, particularly in states where the local share of
OCR for page 182
The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 responsibility is high. Sources of stress include pressures to expand use of highway user fee revenue for nonhighway purposes, the growth of transit spending as a share of local transportation spending coupled with the lack of a stable basis for transit funding, and vulnerability of revenues to acceleration of inflation. In the original conception of the federal-aid highway program and the similar highway finance schemes that most states adopted, finance practice was defined by simple rules: highway users paid special fees, fee revenue was dedicated to highway spending, and the revenue was sufficient to cover government outlays for highways. This arrangement enjoyed political and public support. It was considered to be fair because users paid the government’s cost of providing highways and was considered to be an effective way of matching government spending to taxpayers’ preferences because users could identify the benefits that they received from their payments and because spending was limited to a level that users were willing to support. If adherence to these practices were to decline and no new consensus principles emerged to take their place, there would be grounds for concern that the stability and direction of transportation programs were threatened. To assess whether adherence to traditional finance practices is declining, the committee examined trends in the application of user fee revenue to nonhighway purposes, reliance on revenue from sources other than user fees to fund transportation, and devolution of transportation responsibilities to local governments (since local governments usually have not had direct access to fuel taxes and other instruments for charging highway users). The conclusions are presented below. In summary, the examination revealed that national average user fees per vehicle mile, fraction of highway spending covered by user fees, and fraction of highway user fee revenue devoted to nonhighway purposes have changed little in the past 25 years, but that the average hides a diversity of experiences among the states. Nonhighway Application of Highway User Fee Revenue Regardless of the merit of the practice of dedicating highway user revenues to transit or other non-highway purposes, growth in such uses of revenues would affect the viability of the transportation finance system if it subtracted too much from highway spending or weakened support for user fees among highway users. The question of concern is not the intrinsic worthiness of public investment in transit and other nonhighway applications of highway revenue, but solely whether expanding application of the revenue for such purposes may threaten the integrity of established transportation finance arrangements. The funding of federal transit aid with fuel tax revenue is the most important dedication of highway user fee revenue to nonhighway purposes. Today about 17 percent of federal highway user revenue ($6.0 billion out of $35.1 billion in 2003) is dedicated by federal law to nonhighway uses. In addition, states and local governments devote about 4 percent of aid funds they receive from the highway account of the Federal Highway Trust Fund to transit ($1.1 billion out of $30.3 billion in 2003).
OCR for page 183
The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 State highway user fee revenues dedicated to state transit programs or transit grants ($3.8 billion in 2003) equal about 5 percent of state government highway spending ($80.2 billion in 2003). In certain states, portions of highway user revenues are dedicated to nontransportation purposes, but states also devote funds from nonhighway sources to highways. In national totals, state revenues from highway users nearly equal the states’ highway spending: the sum of all state-imposed highway user fee revenues and federal highway aid received by states was $93.4 billion in 2003, and current spending by states for highways plus state grants for highways to local governments was $92.0 billion. However, the balance between revenue and spending varies from state to state. Reliance on User Fee Revenue and Devolution to Local Governments The committee examined whether reliance on user fees to fund transportation has declined and whether the local government share of financial responsibility has been growing. Significantly declining reliance on user fees would be a fundamental departure from historical practice and would necessarily call into question the viability of the fuel tax and the other user fees. Whereas state government highway programs are predominantly funded by state-imposed user fees, local governments historically have paid for their shares of transportation expenditures out of general revenues or with dedicated broad-based taxes (e.g., dedicated sales taxes or property taxes). 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 some instances, a local property tax assessment dedicated to streets or to infrastructure may function much 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. Devolution of responsibilities to local governments would in many circumstances be in the public interest if it were accompanied by adequate funding provisions. However, it will also strain traditional finance practices if local governments do not have access to and control over user fee revenue. Many local jurisdictions operate arterial roads that serve nonlocal traffic and are subject to congestion and that would be funded most appropriately by user fees. When highway spending and highway user–derived revenues alone are examined, neither devolution of responsibility to local governments nor decline in the ratio of user revenue to expenditures is evident in national totals. The local government share of highway spending has averaged about one-third since the 1960s and has been fairly constant. The ratio of highway user fee revenues to highway spending for all levels of government combined has fluctuated around 80 percent since the 1960s. However, in the past 15 years, the local share of total government highway and transit spending has increased, and the ratio of user fee revenue to total highway and transit spending has declined. The trends are not dramatic in national
OCR for page 184
The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 totals but are pronounced in some states. These trends, where they are occurring, are related to the growth of transit spending. Transit depends more on aid from local sources than from the state or federal governments and covers only a minority of its expenditures with user fee revenue. Legislative Support of User Fee Finance As the introductory chapter explained, the committee did not estimate how much governments should spend on highways. Legislatures and voters are competent to decide on transportation spending levels, taking other priorities into account. Therefore, failure of legislatures to set rates high enough to raise revenue sufficient to satisfy some predetermined level of needs is not in itself evidence that the present funding arrangements are dysfunctional. However, an unwillingness by legislatures to maintain revenues because of inherent, particular characteristics of highway user fees could be viewed as bringing into question the viability of the present fees. For example, the structure of fees might come to be regarded as unfair, or fuel taxes might become especially unpopular because of the rapid rise of fuel prices. Under these conditions, the fee scheme could be regarded as structurally impaired as a revenue-raising instrument. The impairments might be overcome by introducing new forms of fees. The committee does not have evidence that any such structural characteristics of highway user fees are discouraging legislatures from adjusting the rates. The following observations are evidence to the contrary: Legislatures are adjusting rates sufficiently to maintain constant average revenue per vehicle mile and to expand capital stock (although not sufficiently to keep congestion from increasing). The frequency of state rate increases was much greater in the 1980s than in the 1990s, but the cumulative impacts of rate changes during the two decades were equivalent—that is, average rates just about kept up with inflation. At the federal level, rates have not changed significantly since 1993, but Congress has acted twice since then to increase deposits to the Highway Trust Fund. The practice of depositing part of fuel tax revenue to the general fund was eliminated, and the federal revenue loss caused by the gasohol subsidy was debited to the general fund rather than the trust fund. Since the 1980s, the growth rate of state highway user fee receipts has been slower than the growth rate of all state tax revenues, but only moderately so (84 percent versus 104 percent in constant dollars from 1981 to 2001). During this period the extent of state government responsibilities was expanding in many domains. Thus, the funding constraints on highway programs appear similar to constraints that all state programs faced in this period, rather than problems inherent in the structure of highway funding.
OCR for page 185
The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 It has sometimes been asserted that growing use of highway user fee revenue for nonhighway purposes has undermined support for tax increases. In some cases this consideration may have been decisive; however, the share of revenues at the state level that is dedicated to nonhighway uses is small enough on average that the practice seems unlikely to have had a major influence overall. Resistance to raising fees may stem in part from poor performance of some highways and a public impression that expansions buy little improvement. Reform of finance could enhance performance and increase the visible improvement produced by system investments. This outcome might cause legislatures and voters to adjust their spending preferences in favor of transportation. 2. Merits of the Present Finance System The finance system probably has contributed to the success of the highway program indelivering a positive return on the national investment in highways. User fees discourage motorists from making trips of little value, spending has been constrained by therevenues generated from users, and the system allows taxpayers to see the cost of providing highway services. The system also has important shortcomings. The viability of the finance system is of concern only if the transportation programs it supports are beneficial and present finance arrangements help these programs to perform effectively. The system has influenced the behavior of users and the agencies providing services and consequently the economic return on transportation investments. The committee examined the available evidence concerning whether these influences have been positive. Available estimates are incomplete but indicate that the nation has earned a positive return on the investment in the highway system, that historical annual expenditure levels have been justified by the incremental benefits received, and that opportunities exist for expansions that would yield high payoffs. The finance system probably has contributed to this success. To a limited extent, existing user fees discourage motorists from making trips that they value little in comparison with the cost of providing them. These fees are about 7 percent of the cost of operating a motor vehicle and vary with use. More significantly, the revenues generated from users impose a constraint on spending. Reliance on dedicated revenue from user fees reduces the risk that total spending will greatly exceed justified levels, since it is unlikely that the revenue would sustain a facility that produced low levels of benefits for users in relation to its costs. Also, in the political process of setting highway budgets and fees, users are unlikely to support fee levels beyond those that benefit them or to support projects that yield low returns. There is, however, a danger that interests that gain from construction spending regardless of user benefits or fee levels will lobby for fees that are higher than justified. The practice of dedicating the revenue from a particular tax to a particular use also provides revenue stability (compared with reliance on annual appropriations
OCR for page 186
The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 from the general fund), which is valuable for a public works program that entails long-term commitments. Stable funding eases public- and private-sector borrowing to build facilities. A further pragmatic justification for the practice may be that it has appeared in some instances to be effective in gaining public assent to a tax increase in support of a specific program, even during this era of antipathy to other tax increases. Gaining the efficiency benefits of charging fees to highway users does not require that the revenues raised be dedicated to highways. User fees are beneficial as long as they induce savings in the costs of highway travel (for example, congestion, pollution, or road wear costs) that are greater than the value of lost travel benefits to highway users who forgo or alter travel because of the fees. However, dedication of revenues appears, in practice, to have exerted a degree of discipline that has tended to keep spending within bounds and to direct it to worthwhile projects, and that would be absent if there were no linkage between spending and the tax and fee revenue raised from users. Transportation programs also have important failings related to the structure of the finance system. The system does not provide a strong internal check that individual projects are economically justified. Such a check would exist for projects that were financed with funds they generated themselves. Fees do not correspond well to costs. Some road users, including operators of certain types of trucks and buses, do not pay fees commensurate with the pavement and bridge wear costs that they impose on highway agencies, which encourages inefficient use of highways. Because fees do not vary with traffic conditions, avoidable congestion costs are tolerated. The present level of benefits of the road system could be attained at lower cost if pricing were improved. 3. The Value of Reform The conclusions above indicate that the risk is not great that the challenges evident todaywill prevent the highway finance system from maintaining its historical performanceover the next 15 years. That is, the system should be able to fund growth in spendingand capacity, although not at a rate that will reduce congestion. However, transportation system users and the public could benefit greatly from transition to a fee structurethat directly charged for actual use of roads. No likely developments in motor vehicle technology, energy price, or regulation will have an impact on revenue in this period that could not be offset by rate increases that are within the range of historical precedent. There could, however, be lags in adjusting to the revenue consequences of high inflation or a large increase in the price of fuel. Transitioning to direct charging (for example, a system that charged according to mileage and road and traffic conditions) in place of present user fees would potentially have two benefits:
OCR for page 187
The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 Improved operation of the road system, including reduced congestion. By inducing some travelers (those who place a relatively low value on traveling during the peak) to avoid congested time periods, pricing can reduce congestion and trip times for the remaining travelers. Experience with peak charging on roads in the United States and other countries has demonstrated its effectiveness for controlling congestion. Prices must be set so that the benefits to those who enjoy faster travel exceed the cost of inconvenience to those who are induced to change travel habits. Better targeting of investment to the most worthwhile projects. If such a road charging scheme were in effect and highway spending depended on revenue from the fees, expenditures would tend to be directed toward parts of the highway network that generated revenues sufficient to pay for improvements. Pricing would affect investment decisions through several mechanisms: Revenues from peak charges and the response of traffic to the charges would accurately indicate the value the public places on individual highway facilities and would reveal the locations where capacity expansions would have the greatest benefits. Revenue impacts would influence investment decisions: projects with the potential to generate net revenue increases sufficient to pay for themselves would be more likely to be constructed. Because local governments would expect to control the revenues generated by the roads they owned, growing regions with high congestion would generate high revenue and would retain that revenue to support regional needs. However, highway agencies will need new technical skills to take advantage of the information provided by pricing, and oversight may be needed to prevent abuse of pricing powers. There is no certainty that finance reform in the direction of improving the efficiency of the transportation system would raise more revenue than existing arrangements. However, reform would make transportation dollars go further, and it is conceivable that the public would be willing to invest more in a transportation system that worked better. Many years of coordinated effort will be needed to develop the technical and institutional capabilities required for reform and to demonstrate to the public that the potential benefit is genuine. Therefore, an early start is essential. 4. Principles for Reform Reform of the finance system would have benefits now. Eventually, the deteriorating performance of the transportation system and the growing cost of
OCR for page 188
The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 maintaining acceptable service under present practices may compel reforms that would increase efficiency. As the system evolves, adhering to the following rules willhelp keep it on a course leading to the necessary improvements. Maintain the practice of user fee finance, that is, a system in which users of facilities are charged fees or special taxes, payments reflect the transportation provider’s costs to serve each user (to the extent that is allowed by the fee structure), and expenditures to construct and operate the facilities are equal to the fee revenue. The last condition implies dedication of user fee revenue to transportation programs. Seek opportunities to apply pricing where possible. Pricing means allowing fees to ration access to a service or facility. Pricing could significantly lower congestion and other highway operating costs. Two examples of pricing that could be applied immediately are variable tolls on toll roads or lanes (with higher charges imposed during peak periods) and the charging of trucks for the pavement wear they cause. Such initial steps would yield benefits in their own right and would be an opportunity for administrators to learn to apply pricing and for the public to observe its consequences. Align responsibilities of the federal, state, and local governments so that the recipients of each government’s services correspond as nearly as possible to its constituency. For example, local governments should have primary responsibility for providing and funding facilities that serve mainly local travel of their own residents, and states should be responsible for serving intercity and regional traffic. In this way the voters overseeing tax and spending decisions will be those directly bearing the costs and receiving the benefits. The organization of transportation programs today often departs from this rule, in part because local governments are limited in their ability to collect user fees. A goal of reform should be to allow each jurisdiction to collect fees from all users of its facilities. Undertake reforms with full awareness of environmental and equity consequences. In planning for finance reform, governments should identify techniques to offset undesirable distributional effects without seriously eroding the benefits of new forms of charging. Possible solutions include direct compensation to low-income households or other disfavored groups (for example, distribution of transport vouchers that could be used to pay road tolls or transit fares) and expansion of transportation services important to these groups. Provision of additional transit service where the service would be of value to persons displaced by peak highway charges could mitigate the equity consequences of finance reform involving pricing. (The distributional impacts of improved pricing will not always be undesirable. For example, road pricing in cities could cause gains in transit service quality and revenue, which would benefit the transit-dependent population.)
OCR for page 189
The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 Reform that involved partially or entirely replacing fuel taxes with other forms of charges would reduce the price of gasoline (not necessarily by the full amount of the tax reduction) and lessen motorists’ incentives to choose more fuel-efficient vehicles. If fuel taxes are reduced in the future, the impact on fuel consumption should be recognized and consideration given to the need for offsetting actions, if the outcome appears contrary to the goals of U.S. energy policy. A system of mileage fees that incorporated congestion charges would have broad impacts on energy consumption through its impact on congestion, travel, and land use. Efficiency requires that users of the transportation system take into account the environmental costs of their travel choices. One way of accomplishing this would be to impose charges for pollutant emissions. However, the best results from a pollution-charging scheme would be obtained by subjecting all emissions (from transportation and nontransportation sources) to equivalent charges. Broad-based taxes applied equally to all petroleum consumers would be the most cost-effective in promoting petroleum conservation. The distributional and environmental impacts of major changes in transportation finance practices will not be fully predictable. It will be necessary to observe consequences systematically and make adjustments when undesirable side effects appear. 5. Reform Opportunities The committee considered two kinds of proposals to overhaul the system for charging highway users: an expanded network of toll roads and lanes on high-density expressways, with variable pricing, but using present toll technology; and a road use metering and mileage-charging system that could function on all roads, using technology that automatically measured road use and assessed charges. These could be complementary projects. Expansion of toll roads can begin immediately; however, tolls assessed with conventional technology are limited in application. Road use metering holds the greater promise, but development of technological and institutional capabilities and resolution of privacy and fairness concerns will be prerequisites. Toll Roads and Toll Lanes An important opportunity exists today to create an extensive system of tolled limited-access highways and expressway lanes employing existing electronic toll collectiontechnology and variable pricing. The opportunity arises from a convergence of circumstances: the great reduction in the cost and inconvenience of toll collection achieved through new technology; strong interest in several states where tolling is seen as a critical revenue supplement; the willingness of Congress to allow tolling, at least on a trial basis, on Interstate system segments that receive capacity expansions; the valuable experience provided by recent toll implementations; and the interest of private-sector firms seeking opportunities to develop roads. Such a sys-
OCR for page 191
The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 ried out. Road use metering and mileage charging appear to be the most promisingapproach to this reform within a comprehensive fee scheme that will generate revenue to cover the cost of an efficient highway program in a fair and practical manner. These systems use communications and information technology to assess charges automatically according to miles traveled, roads used, and other conditions related to the cost of service. Conversion to road use metering and mileage charging will require a sustained national effort. Governments must decide on the goals of the effort, authorities for setting fees and controlling revenue, and how best to involve the private sector. The institutional framework and administrative mechanisms to manage such systems must be designed. Among the challenging problems are the following: Gaining public acceptance. The public and elected officials will be skeptical of a metering system that could be used to track individuals’ movements; therefore, privacy must be guaranteed. Opposition can be anticipated if the new scheme is perceived as unfairly favoring some categories of road users or to be disadvantageous to the poor, and objections can be expected from road users who may be required to pay more or curtail travel. Development must be open and responsive to the concerns of the public about such a fundamental overhaul of highway administration. Making the transition from present to new revenue sources. Highway authorities will need to establish procedures for equipping vehicles and roads, discontinuing old fees, and commencing collection of the new fees, with minimum disturbance to revenues or travel, over a period of years. Motor vehicle owners will be required to purchase added equipment with new vehicles or to retrofit their current vehicles. The location of industries and households has been profoundly affected by the current approach to highway financing. A radically new approach may be disruptive (even though the ultimate outcome will be positive) unless it is phased in gradually. Setting appropriate prices. Because of inexperience, highway agencies do not now have the competence to set mileage fees that maximize the benefits of the transportation system or to use the information provided by fee revenues to improve the payoffs from capacity expansions. Improper pricing practices could degrade system performance. The technical design of charging systems can solve some aspects of these problems. For example, design features can help ensure privacy, and the transition will be eased if systems allow users to pay through either the old or the new charging scheme. However, solutions will depend at least as much on the design of institutional arrangements for governance, oversight, monitoring, and evaluation. If public acceptance is attained, it will most likely come about over time as the result of experience. Expansion of conventional toll roads and applications of
OCR for page 192
The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 variable pricing and automatic tolling will be important sources of experience. Openness in the development process and demonstrations of effectiveness in early implementation will also be critical in forming opinions. If mileage charging comes into general use, the state and local authorities responsible for road construction and operation will expect to control the revenue generated by the roads they own and to control pricing decisions that will influence traffic flow, congestion, and land use. However, governments with control of pricing may have opportunities to extract monopoly profits, export congestion to neighboring jurisdictions, or attract development from competing jurisdictions by underpricing. Therefore, safeguards will be needed against practices to gain local advantage at the expense of the general welfare. The problem of inappropriate pricing policies could be lessened by aligning state and local governments’ responsibilities for roads with the nature of the traffic. Privatization of the operation of certain roads could also help insulate pricing decisions from narrow considerations. The general introduction of mileage charging would have profound effects on every aspect of the management of transportation programs. The roles of the federal, state, and local governments would be altered; new criteria would become prominent in the selection of projects; highway managers would have new means of regulating traffic and controlling congestion, pollution, and accidents; and a more nearly optimal balance between transit and highway use and resources in urban areas would be attainable. The opportunity is great, but there are risks that the potential benefits of reform could be dissipated through poor management in the new environment. RECOMMENDATIONS 1. Maintain and Reinforce the Existing User-Fee Finance System1 The nation must continue to rely on the present framework of transportation funding for at least the next decade. Therefore, governments must take every opportunity to reinforce the proven features of the present system, in particular, user fee finance in the highway program. Because of the potential benefits of alternative finance arrangements, delay in developing them probably would be costly. Nevertheless, in the interim it will be necessary to depend on the fuel tax and other existing fees as the primary funding source. The potential gain from reforms within this framework, such as the actions recommended here, may be modest, but a strategy of seeking multiple small improvements in the finance system would nonetheless be worthwhile. 1 This recommendation parallels a recommendation of the Transportation Research Board’s Committee for the Study of Freight Capacity for the Next Century (TRB 2003, 125).
OCR for page 193
The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 Refining User Fee Rate Schedules The federal government and the states should make adjustments to user fee rates that would provide incentives for more cost-conscious use of highways by operators of large trucks and other vehicles and allow highway agencies to recover some costs that are not fully accounted for in current fees. At least, the federal government should consider adjustments to the Heavy Vehicle Use Tax to better align fees with the average cost responsibilities for vehicles of different weights and axle configurations. The federal highway cost allocation studies provide an approximate guide to the appropriate adjustments and indicate that certain of the heaviest trucks should pay higher fees unless their operators adopt truck designs that reduce road and bridge wear. The states and the federal government should begin to rely on fees rather than solely on regulations to control vehicle sizes and weights. Tax Evasion and Exemptions Congress and the states should consider eliminating fuel tax exemptions that are commonly abused (perhaps replacing them with other aid to their beneficiaries) and requiring that fuel purchasers entitled to lower rates pay the highway rate and apply for a refund. Too little is known about the magnitude and methods of evasion of federal and state fuel taxes and other highway user fees. However, evidence indicates that it is a significant problem and that better enforcement could increase revenue. A common form of evasion scheme takes advantage of tax exemptions or differences in the tax rates on fuel used for highways and substitutable fuels used for non-highway purposes. The 2005 federal surface transportation program reauthorization legislation tightened controls on assessment and collection of fuel taxes. The effects of this legislation should be monitored and further action considered if compliance problems persist. Providing for Advanced-Technology Vehicles in the User Fee Structure Operators of alternative-fuel or new-technology vehicles should contribute to the upkeep of highways on a basis similar to that of other users. As new kinds of vehicles that do not directly consume gasoline or diesel fuel come into use (for example, hydrogen fuel cell–powered or battery-powered electric vehicles), the present system of fuel taxes and other user fees will be incapable of ensuring that operators of all vehicles pay appropriate shares of the cost of transportation facilities. Adopting mileage charging as the basic user fee would allow equal treatment of all road users regardless of the kinds of vehicles they operated. Other forms of fees (for example, taxes on new fuels that come into use or vehicle registration fees) could accomplish this objective if mileage charging does not become available.
OCR for page 194
The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 Incentives and other policies to promote conservation or reduce pollutant emissions could be made more cost-effective, and at the same time impacts on transportation program revenues would be lessened, if they were broadly targeted. A tax levied on all fuel consumers (or all polluters) will attain a specified reduction in fuel consumption (or pollution) at lower cost than an efficiency standard or a tax targeting only transportation. Such a tax gives producers and consumers flexibility to reduce consumption (or emissions) in ways that have the least cost to them. An incentive that subsidizes road use by forgiving payment of highway user fees can unnecessarily increase the cost of meeting the conservation or emissions goal by encouraging inefficient use of roads. From the standpoint of transportation finance, promoting energy conservation with a broad-based energy tax rather than a motor fuel tax would have an added advantage—it would segregate revenue of the energy tax from revenue of fuel taxes that were intended as user fees and devoted to covering transportation agency expenditures. Defining Federal, State, and Local Government Responsibilities It was not within the scope of the committee’s study to develop a complete definition of appropriate federal, state, and local responsibilities in surface transportation. However, federal budget constraints and demands of the states for autonomy may create an environment in the next decade in which level or reduced federal funding is likely, and development of a new system for direct charging for road use would be likely to lead to a reassessment of federal responsibilities. Regardless of the overall scope of the federal surface transportation program in the future, the federal government should retain certain core responsibilities, including the following: Providing aid to ensure that the states do not underinvest in routes of major national significance for commerce, travel, and public safety and security. For example, a state may be unwilling to invest in such a route if it cannot collect sufficient user fee revenue from out-of-state vehicle operators to pay for the cost of serving them because travelers buy fuel outside the state. Standards setting, in cooperation with states and local governments, to gain efficiencies in construction and operation and to ensure uniformity of highway features needed to allow efficient nationwide passenger and freight traffic (for example, compatibility of road design with vehicles). Environmental regulation and enforcement. Research and development, since all highway agencies share interest in innovation, especially in the development of improved forms of charging. These core federal responsibilities ought to be funded by user fees, as the federal-aid highway program is now.
OCR for page 195
The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 Many states probably could improve the performance of their road programs by periodic review and updating of program responsibilities and jurisdictional control of roads according to analogous criteria. If road use metering and charging come into use, the appropriate spheres of federal, state, and local government responsibility for transportation programs will be altered. State and local governments would be able to raise revenue from all users of their roads and would expect to control revenue and pricing. The need for a federal-aid program would be diminished. However, the core responsibilities listed above would remain. In particular, standards setting and research leadership would be vital federal functions in the program to develop the new transportation funding mechanism. A new federal task, oversight to ensure that governments did not abuse their monopoly pricing powers, might prove necessary. The future revenue source for federal activities would not necessarily have to take the form of a mileage charge. The federal government could continue to rely on excise taxes (at reduced rates) to fund the reduced scope of its activities. States and local governments would be left with primary control of the use and rates of mileage fees. 2. Expand Use of Tolls and Test Road Use Metering The Federal Role in Promoting Toll Road Development Good models for toll road development can only emerge from the experience of states. Therefore, the federal government should adopt a strategy of encouraging states to experiment with arrangements for tolling and private-sector participation in road development. To this end, Congress should liberalize the restrictions in the federal highway program that now prevent states from using aid to build toll roads and instituting tolls on roads built with federal aid. In general, states should be allowed to impose tolls on existing roads that were built with federal aid, and they should be allowed flexibility in the design of toll systems. A common objection to imposing tolls on existing roads is that tolling would be unfair to road users who have already paid for the roads through fuel taxes and other fees. However, existing roads require continuous funding for maintenance and periodic reconstruction. Moreover, congestion fees can greatly improve the efficiency with which capacity is used. Funding an expansion of capacity on a heavily traveled route with revenues generated by that route that are in excess of operating costs is a fair and reasonable means of accelerating improvements that directly benefit payers. Federal tax policy ought to be neutral with respect to whether a toll road is publicly or privately operated. Use of tax-exempt bond finance in a road project is in effect a subsidy from the federal general fund to the highway program and so violates the user-pays principle. However, it is unlikely that the tax treatment of municipal bonds will be reformed to improve the highway financing system. Therefore, removal of biases in tax law that favor government finance and
OCR for page 196
The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 operation of toll roads probably is necessary to encourage experiments with private-sector participation in transportation projects. The provision in the 2005 federal surface transportation aid legislation allowing issuance of $15 billion in private activity bonds for highways is a significant measure in this regard. It was noted in Conclusion 5 above that the most important reason for seeking private-sector participation may be the value of bringing the private sector’s perspective and expertise to the problems of developing and managing toll roads. If tax-exempt bond finance is the incentive used to attract private involvement, the public subsidy this entails must be worth the improved results that increased private participation in the projects brings about. The subsidy will be substantial if the new private activity bond authority is fully utilized. Congress should monitor the results of the private activity bond provision carefully and then judge whether this trade-off has been in the public interest. It should also assess whether tax-exempt bonds are the most cost-effective form of incentive for private participation. Finally, federal action to reduce the duration, cost, and risks entailed in the project development process, including regulatory reviews, would stimulate private-sector participation. Road Use Metering The states and the federal government should explore the potential of road use metering and mileage charging. Creation of a structure to support individual states that decide to conduct trials or pilot implementations may be the most practical initial arrangement. However, a program with national focus will be required, with federal leadership and funding aid for research and testing. The first steps have already been taken toward developing the capability to meter road use and collect mileage charges. In the United States, detailed proposals for systems have been put forth, and tests of technology are being conducted. In Europe, mileage-charging systems for commercial trucks on motorways are in operation. This experience provides a basis for planning the next stages of development. Technical Trials Additional technical trials will be the first requirement. The objectives should be to evaluate the reliability, flexibility, cost, security, and enforceability of alternative designs and to gain information about institutional requirements for administering such systems, user acceptance, and costs. Pilot studies will be needed that simulate the important aspects of systems as realistically as possible, including setting rates, billing and collecting fees, enforcement, and coping with malfunctions. A second necessary research track will be studies with the goal of providing guidance to highway agencies on the proper application and management of road use metering and charging systems. The starting point for this research should be evaluations of the growing number of road pricing systems now in operation.
OCR for page 197
The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 Finally, planning studies will be needed to lay out possible routes to widespread application of road use metering and pricing. The studies should address the responsibilities and relationships of federal, state, and local governments as well as the relationship of government to private-sector participants. Staged Implementation After technically practical systems have been demonstrated, several paths exist for continuing with implementation in stages, to allow highway agencies and the traveling public to learn about new road charging systems and decide whether to proceed further. An individual state or city that wished to proceed with mileage charging would face enormous difficulties because of the high fixed costs of building the first implementations, the complications created by interstate traffic, and the probable eventual need for national coordination of standards and policies. Therefore, once technically proven designs for road use metering and mileage charging are available, the federal government should support one or more implementations that would be on a large scale and fully functional but limited in scope with respect to the region, roads, or vehicles involved. Fee collections can also be used to offset some of the start-up costs. A limited implementation of road use metering and mileage charging could take one of the following forms: A system with participation of large trucks only (possibly starting with metering on Interstates in one region), A system applying to all vehicles on the network of expressways in a region (a state, a group of states, or a metropolitan area), or A system for all vehicles and roads in one or a small number of states. These pilot implementations would still be defined as experiments. The motivations would be to limit initial implementation to a simpler task than metering and charging all vehicle travel on all roads and to conduct evaluations that would increase the likelihood that further stages would be accepted and successful. The German Toll Collect system is a precedent for such a staged approach. That system was designed to be applicable to all vehicles on all roads, but implementation was begun with trucks on motorways. A pilot implementation involving one or a small number of states would be similar to state pilot programs created in past federal transportation legislation (e.g., for congestion pricing and state infrastructure banks). However, the participating states would require federal technical coordination (to ensure eventual nationwide compatibility) and financial aid. Unit costs of onboard equipment and infrastructure for small initial implementations would be high, and a federal subsidy of these costs would be justified to gain the national benefits of large-scale pilot
OCR for page 198
The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 implementations. For the same reason, the federal government should share the cost of evaluations. Because planning and development are in only the earliest phase, it is not possible to predict which of such limited implementations would prove to be practical or worthwhile, considering the costs and potential benefits from evaluation and from the experience that would be gained. However, some intermediate steps between purely technical trials and full-scale, fully functional implementations must be planned. A staged implementation seems necessary because initially no state or local transportation agency will have expertise in managing the new funding arrangement, setting prices, or deciding on the disposition of revenues. The pilot implementations would be controlled settings in which to learn best management practices so that jurisdictions would have guidance available when the charging facility became generally available. In addition, the willingness of certain states to take the lead in testing road use metering and the experience of Toll Collect in Germany suggest that pilot implementations may be an effective step toward gaining acceptance of road use metering. As pilots were under way, components of the metering system could be introduced nationwide. For example, new vehicles could be equipped with the necessary devices and the system used to collect tolls on existing toll roads. Procedures for Trials and Pilot Implementations The following procedural rules should be followed in trials and pilots: Evaluation is integral to the design of all trials and pilots and must be provided for in schedules and budgets. Specific objectives and evaluation criteria, hypotheses to be tested, evaluation techniques, and data collection procedures must be defined at the outset. Designs and pilot implementations should respect the principle that each state and local jurisdiction should control the application of charges on the roads it owns and operates and the use of revenues generated by its roads. Roads within the boundaries of a city or county may be owned by the city, the county, the state government, or an independent authority. Therefore, systems will eventually be required that have the technical capability to set rates and record revenues for individual roads. Pilot implementations should employ only technically proven system designs. It would be a setback for the concept if the first full implementations were hindered by failures that could have been corrected in technical trials. Payers of mileage taxes in the pilots should receive refunds of fuel taxes and other user fees they have paid in a way that is visible to them.
OCR for page 199
The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 Trials and pilot implementations should test whether metering would be applied to all roads or only to certain components of a road system. For example, on the one hand, excluding local streets in residential areas or uncongested rural secondary roads could have advantages from the standpoint of costs, practicality, or public acceptance. Such roads could continue to be funded through traditional mechanisms, probably with little loss of the efficiency benefits of road pricing. On the other hand, excluding some road classes might add to complexity and cost and so would not be worth the effort. Also, pilot implementations should test measures to accelerate the transition from existing user fees to mileage charges by the eligible vehicles, for example, through subsidized retrofit of onboard equipment or other incentives. 3. Provide Stable, Broad-Based Tax Support for Transit Reforms to highway finance arrangements will give rise to needs for reviewing and adjusting the relationship of highway and transit funding. The following are guidelines that should be considered: Transit systems at present require stable and broad-based tax support (for example, dedicated revenues derived from general income, sales, or property taxes). Developing such support will be necessary in order to expand transit services. Among the options available now (which include funding transit out of general revenue, increasing the transit share of highway user fee revenues, and increasing transit fares), such tax funding is preferable because of its practicality and reliability and the importance of minimizing adverse side effects. The present rate of transfers of highway revenues to transit does not seem to be large enough to affect highway programs seriously, and highway users benefit where transit has alleviated highway congestion. However, greatly increasing transfers to fund expanded transit services would risk the loss of travel benefits through declining highway performance. Such losses would affect bus transit riders as well as private passenger and freight vehicles and could be greater than the transit benefits gained. Highway benefits would be lost if highway user charges were set too high or if worthwhile highway improvements were not funded. This risk imposes a limit on the potential of existing highway user fees as a transit funding source. Federal and state transportation aid ought to serve primarily to relieve local governments of the burden of serving nonlocal needs rather than subsidize local services. Applying this rule would lead to some reallocation of external aid among American cities; cities would be compensated in proportion to
OCR for page 200
The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 the services they provided to interregional traffic and nonresident users of local facilities. If road use metering eventually is instituted on all roads in metropolitan areas, with charges that vary with traffic conditions and are set so that highway travel is no longer subsidized, funding a greater share of transit spending with fare box revenue will be possible. Transit would increase ridership and be able to charge higher fares because peak-period riders would have to pay high mileage charges if they shifted to automobile travel and because reduced traffic congestion would improve transit service quality. 4. Evaluate the Impact of Finance Arrangements on Transportation System Performance Transportation agencies must develop new capabilities for research, evaluation, and public communication to manage finance reform over the next few decades in a way that improves transportation system performance. Lack of information hinders comparative evaluation of present finance arrangements and alternatives. There is little systematic information on how the existing structure of charges, subsidies, and grant programs affects the decisions of road users and transportation agencies, even though these interactions undoubtedly exert strong influence on the benefits and costs of transportation programs. Agencies almost never evaluate completed projects after they have been in operation to determine what the actual returns on their investments have been. If tolls and mileage charges become important sources of highway funding, transportation agencies will be faced with new kinds of decisions and new information requirements. For example, transportation program budgets will be influenced by the revenue impacts of decisions about project selection and operating practices. At the same time, the response of traffic to fees and the revenues generated by the fees will provide information never before available about the value the public places on individual highway facilities. Transportation agencies will need to develop the analytic capabilities required to exploit this new information and manage their programs in the new financial environment. To fulfill these requirements, an organized program of research, evaluation, planning, and public communication will be necessary. The institutional structure of this program will require careful design. Among the considerations are the following: Because the states have the primary responsibility for transportation funding and changes in funding probably will entail realignment of federal and state roles, the structure must be a genuinely cooperative federal–state effort. The structure must guarantee that competent, objective, and independent scientific evaluations of alternatives are carried out.
OCR for page 201
The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 The activity must earn public confidence through open processes and effective communication. Congress has recently created the National Surface Transportation Policy and Revenue Study Commission. Parts of its charge are to study alternative revenue sources to fund the surface transportation system for the next 30 years and to develop a transition strategy to move to new funding mechanisms. Although the commission can begin evaluations, development of fundamentally new finance arrangements and the supporting evaluations would extend well beyond its term. Defining the appropriate organization of the development program and its scope of work would be an appropriate topic for the commission’s consideration. REFERENCE Abbreviation TRB Transportation Research Board TRB. 2003. Special Report 271: Freight Capacity for the 21st Century. National Academies, Washington, D.C.
Representative terms from entire chapter: