1
Introduction

Like all government agencies in the United States, those charged with providing highways and public transit1 are perennially faced with the challenge of serving growing needs with constrained resources. The past decade has been particularly challenging as transportation agencies coped first with rapid traffic growth during the economic boom of the 1990s and then with stagnant revenues and state government fiscal crises in the aftermath of the 2001 recession. The federal surface transportation aid program was debated for 2 years after its expiration in 2003 before reauthorization in 2005, as proposals to increase spending clashed with opposition to any increase in highway user tax rates to fund the expansion.

Recent circumstances have heightened long-standing worries of transportation officials that funding sources, particularly fuel taxes, that provided stable and growing revenue for transportation programs for 40 years are going to become unreliable in the future. If petroleum price increases or government interventions to reduce pollutant emissions or petroleum consumption lead to widespread use of more efficient automobile engines or lighter passenger vehicles, maintaining revenue will require that legislatures accelerate rate increases. In addition, there is concern that the political consensus supporting transportation taxes may be eroding as the goals of the programs become more diffuse, the public becomes more sensitive to environmental and land use impacts of expanding infrastructure, and increasing population density and wealth drive up the costs of infrastructure expansion. The payers of transportation fees and taxes may view the deterioration of performance as evidence that transportation agen-

1

In this report, the term “highway” refers to all public highways, roads, and streets, and “transit” refers to all public local bus, subway, commuter rail, and trolley services, unless otherwise qualified. Intercity public transportation is excluded from the definition of transit.



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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 1 Introduction Like all government agencies in the United States, those charged with providing highways and public transit1 are perennially faced with the challenge of serving growing needs with constrained resources. The past decade has been particularly challenging as transportation agencies coped first with rapid traffic growth during the economic boom of the 1990s and then with stagnant revenues and state government fiscal crises in the aftermath of the 2001 recession. The federal surface transportation aid program was debated for 2 years after its expiration in 2003 before reauthorization in 2005, as proposals to increase spending clashed with opposition to any increase in highway user tax rates to fund the expansion. Recent circumstances have heightened long-standing worries of transportation officials that funding sources, particularly fuel taxes, that provided stable and growing revenue for transportation programs for 40 years are going to become unreliable in the future. If petroleum price increases or government interventions to reduce pollutant emissions or petroleum consumption lead to widespread use of more efficient automobile engines or lighter passenger vehicles, maintaining revenue will require that legislatures accelerate rate increases. In addition, there is concern that the political consensus supporting transportation taxes may be eroding as the goals of the programs become more diffuse, the public becomes more sensitive to environmental and land use impacts of expanding infrastructure, and increasing population density and wealth drive up the costs of infrastructure expansion. The payers of transportation fees and taxes may view the deterioration of performance as evidence that transportation agen- 1 In this report, the term “highway” refers to all public highways, roads, and streets, and “transit” refers to all public local bus, subway, commuter rail, and trolley services, unless otherwise qualified. Intercity public transportation is excluded from the definition of transit.

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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 cies are not delivering their money’s worth rather than as evidence that rate increases are called for. Opportunities are at hand for fundamentally new approaches that could provide a sound basis for transportation finance and at the same time improve the efficiency and quality of transportation services. Progress in the technologies of toll collection and road use metering has greatly diminished the obstacles of cost and inconvenience that have discouraged imposition of direct charges on the users of most roads in the past. With the application of these technologies, highway services could be paid for by metering each customer’s use and charging accordingly, just as utilities such as water and electricity are paid for today. Development of this revenue source would maintain the established practice of funding highways largely through fees paid by users, allow fees to be much more closely tied to the cost of providing service for each user, and provide information to transportation agencies about which investments in capacity would yield the greatest benefits. Eliminating the connection between highway user revenues and motor vehicle fuel economy would avoid the potential conflict between transportation funding objectives and policies intended to promote energy conservation or emissions reductions. In addition, facilities that generated their own revenue would be suited to operation by private-sector franchisees, so there would be opportunities to supplement public efforts with private capital and skills to carry out infrastructure projects. Initial steps toward these new kinds of transportation finance arrangements are taking place today. Toll roads featuring automatic toll collection and charges that can be varied to optimize traffic flow, systems to meter vehicle use over an extensive network of roads and assess charges proportional to mileage, and roads developed and operated by private firms receiving revenue from road user fees are in operation in the United States or in other countries. However, before these arrangements can become major components of the transportation finance system, their effectiveness must be demonstrated to the public’s satisfaction and the institutional capabilities needed to manage them on a large scale must be developed. In the meantime, it will be worthwhile to seek refinements that could improve the system’s capacity to provide the right level of funding and direct funds to the best uses within the established structure of fees, revenue sources, and assignment of responsibilities among governments. The Transportation Research Board (TRB) convened the Committee for the Study of the Long-Term Viability of Fuel Taxes for Transportation Finance to assess what recent trends imply for the future of traditional transportation finance, identify finance alternatives and the criteria by which they should be evaluated, and suggest ways in which barriers to acceptance of new approaches might be overcome. The study was sponsored by the state transportation departments through the National Cooperative Highway Research Program, the Federal Highway Administration, and TRB. This chapter describes the transportation finance prob-

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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 lems that are the motivation of the study—in particular, as they are seen by state governments, which are responsible for collecting most highway user taxes and fees and for most highway spending—and explains the charge to the study committee. The final section of the chapter identifies guidelines that the committee applied in its evaluation of alternative government policies for financing transportation. STUDY ORIGIN: TRANSPORTATION FINANCE PROBLEMS Several states have undertaken high-level reviews of transportation finance and tax issues in recent years (Reno and Stowers 1995, Appendix B; CTI 1996; CRC 1996; CRC 1997; CRC 1998; Road User Fee Task Force 2003). These reports provide examples of the states’ diagnoses of their finance problems. A Commission on Transportation Investment was formed in 1995 by the state of California “to investigate California’s investment in transportation infrastructure” (CTI 1996, 5). The commission’s report defines the finance problem facing the state’s transportation program as follows: California’s transportation system has been funded from a dedicated gasoline tax since 1923…. Over the last 20 years, however, several trends have occurred which have led some to question the State’s current reliance on this revenue source. One of these trends is the increasing fuel economy of today’s vehicles…. This creates the ironic situation of total usage of the system increasing while the amount of revenue is not increasing at a commensurate rate. The second trend … is the development of alternative fuel vehicles. These fuels … are subject to tax rates that … are 12 to 58 percent less than the equivalent tax rate for gasoline…. Fuel taxes were originally conceived as a direct user fee—the more one drives, the more one pays. As alternatives and more efficient fuels and vehicles come into use, the linkage between the gas tax and the use of transportation facilities weakens…. This result can be credited to explicit public policies stemming from national energy crises and desires to reduce air pollution…. California motorists pay fuel taxes with the assumption that these revenues are used to maintain and expand the transportation system. But successful implementation of the policies noted above [is] causing the fuel tax to be an unreliable source for all of the system’s needs. (CTI 1996, 13–14) The commission also cites “a legislative and political climate hostile to new taxes” as a financial reality (CTI 1996, 25). The report offers a range of options for coping with the problems, from immediate to long term and from modest to radical (CTI 1996, 26–28): Living within our means. Increasing the fuel tax…. The disadvantages are that there is little political support to raise taxes, the fuel tax is not responsive to the increasing fuel efficiency

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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 of vehicles, and it does not capture the increasing use that non-gasoline powered vehicles are likely to be making of the state’s roads. Require alternative fuels … to pay taxes that are equivalent on a per mile traveled basis to the current gasoline and diesel fuel tax. Vehicle Miles Traveled … Fee [i.e., a fee proportional to miles traveled]. Direct Road Pricing [i.e., a fee depending not only on miles traveled but also on the road used and traffic conditions]. Immediate actions recommended include curtailing applications of highway user revenues to nontransportation purposes, expanding opportunities for public– private partnerships, and introduction of high-occupancy/toll lanes. This list of immediate and long-term options is representative of current proposals for resolving state highway program funding problems. Oregon’s Road User Fee Task Force was formed by the legislature in 2001 with a specific practical charge: “to develop a design for revenue collection for Oregon’s roads and highways that will replace the current system for revenue collection” (Road User Fee Task Force 2003, 1). The task force defines the state highway finance problem in nearly the same terms as California’s Commission on Transportation Investment (Road User Fee Task Force 2001, 1): Fuel tax revenue constitutes the bulk of the total funding available for Oregon roads…. New technology will soon greatly improve the average fuel efficiency of the statewide passenger vehicle fleet…. As a result of fuel efficiency improvements, Oregon fuel tax revenues from the sale of gasoline are likely to level off during the next 10 years and then drop permanently. The task force’s proposal has three provisions (Road User Fee Task Force 2003, 25): imposition of new charges in place of existing ones, including a mileage fee, congestion pricing (i.e., a charge for road travel that is higher at times and locations where congestion is high), and tolling of all newly constructed roads, bridges, or lanes; a 20-year phase-in period during which the state would operate both the mileage fee and the fuel tax; and pilot testing of hardware and administrative arrangements for the mileage fee as the first step toward implementation. This proposal is described in more detail in Chapter 5. With similar motivations, 15 states from all regions of the country pooled funds to conduct the 2002 study A New Approach to Road User Charges. The study’s report cites, in addition to the concern for revenue adequacy emphasized by the Oregon and California panels, other shortcomings of the present fuel tax system, especially “a weak relationship to the relative costs of particular trips such that some vehicle operators pay user charges that exceed the costs they impose, while others pay substantially less than their costs.” Thus, “vehicle operators are not given signals to make them aware of the costs a particular trip may impose on society” (Forkenbrock and Kuhl 2002, 1). The report proposes

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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 technical and administrative arrangements of a system for metering and charging for each vehicle’s road use and recommends a field test. This proposal also will be described in Chapter 5. A final example, the report on highway finance of the nongovernmental Citizens Research Council of Michigan, was issued at a time when Michigan was ranked low among the states in fuel tax rates and road conditions and a debate on raising tax rates was under way. The state increased its gasoline tax rate from 15 to 19 cents per gallon the following year. The theme of the report was that increasing revenue would by itself be an inadequate response to the fiscal problem. The main proposals were the following (CRC 1996, 4–13): user tax increases must be accompanied by management reforms in the highway program (“unless the system is restructured both financially and administratively, it is very likely that any additional dollars will not purchase the improvement in transportation services that might be expected”); jurisdictional control of roads should be updated, with the state taking over responsibility for roads in local hands that serve mainly through traffic; an increase in truck registration fees should be considered; methods of determining priorities must be improved; contracting out should be increased; and indexation of the fuel tax rate to compensate for inflation should be considered. Three distinct justifications for considering an overhaul of transportation finance and highway user fees emerge from these state analyses: a potentially diminishing tax base, erosion of the user fee finance principle, and the opportunity to improve efficiency. In summary, proponents of changing transportation funding arrangements have claimed that developments in motor vehicle technology will threaten the revenue capacity of existing fees, that the finance system has diverged from its founding principles with harmful consequences, and that reform in the direction of pricing would increase the public benefits of government transportation expenditures. The study committee examined the evidence supporting each claim. Potentially Diminishing Tax Base Among the foremost state concerns in the reports is that energy supply, environmental constraints, or changes in automotive technology will reduce fuel consumption, with reduced revenues as the consequence. The implicit assumption behind this fear is that fuel tax rates will not be raised to compensate. Yet if the transition to alternative energy sources is gradual, it is not self-evident that the tasks of adjusting rates and incorporating new fuels into the tax base as the need arises will necessarily entail such a threat to fiscal soundness. The California report cites rising political resistance to tax rate increases; however, as Chapter 2 will describe, nationwide average constant-dollar user fee revenue per vehicle mile has held fairly constant for the past 25 years. The fear that new revenues

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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 will not come online as needed may arise from three considerations. First, subsidies in the form of waivers of excises have been a popular way to promote alternative energy development (e.g., the fuel tax subsidy granted to gasohol). Second, imposing new kinds of fees presents technical and administrative problems. Third, state officials recall the period from the mid-1970s to the early 1980s when the combination of high inflation, slow economic growth, and increasing automotive fuel economy reduced constant-dollar highway user fee revenue by 50 percent. Tax rates were eventually adjusted, but only after a lag of nearly a decade. Erosion of the User Fee Finance Principle One characterization of the finance scheme of the federal-aid highway program (whose centerpiece is a trust fund receiving revenues from user fees), and of the similar highway finance schemes of many states, is that of a compact between highway users and the government highway agency. Users agree to pay fees with the understanding that the agency will spend the revenue to provide highway services. At the creation of the Federal Highway Trust Fund in 1956, all revenue from a specified collection of excise taxes on fuels, vehicles, and parts was dedicated to the fund, to be distributed to the states for highway uses. Over time, the revenue from these taxes has accumulated additional functions, especially at the federal level. Since 1979, gasohol (a blend of gasoline with ethanol produced from grain) has received preferential tax treatment to promote alternative fuels and aid farmers (the revenue loss, after a 2004 change in federal law, is now borne by the general fund rather than by transportation programs alone); since 1983, a portion of the fuel tax is dedicated to a fund for mass transit capital projects; since 1987, a small portion of the fuel tax has been dedicated to the Leaking Underground Storage Tank Trust Fund; and from 1990 to 1997 a significant portion of the fuel tax was deposited in the general fund for deficit reduction (and the general fund continued to receive minor amounts until 2005). During the fiscal crises that many states faced in the early 2000s, a number of legislatures chose to apply user fee revenues normally devoted to transportation to general purposes instead (e.g., AAA Mid-Atlantic 2005). Other uses of the revenues are sometimes proposed. Meanwhile, at the state and local levels, it has become increasingly common to dedicate revenues from particular taxes other than gasoline or motor vehicle excises (for example, sales taxes) as revenue sources for transportation. (When the law that establishes a tax specifies that revenue from the tax is to be used for certain specified purposes, the tax is called a dedicated tax.) The accretion of applications of highway user fee revenue to nonhighway purposes, together with the popularity of dedicated revenue sources that cannot be regarded as user fees, weakens the principle of linkage between the fees paid and the cost of maintaining the highways, which has been the traditional political rationale for the present finance scheme. Of course, there are legitimate

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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 grounds for arguing that transit and the other uses to which user fee revenues have been dedicated are as reasonable uses of the revenue as is highway construction, and there has always been controversy over the merits of the user fee–trust fund arrangement in highway finance. However, if the present system on the whole tends to promote public welfare, then the states are justified in searching for ways to reinforce its core principles. Opportunity to Improve Efficiency In political discussions, the transportation finance problem traditionally has been defined as primarily a problem of revenue adequacy: how to raise revenues sufficient to maintain a desired level of spending or serve defined transportation needs in a manner that is perceived as fair by the public and highway users. This definition of the problem is incomplete because it does not take into account the connection between finance arrangements and the performance of the highway system. Finance provisions affect the quality of investment decisions and the efficiency of operations. Growing congestion and breakthroughs in technology for metering road use, as well as interest in exploiting new revenue sources, have spurred public agencies to consider the use of pricing to manage congestion. It appears to be less widely appreciated that finance reform, especially reform in the direction of pricing, would exert a powerful influence on project selection and overall spending levels, with the potential for improving the targeting of investment spending to the highest-payoff projects and helping the states to determine the optimum level of highway spending. Reforms that reduced arbitrary variation in tax and fee payments among highway users would make the finance system more fair as well. CHARGE TO THE COMMITTEE These motivations for undertaking reform are reflected in TRB’s charge to the committee (defined in the task statement in Box 1-1). The committee was asked to judge the significance of the two hypothesized threats to the viability of revenue sources and finance arrangements. The first is that rising fuel prices, new automotive technology, or new environmental and energy regulations will affect revenues in the next few decades and that the financial side effects of these forces, in the absence of reform, will cause a decline in the performance of the highway system. The second is that trends in the political choices being made about transportation funding at the federal, state, and local levels today threaten the viability of finance arrangements and the performance of the transportation system. Finally, the committee was asked to identify finance alternatives that would improve the services that transportation programs afford the public. As the term

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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 BOX 1-1 Committee for the Study of the Long-Term Viability of Fuel Taxes for Transportation Finance: Statement of Task The study will examine current practices and trends in finance of roads and public transit and evaluate options for a long-term transition to alternative finance arrangements from the present system, which relies heavily on fuel taxes whose revenues are dedicated to transportation spending. The goals of the study are to Assess the future revenue-generating prospects of the present user fee tax base, especially the gas tax, considering developments in fuel prices, automotive technology, and environmental and energy regulation, and the likely time frame for future technology transitions in transportation. Examine developments in transportation finance policies of federal, state, and local governments. Assess the implications of finance trends for the performance of the transportation system, and whether benefits could be attained through reform. Identify alternatives to the present finance scheme and the criteria by which they should be judged, considering the influence of finance arrangements on the performance of the transportation system. Alternatives may include long-term prospects for road pricing and for privatization as well as immediate measures aimed at reinforcing positive features of the present scheme. Identify institutional and technical obstacles that may hinder needed finance reforms and recommend a transition strategy to new finance arrangements if reform appears necessary. 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. Implicit in the charge is a broad definition of the scope of the transportation finance system. The system includes three elements: the schedule of fees or spe-

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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 cial taxes that governments or other operators collect from users of highways and public transit; the sources of funds for transportation programs (which may include dedicated user fees, other dedicated revenues, general fund appropriations, and grants from other governments); and finally, the institutional arrangements and rules that determine budgets, spending priorities, and the distribution of responsibilities among levels of government. The impetus for this study was concern for the viability of present highway user fees as a revenue source; therefore, the committee has considered transit finance primarily insofar as it is linked to highway user fees. A prominent feature of the present finance system is the dedication of portions of federal and state highway user fee revenues to transit. The committee assumed that short-term as well as long-term opportunities for improvement in finance arrangements were within its charge. A transition to some form of road pricing or direct mileage-based charges is viewed favorably in the state finance studies cited above and may be gaining recognition as the desirable eventual outcome. However, it is important not to neglect measures aimed at reinforcing the positive features of the present system. In the short term, dependence on fuel taxes and vehicle registration and license fees as revenue sourcesfor transportation will continue. Highway finance practices have consequences for environmental quality and energy consumption, but they have not been examined in this study. As the report will describe, one of the failings of present practices is that, although revenues from the fees and special taxes motorists pay cover most highway agency expenditures to build and operate roads, fees do not reflect other public costs of road travel, such as congestion delay and automotive pollution. The result is that road users make many trips that cost the public more to provide than they are worth to the traveler. A system for road use metering and mileage charging (a concept described in Chapter 5) could correct this failing, if public officials chose, by charging fees that approximated the actual costs of trips, taking into account the time and place of travel. Within the present framework of highway user fees, proposals have been made to impose a pollution charge in the form of an increase in the fuel tax as a way to reduce automotive pollution costs. Before enacting such a tax, governments would have to consider the costs of overcharging vehicles that produce little pollution and travel in areas where pollution costs are low. A pollution tax would also complicate administration of the present user fee finance system, because history suggests a tendency for the revenue from taxes paid by road users to be devoted to road building eventually, regardless of the original intent. Finally, fundamental change in road user charges and the means of paying for roads would have important impacts on land use. Governments will need to consider such impacts as the transportation financing system evolves. Partially or entirely replacing fuel taxes with fees based on mileage would reduce or eliminate the incentive that fuel taxes provide to motorists to choose

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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 more fuel-efficient vehicles or otherwise conserve fuel. 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 goals of U.S. energy policy. (Of course, a mileage-charging scheme could incorporate conservation incentives.) A mileage-charging scheme that incorporated peak charges would have an important impact on energy consumption through its influence on congestion, travel, and land use. These effects have not been examined in this study. As will be argued in Chapter 4, the most cost-effective taxes for promoting petroleum conservation would be broad-based taxes applied equally to all petroleum consumers. Lack of information makes definitive responses to all the questions raised in the study charge impossible. Projections of technology and energy futures are inherently highly uncertain. There is little systematic information on how the existing structure of charges, subsidies, and grant programs affects the decisions of users and transportation agencies. Information on the benefits and costs of highway investments and other transportation programs is fragmentary because agencies do not routinely conduct rigorous economic evaluations of their projects. Because of this information gap and lack of experience with some of the reform measures that have been most prominently proposed, any specific and detailed recommendation for a new transportation finance system would be premature. Preparation for long-term reform will require basic research, planning, the promotion of informed public discussion, and early implementation of new approaches where circumstances permit, with the goal of learning from experience. A strength of U.S. transportation programs in this respect is the variety of conditions, experience, and practices among the states, which provide a natural laboratory for problem solving. The committee’s conclusions and recommendations are to point out opportunities in these directions. GUIDELINES FOR FINANCE ARRANGEMENTS The study charge calls for evaluating the present transportation finance system and alternatives. This task requires criteria for comparison and an understanding of the goals of the finance system. Chapter 3 reviews methods and criteria that have been used to evaluate finance practices. In this introductory chapter it is appropriate to state certain premises that the committee believes should underlie the evaluations: Finance arrangements are central to the performance of the transportation system. Choices about fees and taxes charged to users and about funding sources are critical not only to the feasibility of a transportation project or program but also to the likelihood of its success. The finance system is a

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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 major influence on decisions about which projects and services are provided and how existing facilities are utilized. Therefore, any fundamental change in finance arrangements (e.g., replacing current user fees with fees of a different form) would strongly affect transportation system performance. Decisions on finance also determine the distribution of the costs and benefits of transportation programs. Finance alternatives should be evaluated in terms of these impacts. Efficiency is an important test of finance options. The first test that should be applied to a proposed finance reform is whether it would tend to promote efficient investment and operation. That is, finance arrangements should encourage investments in the transportation system that yield economic benefits and discourage investments that do not, and they should encourage operating practices on existing facilities such that service is provided to those who value the service more highly than the cost of producing it and is not provided to others. The cost of transportation services includes congestion, environmental costs, and accident costs. Nearly any change in the finance system—adjustments in highway user fees, changes in the dedication of particular revenues to particular uses, or changes in grant rules—will affect efficiency. Pricing is a means to allow users to express what they want from the transportation system. Pricing means a system of imposing charges on users in which each user recognizes a connection between decisions to use the transportation system and the charges incurred and the operating agency sets the charges on the basis of the cost of providing service to the user. The present highway user fee scheme of fuel taxes, registration fees, and licensing fees is an imperfect form of pricing. In a more refined scheme, such as the proposals for mileage charges cited above, the fee would be much more closely matched to the cost of each trip. The intent of pricing should be to give consumers the information they require to make efficient choices, rather than to dictate choices. In general, the price-setting process should not set targets for mode shares, congestion or pollution levels, or land use patterns and then adjust fees until the targets are reached. Rather, fees should be set according to costs, and travelers should be allowed to choose their preferred modes, congestion levels, and locations for activities. [The relevant costs and methods of measuring them were identified in the report of an earlier TRB committee (TRB 1996).] There are advantages in aligning the responsibilities of the federal, state, andlocal governments so that the lowest level of government that represents the parties directly benefiting from a transportation facility takes responsibilitythatthe facility is funded and provided. If this rule is followed, then the government responsible for the facility is accountable to the beneficiaries, who

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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 also pay for it through their taxes and fees, and thus transportation priorities are more likely to correspond to the services that beneficiaries value and are willing to pay for. It does not follow from this guideline that the federal government must necessarily provide all facilities that serve national needs. State and local governments have shown that they are willing to provide many facilities of national significance as long as local residents do not have to subsidize them. Consideration of the division of responsibility among the federal, state, and local governments for providing and funding roads and transit is an essential element of the committee’s charge to identify alternatives to present finance arrangements. The present division of responsibility in large part reflects the character of funding sources. Lack of practical means for local governments to charge users of their roads, and especially of means for charging users from other jurisdictions, has been a primary reason for involvement of the federal and state governments in local transportation, and part of the justification for federal aid to states has been similar limits on state revenue-raising capacity. As governments pursue reform of transportation finance, the simple substitution of new revenue sources for the existing ones while leaving these institutional arrangements unchanged may not be possible. In particular, adoption of systems to directly charge motorists for road use (such as the Oregon mileage-charging proposal described above or expanded use of other forms of tolls) would compel a reexamination of federal, state, and local roles. State and local governments would expect to control revenue directly generated by the roads they own and operate and to control pricing on those roads. The new revenue-raising capacity would diminish the rationale for intergovernmental aid. To the extent that local and state governments have mechanisms to charge all users of the roads they operate, rather than just their own residents, the need for involvement of higher levels of government is lessened. In most public discussions of transportation finance, the desire to increase revenue in order to serve defined needs is identified as the primary motivation for searching for finance alternatives. The state transportation finance studies summarized in the first section of this chapter are examples: the studies project that existing sources will not yield sufficient revenue to maintain desired levels of spending. Revenue adequacy is a primary federal concern as well. The Federal Highway Administrator, explaining the need for finance reform, has stated that “it is politically untenable to increase [fuel] taxes to the level necessary to support today’s and tomorrow’s needs” (Orski 2004). Revenue-raising capacity is certainly a relevant criterion for evaluating tax alternatives, and it is responsible for public officials to view finance as the art of finding money for programs they believe the public wants.

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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 However, the list of the committee’s evaluation guidelines above does not refer to revenue adequacy. The committee has not interpreted its task as finding revenue mechanisms that will support an increased level of spending for transportation. Information about highway benefits and costs is incomplete, and only highly imprecise estimates of correct spending levels are now possible. More important, there is no certainty that finance reform in the direction of improving the efficiency of the transportation system would necessarily raise more revenue than existing arrangements. The reformed system would remain subject to many of the external political and economic constraints that limit the revenue potential of the present system, although the public might be willing to pay more for a transportation system that worked better. Finance reform could improve performance to the extent that expenditures that appear to buy little improvement today might be more attractive. Even though it would be difficult to predict the revenue consequences of developing new user fees to supplement or replace existing ones, it is reasonable to expect that the performance of the system would improve over time if fees more closely reflected costs. Transportation agencies would have more information about user benefits, and the pressures arising from budget constraints and user preferences would tend to encourage better investment and operating decisions. OUTLINE OF THE REPORT The remainder of this report is organized as follows. Chapter 2 describes present highway and transit finance arrangements and trends in finance practices. The chapter considers whether the viability of the present finance system is threatened by trends in reliance on user fees, legislative adjustments to fees, or revenue yield. Chapter 3 summarizes available information on the performance of the finance system for highways and transit at the federal, state, and local government levels—whether appropriate resources are available and are being devoted to the most beneficial uses, and the degree to which the system incorporates incentives for prudent use and management of facilities. The benefits of reform depend on how well present arrangements are working. Chapter 4 reviews projections of energy prices, motor vehicle technology, and fuel economy and considers the likelihood of future government interventions to regulate fuel consumption or pollutant emissions that could affect transportation revenue sources. Thus the merits of the three arguments for reform of the system identified above—a diminishing tax base, erosion of the user fee finance principle, and the opportunity to improve efficiency—are assessed in Chapters 4, 2, and 3, respectively. Chapter 5 describes proposals for fundamental changes in revenue sources, including mileage charges and expansion of toll roads. Chapter 6 reviews avariety of proposals for improvements within the established framework of user fees and

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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 other finance practices. Finally, Chapter 7 presents the committee’s conclusions and recommendations. REFERENCES Abbreviations CRC Citizens Research Council of Michigan CTI Commission on Transportation Investment (California) TRB Transportation Research Board AAA Mid-Atlantic. 2005. Maryland’s Transportation Network. CRC. 1996. Michigan Highway Finance and Governance: In Brief. Nov. CRC. 1997. Michigan Highway Finance and Governance. May. CRC. 1998. Michigan Highway Finance and Governance: A One-Year Report Card. CTI. 1996. Final Report. Jan. Forkenbrock, D.J., and J.G. Kuhl. 2002. A New Approach to Assessing Road User Charges. Public Policy Center, University of Iowa. Orski, C.K. 2004. Two Senior Federal Transportation Officials Share Their Views on the Future Federal Role in Transportation Financing. Innovation Briefs, Vol. 15, No. 5, July–Aug. Reno, A.T., and J.R. Stowers. 1995. NCHRP Report 377: Alternatives to Motor Fuel Taxes for FinancingSurface Transportation Improvements. Transportation Research Board, National Research Council, Washington, D.C. Road User Fee Task Force. 2003. Report to the 72nd Oregon Legislative Assembly on the PossibleAlternatives to the Current System of Taxing Highway Use Through Motor Vehicle Fuel Taxes. March. TRB. 1996. Special Report 246: Paying Our Way: Estimating Marginal Social Costs of FreightTransportation. National Research Council, Washington, D.C.