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2 How Transportation Is Funded and Who Pays Given the size and complexity of the U.S. surface transportation system, it should come as no surprise that collecting revenue for and spending money on transportation regularly generates political debates over fair- ness. Who should pay? How much should they pay? From where should revenues be collected? On what should revenues be spent? Where should revenues be expended? Such questions are at the heart of transportation policies and politics. This chapter presents a taxonomy of transportation funding approaches for highways and transit in the United States to set the scene for later dis- cussions of specific issues relating to transportation finance equity. For a more detailed discussion of surface transportation revenue sources, the reader is referred to the reports of the National Surface Transportation Policy and Revenue Study Commission (NSTPRSC 2007) and the National Surface Transportation Infrastructure Financing Commission (NSTIFC 2009). Chapter 3 of the latter report includes tables evaluating both exist- ing sources of financing for surface transportation and new revenue options. The evaluation criteria include equity considerations, notably income and geographic equity, and the extent to which the financing mechanisms can be structured to reflect the user (beneficiary) pay principle. Highlights from the commission’s generic and qualitative assessment of selected finance mechanisms in terms of these criteria are summarized in Appendix E. The legislation and administrative regulations authorizing the various sources of revenue described in the taxonomy often identify who is responsible for making payments but do not address who actually pays in practice. The motor fuel tax, for example, is levied on fuel distributors, but, as motorists know, at least some portion of this tax is incorporated 21

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22 Equity of Evolving Transportation Finance Mechanisms into the price they pay for gas at the pump. The question of who ulti- mately pays is fundamental to any equity analysis. Therefore, the chapter concludes by considering briefly the question of who bears the burden (cost) of a given transportation finance policy. This topic is examined in detail in the section of Chapter 3 on distributions of burdens and benefits. TAXONOMY OF TRANSPORTATION FUNDING APPROACHES The revenue raised for surface transportation comes from a variety of transportation and nontransportation sources, ranging from vehicle reg- istration fees and weight-based fees to property and sales taxes. Individ- uals and firms pay for private vehicles, insurance, fuel, and fares. Local governments—cities and counties—use tax money to pay for local streets and roads. State and federal governments collect fees and taxes to share the capital costs of freeways, other highways, and components of public transit systems, while operating and maintenance costs are typically the responsibility of state and local agencies. The structure of transportation finance varies from state to state, and even from county to county, thereby adding to the overall complexity. Major sources of surface transportation revenues for highways and transit are listed in Box 2-1 and discussed below.1 This discussion is not intended to be exhaustive, but rather to provide a brief overview high- lighting features particularly pertinent to the committee’s examination of the equity implications of evolving transportation finance mecha- nisms. To this end, several road-pricing mechanisms, including cordon tolls, high-occupancy toll (HOT) lanes, and vehicle miles traveled (VMT) fees, are described. 1 The taxonomy presented here draws extensively on a report assessing the viability of a range of conventional and innovative options for financing investments and operations of highway and transit systems (Cambridge Systematics, Inc., et al. 2006). The reader is referred to this document for a more comprehensive treatment and additional details of the finance mechanisms. The rele- vance of both existing and evolving finance mechanisms for different levels of government (fed- eral, state, and local) is discussed by Rosenbloom (2010).

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How Transportation Is Funded and Who Pays 23 BOX 2-1 Overview of Transportation Finance Sources • Motor fuel taxes: – Federal and state excise taxes and – State sales taxes. • Motor vehicle taxes and fees: – Vehicle registration and license fees, – Vehicle personal property taxes, and – Excise taxes on vehicle sales. • Tolling, pricing, fares, and other user fees: – Tolling and congestion pricing, – Vehicle miles traveled fees, and – Transit fares and other fees. • General revenue sources: – Income taxes, – Property taxes, and – General sales taxes. • Special-purpose taxes: local-option sales taxes. • Value-capture strategies. Motor Fuel Taxes The gas tax (or, more precisely, the motor fuel excise tax) is a levy imposed on the sale of motor fuels on a per-gallon basis at both the fed- eral and state levels. All 50 states and the District of Columbia levy motor fuel excise taxes, which are in addition to the federal gas tax. The current federal fuel excise tax is 18.4 cents per gallon of gasoline and 24.4 cents per gallon of diesel fuel. State fuel excise taxes vary widely; in 2009, they ranged from 7.5 cents per gallon of gasoline in Georgia to 45.1 cents in Connecticut. The weighted average of the 50 states plus the District of Columbia and Puerto Rico was 21.3 cents per gallon in 2009 (FHWA 2010b). The federal gas tax is not indexed to inflation; for example, it does not change with the price of gasoline and related fuels. The federal

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24 Equity of Evolving Transportation Finance Mechanisms gas tax was last raised in 1993, whereas most states have raised their fuel taxes at least once since that date. Some states index part or all of the gas tax in response to changes in fuel prices or general rates of inflation. In addition to the traditional motor fuel excise taxes, some states also collect sales taxes on motor fuels. These sales taxes are set as a percent- age of the fuel price rather than as a unit price per gallon, and typically range from 4 to 6 percent. Some places also levy county or local taxes on motor fuel. Motor fuel taxes account for most of the federal revenues used for highway and transit programs and for almost half of the revenues used by states to fund highway needs. In addition, state motor fuel tax revenues are commonly distributed to local governments for highway use and are used to pay debt service on bonds issued for transportation projects. Motor fuel tax revenues are typically dedicated to transportation by statute, and about half the states currently have either constitutional or statutory restrictions that limit the use of revenues from state motor fuel taxes to highway and road purposes (Rall et al. 2011). As a consequence of these restrictions, at least in part, state and local fuel tax revenues account for only about 2 percent of state and local revenues used for transit nationwide (NSTPRSC 2007). This nationwide average is some- what misleading, however, because the percentage may be considerably higher in jurisdictions that allow the use of fuel tax revenues for transit. At the federal level, the excise tax on motor fuels is one of the principal sources of funding for capital investments in public transit. About 16 percent of federal highway user excise taxes are deposited into the Mass Transit Account of the Highway Trust Fund and are used to sup- port the programs of the Federal Transit Administration (GAO 2006). Sales taxes on motor fuels are a source of funding for transportation in some, but by no means all, states. In California, for example, sales taxes on motor fuels provide funding for state and local highways and public transportation, but a portion of these taxes goes to the general fund. In New York, none of the receipts of sales taxes on motor fuels are dedicated for transportation (Cambridge Systematics, Inc., et al. 2006). As noted in Chapter 1, the motor fuels tax is based on the user fee principle, whereby the beneficiaries of a transportation asset (highways) are charged for its use. Therefore, motor fuel taxes are referred to as “user

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How Transportation Is Funded and Who Pays 25 fees” and are widely perceived as such. In contrast to the tolls and transit fares discussed below, however, the motor fuel tax is not levied directly at the point of use. It is, therefore, an indirect user fee and so may not always be perceived by users as a fee for service. Motor Vehicle Taxes and Fees Motor vehicle taxes and fees levied by states include vehicle registration, license, and title fees; personal property taxes on vehicles; and excise taxes on vehicle sales. Vehicle registration fees are normally the largest source within this category, and they vary by vehicle class. Many states have a flat fee for light-duty vehicles, but others base the registration fee on weight or a combination of weight, age, horsepower, and value. Most registration fees for heavy duty vehicles are based on vehicle type and weight and are graduated based on each state’s unique, legislatively defined schedule for vehicles of different weights. The fee categories for heavy vehicles are specific to each state. Most states dedicate the revenue from motor vehicle taxes and related fees to transportation. In 2004, motor vehicle taxes and fees accounted for almost 27 percent of total state revenues dedicated to highway expen- ditures and represented the second largest source of revenue for most states after the gas tax (Cambridge Systematics, Inc., et al. 2006). Motor fuel taxes and vehicle registration and related fees together are the main- stay of state highway programs, accounting for more than half of high- way revenues in the vast majority of states (NSTPRSC 2007). Tolling, Pricing, Fares, and Other User Fees Direct highway user fees levied at the point of use, such as tolling and pricing, have contributed a relatively small share of highway revenues in recent history, although in colonial times tolls were the main source of funds for building highways and bridges. Currently, tolls represent about 5 percent of highway revenues at all levels of government (FHWA 2010a). These fees have, however, received a great deal of attention in recent years as options for supplementing or replacing current highway financing mechanisms, notably the gas tax (see, for example, TRB 2006 and NSTIFC 2009). Options of particular interest include tolling and

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26 Equity of Evolving Transportation Finance Mechanisms congestion pricing as well as VMT fees. In the case of transit, fares are the primary form of user fee. Tolling and Congestion Pricing Currently, there are approximately 5,100 miles of tolled roads, bridges, and tunnels in the United States, with 101 tolled facilities operated by 85 different regional, state, and local agencies or entities (NGA Center for Best Practices 2008). Toll rates on most of these facilities do not vary by time of day or day of the week, though the number of variable-toll-rate facilities is slowly growing. A few states—notably California, Florida, Illinois, New York, and Texas—account for the bulk of toll revenues. Many states are using, or considering using, tolls as a way of generat- ing new revenue. It is generally easier to ask users to pay tolls for use of new roads, bridges, and special lanes than to apply tolls to currently unpriced facilities, which is a challenging undertaking politically and is prohibited on the Interstate System with a few exceptions. Therefore, the most promising candidates for future toll facilities are new roads or new lanes added to existing roads. These newly constructed facilities tend to be in fast-growing states, and Florida and Texas are among the leading states in building new tollways (NGA Center for Best Practices 2008). Congestion pricing policies aim to manage congestion by levying tolls that encourage people to change their travel patterns, thereby avoiding the toll. Such policies are not usually designed primarily to be a funding source, and, in practice, the toll collected to manage congestion may be less than that needed to build or operate the facility. Nonetheless, the revenue generated may help pay for other travel options, such as transit services, or for implementation of the congestion pricing policy. Cordon Tolls In recent years, toll charges to enter or drive within a congested urban area during times of heavy traffic have been imple- mented in cities around the world, including Singapore, London, and Stockholm, Sweden. In 2007, New York City’s Mayor Bloomberg pro- posed a congestion pricing approach to discourage driving into the core of Manhattan, but this proposal generated considerable controversy and was not implemented (see Chapter 5). These cordon, or area, pricing concepts are primarily intended to reduce congestion by discouraging

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How Transportation Is Funded and Who Pays 27 some people from driving in central business districts and encouraging them to use alternative modes of transportation or to travel at less- congested times. To this end, any surplus revenue from cordon tolls, over and above that needed to operate the facility, is often dedicated to improving transit services. Corridor Pricing Pricing is also used on specific facilities—expressways or other arterial roads—to manage congestion by charging higher fees during peak periods to encourage some travelers to alter their choice of mode, route, or time of travel. In the United States, congestion pricing applications tend to be facility-specific rather than system- or areawide applications. Examples include two bridges connecting Fort Meyers and Cape Coral in Lee County, Florida; the Tappan Zee Bridge in New York State; the Bay Bridge in the San Francisco, California area; and the bridges and tunnels of the Port Authority of New York and New Jersey. In addition, the Washington State Transportation Commission has pro- posed imposing time-based charges on the State Route 520 floating bridge across Lake Washington (now free) to begin paying for a replace- ment bridge.2 HOT and Express Toll Lanes HOT lanes are tolled lanes operating alongside existing highway lanes that provide users with a faster and more predictable travel option in return for payment of a toll.3 Some vehicles, such as carpools, buses, and emergency vehicles, typically have free access to HOT lanes; other vehicles pay for access. Nearly all U.S. HOT lane projects have been converted from existing high-occupancy vehicle (HOV) lanes, usually because there is unused capacity in the HOV lanes. The first such conversion opened on Interstate 15 north of San Diego in the mid-1990s, and since then a number of other HOV-to- HOT lane conversions have opened (Altshuler 2010). There are also projects that charge tolls for premium service in dedi- cated lanes but provide little or no additional incentive for HOV. The 2 See http://www.wsdot.wa.gov/Partners/Build520/. 3 See http://www.virginiahotlanes.com/.

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28 Equity of Evolving Transportation Finance Mechanisms first example of this was the 91 Express Lanes project in Orange County, California, where two new lanes in each direction were built in the median of an existing freeway (California State Route 91). Tolls are based on time of day and day of week, and vehicles with three or more occu- pants sometimes (but not always) get a discounted price. The toll for access to an HOT lane varies, either by time of day or by real-time congestion level, such that the level of service is sufficiently attractive to offer travelers an incentive to share rides and to provide pre- mium value to toll customers. Altshuler (2010) characterizes existing HOT lanes in the United States as a weak variant of congestion pricing: although they do charge for travel during congested periods and thus are intended to manage congestion through pricing, there is always an unpriced route available in the corridor, giving travelers the option of paying more for faster service or tolerating congestion at no incremen- tal cost. Truck-Only Toll Lanes There has been discussion in the United States of roadways or lanes for exclusive truck or commercial-vehicle use, financed by direct user fees (tolls). A study undertaken by the Trans- portation Research Board’s Cooperative Research Programs found growing interest in such lanes, with many proposals appearing in the planning and traffic engineering literature in response to the growing problem of congestion (TRB 2010). A study of the potential for such lanes near the Ports of Los Angeles and Long Beach, California, found that urban truck-only toll (TOT) lane facilities would need to overcome the operational challenges of short average truck trip lengths and little or no travel-time savings relative to the free alternatives available during off-peak periods (Fischer et al. 2003). Further, the geometric constraints of adding lanes in a built-out urban environment escalated expected facility construction costs significantly. Nevertheless, there appear to be some locations where TOT lanes are financially attractive, and truckers have endorsed the concept with certain conditions, which include allow- ing longer or heavier vehicles than are now permitted on other highways. A study for the Atlanta metropolitan area found that TOT lanes have the potential to relieve congestion in dense urban regions with heavy truck demands (Georgia State Road and Tollway Authority 2005).

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How Transportation Is Funded and Who Pays 29 VMT Fees A number of organizations have explored alternative (or supplementary) fees to the gas tax based on a charge for each mile driven. Such VMT fees have gained increasing exposure as policy makers become concerned about declining motor fuel tax revenues. A study on the viability of a VMT fee system using the Global Positioning System was conducted by the Uni- versity of Iowa in 2002 (Forkenbrock and Kuhl 2002), and in 2005 the National Chamber Foundation recommended a two-tier VMT fee system as a long-term option that would reduce reliance on the fuel tax (National Chamber Foundation 2005). Under this system, a state VMT fee would gradually replace motor fuel taxes and a local-option VMT fee would be used to manage congestion in metropolitan areas. More recently, the National Surface Transportation Infrastructure Financing Commission recommended commencing the transition to a comprehensive mileage- based user fee system for deployment by 2020 (NSTIFC 2009). The state of Oregon has conducted a pilot program to explore the possible use of a road user fee as a replacement for the current system of revenue collection for the state’s roads and highways (Starr 2009). An important equity issue arising from the pilot program is whether rural and urban drivers should be treated differently because the former nec- essarily drive more and do not have readily available mass transit alter- natives (Whitty 2007). A recent modeling study found that, in Oregon, rural households would actually benefit relative to urban households if the fuel tax were replaced by a VMT tax (McMullen et al. 2010). This somewhat surprising result was attributed to rural households owning less-fuel-efficient vehicles, on average, even though they drive more miles than urban households.4 In contrast to VMT fees for passenger vehicles, weight–distance taxes on trucks are not a new finance mechanism. State weight–distance taxes were formerly in quite widespread use but have gradually become less common as they have been strongly opposed by the U.S. trucking industry 4 Because the motor fuel tax is assessed on a per gallon basis, the amount of tax paid per mile driven decreases with increasing fuel economy. A recent study of more than 350,000 vehicle registra- tion records in Texas found that vehicles registered in lower income areas tended to have lower average fuel economies than vehicles registered in medium- and high-income areas (Baker et al. 2011). In other words, low-income drivers are more likely than higher income drivers to drive inefficient vehicles and thus to pay more in fuel tax per mile driven.

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30 Equity of Evolving Transportation Finance Mechanisms on the grounds that they are excessively complex administratively. Currently only four states—Kentucky, New Mexico, New York, and Oregon—charge trucks on the basis of distance traveled at a rate that depends on some measure of weight. These weight–distance taxes on trucks are a form of VMT tax.5 In recent years, however, several Euro- pean nations have implemented weight–distance truck charges using electronic tolling technology (Sorensen et al. 2009). In 2005, for exam- ple, Germany implemented an electronically administered weight– distance tax for all heavy trucks using the highway network (the Toll Col- lect System). Despite questions about equity (Taylor 2010), the European Union has ruled that the tax satisfies the criteria for open international commerce within the Union (Bonsall 2009). Transit Fares and Other Fees Research has consistently shown that transit system costs vary signifi- cantly by distance traveled, time of day, and mode, but most transit fares today are flat, that is, they are the same regardless of when or how far one travels (Taylor et al. 2000). Distance-based pricing, mostly in the form of zone fares, was more common in years past. These zone fares were, however, unpopular with bus drivers and passengers alike because, in the days before electronic fare media, they required drivers to recheck pas- sengers’ fare tickets when crossing zone boundaries, sometimes result- ing in driver-passenger conflicts. The spread of transit fare smart cards allows for the relatively easy assessment of fares that vary by distance or time, or both, but most transit agencies adopting smart cards have cho- sen to retain their flat fare structures (Iseki et al. 2007). Other sources of transit operating revenue in addition to fares include parking fees, investment income, advertising revenues, leases, charters, and concessions. Although these sources represent opportunities for agencies to generate some additional resources, their revenue-generating potential is limited; public transit is subsidized precisely because systems cannot function on operating income alone. Significantly increasing transit fares would both drive away customers and raise equity concerns because tran- 5 The weight–distance tax is also called a ton-mile tax, and occasionally a highway use tax. This lat- ter name is also used for weight-based registration fees, which are currently levied by the federal government and several states.

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How Transportation Is Funded and Who Pays 31 sit users are, on average, considerably poorer than those who travel by pri- vate vehicle. These concerns are not, however, clear cut because some tran- sit riders, particularly those using rail services, are relatively wealthy. Transit fares and other operating revenues account for approximately 30 percent of the total revenues used for transit expenditures at all levels of government (Cambridge Systematics, Inc., et al. 2006; NSTPRSC 2007; National Transit Database 2008). Most transit agencies dedicate fare revenues to operating and maintenance costs. General Revenue Sources Some states and local governments use general fund appropriations from sources such as income taxes (states) and property taxes (local govern- ments) to support highway and public transit needs. These general revenue sources are not linked to transportation use. In 2004, about 15 percent of state and local transit revenue and 22 percent of state and local highway revenue came from general fund allocations. Local gov- ernments in particular rely on general fund appropriations to support highway expenditures. For example, in 2004, about 46 percent of the rev- enues used for highway expenditures at the local level came from the general fund; at the state level, however, general fund appropriations were reported at less than 8 percent of the total revenues for highways (Cambridge Systematics, Inc., et al. 2006). Special-Purpose Taxes This category includes special, usually incremental, tax revenue dedi- cated to transportation purposes with voter approval. The important distinction from general tax revenues is that voters or property owners, who typically must approve these dedicated taxes, are assured that the money will be spent only on transportation, and usually only on specific projects. Some observers attribute the success of special-purpose taxes to the fact that revenues remain within the jurisdiction where they are raised, rather than being reallocated to state or federal governments (see, for example, Wachs 2003). Of particular interest in the present context are local-option sales taxes. These special-purpose taxes are implemented and levied at the

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32 Equity of Evolving Transportation Finance Mechanisms local or regional level, often as a means of raising funds for specific local or area projects, such as improving area streets and roads or providing transit service. For example, the dominant share of public subsidies for operating transit services in the Chicago metropolitan area comes from dedicated sales taxes of 1.25 cents in Cook County and three-quarters of a cent in the surrounding collar counties (Joseph Schofer, committee chair, personal communication, 2010). Other examples of local-option sales taxes for highway investments and transit are provided by Cam- bridge Systematics, Inc., et al. (2006). In many cases, local-option sales taxes are levied for a limited period commensurate with the project(s) to be funded. For example, in 1987 the electorate in San Diego County, California, voted in favor of a 20-year, one-half-cent sales tax increase to support transit and highway expansion and local street and roadway improvements. In 2004, county voters approved a 40-year extension of the one-half-cent local-option sales tax in light of continued rapid growth in the county and the expiration of the original measure slated for 2008 (Cambridge Systematics, Inc., et al. 2006). In 2004, special-purpose taxes provided $15.4 billion for highways and $9.5 billion for transit (12 percent of total highway revenues and 25 percent of total transit revenues at all levels of government, respec- tively) (Cambridge Systematics, Inc., et al. 2006). Value-Capture Strategies Value capture is a type of public financing that captures some of the increased value of private land or property resulting from public investment in specific transportation projects (a new freeway interchange or transit sta- tion, for example) to pay for transportation projects. Mechanisms most commonly used by state and local governments include the following: • Impact fees, which are typically one-time charges to developers. Rev- enues from impact fees are used to pay for infrastructure improvements needed to support the growth generated by new development, includ- ing not only roads, but also water, sewers, parks, schools, and the like. • Special assessments levied in specified districts (often called special assessment districts) where the cost of infrastructure is paid for by owners of properties deemed to benefit from that infrastructure.

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How Transportation Is Funded and Who Pays 33 • Tax increment financing, whereby bonds are issued to finance pub- lic infrastructure improvements and repaid with dedicated revenues from the increment in property taxes that can be traced to property- value increases resulting from such improvements. Other value-capture strategies are discussed by Iacono et al. (2009). Public–Private Partnerships Public–private partnerships (PPPs) are contractual agreements formed between a public agency and a private-sector entity that allow for greater private-sector participation in the delivery and financing of transportation projects (FHWA Office of Innovative Program Delivery n.d.). PPPs are not a revenue source per se; rather, they are a form of project delivery that relies on one of the funding sources described above to retire project debt and cover operating and maintenance costs and profits. Tolls are often, but not always, the revenue source. In many cases, PPPs are a way of using private- sector borrowing capacity to raise revenue up front, to be paid back later by a stream of dedicated funds from gas taxes, tolls, transit fares, or parking fees. Thus, some PPPs have come in the form of a long-term lease of exist- ing publicly financed facilities to private firms, as happened in 2005 for the Chicago Skyway and in 2006 for the Indiana Toll Road (FHWA 2008). In such cases, the upfront concession fee paid by the private partner may be substantial; for example, the fee for the 99-year lease of the Chicago Skyway was $1.8 billion. For private investors, the primary motivation for pursuing leasing opportunities is the potential to gain an attractive rate of return on their investment. Economic (and equity) issues associated with PPPs are considered by Small (2010). As discussed in Chapter 3, PPPs raise impor- tant questions about generational equity, notably, the shifting of cost burdens to future generations who may or may not benefit from the transportation facilities and services for which the funds are used. WHO ULTIMATELY PAYS? Who actually pays or otherwise bears the burden of the various methods used to raise revenues for transportation discussed in the preceding section? Legislation or administrative regulations may identify who is responsible

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34 Equity of Evolving Transportation Finance Mechanisms for making prescribed payments under a revenue-raising policy but can- not dictate what eventually happens to prices, incomes, investments, asset retirements, product quality, and other dimensions of economic activity through the interaction of the regulations with market forces. People and businesses faced with a tax may be able to shift the burden to others (West 2009; Besley and Rosen 1999; Holguín-Veras et al. 2006). Consumers may be less likely to pay for goods that become more expen- sive because of a new or increased tax, however, thereby reducing the revenues of those selling the taxed product and possibly also the amount of tax raised. The equity implications of a transportation finance mechanism depend on who pays and how much they pay (i.e., who bears the bur- den), and are, therefore, strongly influenced by tax shifting. The gas tax, for example, is levied on fuel distributors, who then include some or all of it in the price they charge fuel retailers. If these retailers can shift the tax onto motorists, then the distribution of the resulting burdens among the latter is what should really matter for an equity analysis. This distri- bution depends on two factors: how much of the burden is shifted to which party, and how much that party can reduce its burden by cur- tailing its use of the priced or taxed quantity. Motorists, for example, may respond to an increase in the gas price by driving less (see West 2009 and references therein). Such reductions in driving, however, may result in other burdens (for example, difficulties in getting to work by other means) that must be taken into account in equity discussions. The subject of economic and other burdens is discussed more fully in Chapter 3. The pattern of shifting of tax burdens can be both complicated to assess and at times counterintuitive. As a result, elected officials and the traveling public tend to focus more on immediate, proximal effects when assessing transportation tax instruments than on ultimate, shifted out- comes. Even if they rely on their staff and other advisors to delve into the details of economic incidence, however, public officials need to recog- nize that tax burdens may be shifted. Absent such recognition, they may fail to understand that some groups consider a finance mechanism unfair because of anticipated shifting of the burden. The subject of shift- ing of burdens (and benefits) is discussed at greater length in Chapter 3.

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How Transportation Is Funded and Who Pays 35 CHAPTER HIGHLIGHTS • Revenues for highways in the United States are dominated by indirect user fees, primarily federal and state motor-fuel and vehicle taxes. User fees levied directly at the point of use (e.g., tolls, HOT lane fees, and congestion charges) account for only about 5 percent of total highway revenues at all levels of government, but this share is growing. Many states are using, or considering using, tolls as a way of generating new revenue, but currently there are only approximately 5,100 miles of tolled roads, bridges, and tunnels in the United States, that is, just over a 10th of 1 percent of the nation’s 3.9 million miles of public roads. • Revenues for public transit in the United States come from fares and federal, state, and local sources. Local sources predominate, although the federal motor fuel tax is an important source of funding for capi- tal investments in public transit. Revenues from fares are nearly always dedicated to operating expenditures. Despite the spread of smart card technology, relatively few transit agencies have taken advantage of the opportunities this technology offers to implement fares (i.e., user fees) varying by distance or by time of day. • Because of the limited implementation of nontraditional transporta- tion finance mechanisms in the United States, empirical evidence on which to base equity assessments is similarly limited, although useful data are available from overseas. – The U.S. experience with congestion pricing of roads is almost entirely limited to HOT lanes, a relatively mild variant of road pricing that offers drivers free (but relatively congested) alternatives to tolled lanes. – Cordon or area pricing approaches with no free alternatives have been implemented overseas, but not in the United States. – The main motivation for the implementation of congestion pric- ing is to modify travel behavior by varying prices. Revenues, which are often modest, have usually been used to support the congestion management program, pay for highways, and improve parallel transit services. – VMT fees continue to attract considerable interest among policy analysts as a finance mechanism, but practical experience is limited to truck weight–distance taxes levied by a few U.S. states and recently implemented in Germany.

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36 Equity of Evolving Transportation Finance Mechanisms • Local-option sales taxes have been a popular way to get transporta- tion projects built because they ensure local control over the use of revenues, are usually linked to one or more specific projects, and are often levied for a limited period. • The ultimate distribution of the burden of paying taxes and fees used to fund transportation is determined by market forces and people’s behavior rather than by legislation or administrative regulations. It is this ultimate distribution that determines the equity implications of transportation finance mechanisms. REFERENCES Abbreviations FHWA Federal Highway Administration GAO Government Accountability Office NGA National Governors Association NSTIFC National Surface Transportation Infrastructure Financing Commission NSTPRSC National Surface Transportation Policy and Revenue Study Commission TRB Transportation Research Board Altshuler, A. 2010. Equity, Pricing, and Surface Transportation Politics. John F. Kennedy School of Government, Harvard University, Cambridge, Massachusetts, 2010. Baker, R. T., M. Russ, and G. Goodin. 2011. The Relationship Between Income and Per- sonal Vehicle Fuel Efficiency and Associated Equity Concerns for the Fuel Tax. Report SWUTC/11/161007-1, Project 161007. Texas Transportation Institute, Texas A&M University System, College Station, March. Besley, T. J., and H. S. Rosen. 1999. Sales Taxes and Prices: An Empirical Analysis. National Tax Journal Vol. 52, No. 2, June, pp. 157–178. Bonsall, P. 2009. International Experience with Equity Issues in Financing Transporta- tion. Presentation to Committee on Equity Implications of Evolving Transportation Finance Mechanisms, Washington, D.C., September 2. Cambridge Systematics, Inc., Mercator Advisors LLC, A. E. Pisarski, and M. Wachs. 2006. NCHRP Web-Only Document 102: Future Financing Options to Meet Highway and Tran- sit Needs. Transportation Research Board of the National Academies, Washington, D.C. FHWA. 2008. Innovation Wave: An Update on the Burgeoning Private Sector Role in U.S. Highway and Transit Infrastructure. U.S. Department of Transportation, Washing- ton, D.C. http://www.fhwa.dot.gov/reports/pppwave. FHWA. 2010a. Highway Statistics 2008. U.S. Department of Transportation, Washing- ton, D.C. http://www.fhwa.dot.gov/policyinformation/statistics/2008.

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