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209 This appendix presents detailed assessments of strategic directions that states might choose to pursue with the princi- pal aim of maintaining or enhancing available transportation revenue. The possibilities include direct user fees (e.g., tolls, mileage-based user fees, and weight-distance truck fees), indi- rect marginal-cost user fees (e.g., fuel taxes), indirect fixed-cost user fees (e.g., vehicle sales taxes and registration fees), value capture and beneficiary fees (e.g., tax increment financing, special assessment fees, and developer impact fees), general revenue sources (e.g., portions of sales taxes and income taxes dedicated to transportation funding), and private capital (vari- ous forms of publicâprivate partnerships). I.1 Direct User Fees (Tolls or Mileage-Based User Fees) Direct user fees offer a mechanism for raising transporta- tion revenue in which travelers pay charges based on actual system use (e.g., based on the distance that they travel or on the specific facilities that they use). Relative to other funding mechanisms, user fees offer two key advantages: they pro- mote more efficient system use and they fairly align the costs of constructing and maintaining the system with the benefits afforded by system use (NSTIFC 2009). I.1.1 Supportive Policies Frequently discussed forms of direct user fees are tolling, MBUFs, and weight-distance truck fees. In the transit arena, passenger fares that vary with distance of travel and poten- tially time of travel can also be viewed as direct user fees. While some of these mechanisms have a long history (e.g., tolling has existed for centuries), recent technology advances now make it possible to implement various forms of direct user fees with much greater efficiency (Sorensen and Taylor 2006). Facility tolls. Tolls are often employed in the United States to fund the construction and maintenance of bridges and tunnels. Toll roads (typically limited-access facilities) are also common in some areas of the country, such as the Northeast, Florida, Texas, and Southern California. With the decline of fuel-tax revenue in recent decades, tolling has increasingly been used to fund new capacity; in the past decade, about a third of all new limited-access lane miles have been tolled, and tolls are often mentioned as a potential revenue source for funding truck- only facilities (NSTIFC 2009). One option for states to enhance available revenue for building and maintaining the broader transportation network as a whole would be to introduce toll- ing on currently untolled highways and major arterials. Because electronic tolling relies on the installation of roadside or gantry- mounted readers, its application would likely be constrained to only the most heavily traveled segments in the road network. Mileage-based user fees. In response to more fuel-efficient conventional vehicles and the anticipated adoption of alternative-fuel vehicles, both of which will further erode the viability of continued reliance on gas and diesel taxes, decision makers have begun to consider the idea of transition- ing to MBUFs (see, e.g., NSTIFC 2009). The state of Oregon, for example, is currently developing legislation to implement MBUFs for electric vehicles beginning in 2015 (Whitty 2011). While MBUFs are conceptually similar to tolling, they could be applied across the entire road networkânot just on the most heavily traveled segments. Multiple options for implement- ing MBUFs are possible (see Sorensen et al. 2009; Sorensen, Wachs, and Ecola 2010). At the simple end of the spectrum, it would be possible to read a vehicleâs odometer each year to record and charge for total mileage. In a more sophisticated approach, vehicles could be equipped with GPS-enabled devices capable of metering distance traveled by time and location. This would allow the system to charge for in-state miles but not out-of-state miles, for example, or to charge for travel on public roads but not on private roads. (It would also allow the system to charge higher fees for peak-hour travel in congested areas; this possibility is discussed separately in the section on congestion pricing policies.) A p p e n d i x i Strategies to Sustain or Increase Revenue
210 Although MBUFs offer many policy advantages, such as the ability to effectively toll the entire road network, the concept also faces significant challenges relating to the cost of implementing and administering a system to levy mile- age fees (Rufalo 2011; Sorensen, Wachs, and Ecola 2010) and public acceptance (Baker and Goodin 2010, Hanley and Kuhl 2011). Oregon and Minnesota are currently exploring a range of innovative MBUF system-design strategies to overcome these challenges (Sorensen, Ecola, and Wachs, 2012). Weight-distance truck fees. Weight-distance truck fees represent a variation of MBUFs in which the per-mile charge increases with vehicle weight to reflect the additional road damages caused by truck travel. To account for such damages with precision, the per-mile fee should vary with axle weight (with higher charges for heavier axle loads) and the type of road being traversed (with higher charges for more lightly engineered local or rural roads that suffer greater damage from truck travel). In practice, however, most weight-distance truck fees are based simply on distance and gross vehicle weight. While weight-distance truck fees have been employed by a large number of states, the traditional implementation approachâ reliant on manual record keepingâproved quite cumbersome. This led many states to discontinue this approach; only Ore- gon, New York, Kentucky, and New Mexico still levy weight- distance truck fees (NSTIFC 2009). Over the past decade, however, advanced telecommunication technologies have been employed to develop automated weight-distance truck fees in such countries as Switzerland, Austria, Germany, the Czech Republic, Slovakia, and New Zealand, making this form of tolling much more efficient (Sorensen et al. 2009). Oregon, likewise, has conducted trials of a system to automate the stateâs existing weight-distance tolls. Other direct user fees. As noted previously, transit fares that vary by distance traveled and potentially by time of travel can also be viewed as direct user fees. This review focuses, however, on direct user fees for passenger vehicle and truck travel. Transit fares are not commonly employed as a source of state DOT revenue. Assumed policies for assessing direct user fees. The follow- ing sections that assess direct user fees assume that states would implement either expanded tolling on highways and other major thoroughfares or mileage-based user fees for passenger vehicles and would additionally implement weight-distance tolls for trucks. The fees would not, however, be structured to vary with vehicle emissions characteristics or with the time and location of travel. (Emissions fees and congestion tolls are discussed separately with other strategic policy options.) I.1.2 Intended Mitigation Effects Direct user fees could be quite effective in helping to address some of the challenges for state DOTs that may arise with alternate energy futures. Increasing transportation revenueâhighly effective. As discussed in Chapter 6, total vehicle travel is expected to grow much more rapidly than fuel consumption in the coming decades (EIA 2013). As such, a transition from fuel taxes to a system of user fees based on travel distance, even if structured to be initially revenue neutral, would create a more sustain- able revenue stream that continues to increase in proportion to funding needs. And in the case of weight-distance truck fees, it is quite possible that the initial shift would not be rev- enue neutral. Rather, a careful cost allocation model could show that truck user fees should be increased to reflect the aggregate burden from trucks on the road network (NSTIFC 2009). Direct user fees could therefore be a very effective alternative to continued reliance on fuel taxes. Reducing DOT costsâhighly effective. Instituting weight- distance truck fees that vary with axle weight and the type of road traveled should be very effective in motivating trucking firms to adopt vehicle configurations and select routes to mini- mize damage to the road network, and in turn charges owed (Small, Winston, and Evans 1989). It could also have the effect of shifting some freight from trucking to rail. Because a disproportionate amount of road damage is caused by trucks with heavy axle loads (NSTIFC 2009), this strategy should be highly effective in reducing costs associated with road mainte- nance and repair. Reducing traffic congestionâmoderately effective. In contrast to many other revenue options, direct user fees would increase the marginal cost of travel and, in turn, help constrain the growth in passenger vehicle and truck travel. Regarding the latter, studies have indicated that the share of road use revenue generated by trucks through diesel taxes and other user fees is not commensurate with the burden that trucks impose on the system (for discussion see TRB 1996 and NSTIFC 2009). Assuming that a shift from fuel taxes to direct user fees would be informed by a careful highway cost allocation study to determine appropriate rates, a switch to weight-distance truck fees could result in a considerably higher tax burden for the trucking industry. Given tight profit margins and the possibility of switching to other modes for certain products, this could in turn act to significantly reduce the growth in trucking. Given that the relationship between total travel and traffic congestion is nonlinear, even small reductions in vehicle travel can produce large effects in reducing traffic congestion (Downs 2004). Yet the types of user fees discussed here would not vary by time and location to create more specifically targeted incentives to reduce peak-hour traffic in congested locations. (Such fee structures are instead discussed under the category of conges- tion pricing.) This ultimately limits their effectiveness in terms of achieving significant and lasting congestion reductions. Improving safety outcomesâmoderately effective. Vehicle crashes and fatalities vary in proportion to total travel. By act-
211 ing to help reduce passenger vehicle and truck travel, direct user fees should likewise have a beneficial effect on safety. I.1.3 Intended Shaping Effects The main intent of direct user fees is to raise transporta- tion revenue in an efficient and equitable manner. Such fees would not be intended to exert significant influence in shap- ing evolving patterns of energy use. I.1.4 Other Effects Among the broad range of potential transportation rev- enue mechanisms, direct user fees are generally viewed favor- ably in terms of their ability to promote more efficient system use and to fairly align the costs and benefits of travel (Wachs 2003, NSTIFC 2009). Economyâhighly positive. When the costs charged for traveling are lower than the costs imposed by that travel, drivers and businesses will rationally over-consume road spaceâthat is, they will choose to make at least some trips for which the net social benefits are exceeded by the net social costs (Downs 2004). Imposing direct user fees to more accurately reflect the cost associated with travel, in contrast, creates an incentive for drivers to ration their least-valued trips, in turn promoting more economically efficient use of the system (Wachs 2003). At the same time, they would provide more revenue for strategic capacity investments to address congested bottlenecks in the current road network that act to constrain economic produc- tivity. Direct user fees should thus have a highly positive effect on economic growth and productivity. Environment and public healthâmoderately positive (uncertain). Direct user fees should have some effect on reducing vehicle travel and traffic congestion, as discussed previously. This could help reduce harmful GHG emissions; improve air quality; and promote greater use of transit, walk- ing, and biking, offering both environmental and public health benefits. On the other hand, existing fuel taxes cre- ate an incentive for purchasing more fuel-efficient vehicles, whereas tolls, MBUFs, and weight-distance truck fees lack such an incentive. Indeed, a shift from fuel taxes to MBUFs, for example, would result in reduced total road-use charges for vehicles with very poor fuel economy (Weatherford 2011). This would tend to counteract some of the benefits of reduced overall vehicle travel. It is difficult to estimate the compara- tive magnitude of such effects, however, leading to a rating of moderately positive but uncertain. Equityâhighly positive. Direct user fees can be described as promoting greater fairness in transportation funding by more accurately aligning the costs and benefits of travel (NSTIFC 2009). Additionally, in terms of the relative distribution of the tax burden, research by Weatherford (2011) demonstrates that road use charges based on miles of travel would be less regres- sive than fuel taxesâin other words, shifting from fuel taxes to MBUFs would generally benefit lower-income drivers. I.1.5 Barriers The preceding text indicates that a shift to more direct user fees would offer many benefits. The fact that such mechanisms are not more widely employed already suggests that they also face considerable barriers. Low public supportâsignificant barrier. Most public opin- ion research about the concept of MBUFs indicates that the public does not understand the problems faced by continued reliance on fuel taxes, does not understand the potential ben- efits of MBUFs, and has very low initial support for the concept. [As indicated by the work of Hanley and Kuhl (2011), however, support for MBUFs rises with greater understanding of how such a system would work.] The trucking industry, in turn, is extremely skeptical of distance-based charging, instead prefer- ring to raise additional transportation revenue by increasing fuel taxes (Roth 2011). This position is understandable if one assumes (a) that the fees paid by the trucking industry through fuel taxes and other user charges may not fully reflect the costs imposed by truck travel (TRB 1996, Parry 2006, NSTIFC 2009), and (b) that trucking fees might be increased through a switch to weight-distance truck fees. In short, with both poorly informed opposition to MBUFs among the public at large and well-informed opposition to weight-distance tolls in the truck- ing industry, gaining public acceptance for a switch to direct user fees represents a significant challenge. Technical riskâmoderate barrier. The technology for distance-based road-use fees has been demonstrated in U.S. trials and implemented in international road pricing pro- grams. Still there are some risks. One is that the system could prove to be more expensive to build, operate, and enforce than anticipated; another is that similar systems developed in dif- ferent states would not be interoperable, creating challenges in collecting road use fees for out-of-state travel (Sorensen, Wachs, and Ecola 2010). Enabling legislationâsignificant barrier. Any state wishing to implement MBUFs or weight-distance truck fees would almost certainly need enabling legislation. (The sole exceptions, for weight-distance truck fees, are Oregon, New York, Kentucky, and New Mexico, which already levy this form of trucking fee.) A decision to expand tolling across the Interstate system could require enabling federal legislation, potentially representing an even greater barrier. I.1.6 Required Lead Time Although the concept of direct user fees is rather easy to explain, the systems required to implement this form of
212 result fuel-tax revenuesâexpressed in real dollars per mile of travelâhave eroded considerably. The strategy considered here, then, would be for states to either increase or index their fuel taxes to reverse this trend. Taxes on other transportation fuels. Looking forward to the introduction and increasing adoption of alternative fuels in the transportation sector, states might consider the appli- cation of analogous excise taxes on these alternative fuels to collect highway revenue. Green, for example, has suggested the concept of an âindexed energy user feeâ that could be applied to multiple fuel types based on their embodied energy content and indexed to increase with average fleet fuel economy along with inflation in highway construction and maintenance costs (Green 2011). Though appealing, this concept faces at least two challenges. First, some potential fuels, such as natural gas and electricity, have alternate uses outside of transportation. This means that to collect fees related strictly to road useâthat is, to apply the taxes only on the amount of fuel used to power a vehicleâthe taxes would need to be collected at the retail level rather than at the wholesale level. This in turn would entail higher administrative costs. Second, at least some of the alternative-fuel options, including electricity, hydrogen, and natural gas, could allow for home refueling or even home pro- duction. At a minimum this could require the installation of multiple meters at a home to distinguish between different uses for, say, electricity or natural gas. Even more challenging, some users might be able to avoid fees entirely. For example, an owner of an electric vehicle could in theory charge a vehicle from battery storage connected to off-grid photovoltaics. In sum, an effort to embed road use charges in alternate fuels could prove more expensive, less effective, and ultimately less equitable (in terms of ensuring that all drivers pay their fair share) than the current system of taxes for gasoline and diesel. Container fees. A parallel option to raise revenue for invest- ment in goods movement facilities is to impose a fee on the transportation of shipping containers (NSTIFC 2009). This would likely be easier to implement at ports than at state cross- ings, however, thus limiting the number of states for which it would be a viable option. Note that from the perspective of a port seeking to raise its own revenue, a container fee might be viewed as a direct user fee given that each container requires roughly the same effort to process. From the perspective of a state, however, container fees would not reflect the amount of subsequent travel on the road network, if any, and would thus represent a more indirect user fee. Other policies. In addition to taxing fuel, it is also pos- sible to tax other vehicle parts and supplies that wear out in proportion to use. Owners of heavy-duty trucks, for example, pay federal taxes on the purchase of new tires, the proceeds of which are deposited into the HTF. Many states have levied similar taxes on tires, motor oil, and other parts and supplies (Cambridge Systematics et al. 2006). charging are technically complex (Sorensen et al. 2009). As such, it is reasonable to assume that a period of 5 to 10 years would be needed to explore, plan, and implement any of the direct user-fee options discussed in this section. Once imple- mented, however, the effects on revenue and travel behavior would occur rather quickly. I.1.7 Qualifications The forms of direct user fees discussed in this section should work equally well and be equally helpful for all states regardless of geographic and demographic differences. I.2 Indirect Marginal-Cost User Fees (Fuel Taxes) Marginal-cost indirect user fees represent another potential transportation funding approach. Like direct user fees, they vary in proportion to system use (hence âmarginal costâ). As such, they promote more economically efficient travel choices, and they also more fairly align the costs and benefits of using the transportation system (Wachs 2003). On the other hand, marginal-cost indirect user fees do not accurately mirror actual travel patterns and thus may be somewhat imprecise in their distribution of costs on system users. I.2.1 Supportive Policies Federal and state excise motor-fuel taxes on gasoline and diesel are the most commonly employed form of marginal- cost indirect user fees in the United States, and one could envision the application of similar taxes on alternate fuels in the future. Container fees represent another potential option for goods movement. Finally, taxes on tires and other vehicle parts and supplies also fall under this category. Excise motor-fuel taxes. Federal and state excise taxes on gasoline and diesel consumption combine to provide almost two-thirds of all highway user fees and about half of all high- way revenue in the United States (TRB 2006). Fuel taxes offer numerous advantages as a highway funding mechanism, including low administrative cost, low evasion rates, reason- able alignment of the tax burden with system use (variations in vehicle fuel economy prevent more precise alignment), and a modest incentive for the purchase of vehicles with greater fuel economy. The main drawback of fuel taxes is that they are typically levied on a cents-per-gallon basis and, as a result, must be periodically increased to offset inflation and fuel economy improvements. While a few states have indexed their fuel taxes to increase automatically, most states and the federal government rely on fixed per-gallon rates that require either legislative action or voter approval to increase. This has proven to be politically difficult in recent years, and as a
213 with heavy axle loads on lightly engineered routesâthat can cause the greatest damages to the road network. As such, this strategy is rated as only moderately effective in reducing DOT maintenance and operations costs. Reducing traffic congestionâmoderately effective. Here again, increased fuel taxes should stimulate an overall reduc- tion in total vehicle travel, in turn helping to reduce traffic congestion. Fuel taxes would not, however, create a specific incentive for the reduction of peak-hour travel in congested areas (in comparison to, say, congestion tolls); this ulti- mately limits their effectiveness in reducing traffic congestion (Downs 2004). Improving safety outcomesâmoderately effective. Traf- fic crashes and fatalities are generally proportional to total vehicle travel. Anticipated reductions in vehicle travel based on higher fuel taxes should therefore translate into improved safety outcomes as well. Improving air qualityâmoderately effective. Higher fuel taxes would help reduce harmful air pollutant emissions in several ways. First, they would reduce total vehicle travel and, in turn, emissions. Second, they would have some effect on reducing traffic congestion, which in many cases would lead to reduced emissions per mile of travel. Third, they would create an incentive for the purchase of newer vehicles with higher fuel economy, and such vehicles often meet more- stringent emission control standards as well. Reducing GHG emissionsâhighly effective. GHG emis- sions vary directly with the combustion of gasoline and die- sel. Taxing these two fuels, therefore, represents one of the most effective ways for reducing GHGs in the transportation sector (NSTIFC 2009). Drivers may respond to increased fuel taxes through some combination of reducing travel and purchasing cars with higher fuel economy; both of these actions reduce fuel consumption and, in turn, greenhouse gas emissions. Finally, it is possible that higher fuel taxes could accelerate the shift to alternative fuels with potentially lower carbon footprints such as electricity or hydrogen. I.2.3 Intended Shaping Effects While a core motivation for increasing fuel taxes is to pro- vide more revenue, fuel taxes would also promote reduced oil consumption and perhaps make alternative-fuel options more cost-competitive. Reducing oil consumptionâmoderately effective. By increasing the purchase price of gasoline and diesel, higher fuel taxes would create a strong financial incentive for the purchase of more fuel-efficient vehicles, in turn reducing aggregate oil consumption (CBO 2002). In contrast to fuel price swings due to market volatility, drivers recognize that fuel taxes represent a permanent surcharge on the price of gas and diesel; thus, the savings from purchasing a vehicle with Assumed policies for assessing marginal-cost indirect user fees. The assessments that follow address a scenario in which states would institute sufficiently large fuel-tax increases to offset losses in past decades due to inflation and improved fuel economy. Depending on the state, such increases could be as high as an additional 25 to 50 cents per gallon. While this would produce significantly more transpor- tation revenue, retail fuel prices would still remain far lower than in many European nations, for example, where fuel- tax rates equate to several dollars per gallon and the result- ing proceeds are treated as general revenue. In the scenario considered, states would also index their fuel taxes to keep pace with a combined measure of inflation and improved fuel economy, thus ensuring a sustainable revenue stream moving forward. States might also include fees on other parts and supplies that need to be periodically replaced based on usage patterns, and port states could conduct analyses to determine whether it would be possible to levy container fees to help fund goods movement projects without stimulating a shift in trade volume to other ports in other states. Given the chal- lenges outlined previously, the scenario does not assume that states would apply transportation taxes on any alternative fuels that allow for at-home production or refueling. I.2.2 Intended Mitigation Effects The main intent of the policies discussed in this section would be to increase revenue, in turn helping to address potential increases in the cost of construction and mainte- nance. Additionally, increased fuel taxes would help reduce traffic congestion, improve safety outcomes, and reduce emis- sions of harmful local air pollutants and greenhouse gases. Increasing transportation revenueâhighly effective (uncertain). In prior decades, fuel taxes provided sufficient revenue to construct the Interstate system and support local road networks. If raised to offset prior losses due to inflation and fuel economy gains, they could again provide enough revenue to meet investment needs. Container fees, if and where applied, could help fund much-needed goods movement projects. Over the longer term, however, a shift to greater reliance on alternative fuels that would be more dif- ficult to tax is possible, and this could undermine the ability of fuel taxes to provide a sustainable revenue source. Given this possibility, the rating of highly effective is described as uncertain. Reducing DOT costsâmoderately effective. As noted pre- viously, greater reliance on user fees should have the effect of reducing overall travel. Because road damage varies to some degree with total travel, this should in turn reduce the level of required repair and maintenance activities. On the other hand, indirect user fees such as fuel taxes do not provide spe- cific encouragement for reducing the types of tripsâtrucks
214 transportation revenue options such as dedicated sales taxes, those who do not driveâincluding many in lower-income householdsâare not required to pay for the road network. For these reasons, fuel taxes can be viewed as promoting greater equity in transportation finance (Wachs 2003). Yet the degree to which fuel taxes align costs and benefits may be under- mined in the future. With the recent establishment of much more stringent CAFE standards through 2025, new vehicles will exhibit much higher fuel economy. At the same time, a variety of alternative-fuel vehicles are now reaching the mar- ket or are poised to do so in the near future. Owners of such vehicles, which are more likely to be purchased by upper- and middle-income households, will either pay less in fuel taxes per mile of travel or no fuel taxes whatsoever. Thus, the ability of fuel taxes to fairly align the costs and benefits of road use may be increasingly undermined in the future, to the detriment of owners of older vehicles with lower fuel economyâincluding a proportionally larger share of lower-income households. I.2.5 Barriers The main challenge to increasing fuel taxes is the cur- rent degree of public opposition to higher taxes in any form. Efforts to institute container fees, if pursued, would likely face similar challenges from stakeholders in the goods movement industry. Enabling state legislation could also be needed. Low public supportâmoderate barrier (uncertain). Opposition to higher taxes in any formâwith few distinctions drawn in the public debate between user fees and general revenuesâhas grown acute in recent decades. Over much of the past century, however, both the federal government and states have been generally willing to increase fuel taxes as needed to pay for highway construction and maintenance. It is plausible to argue that the public, confronted by ever- deteriorating road conditions, may at some point return to the perspective that investing in the nationâs transportation network is a worthy endeavor, with fuel taxes representing a sensible approach for raising the necessary funds. Low public support is thus rated as a moderate rather than a significant barrier; whether such an attitudinal shift will occur, however, is also uncertain. Turning to the goods movement arena, it is reasonable to expect that many stakeholders would prefer not to pay container fees. Yet freight stakeholders also rec- ognize the economic costs associated with delays and unre- liable transport times due to capacity constraints. Provided that revenue from container fees, if and where levied, would be devoted to freight improvements, opposition to container fees could prove to be more muted. Enabling legislationâmoderate barrier. All states already levy some form of fuel taxes, but increasing the rate is likely to require legislative action in most states. Container fees, if pursued, would likely require enabling legislation as well. higher fuel economy will continue over time. However, even with an additional tax of 25 to 50 cents, as envisioned for this assessment, fuel prices would remain far below the level seen in other countries. Additionally, the most recent revisions to CAFE standards already require vehicle manufacturers to achieve significant gains in average vehicle fuel economy by 2025. Against this backdrop, the marginal effect of higher fuel taxes on promoting further improvements in fuel economy is likely to be modest. Promoting adoption of lower-carbon alternative fuelsâ moderately effective (uncertain). Increasing the cost of gas- oline and diesel through higher fuel taxes would also increase the relative attractiveness of alternative-fuel vehicles. Still, it is expected that most emerging vehicle technologies reliant on alternative sources of energy will entail a significant pre- mium for many years to come. Additionally, the question of which technologies will emerge as market competitors remains unclear. For this reason, the policy is rated as moderately effec- tive with a significant degree of uncertainty. I.2.4 Other Effects The marginal-cost indirect user fees considered here should have broadly positive effects with respect to the economy, environment, and equity. Economyâhighly positive. Higher fuel taxes, to the extent that they better reflect the costs of providing and maintaining roads, engender more economically efficient use of the exist- ing network by creating an incentive for drivers to ration their least-valued trips (Wachs 2003). Additionally, the resulting revenue stream can be used to improve the road network, one of the key historical underpinnings of the nationâs eco- nomic success through the 20th century. In similar fashion, container fees, if included in the mix of indirect user fees, would provide much-needed revenue for freight projects to reduce bottlenecks and improve the efficiency of the goods movement (NSTIFC 2009). Environment and public healthâhighly positive. As noted previously, fuel taxes should be moderately effective in reducing criteria pollutants and highly effective in reduc- ing greenhouse gases. Additionally, container fees, if applied, would create a revenue source that could be used to fund not only freight capacity improvements but also environmental remediation projects to improve air and water quality in the vicinity of ports. All of these should lead to positive environ- mental and public health outcomes. Equityâmoderately positive (uncertain). Fuel taxes (like most taxes) are regressive with respect to income; that is, their burden falls more heavily on lower-income drivers. On the other hand, because the tax burden varies in proportion to total travel, fuel taxes result in a relatively fair alignment of the costs and benefits of road use. And in contrast to other common
215 by different states. License and title fees are also levied in some states, although these do not typically yield significant revenue. Vehicle sales taxes. Many states collect sales taxes on vehi- cle purchases, just as they do with the sales of other goods, and these are treated as general revenue. A smaller number of states collect excise taxes on vehicle sales, which are dedicated to transportation. The federal government collects a similar fee on the sales of commercial trucks and trailers to help fund the HTF (Cambridge Systematics et al. 2006). Vehicle registration fees. All states levy some form of vehi- cle registration fees, which typically vary by vehicle class. For light-duty vehicles, some states levy a flat fee, some levy a fee based on vehicle weight, and some levy a fee that accounts for a combination of age, weight, horsepower, and value. For heavy-duty vehicles, fees are typically based on weight accord- ing to a classification system that varies from one state to the next. Personal property taxes on vehicles have been levied by a few states, such as California, Kansas, and Virginia. While these act, in effect, as registration fees, federal tax code allows tax payers to itemize state personal property taxes on their income returns; the same does not hold for vehicle registra- tion fees. This approach has therefore provided states with a mechanism for increasing transportation revenue in a way that mitigates the net increase in combined federal and state taxes for their residents (Cambridge Systematics et al. 2006). Other policies. Many states also assess fees for vehicle titles and driver licenses. These, however, generate relatively little revenue, which is often used to cover administrative expenses rather than to fund highway investments (Cambridge Sys- tematics et al. 2006). Assumed policies for assessing marginal-cost indirect user fees. The following assessments assume that states would institute large increases in vehicle registration feesâsufficient to cover a major share of current transportation funding shortfallsâfor both light-duty vehicles and commercial trucks. For light-duty vehicles, the fees would be structured to vary with vehicle age, weight, and value. The purpose of including age in the calculation is that older vehicles tend to be driven fewer miles each year than newer vehicles (Santos et al. 2011, Table 22). Weight, in turn, relates to the amount of wear and tear that a vehicle imposes on the roadways. Finally, factoring in the value of the vehicle is intended to reduce the burden on lower-income drivers, who tend to own lower- valued vehicles, and should thus promote improved equity outcomes. For trucks, the fees would be based on some mea- sure of size, weight, and axle configuration to reflect the amount of wear on the road network likely to be caused by use of the trucks. Excise taxes on new vehicle sales are not assumed in the assessment because, unlike annual registra- tion fees, they do not represent an ongoing revenue stream that persists for as long as the vehicle is being used in the state. I.2.6 Required Lead Time States already levy fuel taxes. Assuming that public support for increased fuel taxes can be secured, it should be possible to institute the increases with little delay. The effects in terms of boosting available revenue would be immediate, while the secondary effects on traveler choice (e.g., to reduce travel or to purchase vehicles with greater fuel economy) would become apparent within a few years. While container fees are much less common than fuel taxes, they are not particularly complex in concept. It thus seems reasonable to assume that container fees could be planned, implemented, and begin to produce revenue within a 5-year window. I.2.7 Qualifications Increasing fuel taxes would be valuable for most states, but especially for those that do not currently index their fuel taxes and have not increased the per-gallon rates for many years. Container fees would mainly be applicable for states with major port facilities or international border-crossing points along major goods-movement corridors. I.3 Indirect Fixed-Cost User Fees (Registration Fees) Fixed-cost indirect user feesâincluding vehicle sales taxes and registration feesârepresent another common approach for raising transportation revenue. Such fees account for a significant share of state highway funding. In 2010, states col- lected almost $23 billion in taxes on motor vehicles and motor carriers, equal to about three-quarters of the $30 billion that they collected on state motor-fuel taxes (OHPI 2012). Such taxes are related to use of the transportation network and thus fall into the general category of user fees. Unlike direct user fees and marginal-cost indirect user fees, however, the amount paid in vehicle sales taxes and registration fees does not depend on the amount one travels. Rather, these are fixed fees that may be paid a single time (as with sales tax on a new vehicle) or annually (as with license and registration fees). As such, though they may be quite adequate for raising revenue, they do not perform particularly well with respect to fairly allocating the costs associated with building and maintaining the road network based on actual use. Rather, the effect will be for those who travel more to be subsidized by those who travel less. I.3.1 Supportive Policies Vehicle sales taxes and registration fees are the most com- monly employed revenue mechanisms in this category, as noted, although these have been structured in different ways
216 and goods movement. The effect would not be as strong, how- ever, as with marginal-cost indirect user fees (e.g., gas taxes) or direct user fees (e.g., tolls or mileage-based user fees). Both of these alternatives discourage lower-valued trips and thus promote more efficient use of the road network (Wachs 2003, NSTIFC 2009). Additionally, either tolling or mileage-based user fees would provide an opportunity to collect better data about where travel demand is highest (Sorensen, Wachs, and Ecola 2010), allowing for the selection of improvement projects that would yield the greatest economic returns on investment. Thus, registration fees are rated as only moderately positive in comparison to these other alternative revenue sources. Environment and public healthâneutral (uncertain). Should higher registration fees lead to decreased vehicle ownership and, in turn, vehicle travel, this should have some effect on reducing emissions and promoting more walking, biking, and transit use. On the other hand, if the fees are determined in part by the value of the vehicle, which would help reduce the burden on lower-income drivers, this would result in an incentive for keeping older, and more-polluting, vehicles on the road for a longer time. These two factorsâ potentially fewer vehicles, but also potentially more polluting vehiclesâwill tend to cancel each other out, although the exact interplay would depend on programmatic implemen- tation details. The combined effect on the environment and public health is therefore rated as neutral but uncertain. Note that it would be possible to impose sales or registration fees based on the environmental performance of a vehicle, lead- ing to more unambiguously positive effects; this is considered separately under the strategy of pricing vehicles to achieve environmental aims and is not assumed here. Equityâmoderately positive. As envisioned for the pur- pose of this assessment, increasing registration fees would perform moderately well in terms of equity. As a user fee, registration fees would ensure that those who own vehicles and use the roads would play a role in helping to fund expan- sion and maintenance, whereas those who do not own vehi- cles would be relieved of this burden. This stands in contrast with, for example, dedicated sales taxes, under which both users and nonusers share the burden. Further, by incorporat- ing vehicle value into the fee structure, the burden on drivers from lower-income groups would be lessened. On the other hand, registration fees would not vary with the amount of travel. As such, they would do a much poorer job of fairly aligning the costs and benefits of using the roads than, say, fuel taxes, tolls, or mileage-based user fees (NSTIFC 2009). I.3.5 Barriers The main challenge to increasing registration fees is gen- eral opposition to higher taxes in any form, although enabling legislation might also be needed. I.3.2 Intended Mitigation Effects The main intent of higher registration fees would be to increase revenue, which would in turn help to address poten- tial increases in the costs of construction and maintenance. Indirectly, it is possible that they could have a modest effect in reducing traffic congestion and vehicle crashes. Increasing transportation revenueâhighly effective. Registration fees already constitute a significant share of state transportation revenue (OHPI 2012); if raised significantly, they could certainly provide enough revenue to address cur- rent funding shortfalls. Reducing DOT costsâmoderately effective. As described next, it is possible that higher registration fees, by discourag- ing vehicle ownership, could lead to reduced overall travel, which in turn could reduce road maintenance needs. Addi- tionally, if the registration fees for trucks are structured to account for axle-weight loads, they could encourage motor carriers to adopt vehicle configurations with lighter axle loads, which would reduce the wear and tear on pavement, in turn reducing required maintenance activities. Reducing traffic congestionâmoderately effective (uncer- tain). It is possible, though uncertain, that higher registration fees could exert downward pressure on the growth in vehicle travel, and in turn on traffic congestion. By increasing the annual costs associated with owning an automobile, higher registration fees should have the effect of reducing average vehicle ownership rates. Vehicle ownership, in turn, corre- lates strongly with total household vehicle travel (Giuliano and Dargay 2006). On the other hand, if higher registration fees are paired with reduced reliance on fuel taxes over time, then the reduced marginal cost of travel is likely to promote increased travel for vehicles that have been registered. The net effect of these opposing influences is uncertain. Improving safety outcomesâmoderately effective (uncer- tain). If higher registration fees lead to reductions in total travel, this should also reduce the incidence of vehicle crashes. I.3.3 Intended Shaping Effects The main objective of indirect user fees is to raise revenue; they would not be expected to exert a significant shaping influence on evolving energy patterns. I.3.4 Other Effects The anticipated effects of higher registration fees on the economy, environment, and equity range from neutral to moderately positive. Economyâmoderately positive. By boosting available rev- enue, higher registration fees could help stimulate economic growth through investments in transportation aimed at allevi- ating congestion and improving mobility for passenger travel
217 I.4.1 Supportive Policies The most common forms of beneficiary fees and value capture taxes must be enabled in state authorizing legisla- tion but are administered by regional or local governmental units. Potential strategies include establishing tax increment financing and special assessment districts, imposing impact fees on new developments, and enacting transportation util- ity fees. Other forms of tax policy less commonly used for transportation purposes are payroll taxes, joint development agreements, and split-value tax rate mechanisms. Tax increment financing. Tax increment financing (TIF) leverages the additional taxes on property within a defined geographic area, often a downtown area or transportation corridor, accruing from publicly supported improvements. Public investment in these areas, including new transporta- tion infrastructure, is expected to increase assessed property values. TIF levies apply only to a portion of assessed valueâ the increase that is assumed to be directly associated with a public investment. Additional revenues are often used to bond or finance the initial infrastructure investment or are reinvested in improvements within the TIF area (AASHTO 2011). Special assessment districts. Special assessment districts involve the creation of a taxation district around a new or improved public facility. Landowners adjacent to the facility typically must agree by referendum to introduce the assess- ment as a means of funding a planned improvement. Assess- ment districts are a broader tool than TIF areas since they result in increased tax rates on the full assessed value of prop- erty, regardless of valuation changes (AASHTO 2011). Impact fees. The creation of new housing or commer- cial development often requires the public sector to provide additional transportation services or infrastructure. If real estate developers do not provide facilities (e.g., improved street frontage), municipalities may require them to pay a fee to fund the additional infrastructure. Most states must first provide enabling legislation to allow for the imposition of impact fees, which are often analyzed and levied by local gov- ernments. Impact fees are based on the expected impacts of a development, the cost of new infrastructure required, and the developerâs share of that cost (AASHTO 2011). Transportation utility fees. Property owners typically pay fees for specific public utilities such as sewage and water ser- vice. Fees for transportation services can be levied and used to fund transportation system maintenance or infrastructure improvements. Fees can be imposed as flat rates or can be set in proportional to a buildingâs square footage, occupancy, estimated trip generation, or other proxies for usage of the transportation system. For example, several local jurisdictions in Oregon allocate a portion of road maintenance costs to households by charging monthly rates based on estimated travel patterns (Halligan 2011). Low public supportâmoderate barrier (uncertain). All states levy registration fees, providing evidence of the politi- cal viability of this approach. On the other hand, the level of resistance to taxes in any form has risen considerably in recent decades, and registration fees have not been immune to this sentiment (Cambridge Systematics et al. 2006). In California, for example, the recall of Governor Gray Davis and subsequent election of Governor Arnold Schwarzenegger was largely pre- cipitated by Governor Davisâs decision to increase registration fees to help address funding shortfalls after reducing them ear- lier in his tenure when the state was enjoying a fiscal surplus. In short, it is unclear whether low public support constitutes a moderate or significant barrier; the longer-term record suggests the former, while more recent history suggests the latter. Enabling legislationâmoderate barrier. Although all states already levy registration fees, increasing the rates is likely to require legislative action in most cases. I.3.6 Required Lead Time States already levy registration fees. Assuming that public support for increased fees can be secured, it should be pos- sible to institute the increases with little delay. The effects in terms of boosting available revenue would be immediate, while the secondary effects on vehicle ownership and travel choices would likely unfold within a few years. I.3.7 Qualifications Increasing registration fees should be a viable approach across all states. I.4 Beneficiary Fees and Value Capture Public investment in transportation facilities can increase the value of surrounding property through improved access. Value capture and beneficiary feesâincluding, for example, special assessment districts or developer impact feesâinvolve raising revenue from property owners and developers who benefit from improved access to fund needed transportation investments. Such revenue streams are commonly directed to support further transportation improvements within a specified area or to fund broader transportation programs. While they are often used to construct urban transit facilities or local roadway or pedestrian enhancements, these strategies may also be used to fund improvements to the state high- way system. For example, revenue raised from a property tax imposed through joint petition of the majority of commer- cial and industrial property owners in the vicinity of Route 28 in Loudoun County, Virginia, covered 80% of the cost to improve supporting roadway infrastructure (Halligan 2011).
218 Increasing transportation revenueâmoderately effective (uncertain). DOTs may partner with local governments to use value capture strategies to fund spot improvements to the state highway system. However, these strategies are unlikely to generate substantial revenue for general use by DOTs due to the fact that value capture revenues (e.g., property taxes) are typically collected by local governments and must often be reinvested in local areas (AECOM Consult 2007). Tools such as impact fees or tax increment financing generate revenue streams that are sporadic or unstable, while mechanisms such as utility fees generate stable but very low levels of revenue. (They are generally unsuitable to fund significant operation and maintenance of the highway system and are rather devoted to new capacity improvements.) I.4.3 Intended Shaping Effects Value capture and beneficiary fees are mainly intended to raise revenue from those who benefit from the improved access provided by transportation improvements; they would not be expected to have significant influence on evolving energy patterns. I.4.4 Other Effects Value capture strategies and beneficiary fees generally have positive effects on the economy, environment, and equity. Economyâhighly positive. Value capture taxes, particularly tax increment financing and special assessment districts, are frequently cited as an economic development tool because they provide a mechanism for investment in improvements expected to generate additional economic activity. Additionally, most value capture strategies are considered economically efficient in that they assign the cost of paying for new infra- structure to those who will benefit most (Johns 2009). Environment and public healthâneutral (uncertain). Value capture taxes and beneficiary fees may be applied to support a range of infrastructure investments in different contexts with differing environmental outcomes. On one hand, they are frequently used to develop new urban transit stations or to improve walking and biking amenities in the surrounding area. Yet they are also applied to new roadways or new developments in rural and suburban areas, leading to decentralized development patterns and potentially greater vehicle use. Given this range of outcomes, the effects on envi- ronment and public health are rated as neutral but uncertain. Equityâmoderately positive. Value capture taxes and beneficiary fees are considered efficient and equitable in allo- cating the costs of new transportation facilities to those who benefit most from them. However, they often rely on property taxes, which can be considered somewhat regressive in nature (Institute on Taxation and Economic Policy 2009). Other beneficiary fees and value capture policies. Several other forms of value capture and beneficiary fees are also pos- sible, though their use in raising transportation revenue is less common: â¢ Employment-locationâbased payroll taxes. Many locali- ties impose local payroll taxes on those who work within an area and thus benefit from transportation improve- ments. While such taxes are seldom dedicated to trans- portation, they can be. For example, a special payroll tax applied within the urban transit districts of Portland and Eugene, Oregon, is used to fund transit improvements (AASHTO 2011). â¢ Joint development. Joint development occurs when a transportation agency and a real estate developer partner to develop land around a new transportation facility. The agency may own the land in question or may be paid by the developer in exchange for implementing a new trans- portation facility or service (AASHTO 2011). While joint development is most frequently practiced by transit agen- cies that own land surrounding urban transit stations, examples of joint development of highways, such as I-110 in Pensacola, Florida, also exist (Office of Planning, Envi- ronment, & Realty, undated). â¢ Land value and split-rate taxes. Land value and split-rate or two-rate taxes make up an alternative mechanism for capturing property value increases associated with better access through improved infrastructure. These taxes are imposed either solely on the estimated value of the land (a single land-value tax) or through separate assessments of the value of the land and the value of any buildings or improvements (a split-rate tax). Land is usually taxed at a higher rate, reflecting in part the value of access, than any subsequent improvements in order to encourage devel- opment of vacant or underutilized properties. These tax strategies are relatively uncommon in the United States and are primarily in use only in Pennsylvania (Maryland DOT 2011). Assumed policies for assessing value capture and benefi- ciary fees. The following sections for assessing value capture strategies and beneficiary fees assume that states aggres- sively pursue tax increment financing or special assessment districts to fund improvements to state-owned transporta- tion infrastructure. Impact fees and utility fees would also be employed, as appropriate. I.4.2 Intended Mitigation Effects Value capture strategies and beneficiary fees could be somewhat effective in helping to address revenue challenges likely to arise with alternative energy futures.
219 to generate sufficient funding for new improvements. How- ever, special assessment districts and similar strategies could be applied to improvements in rural areas or corridors with wide but well-defined geographic coverage. I.5 General Revenues General funds include government revenues from taxes and fees that have little or no direct dependence on the use of the transportation system. Income, property, sales, and value- added taxes are examples of general fund revenues, as are revenues from the sale of lottery tickets, alcohol, tobacco, and various licenses and permits. While real estate or personal property taxes can be considered a benefit-related tax when levied exclusively in areas served by a new investment or ser- vice, property taxes on all commercial or residential property are usually understood to be general revenues. From the perspective of efficiency or equity, general revenues as a source of funding for transportation are not as desirable as user fees, but they are often viewed as being more politically palatable. I.5.1 Supportive Policies The most well-known examples in this category are dedi- cated shares of sales taxes, income taxes, and property taxes. General obligation bonds are a related instrument by which general revenue may be raised, with debt retired over time using the sources of revenue listed previously. Sales taxes. There are 45 states that employ general state- wide sales taxes and five that do not. Of those that raise revenue through general sales taxes, 36 also by state law empower local units of government to employ dedicated sales taxes. General sales taxes in some states are apportioned annually by the legislature for transportation and other competing uses, while in some states a portion of the general sales tax is earmarked specifically for transportation programs. Income taxes. There are 41 states that generate revenue through personal and corporate income taxes, which may be apportioned to transportation programs as part of the normal state budgeting process. Property taxes. A few states directly employ property taxes as an instrument of general revenue, while the vast majority of states empower local jurisdictions, primarily counties, to levy such taxes. These are often a source of support for local roads and public transit. Other general revenue policies. Often states or local governments issue debt to raise capital for transportation and other investments to be paid back over time from general rev- enue. Most units of government are subject by statute to debt limits. Higher debt limits, and the willingness of state legisla- tive bodies to raise them, are thus among the most important I.4.5 Barriers Several barriers create a challenge for using value capture as a significant future option for raising revenues for state DOTs. Technical riskâmoderate barrier. Value capture taxes and beneficiary fees can be technically challenging, requiring com- plex partnerships, enabling legislation, and assessment criteria. This can be particularly problematic for road projects because they are accessible to many people, and it is difficult to geo- graphically isolate and charge via a property tax all those who benefit (AASHTO 2011). Additionally, the relationship between highway access improvements and property values can be complex; values can sometimes decline immediately adjacent to new facilities due to the effects of noise and additional pollution. Enabling legislationâmoderate barrier. Most value cap- ture arrangements or beneficiary fees require enabling leg- islation. For example, development impact fees are only authorized in 26 states (Duncan Associates 2008). Although special assessment districts and tax increment financing have been authorized in nearly all states (Council of Development Finance Agencies and International Council of Shopping Centers 2007), not all states permit revenues to be used to fund state-owned or operated transportation infrastructure. Maryland expanded its TIF authority in 2009 to make state- owned transit-related infrastructure eligible for funding, although highway projects remain ineligible (Bauman 2011). Minnesota law precludes Minnesota DOT and Metro Transit from using TIF arrangements (Johns 2009). Institutional restructuringâmoderate barrier. Value cap- ture strategies are usually implemented at local levels of gov- ernment. For state DOTs to use value capture as a meaningful source of funding to expand and improve the state transporta- tion network, institutional capacity must be developed to enter into financial and legal partnerships with local governments and private development partners. Some state DOTs, such as Marylandâs, have aggressively explored building this capacity (Bauman 2011). I.4.6 Required Lead Time Because state DOTs would have to enable and enter into complex institutional arrangements to benefit systematically from value capture, approximately 5 to 10 years of lead time would be required before a state could begin making frequent use of value capture arrangements. If required legislation depends on state constitutional amendments, the lead time would be much longer. I.4.7 Qualifications Value capture and beneficiary fee strategies are likely to be most successful in states with dense urban or growing suburban populations since they require a critical mass of property owners
220 Economyâmoderately negative (uncertain). While the transportation investments funded by general revenue could promote economic growth, increased taxation is often viewed as a drag on the economy. Additionally, in comparison to fuel taxes or other forms of user fees, relying on general revenue to fund transportation would not promote more economically efficient use of the system (Wachs 2003). Another consid- eration is that increasing general revenue tax rates could in some cases motivate businesses to relocate to other states. Businesses with the ability to relocate often prefer to invest in new facilities in low tax states. Faced with the prospect of increased tax rates, such businesses often threaten to, and on occasion actually do, leave states with higher taxation rates. In contrast, businesses may be more tolerable of small increases in taxation rates in areas where taxes are already low, such as in the rural South and Southwest. While the net eco- nomic effect of greater reliance on general revenue sources is uncertain, it is likely to be negative overall in comparison to user fees. Environment and public healthâmoderately negative. User fees such as tolls or fuel taxes create an incentive for indi- viduals to reduce travel or fuel use and rely on non-automotive modes to a greater extent. Increased reliance on general revenue sources, in contrast, offers no benefit to those who use less fuel, purchase vehicles that are more efficient, or take transit, bike, or walk instead of driving. By reducing the marginal cost of travel, a shift from user fees to general revenue would encourage more travel and in turn more energy use and emis- sions, with negative consequences for both the environment and public health. Equityâmoderately negative. Relying on general revenue to fund transportation has at least two negative equity implica- tions. First, general sales taxesâa common source of general revenueâare regressive in the sense that the burden of pay- ing them falls more heavily as a proportion of income on the poor than on the rich (Sorensen 2006). This regressivity can be mitigated somewhat by granting tax credits or by applying different tax rates to people in different income categories. For example, the use of progressive income tax brackets or the taxation of commercial property at rates that differ from the taxation rates for principal residences is used to mitigate the impacts of general taxes on lower-income people. Second, the use of general revenues to fund transporta- tion does not fairly align the costs of building and main- taining the system with the benefits of using the system (Wachs 2003). In particular, those who do not drive but still pay income, property, or sales taxes end up subsidizing the road network for those who do drive. The subsidization of users by nonusers was perhaps more problematic in the past, when fewer households owned vehicles; with the vast majority of the population now consisting of travelers and vehicle owners, this distinction has become less significant. policies supportive of the use of general revenues for transpor- tation. Additionally, more than a dozen states have in the past two decades enacted enabling legislation to permit the states or their counties and municipalities to hold referenda in which voters may approve borrowing to be backed by general revenue sources (Goldman and Wachs 2003). In California, for exam- ple, enabled by state law, nearly 30 counties have placed local- option sales taxes on the ballot for consideration by the voters (Crabbe et al. 2005). Finally, state interest tax deductions are a common device by which general fund debt is encouraged. Citizens purchase debt instruments where public agencies promise to pay them back over time, and a very important policy to encourage the purchase of such debt is the provision of income tax exemptions or credits on the interest earned through such debt instruments. Assumed policies for assessing general revenues. In the assessments that follow, it is assumed that a state would allow its current fuel taxes to remain stagnant, leading to declining real fuel-tax revenue over time. To make up for this short- fall, the state would instead raise additional revenue dedicated to transportation through some combination of higher sales taxes, higher income taxes, and (less likely) higher property taxes. The specific combination of general revenues employed for transportation in any state would depend on what type of taxes it already levies. I.5.2 Intended Mitigation Effects Increased reliance on general revenues would mainly be intended to boost available transportation funding, which could in turn accommodate higher construction costs. Increasing transportation revenueâhighly effective. Although few forms of taxation are popular, general revenue sources enjoy the advantage of being spread across a broad base of individuals or transactions (sales taxes on many goods, transaction taxes on all businesses, or property taxes on all real property); as such, even modest increases in tax rates can produce substantial returns. Further, citizens are often more tolerant of small rates of increase in existing revenue sources than they are of new taxes and fees, especially if they are seen to be fairly administered. I.5.3 Intended Shaping Effects Greater reliance on general revenue would not be expected to exert much influence on evolving energy use patterns. I.5.4 Other Effects While potentially an effective way to raise funds, general rev- enue strategies do not fair particularly well with more general policy goals related to the economy, environment, and equity.
221 Australia) but have recently gained ground domestically as a potential strategy for expanding the pool of available trans- portation funding. In the United States, generally the invest- ments made by private firms are repaid through tolling rather than government transfers (also known as âavailability pay- mentsâ), which are more common overseas. One key distinc- tion from other funding strategies is that private capital is generally tied to specific projects (although in some cases multiple projects may be involved), so it is not necessarily a strategy through which to fund a statewide transportation program. However, it is possible for a state to shift more of its new capacity building to a PPP basis and to make greater use of PPPs as a state policy. I.6.1 Supportive Policies States can leverage private funds in a variety of ways. These are better thought of as lying along a spectrum rather than as discrete categories because there are many ways to catego- rize them based on a variety of factors. For the purposes of this discussion, the possibilities are organized into two broad categories: Publicâprivate partnerships. PPPs (also known as P3s) are arrangements for building or operating transportation facilities that âallow more private sector participation than is traditionalâ (U.S. DOT 2004). This broad definition cov- ers the many varieties of PPPs that have been used, some of which do not include private funding. Zhao, Saunoi-Sandgren, and Barnea (2011) provide a useful typology for PPPs that do leverage private funding: â¢ Private-financing PPPs: In this form of PPPs, the private entity may contribute financing through debt or equity finance, up-front payments, or revenue streams. Possibilities are a designâbuildâfinance model, in which the contrac- tor helps with construction financing; asset-monetization leasing, in which the contractor pays an up-front fee in exchange for later revenues; and various other types that combine a long-term concession and contractor finance. In such arrangements, the public sector continues to own the facility. â¢ Value capture PPPs: In this form, a private entity agrees to build a facility in exchange for the ability to profit from new development. For example, air rights development is common in transit projects, in which a station is built or upgraded in exchange for the right to build a private project above the station. Note that the U.S. DOT currently allows states to experi- ment with PPP structures that waive the standard require- ments in contracting, right-of-way acquisition, project finance, and environmental compliance through a program While there are still some nondrivers, their numbers have decreased as a share of the overall population, and it can be argued that almost all citizens benefit by accessibility and by the delivery of goods and services even if they do not own vehicles (Cambridge Systematics et al. 2006). Still, reliance on general revenue to fund transportation will, all else being equal, tend to result in lower-mileage drivers subsidizing higher-mileage drivers. I.5.5 Barriers The main barrier to general revenue enhancements is public opposition to new taxes, but it is possible that modest changes can be more acceptable than some of the alternative revenue sources that might be considered. Low public supportâmoderate barrier. Recent increases in the cost of petroleum provide the context within which general taxes and fees for transportation must be considered. There is opposition to almost any tax or fee; this is especially notable with respect to transportation because of its steadily increasing share of household expenditures. While increases in user fees are a source of objection, any new revenues devoted to transportation are a source of consternation, and general revenues are not spared. Still, evidence indicates that voters in many local jurisdictions, at least, are willing to accept higher rates of general taxation to pay for much-needed transporta- tion improvements (Goldman and Wachs 2003). Enabling legislationâmoderate barrier. Some states may set tax rates via legislation. In other states, voter referenda have been undertaken, and many have failed at the polls. Increasing these general revenue sources appears most likely to require legislative changes at the state level, though it could involve election campaigns by advocates. I.5.6 Required Lead Time This strategy envisions increasing the rate for a form of general taxation (e.g., sales, income, and property taxes) already levied in the state. Once political consensus to take this step has been achieved, implementing the actual increase should be possible within a yearâs time. I.5.7 Qualifications This strategy could be pursued by any state. I.6 Leveraging Private Capital Leveraging private capital encompasses a variety of meth- ods to attract funding from the private sector to construct or operate transportation infrastructure. Such means are more common outside the United States (especially in Europe and
222 $420 million of its $1.1 billion cost from senior bank debt and equity contributions (FHWA, undated a). Second, projects with private finance are often, though not exclusively, paid for with new or higher tolls on those facilities, thus expand- ing the stream of user fees flowing into the system. The Dulles Greenway in northern Virginia was built privately and pro- vides the private owner with toll revenues; rates are subject to public oversight (FHWA, undated a). A third possibility is asset monetization, although this approach has been rel- atively rare in the United States. Under this arrangement a private entity purchases the right to manage a facility from the public owner and then recoups its investment over time through the collection of tolls or other fees. Both the Chicago Skyway and the Indiana Toll Road produced these one-time revenue infusions (FHWA, undated a). Despite prior successes, the leveraging of private capital is rated as being only moderately effective in addressing revenue shortfalls, although it is also characterized here as uncertain. This is because private funding to date has mainly been employed for projects involving existing toll roads or for the construction of new capacity that will be subject to tolls. Much of the highway system, however, is not cur- rently tolled, and it is generally difficult from a political perspective to add new tolls to currently free routes. This reduces the prospects for relying on PPPs or privatization to address shortfalls in revenue more broadly throughout a stateâs entire network. Reducing DOT costsâmoderately effective (uncertain). PPPs and privatization can also be helpful in reducing DOT costs, although this only applies for roads that fall under the publicâprivate management arrangements. Construction cost savings have been documented on a number of specific projects involving PPPs. A Florida study found that while most projects had cost overruns, they tended to be far lower with the innovative contracting techniques employed in PPPs (U.S. DOT 2004). Some observers have noted that these cost reductions may also be tied to the shorter time frames for construction often achieved with PPPs, since delays usually increase costs (Rall, Reed, and Farber 2010). Ideally, for a facility managed by a private entity, tolls would be set based on the needs of any debt repayment for construction costs in addition to ongoing maintenance costs. However, the likely effectiveness of leveraging private capital in this context is rated as uncertain for two reasons. First, almost all PPP proj- ects have long concession periods, and most projects have been in service only a few years, so it is difficult to say how they will fare in the long term. Second, several private enti- ties that managed PPPs have been restructured or have filed for bankruptcy when toll revenues did not cover costs. For example, the South Bay Expressway was built with private funding and a TIFIA (Transportation Infrastructure Finance and Innovation Act) program loan, but the owner filed for called Special Experimental Project Number 15, or SEP-15 (FHWA, undated c). Full privatization. Privatization means that the private entity becomes the owner of a facility, either through build- ing it or by purchasing it from a public entity. Generally the private owner is still subject to some public oversight, much as with a regulated utility. Another distinguishing factor from PPPs is that privately owned facilities are private in perpetu- ity, while PPPs have a specified concession date, often in the range of 25 to 75 years. These methods of attracting private capital are often but- tressed by other innovative financing tools to help states leverage their own funds. For example, many states operate state infrastructure banks, which are state-level lending insti- tutions that are capitalized with federal or state funds. Funds are lent to specific projects that may or may not include pri- vate capital, depending on how a particular deal is structured. Another example is 63-20 public benefit corporations, which are ânonprofit corporations that . . . [are] authorized to issue tax-exempt debt on behalf of private project developers for activities that are public in natureâ (U.S. DOT 2004). How- ever, these particular tools are more properly considered financing tools than revenue sources. Assumed policies for assessing efforts to leverage private capital. For the evaluation, it is assumed that states are will- ing to use both PPPs and full privatization, depending on the specific project. The 2005 SAFETEA-LU authorization allows all states to use PPPs for any project eligible for federal fund- ing, but as of October 2010, only 29 states had passed legisla- tion allowing the use of PPPs (Rall, Reed, and Farber 2010). Legislation differs from state to stateâfor example, in some states it narrowly defines specific projects, while in other states it allows use on any project fulfilling certain criteria (FHWA, undated b). For this assessment it is assumed that enabling legislation would be written broadly enough to make these strategies widely available. I.6.2 Intended Mitigation Effects Strategies to leverage private capital could play a modest role in mitigating the impacts of declining transportation revenues or higher construction and maintenance costs by bringing in a new source of revenue to the transportation system as a whole that can allow a state to stretch its budget. Increasing transportation revenueâmoderately effec- tive (uncertain). While in many cases PPPs and privatization do not provide additional revenue to the public sector, they often do expand the total amount of funding (public plus pri- vate) that is directed to transportation improvements. This can unfold in several ways. First, private capital may allow a state to spend less of its own funds on construction or mainte- nance. For example, the Port of Miami tunnel received about
223 tion labor; it is possible, though, for states to require private construction firms to pay prevailing wages (Rall, Reed, and Farber 2010). Finally, although private capital should gener- ally be attracted to the most potentially productive projects, it still seems unlikely that any selection process for new roads would be entirely free of political considerations. Environment and public healthâneutral. The presence of private capital in construction or maintenance does not in itself raise any particular environmental or public health issues, either positive or negative. While some critics have alleged that private operators could use less environmentally friendly construction techniques or encourage more traffic to gener- ate higher revenues, carefully written contracts can probably address these concerns (Rall, Reed, and Farber 2010). Equityâneutral (uncertain). In the literature on PPPs and privatization, concerns about equity are generally related to issues such as toll increases and whether the public, broadly defined, benefits from the arrangement. Toll increases are not necessarily inequitable if they reflect the cost of mainte- nance and help the operator provide better service, but they create equity concerns if they are allowed to rise enough to price some lower-income drivers off of a facility. This would be most relevant in the case of asset monetization in which a private entity anticipates significant toll increases to recoup its investment. I.6.5 Barriers The main barriers to PPPs and privatization are low public support, the possibility of long-term financial cost, and other types of risk unique to these strategies. The relative impor- tance of these barriers will vary from project to project. Low public supportâmoderate barrier (uncertain). Some surveys have found general public opposition to privatization versus other forms of PPPs (Baxandall, Wohlschlegel, and Dutzik 2009). For existing projects (as distinct from new con- struction), public support can be low based on concerns over toll rate increases, which voters may perceive as being moti- vated exclusively by profit (Rall, Reed, and Farber 2010). Technical riskâmoderate barrier (uncertain). PPPs and privatization, by their nature, carry specific types of risk that are not present with other strategies. First, non-compete clausesâwhich essentially restrict the state from building or improving other infrastructure in the vicinity of a privately managed roadâmay lead to a loss in public control over transportation policy (Baxandall, Wohlschlegel, and Dutzik 2009). Some states have specifically restricted the use of these clauses for this reason (Rall, Reed, and Farber 2010). Second, traffic may be diverted to other roads, which could negatively affect rural areas that depend on that traffic (Pew Center on the States 2009), reduce the revenues available to the private entity, or increase congestion on heavily used roads. Third, bankruptcy less than 3 years after the roadway opened for service. Claims against the private operator and a downturn in revenues led to its financial problems, even though the concession allowed tolls to be set at market rates. The private entity was restructured as a result, and the toll revenues are shared by the TIFIA program and the lending banks (FHWA, undated a). Reducing traffic congestionâmoderately effective (uncer- tain). Leveraging private capital can make it possible for states to add new capacity that would not otherwise have been pos- sible with state funding alone, which in turn can help relieve existing traffic bottlenecks. However, such benefits will not tend to be system-wide but will be constrained to the corri- dors in which the investments are made. Additionally, while adding new capacity will accommodate more vehicle travel, it will not necessarily solve congestion over the long term due to the effects of latent and induced demand (Downs 2004). To maintain uncongested travel conditions in tolled lanes, PPP operators may choose to implement congestion pricing (FHWA, undated a); this was the case, for example, with the SR 91 express lanes in Southern California. Whether future PPP projects would commonly employ this technique is unknown, resulting in characterization of this rating as uncertain. I.6.3 Intended Shaping Effects Strategies to leverage private capital would not be intended to shape evolving energy use patterns. I.6.4 Other Effects In general, the use of private capital to pay for construction and operating costs is not expected to have major impacts on the economy, environment, or equity. Any of these con- cerns could arise on a particular project, depending on its structure, but they are less related to the question of whether private capital is involved. Economyâmoderately positive (uncertain). It is reason- able to expect that leveraging private capital for transporta- tion investment should have a moderately positive effect on the economy as private firms gravitate to projects that they anticipate will be profitable. One key reason for profitability is the existence or projection of sufficient demand from driv- ers willing to pay tolls, which will tend to align with prospects for greater economic activity. This rating is characterized as uncertain, though, for several reasons. First, while there may be localized economic benefits to investing in a specific new road or bridge, for example, such local investments are more likely to redistribute economic activity than produce overall gains (Shatz et al. 2011). Second, there may also be negative economic impacts if private firms use lower-wage construc-
224 I.6.6 Required Lead Time Provided legislation is in place, the anticipated time frame for delivering new construction under a PPP model is prob- ably in the range of 5 to 10 years, which includes time for negotiating the financing as well as environmental review and construction. While the length of time for construction depends on a number of factors unrelated to the financ- ing concerns, the time to finance and build these projects is generally shorter than it would be under more conven- tional means (U.S. DOT 2004). The time needed for conver- sion of an existing roadway to a PPP is shorter, in the 1- to 5-year range. I.6.7 Qualifications These strategies could be used in any state with authoriz- ing legislation, but they may be more practical in areas that are experiencing economic and population growth because these drive the toll revenues that are generally used to repay private investors. References AASHTO. 2011. 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This can lead to declines in maintenance and safety stan- dards if the public sector cannot be sure that the private entity is adhering to established standards (FHWA 2007). Fourth, private entities may have conflicts of interest (Baxandall, Wohlschlegel, and Dutzik 2009). The mark of a successful PPP is that each party bears the risks it can best manage (U.S. DOT 2004). However, if risk is not managed properly through up-front comparison, contracts, and performance measures, it is pos- sible that the private sector will reap the rewards if the project is successful and that the public sector will pay the price if the project fails. Finally, in the long termâlooking at operations cost versus construction costâthe overall cost to the public sector under a PPP structure could be higher than it would have been if a facility was built or operated in the conventional way. Crit- ics have expressed concerns about the disparity between up-front payments and long-term toll collection, as with the Indiana Toll Road (Baxandall, Wohlschlegel, and Dutzik 2009); cost overruns and the resulting need for the public sec- tor to assume control over a facility (Hodge and Greve 2007); and the possible cost to the public sector if a private operator declares bankruptcy (Rall, Reed, and Farber 2010). Collec- tively these technical risks are rated as moderate but uncer- tain. PPP projects vary so widely that some concerns can be mitigated with carefully structured and well-monitored con- tracts. Also, the lack of long-term evidence makes it difficult to assess the probability of these risks over the lifetime of a concession. Enabling legislationâmoderate barrier (uncertain). While for the purposes of this assessment it is assumed that states have such legislation in place, in reality just over half the states are able to pursue such policies under their cur- rent legislation. While model legislation exists (FHWA 2010), it would constitute new legislation rather than a modifica- tion to existing legislation, and it may engender a number of debates related to how to use revenues, whether to allow any project or specify certain projects, whether to consider unsolicited bids, and so forth. The extent to which enabling legislation constitutes a barrier thus varies widely from state to state. Institutional restructuringâmoderate barrier (uncer- tain). Some state DOTs may find that institutional restructur- ing will be required because their current organization does not lend itself to dealing effectively with the private sector for developing PPPs or other agreements. It is also possible that the skills needed to successfully negotiate with private firmsâincluding specialized legal and financial skillsâare not available in-house at every state DOT. This is rated as uncertain since it likely varies from state to state depending on previous experience with private capital.
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