Dedicated Revenue Mechanisms for Freight Transportation Investment (2012)

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11 Freight Infrastructure Funding Issues This research explores viable sources of revenue to sup- port freight-oriented investment in the nation’s surface transportation system. Public- and private-sector concerns with freight mobility, economic development, U.S. com- petitiveness in world markets, and conflicting freight and passenger needs for limited highway and rail capacity have led to proposals for a separate freight infrastructure trust fund or funding program with a dedicated revenue source. Examples of potential funding mechanisms include customs revenues, container fees, bill of lading fees, weight-based taxes, weight-distance taxes, freight transportation value taxes, annual highway user vehicle fees, annual highway miles traveled fees, sales taxes on motor vehicles, national vehicle safety inspection fees, and carbon tax or cap-and- trade proceeds. The U.S. DOT’s 2008 Conditions and Performance Report indicated that public capital investment from all levels of gov- ernment in highways totaled $78.7 billion (FHWA and FTA, 2008). In 2008, the net revenue of the Highway Trust Fund’s Highway Account was $37.3 billion, about half of the total public highway investment. The same U.S. DOT report proj- ects an annual federal, state, and local highway investment need of about $175 billion to achieve funding of projects with a positive benefit to cost ratio. AASHTO is recommending funding at the rate of $62.5 billion per year from Congress over the next 6 years. The National Surface Transportation Infrastructure Financing Commission report compiled vari- ous estimates of long-term federal funding requirements (National Surface Transportation Infrastructure Financing Commission, 2009). The funding totals required to improve the nation’s infrastructure (see Figure 3), average $100 billion (in 2008 dollars). At present, approximately $37 billion is being raised annu- ally through federal fuel and excise taxes, but the revenue is falling short of existing demand for funds. Transfers from the General Fund have been required in each of the past 3 years, totaling $34.5 billion. The reasons for the revenue shortfall are well documented: • The fuel tax is not indexed and has not been increased since 1993. Meanwhile, highway program costs have increased 119%. • Improving technology and tighter fleet fuel-efficiency standards for automobiles have increased composite aver- age fuel mileage by 45% since 1971. While the number of heavy truck miles per gallon has been flat, ton-miles per gallon more than doubled between 1975 and 2005. • A large number of highway users, mainly government agencies and schools, are exempted from paying the tax. Off-road uses are not taxed. The American Trans- portation Research Institute (ATRI) estimates the an- nual cost of these exemptions at between $1 billion and $1.5 billion. • A substantial portion of the tax revenue is dedicated to mass transit, and portions of the Highway Account funds are diverted to non-highway uses. • Fuel tax evasion is a significant problem, resulting in an annual loss estimated at 6.5%, or about $2.2 billion annually. • Long-term viability of the fuel tax may be threatened by transition from fossil carbon-based fuels to electricity and hydrogen. In the absence of new sources, freight-related tax revenue growth will be modest at best. Table 3 shows that the freight- related contributors to the Highway Trust Fund are expected to grow at less than 2% annually, which is not enough to keep up with inflation, much less reduce the backlog of infrastructure needs. The Inland Waterway Trust Fund, supported by the fuel tax paid by tug and barge operators, may even decline if industry ton-miles continue to decline as projected. C h a p t e r 1 Background and Research Approach

12 As a result, there are a number of suggestions for reform- ing the existing fuel tax system and for creating a dedicated mechanism to fund freight infrastructure. Embedded in the overall concept of freight infrastructure revenue mechanisms are multiple possible goals: • Incremental dedicated funding for freight infrastructure. • Project-specific funding. • Transportation demand management/travel demand management (TDM) measures. • Environmental mitigation or improvement. • Increased private-sector investment to supplement or lever- age government revenue. Numerous potential freight infrastructure funding mecha- nisms have been suggested as alternatives or supplements to existing sources. Study Scope and Objectives There are three stages to the process of funding freight infrastructure—generating the revenue, dedicating the funds to freight needs, and allocating the money to projects. The scope of this study corresponds to the first stage— generating revenue—although the willingness of the freight industry to pay taxes or fees also depends on how the money is used. The objectives of this research were the following: Figure 3. Average annual federal capital needs, 2008–2035 (2008 dollars). 60 78 87 85 96 118 0 20 40 60 80 100 120 140 C&P 2006/NCHRP Financing Commission Source: National Surface Transportation Infrastructure Financing Commission, 2009. Policy Commission C&P 2006/NCHRP Financing Commission Policy Commission 20 08 $ in B illi on s Needed to Maintain Infrastructure Needed to Improve Infrastructure Table 3. Freight-related tax revenue forecasts.

13 • Identify feasible, practical options for providing dedi- cated federal revenue and finance mechanisms to support investment in freight transportation infrastructure. • Provide a comprehensive analysis of the functioning and implications of the potentially most viable options. • Assess the relative merits of these potentially most viable options and describe in detail requirements and steps required for their implementation and operation. For purposes of this analysis, it is assumed that the federal fuel and excise tax system remains in place as the major reve- nue source for federal transportation infrastructure funding. The options addressed in this study would therefore generate new revenue to be dedicated to freight infrastructure through either supplementary federal fuel or excise taxes within the current system or revenue mechanisms outside of and paral- lel to the current federal system. The candidate mechanisms are therefore viewed as potential supplements to the existing federal system of fuel taxes and other excise taxes, rather than as replacements. Most of the reviewed literature, however, is concerned with replacing the fuel tax system with an entirely new system to cover both pas- senger cars and trucks. This difference in perspective compli- cates the use of cost and revenue estimates from the literature. If a VMT fee system were implemented for all 250 million U.S. vehicles, for example, then the cost of covering 9 million medium- and heavy-duty trucks would be marginal. The emphasis of this study is on mechanisms for generating new revenue for freight transportation infrastructure. Diver- sion of other revenue streams, such as customs revenue now used for other purposes, would not add any new net funds to federal programs. Likewise, recapture of Highway Trust Fund funds presently diverted to other uses, notably transit fund- ing, would not increase the total funds available within the federal budget. Closure of exemptions to the fuel tax would transfer funds from other state, local, and federal agencies to the Highway Trust Fund, but again would not add net rev- enue. Recapture of diverted Highway Trust Fund funds and closure of exemptions would, however, result in substantial additional funding for highways and shift the burden of funding transit and paying for formerly exempt vehicles to other sources. The trucking industry has frequently pointed out that a signifi- cant portion of the fuel taxes it pays are used for non-highway uses. The diversion to transit funding was estimated at a cumulative $50 billion from 1994 through 2005. Study Tasks The study team began by reviewing existing literature and domestic and international experience to prepare a compre- hensive list of potential freight funding and financing mecha- nisms. There is wide agreement in the surveyed literature on the great volume of freight moved in the United States, the high volume increases expected in the long run, the inad- equacy of existing infrastructure to manage the throughput, and the lack of specific programs to fund future infrastructure requirements. A standalone literature review was prepared and is presented as Appendix A. The study team then compiled a list of possible freight infra- structure funding mechanisms and criteria for initial screen- ing. The list of potentially feasible options was narrowed considerably as many turned out to be impractical for various reasons or to be more suitable for project-specific funding than for national application. The study team recommended carrying forward seven potential revenue mechanisms as candidates for additional analysis: fuel tax surcharge, VMT fees, PPPs, ITCs, registra- tion fees and excise taxes, waybill taxes, and carbon taxes. The research team recommended that the fuel tax surcharge, VMT fee, and excise tax options should be carried forward into detailed analysis of collection mechanisms and concepts of operation and into the final report. Literature Review Results The literature reviewed for this study (see Appendix A) focuses on the need for new revenue sources for transportation projects in general and for freight infrastructure specifically, and on conceptual discussions of various potential revenue mechanisms. A few sources make concrete recommendations for new revenue sources; most suggest a range of options for further study. Only a very few sources discuss the mechanics of possible revenue options in any detail. Sources agree that the current state of affairs includes the following: • Heavy usage of existing facilities and attendant congestion. • Under maintenance or inadequate state of physical facilities. • Weakness of fuel taxation and depletion of the Highway Trust Fund, stemming from multiple causes. • Unmet need for targeting funding for freight infrastructure. The literature on alternative revenue generation mecha- nisms is focused almost exclusively on private automobiles. Issues particularly relevant to freight movement—such as use of graduated VMT fees for different truck sizes, the role of federal excise taxes, and the use of commercial fuel card and fuel tax allocation systems for VMT fees—have been largely neglected. Revenue Options The array of funding options discussed in the literature draws on existing taxes and fees, on pilots and demonstra- tions, and on new funding sources that could be used for

14 freight infrastructure. These funding options include the following: • Existing fuel taxes. The current fuel tax regime is described in the literature in detail, including accounting rules, diversion of funds to non-highway sources, and especially exemptions. • VMT fees. A VMT fee is a user fee charged to each vehicle per mile traveled on all roads or on specific segments of roads (e.g., Interstate highways). There are multiple options for VMT implementation. This revenue-generation mech- anism has received extensive treatment, starting with the National Surface Transportation Infrastructure Financing Commission and most recently by the RAND Corporation (Sorenson et al., 2009). • Vehicle and freight weight taxes. Variations on vehicle weight taxes include vehicle or axle weight taxes, freight tonnage taxes, and freight weight-distance taxes. These main taxes are meant to reflect the impact of weight (vehi- cle or freight) on the roads. Oregon uses a weight-distance tax currently. The ATA has evaluated this option. • Freight transportation or waybill tax. A freight services or waybill tax would be assessed on the price or equivalent value of transportation services. PricewaterhouseCoopers (PwC) has developed a waybill tax proposal for the Ameri- can Road and Transportation Builders Association. • Dedicated customs duties. Both diverting existing revenues from customs duties or revenue generated by a surcharge on existing customs duties have been considered as revenue options. The California Marine and Intermodal Transpor- tation System Advisory Council examined this option as a source of funding for maritime infrastructure projects. • PPPs. PPPs are a broad topic and represent the attempt to attract private equity capital to public infrastructure investment. Examples range from Chicago-area tollways to leasing out the Indiana Turnpike. • ITCs. Short line railroads have enjoyed a tax credit worth about $170 million annually; it has lapsed, but is expected to be extended. This credit evidently has been serving its purpose of boosting private capital investment. Class I railroads are seeking a similar provision applying to them as well. Criteria for Evaluation Criteria for evaluation have also been supplied in the lit- erature, both by the trucking industry and most notably by the National Surface Transportation Infrastructure Financing Commission. The trucking industry lists seven criteria: effi- ciency, equity, effectiveness, enforceability, competitiveness, neutrality, and non-intrusiveness. The National Surface Trans- portation Financing Commission developed a more elaborate list, including a weight for each criterion. The National Surface Transportation Financing Commission places the maximum weight on the revenue potential of each option and promotion of efficiency (minimizing economic costs of revenue genera- tion and inducing socially desirable behavioral responses). The user fee/benefit tax principle and the political acceptability of the revenue option are also given high weights. In the literature, two revenue options are considered main contenders based on their revenue-generating potential as well as other criteria. These are modified fuel taxes and VMT fees. Other options do not fare as well in the literature. Weight- based taxes (vehicle and freight) are attractive because they allow for variations in charges based on costs imposed by freight movements on roads and infrastructure. However, these revenue mechanisms have different effects on private, commercial, and government use of vehicles for freight trans- portation. They also require levels of information that could be considered intrusive. A similar case can be made against waybill taxes. On the other hand, customs duties, while rela- tively easy to implement, are likely to be a disappearing tax base as international trade agreements limit the duties that member countries can impose on imported goods and ser- vices. Congestion- or value-pricing mechanisms are primar- ily suited for demand management rather than revenue generation. From the literature, it appears that freight con- gestion charges are not very effective in changing freight transportation demand or its timing. Market and profitabil- ity considerations are more important determinants of the timing and distance of freight transport. There is strong support in the literature for user fees over taxes. “The paramount difference between a tax and fee is based on the purpose of the charge. A charge that covers the cost of providing a service to the payer is a fee. A charge that raises revenue for general spending without conferring any exclusive benefit to the payer is a tax” (Henchman and Greaves, February 2009). The current fuel tax occupies a middle ground between user fee and tax. Parties pay a set amount per gallon of fuel purchased regardless of how much, where, and when they travel on federal or state highways. The high correlation between gallons purchased and miles traveled, however, makes the fuel tax levy effectively proportional to road use (the “user pays” principle). The earmarking of federal fuel taxes to the federal Highway Trust Fund and the dedicated use of this fund for transportation infrastructure projects cre- ates a “user fee” structure of funding for transportation in the United States (with exceptions to dedicated uses causing a dilution of the user fee structure). There is, however, little agreement in the literature regarding how to assess the “user pays” principle in practice, considering the various revenue options. Issues and questions raised regarding four funding mechanisms (tolls, VMT, freight transportation or waybill tax, and PPPs) are listed below:

15 • Tolls. Are they a good way to ensure that the user pays, or are they more trouble than they are worth? This is largely an argument of theory versus practice. Economists gener- ally favor tolls, while truckers see the practical disadvan- tages of collection as outweighing the benefits. • VMT. Will or should highway usage be billed back to users on a VMT basis, superseding the fuel tax as a surrogate user fee? Can VMT be applied in a way that comports with neutral, accepted tax principles? Two national commis- sions, seeing the difficulties of the fuel-based trust fund, have called for exploring this concept. Much of the truck- ing industry, however, drawing from the practical difficul- ties of implementation in Oregon, remains opposed to this form of charging for road services. • Freight transportation or waybill tax. Can a tax on the value of transportation services be administered adequately and fairly? Would it apply only to carriage transported for a price, as with the existing air cargo tax, or would it extend as well to private carriage of goods? • PPPs. Many parties laud the concept of PPPs while being short on specifics. The trucking industry, however, generally opposes the leasing or concession-based operation of pub- lic roads by private concerns and has opposed creating new tolled truck-only lanes while cars remain on untolled lanes.