Future Financing Options to Meet Highway and Transit Needs (2006)

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NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs F-1 Appendix F Assumptions for Selected Short-Term Revenue Enhancement Projections „ Index the Federal Fuel Taxes Three different options were assessed to fill the gap over the next two reauthorization cycles: 1) starting indexing to the Consumer Price Index (CPI) in 2010; 2) increase Federal motor fuel tax by 5 cents in 2010; or 3) retroactively indexing the Federal fuel taxes to the Consumer Price Index (CPI) going back to the last Federal tax increase in 1993 (adding 10 cents) by 2010. Indexing the Federal fuel taxes to the CPI as estimated by Congressional Budget Office (CBO) starting in 2010 could raise $32 billion in additional Federal revenues, during 2010 to 2017. If the Federal fuel taxes were increased by 5 cents in 2010 to gain half of the purchasing power it has lost since it was increased in 1993, they could raise $113.0 billion for 2010 to 2017. The last option, assumes that the Federal motor fuel tax rates are indexed back to 1993 (as originally proposed by the House Transportation and Infrastructure Committee); this option could raise $202.6 billion in additional Federal revenues for 2010 to 2017. For these three scenarios, the current dollar fuel tax rate on gasoline in 2017 would be 21.8 cents for indexing beginning in 2010; 27.1 cents by adding 5 cents in 2010 and indexing; and 33 cents by adding 10 cents in 2010 and indexing, in comparison to the current 18.3 cents currently credited to the Highway Trust Fund (HTF). „ Eliminate Exemptions to the Highway Trust Fund This proposal assumes that the state and municipal vehicle and agricultural exemptions to highway user fees come from the General Fund rather than the HTF starting in 2008. This gains approximately $1.2 billion per year to the HTF in 2010, increasing to $1.3 by 2017, for a total of $12.3 billion in year-of-expenditure (YOE) dollars.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs F-2 . „ Recapture Interest on Highway Trust Fund Balances Prior to enactment of the Transportation Equity Act for the 21st Century (TEA-21), interest earned on the HTF cash balances was credited to the fund. With TEA-21, that interest was credited to the General Fund instead. This estimate assumes that both the highway and the transit account balances are maintained at levels approximately equal to or slightly smaller than today’s. If interest earned was recaptured for the HTF, it is estimated that approximately $5.0 billion could be generated between 2008 and 2017. „ Federal Sales Tax on Motor Fuel The revenue potential of implementing a sales tax of 3 percent on motor fuels was esti- mated using the methodology described below. • Estimate VMT by Vehicle Type (LDV and Heavy Trucks) – Base VMT for 2004 was obtained from Highway Statistics (Table VM-1). Future VMT was calculated by applying a 2.07 percent annual growth rate as forecasted by the 2004 C&P report. The VMT forecast was split by vehicle type using the Department of Energy’s (DOE) long- term forecast of VMT by vehicle type. For simplification purposes, it was assumed that light duty vehicle (LDV) and heavy vehicle VMT can be used to estimate gasoline and diesel consumption, respectively. • Calculate Fuel Consumption – Gasoline and diesel consumption was calculated by dividing the VMT projections by fuel efficiency forecast (in miles per gallon) by vehi- cle type from DOE. The fuel consumption was adjusted by a factor of 98.4 percent to account for exemptions and refunds. • Calculate Retail Sales of Fuel – Fuel consumption was multiplied by the average fuel price as forecasted by DOE; and • Estimate Sales Tax Revenue Projections – Apply sales tax rate (3 percent) to the fore- cast of motor fuel retail sales. „ Index Federal Heavy Vehicle Use Tax The Heavy Vehicle Use Tax (HVUT) has remained constant since 1984. If the HVUT was indexed for inflation starting in 2010, cumulative additional revenues through 2017 are estimated at $1.5 billion. If in addition, we assumed retroactive indexing of the HVUT to 1997 to capture about half the past loss due to inflation, this could generate about $23 bil- lion additional in cumulative revenues through 2017. In these estimate we also assume

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs F-3 that the HVUT cap at 80,000 pounds gross vehicle weight is lifted; no changes in Federal TS&W laws are assumed but states increasingly allow vehicles heavier than 80,000 pounds off the Interstate system and they would be charged a higher HVUT rate corresponding to their state registered weight. The effects of increased revenues due to adjustments for inflation were included in the revenue forecast model, by assuming that future revenues will increase at the base growth rate plus inflation. „ Federal Vehicle Tax on Passenger Cars and Light Duty Trucks This revenue option proposes the implementation of a Federal retail sales tax on passen- ger cars and light duty trucks, similar to the retail sales tax on heavy trucks that now goes into the HTF. The methodology developed to calculate the revenue potential of a 1 percent sales tax on light-duty vehicle retail sales (new vehicles only) is described as follows: • Estimate Projected Growth of Automobile Retail Sales – Using 2004 Woods and Poole forecasts of Automobile Dealer Retail Sales, we estimated the projected growth in vehicle retail sales (4.23 percent to 4.54 percent through 2017). • Estimate Percentage of New Auto Dealer Retail Sales that Comes from “Used Vehicles” and “Parts and Service” – New Automobile Retail Sales data also includes sales from “Used Vehicles” and “Parts and Service.” Recent data from the National Automobile Dealers Association (NADA) shows that these account for 40 percent of total auto retail sales. • Forecast Auto Dealer Retail Sales through 2017 – U.S. Census Data shows that auto retail sales in 2005 were $747.2 billion. This figure was adjusted to discount for used vehicles, parts, and service sales. Woods and Poole growth rates were applied to the net auto retail sales. • Apply 3 percent sales tax to projected auto dealer retail sales. A 3 percent sales tax on light duty vehicles could raise $140.8 billion through 2017 in additional revenues for the HTF.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs F-4 . „ Utilize (5 or 10 Percent of Current) Customs Duties Dedication of 5 percent or 10 percent of currently collected Customs duties for port and intermodal improvements is estimated to produce $20 billion and $40 billion, respectively, in current dollars. For purposes of our estimate, 30 percent of these improvements are assumed to be included in the national surface transportation needs estimates. Projects such as intermodal connectors to ports and other intermodal terminals, rail-highway grade crossings, and additional freight rail track that benefits commuter rail would offset a portion of national highway and transit system needs. Fifty percent of Customs duties are assumed to be used for port capacity and security improvements that are not reflected at all in the surface transportation needs estimates. Assuming the other 50 percent is used for intermodal surface access (highway and freight rail), the assumption was made that 30 percent would be used for highway access and 20 percent for freight rail access. There- fore, 30 percent of the dedicated Customs revenue is counted as new revenue to offset sur- face transportation needs as reflected in our estimates. „ Authorize Tax Credit Bonds The potential distribution of tax credit bond proceeds as grants to state and local govern- ment for highway and transit projects, as envisioned in the Senate-proposed “Build America Bonds” proposal and estimated in the National Chamber Foundation finance study,1 is illustrated in Table F.1. Table F.1 Annual Induced Capital Investment “Build America Bonds” Assumptions from National Chamber Foundation Finance Study (Billions of YOE Dollars)2 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Sum Induced Capital $5.0 $5.0 $5.0 $5.0 $5.0 $5.0 $5.0 $5.0 $5.0 $5.0 $5.0 $55.0 1 U.S. Chamber of Commerce, National Chamber Foundation. Future Highway and Public Transportation Financing – Phase II, Appendix C. Washington, D.C. November 2005. 2 Ibid.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs F-5 „ Authorize Freight/Intermodal Investment Tax Credit Table F.2 illustrates the funding for freight and intermodal projects that could be gener- ated by an investment tax credit proposal of the type being discussed by various industry groups. This analysis incorporates the following technical assumptions from the National Chamber Foundation finance study:3 • Investors in eligible projects may claim, in aggregate, up to $500 million annually in 20-year tax credits for qualified freight/intermodal investments; • The tax credit streams would be monetized up-front during the 11-year period from 2007 to 2017; and • The annual tax credit rate would be established such that the sponsors of qualified investments would receive a 70 percent present-value subsidy for their projects. Table F.2 Annual Induced Capital Investment Investment Tax Credits Assumptions (Billions of YOE Dollars) 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Sum Induced Capital $1.2 $1.2 $1.2 $1.2 $1.2 $1.2 $1.2 $1.2 $1.2 $1.2 $1.2 $13.2 As illustrated above, these assumptions result in the up-front monetization of about $1.2 billion for each 20-year stream of tax credits during the first five years, for a total of $13.2 billion during the 2007 through 2017 period for freight and intermodal projects. It is assumed, however, that only 15 percent of this investment offsets highway and transit needs as reflected in the U.S. DOT C&P report. Most funding will be for rail intermodal improvements that are not included in the C&P report. 3 Ibid.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs F-6 . „ Implementation of Container Fees Container traffic in U.S. ports has increased at a rate of 6.6 percent over the last decade, according to historical data from the American Association of Ports Authorities (AAPA). It was assumed that this growth trend will continue through 2017, and that a $30 fee per TEU as recently proposed in California4 will be collected on all import and export con- tainer movements starting by 2010 to help fund freight and intermodal improvements. „ Index State Motor Fuel Taxes Similar to the Federal Motor Fuel Tax indexing, a scenario was developed to estimate the additional revenues generated by indexing state motor fuel tax rates. For the purpose of our estimate, it was assumed that states currently not indexing for inflation begin indexing their motor fuel tax rates to the CPI by 2007, with full implementation by 2010. It was assumed that in 2007, 25 percent of the currently non-indexed state motor fuel tax revenues will be indexed to inflation, gradually increasing until all revenues are adjusted for inflation by 2010. Indexing state motor fuel taxes is estimated to generate an addi- tional $31.9 billion between 2007 and 2017. „ Increase State Motor Fuel Tax Rates to Account for Inflation Losses Since 2000 An average increase of 5.23 cent per gallon of gasoline and 5.41 cents per gallon of diesel by 2010 would be needed by states to gain the motor fuel purchasing power lost over the last decade at the state-level. This revenue option assumes that the additional motor fuel tax rates will be gradually adopted through 2010 by those states that have not increased their motor fuel tax rate in recent years. A second option assumes that the additional tax rate will be indexed beyond 2010. For the forecast period, the increase in motor fuel tax rates could generate between $65 billion (increasing excise tax only) to $70 billion (increasing excise tax plus indexing beyond 2010). The methodology used to calculate the annual purchasing power of 1 cent per gallon of motor fuel is described as follows: 4 As proposed in the California bill SB 927 by Lowenthal. The bill was passed by the legislature, but recently vetoed by the Governor.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs F-7 • Estimate VMT by Vehicle Type (LDV and Heavy Trucks) – Base VMT for 2004 was obtained from Highway Statistics (Table VM-1). Future VMT was calculated by applying a 2.07 percent annual growth rate as forecasted by the 2004 C&P report. Forecast VMT was adjusted to account only for those states that have not increased their motor fuel tax rates since 2000.5 The VMT forecast was split by vehicle type using the Department of Energy’s (DOE) long-term forecast of VMT by vehicle type. For simplification purposes, it was assumed that light duty vehicle (LDV) and heavy vehicle VMT can be used to estimate gasoline and diesel consumption, respectively. • Calculate Fuel Consumption – Gasoline and diesel consumption was calculated by dividing the VMT projections by fuel efficiency forecast (in miles per gallon) by vehi- cle type from DOE. The fuel consumption was adjusted by a factor of 98.4 percent to account for exemptions and refunds. • Estimate Revenue Forecast – Gas and diesel tax revenues were calculated by multi- plying the assumed tax rate to the fuel consumption estimates. „ State Sales Tax on Motor Fuel Seven states currently levy sales taxes on motor fuels. Some of these states dedicate all or a portion of these revenues to transportation. This scenario explores the revenue potential of dedicating a 3 percent sales tax on motor fuels, excluding 1) states that already collect from this source and dedicate a portion or all revenues to transportation6, and 2) states that do not collect general sales taxes. Cumulative revenues through 2017 from this reve- nue option are estimated at $94 billion, assuming gradual implementation through 2010, starting with 25 percent of total potential revenues realized by 2007, and gradually increasing to 100 percent by 2010. The methodology used to calculate the annual purchasing power of a sales tax on motor fuel is described as follows: 5 The following states were excluded from the motor fuel revenue forecast: Arkansas, Florida, Iowa, Kansas, Kentucky, Maine, Nebraska, Nevada, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, Tennessee, Washington, West Virginia, and Wisconsin. 6 The forecast excludes the following states: California, Georgia, and Hawaii. The analysis also excludes those states where no sales taxes are collected, such as Alaska, Delaware, Montana, New Hampshire, and Oregon.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs F-8 . • Calculate VMT and fuel consumption (as described above for excise motor fuel taxes); • Calculate Retail Sales of Fuel – Fuel consumption was multiplied by the average fuel price as forecasted by DOE; and • Estimate Sales Tax Revenue Projections – Apply sales tax rate to retail sales forecast. „ Adjusting State Vehicle Registration Fees to Account for Inflation This scenario explores the revenue potential of states adjusting vehicle taxes and fees to at least keep up with inflation, phasing in by 2010 and continuing thereafter. It was assumed that in 2007, 25 percent of the vehicle registration revenues will be adjusted for inflation, gradually increasing until all revenues are adjusted for inflation by 2010. The cumulative revenues from this option through 2017 are estimated at $33.4 billion. „ Vehicle Excise Sales Taxes This scenario estimates the revenue potential from implementing a 1 percent sales tax on vehicle sales. The analysis excludes those states already dedicating vehicle sales tax reve- nues to transportation,7 and those states where sales taxes are not collected.8 If states were to dedicate vehicles excise sales taxes for transportation (assume full phase in by 2010), approximately $67 billion would be raised through 2017. Vehicle retail sales were estimated using the methodology described above for the Federal vehicle tax on light duty vehicles. Nationwide vehicle retail sales forecast were adjusted to discount vehicle retail sales from certain states to which this revenue option is not applicable,9 that is, 1) states that currently are dedicating vehicle sales tax revenues to transportation, and 2) states that do not collect sales taxes. 7 The following states currently dedicate at least a portion of their sales tax on motor vehicles to transportation: Connecticut, Iowa, Kansas, Maryland, Michigan, Minnesota, Missouri, Nebraska, North Carolina, Oklahoma, South Dakota, and Virginia. 8 Alaska, Delaware, Montana, New Hampshire, and Oregon do not collect statewide sales taxes. 9 List of states in footnotes 7 and 8.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs F-9 „ Authorize Flexible Tolling Provisions Estimating the future revenue potential of toll projects through 2017 is decidedly conjec- tural, as it depends on anticipating the policy actions of the Federal government, 50 states, plus numerous counties, cities, and regional agencies. Building on work performed recently for the Federal Highway Administration (FHWA),10,11 we have used the following methodology to estimate the potential scale of future toll revenues. Current trends in toll revenue were examined, active toll road proposals being advanced around the country were reviewed, and the potential impact of SAFETEA-LU legislation allowing increased tolling and pricing on the existing Interstate Highway System was considered. It is esti- mated that approximately $8.9 billion in additional revenues could be generated between 2007 and 2017 with a more aggressive toll road scenario. For purposes of this estimate, it was assumed that the annual growth rate in toll revenues would increase from the current 5 percent annually to 7.5 percent annually by 2015 and 10 percent growth annually by 2020. Our methodology takes into account the likelihood that projects on the drawing boards today may not open for five years or more from now. It also recognizes that today’s new toll roads are charging rates that are considerably higher than those of long- established facilities such as state turnpike systems, and that some of the newer projects incorporate covenants to raise tolls over time to track inflation. The estimate assumes both more aggressive implementation of new toll roads and implementation of high- occupancy toll (HOT) lanes and new express toll lanes. „ General State Sales Taxes for Transportation Ten states currently dedicate a portion of general sales tax revenues for transportation, ranging from 1.7 percent to 20 percent of the total sales tax levies. This scenario estimates the revenue potential of dedicating one-half percent sales tax to transportation. If all states that impose sales taxes on goods were to dedicate one-half percent of state sales taxes collected to transportation by 2010, about $9.0 billion would be generated in 2010, increasing to $12.0 billion by 2017. The methodology developed to calculate the revenue potential of a 1 percent sales tax on general retail sales is described as follows: 10 Federal Highway Administration, Office of Transportation Policy Studies. Current Toll Road Activity in the U.S. – A Survey and Analysis. Prepared by Benjamin Perez and Steve Lockwood. August 2006. 11 Federal Highway Administration. FHWA Future Directions of Innovative Finance. Prepared by Cambridge Systematics with Mercator Advisors LLC. March 2005.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs F-10 . • Estimate Projected Growth of Retail Sales – Using 2004 Woods and Poole forecasts of Retail Sales (excluding auto and gasoline sales), we estimated the projected growth in retail sales (4.17 percent to 4.30 percent through 2017). In addition, Woods and Poole historical data was used to adjusted retail sales forecast to account only for those states that we are assuming the sales tax will be applied. • Forecast Retail Sales through 2017 – U.S. Census Data shows that retail sales in 2005 were $2,368.4 billion (adjusted for states currently using general sales tax revenues for transportation and states without general sales taxes). Woods and Poole growth rates were applied to the net retail sales. • Apply one-half percent sales tax to projected retail sales to estimate potential transpor- tation funding. „ Local Dedicated Taxes In the last 10 years, dedicated fees at the local-level such as local options taxes have grown at over 8 percent. Our base case assumed that no fees except tolls would grow faster than the economy, i.e., GDP growth at 4.4 percent, over the next 10 years. If as an aggressive scenario, we assume localities were able to sustain the higher rate of growth for the next 10 years, $96 billion additional revenues could be generated. Our assumption is that this local gap closing estimate would include a variety of measures such as local option taxes, value capture/beneficiary charges, and other miscellaneous fees often dedicated to transit (rental car taxes, leases, lottery, cigarette tax, etc.).