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 2-1 2.0 Highway and Transit Investment Needs, Revenues, and Shortfalls This section estimates highway and transit system investment needs, revenues, and the investment gap or shortfall over the period 2007-2017. The investment requirement esti- mates rely heavily on the Federal Highway Administration (FHWA) and Federal Transit Administration (FTA) investment analysis models and methodologies. These include the Highway Economic Requirements System (HERS), the National Bridge Inventory Analysis System (NBIAS), and the Transit Economic Requirements Model (TERM). Revenue trends and estimates rely primarily on the FHWA Highway Statistics series and the FTA National Transit Database. All of the estimates themselves, other than the base data on capital needs, have been prepared for this project. „ 2.1 Highway and Transit System Investment Requirements This section provides projections of highway and transit system investment needs over the period 2007-2017. These needs are comprised of capital needs which are developed using methodologies based on the FHWA and FTA models, and operations, maintenance and other needs. A well established process and set of models has been developed and utilized by FHWA and FTA to estimate highway and transit capital needs. AASHTO’s Bottom Line analysis of needs has utilized the same types of procedures and models to estimate highway and public transportation capital needs. Less attention in previous studies has been paid to operations and maintenance needs. The estimates of operations and maintenance needs are based on extrapolations of current expenditures on operations and maintenance. Since it is not within the scope of this revenue research to improve on the needs estimates, the operations, and maintenance portion of needs is fully acknowl- edged to be a simple approximation. In its 2004 Condition and Performance (C&P) report, FHWA and FTA estimated that an annual capital investment of $89.4 billion in 2002 dollars was needed just to “maintain” the condition and performance of the nation’s highway and transit systems.1 It is the tradition of the C&P reports to present needs in constant or uninflated dollars. When discussing revenues in the short term of this research project (2007-2017), it is not as appropriate to 1 U.S. Department of Transportation, Federal Highway Administration, and Federal Transit Administration. 2004 Status of the Nation’s Highways, Bridges and Transit: Conditions and Performance – Report to Congress, Washington, D.C., February 2006.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 2-2 . use constant dollars, so all estimates have been converted to current dollars adjusted for inflation. Updating the FHWA estimates using inflation as measured in the consumer price index (CPI), and using an additional technical adjustment to needs due to even higher inflation in the Highway and Street Producer Price Index (PPI), results in an annual capital investment need of $130.7 billion in 2007 just to maintain the conditions and performance.2,3 The basis for adjusting needs estimates since the earlier report is to apply both consumer prices, and to apply an additional adjustment to take account of the recent large disparity between producer price increases and consumer price increases. An analysis of consumer or general inflation as measured by the consumer price index (CPI) and highway inflation as measured by the Bureau of Labor Statistics Producer Price Index (PPI) for Highway and Street Construction between 2002 and 2006 shows that the latter has increased at a much faster rate than general inflation; see Figure 2.1. If both consumer prices and producer prices increased at the same rate, adjustments to a future year from a past year would just index the estimated needs by the inflation adjust- ment. This would be acceptable because both costs and benefits (as included in the FHWA and FTA models) would have increased by the same percentage amount, and therefore needs could be adjusted very directly to future year costs. However, if producer prices rise faster than consumer prices, then some of the projects that the model systems found to be cost-effective may no longer be cost-effective, and thus, the adjustment must take into account the differences between the rates of inflation for costs (producer prices) and the rates of inflation for benefits (consumer prices). FHWA has addressed this situa- tion by performing sensitivity analysis with regard to changes only in costs or changes only in benefits while the other factors remain the same. According to recent estimates made by FHWA, an increase of 25 percent of construction costs with no other changes in any factors would increase needs by 11.2 percent for the “improve” scenario, and by 25 percent for the “maintain” scenario. This has been trans- lated to an elasticity of 0.448 and 1.000 for each percent increase in PPI over and above the increase in consumer prices (the CPI), for both the needs to “improve” and to “maintain,” respectively. An adjustment for the recent change in producer prices relative to consumer prices was applied to the needs after they were adjusted for consumer price inflation. The additional PPI adjustment to the needs to improve for the 2002-2006 period was estimated at 13.1 percent, based on a PPI growth rate over inflation of 29.2 percent, whereas the PPI adjustment to the needs to maintain was estimated at 29.2 percent. 2 U.S. Department of Labor, Bureau of Labor Statistics. Available at http://www.bls.gov/ppi/ home.htm. 3 Unless otherwise described, estimates are reported in current or year of expenditure (YOE) dol- lars. Needs estimates were made in constant dollars and were adjusted to year of expenditure dollars using Bureau of Labor Statistics Producer Price indices through 2005 and the Consumer Price Index (CPI) projections for future years (2006 to 2030) from the Congressional Budget Office, January 2005.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 2-3 Figure 2.1 BLS Producer Price Index Highway and Street Construction 110 120 130 140 150 160 170 180 190 200 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 January Index 1986=100 The PPI adjustment for transit needs, as estimated by FTA for the 2004 C&P report, indi- cated that a 25 percent increase in transit capital costs would increase the needs for the maintain conditions and performance scenario by 14 percent, and the improve conditions and performance scenario by 9 percent. The adjustment factor to PPI increases over inflation is thus estimated at 0.56 for the “maintain” scenario, and 0.36 for the “improve” scenario. The additional PPI adjustment for the 2002-2006 period was estimated at 16.3 percent and 10.5 percent for the maintain and improve needs, respectively. The costs of operations, maintenance, administration, debt service, and other noncapital operations, maintenance, and other costs (collectively, “O&M”) incurred by state and local governments must be added to annual capital needs to estimate the total expenditures needed to maintain the nation’s highway and transit systems. The FHWA reported that $69 billion was spent in 2004 on highway and bridge O&M by state and local govern- ments.4 The average annual O&M real growth rate (i.e., the rate of growth over and above the change in CPI) over the last 25 years of 1.6 percent has been used to forecast highway O&M needs. This yields an annual highway O&M need of $78.6 billion in 2007. The Federal Transit Administration (FTA) reported that $25.4 billion was spent in 2004 on 4 Federal Highway Administration, 2004 Highway Statistics, Table HF-10.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 2-4 . transit O&M by state and local governments.5 Transit O&M real costs (i.e., the rate of growth over and above the change in CPI) have grown at a rate of 1.7 percent annually over the last 10 years, resulting in a projected annual O&M need of $29.0 billion in 2007. Adding O&M needs to the inflation-adjusted C&P capital needs derived above results in a total annual need to “maintain” of $238 billion in 2007 increasing to $319 billion by 2017. The operations and maintenance needs estimates are clearly very conservative, since no estimate was made of the current shortfall in operations and maintenance expenditures versus operations and maintenance needs. Such needs have not been systematically esti- mated across all of the nation’s highway and public transportation systems. The FHWA and FTA models and methodologies deal only with capital needs because Federal aid for highways and public transportation are primarily capital programs. The states and the transit industry could consider conducting additional research in these areas of future needs. With similar adjustments, a higher level of annual capital investment – $185 billion – is needed in 2007 to “improve” the condition and performance of highway and transit sys- tems. “Improve” means making improvements that will have a positive benefit/cost ratio and that will improve United States economic productivity.6 In the 2004 C&P Report, FHWA and FTA estimated that an annual capital investment of $142.9 billion in 2000 dol- lars was needed to both “maintain” and “improve” the nation’s highway and transit sys- tems. When these estimates are updated to 2007 and highway and transit O&M costs are added, an annual investment of $293 billion is needed to meet the “improve” highway and transit system investment requirements, increasing to $387 billion in 2017. The needs estimating procedures and results are described further in Appendix A. Tables 2.1 and 2.2 show the annual capital and O&M needs by mode as estimated for this study for both the “maintain” and “improve” scenarios. 5 Federal Transit Administration, National Transit Database. Available at http://www. ntdprogram.com. 6 In the Federal Highway Administration’s periodic Condition and Performance Report to Congress and the American Association of State Highway and Transportation Officials’ Bottom Line Report, an economically productive transportation investment is a project that has a benefit/cost ratio of 1.0 or higher as measured by the Federal Highway Administration’s Highway Economics Requirements System (HERS).

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 2-5 Table 2.1 Summary of Investment Needs to “Maintain” 2007-2017 (Billions of Year of Expenditure Dollars) FHWA/FTA 2004 C&P Adjusted + O&M Highway Transit Highway and Transit Year Capital O&M Total Capital O&M Total Capital O&M Total 2007 109.8 78.6 $188.4 20.9 29.0 $49.9 130.7 107.6 $238.3 2008 112.2 81.6 $193.8 21.4 30.1 $51.5 133.5 111.7 $245.3 2009 114.6 84.7 $199.4 21.8 31.3 $53.1 136.5 116.0 $252.5 2010 117.2 87.9 $205.1 22.3 32.5 $54.8 139.5 120.5 $259.9 2011 119.7 91.3 $211.0 22.8 33.8 $56.6 142.5 125.1 $267.6 2012 122.4 94.8 $217.1 23.3 35.1 $58.4 145.7 129.9 $275.5 2013 125.1 98.4 $223.4 23.8 36.5 $60.3 148.9 134.8 $283.7 2014 127.8 102.1 $229.9 24.3 37.9 $62.2 152.2 140.0 $292.1 2015 130.6 106.0 $236.6 24.9 39.4 $64.2 155.5 145.3 $300.8 2016 133.5 110.0 $243.5 25.4 40.9 $66.3 158.9 150.9 $309.8 2017 136.4 114.2 $250.6 26.0 42.5 $68.5 162.4 156.7 $319.1 Table 2.2 Summary of Investment Needs to “Improve” 2007-2017 (Billions of Year of Expenditure Dollars) FHWA/FTA 2004 C&P Adjusted + O&M Highway Transit Highway and Transit Year Capital O&M Total Capital O&M Total Capital O&M Total 2007 154.8 78.6 $233.4 30.5 29.0 $59.5 185.3 107.6 $293.0 2008 158.2 81.6 $239.8 31.2 30.1 $61.3 189.4 111.7 $301.2 2009 161.7 84.7 $246.4 31.9 31.3 $63.2 193.6 116.0 $309.6 2010 165.2 87.9 $253.2 32.6 32.5 $65.1 197.8 120.5 $318.3 2011 168.9 91.3 $260.2 33.3 33.8 $67.1 202.2 125.1 $327.3 2012 172.6 94.8 $267.3 34.0 35.1 $69.2 206.6 129.9 $336.5 2013 176.4 98.4 $274.7 34.8 36.5 $71.3 211.2 134.8 $346.0 2014 180.3 102.1 $282.4 35.6 37.9 $73.5 215.8 140.0 $355.8 2015 184.2 106.0 $290.2 36.3 39.4 $75.7 220.6 145.3 $365.9 2016 188.3 110.0 $298.3 37.1 40.9 $78.1 225.4 150.9 $376.3 2017 192.4 114.2 $306.6 38.0 42.5 $80.5 230.4 156.7 $387.1

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 2-6 . „ 2.2 Highway and Transit System Current and Projected Revenue The FHWA Highway Statistics and the FTA National Transit Database (NTD) compile summary data on Federal, state, and local funding sources used by state DOTs, local gov- ernments, and transit agencies to support highway and transit investments and O&M expenditures. These data sources were used to identify funding sources, levels of annual funding, and historical trends. For highways, data was reviewed for the last 25 years, whereas for transit, data was available in a consistent format for only the last 11 years.7 The most recent data available from both sources is for 2004, which has been used as the base year for the revenue projections. Figure 2.2 shows the share of state funding by source for highway investments over the last 25 years. Motor fuel taxes and motor vehicles taxes and fees are the main sources of revenue for highway investments at the state level as they are at the Federal level, accounting for 73 to 80 percent of the total state highway funding over the last 25 years. Figure 2.2 State Funding Sources Fiscal Years 1978-2004 0 10 20 30 40 50 60 70 80 90 100 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 Year Percent MFT and Vehicle Taxes General Fund Special Taxes Miscellaneous Tolls Source: Highway Statistics, Table HF-10. 7 Because of several changes in NTD data reporting over time, the study team decided to use NTD data starting in 1993 to ensure consistency across funding categories.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 2-7 Figure 2.3 provides a closer look at state highway funding sources, excluding motor fuel tax and vehicle tax revenues. These funding sources account for about one-quarter of the state highway funding, and each account for 4 percent to 9 percent of the state highway funding. Of the four funding sources shown here (i.e., toll, general fund, specialized taxes, and miscellaneous), specialized taxes are the ones that have increased significantly in terms of funding share over the last 25 years. Specialized taxes accounted for 1.4 percent of the state highway funding in 1978, increasing to 5.6 percent by 2004. Figure 2.3 Highway – State Funding Sources (Except MFT and Vehicle Taxes) Fiscal Years 1978-2004 0 2 4 6 8 10 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 Year Percent Source: Highway Statistics, Table SF-1. General Fund Special Taxes Miscellaneous Tolls At the local government level, general fund and property taxes account for most of the highway funding. In 2003, highway funding from general fund and property taxes accounted for about two-thirds of the total highway funds (Figure 2.4). The shares of these revenue sources have declined over the last 25 years, due to increases in the funding share from specialized taxes. Specialized taxes accounted for 2.8 percent of the local highway funding in 1978, increasing to 11.4 percent by 2003.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 2-8 . Figure 2.4 Highway – Local Funding Sources Fiscal Years 1978-2003 0 10 20 30 40 50 60 1978 1983 1988 1993 1998 2003 Year Percent MFT and Vehicle Taxes Special Taxes Property Taxes Miscellaneous General Fund Tolls Source: Highway Statistics, Table LGF-1. The share of transit revenues by source (excluding Federal allocations and apportion- ments) is shown in Figure 2.5. On average, passenger fares and other operating revenues accounted for 37 percent over the last 11 years. This figure also shows that general funding appropriation have declined over time, whereas specialized taxes such as dedi- cated sales taxes have become an important revenue source for transit investments. Specialized taxes accounted for 22.5 percent of transit funding in 1993, increasing to 30.1 percent by 2004.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 2-9 Figure 2.5 Transit – State/Local/Agency Funding Sources Percent Source: NTD Data. 0 5 10 15 20 25 30 35 40 45 1993 1995 1997 1999 2001 2003 Year General Fund Miscellaneous Special Taxes MFT Fares & Other Operating Revenues Revenues collected in 2004 at all levels of government totaled $129.5 billion for highways and $38.6 billion for public transportation. As for the needs estimates, these revenue esti- mates cover all highway and public transportation expenditures. For this study, a more generic categorization of types of revenues is included rather than the traditional “first structure, second structure, third structure” categorization utilized in the past for highway revenue studies. In those historical revenue studies, first structure referred to motor fuel and similar taxes, second structure to registration and related fees, and third structure to mileage-related fees. For this study, three more generic categories are utilized, based primarily on how the fee is collected in relation to the transportation function. The three major categories of revenues are summarized as follows: 1. User Fees – User fees are collected from users, and can be further divided into indirect and direct user fees. Indirect user fee are not collected in association with an actual trip itself, whereas direct user fees are typically applied at the point and time of use. Motor fuel taxes are the largest of the indirect sources. Other indirect user fees include vehicle registration fees and excise taxes, and replacement parts taxes such as the Federal tax on tires for large vehicles. Tolls and transit fares are major examples of direct user fees. Direct freight user charges such as container fees, while now rare, would be identified in this category. For this study, user fees mostly include motor

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 2-10 . fuel taxes, motor vehicle fees, tolls, passenger fares, and other miscellaneous use- related revenues8 for transit. At the Federal level, user fees generated $28.6 billion for highway and about $5.6 billion for transit investments in 2004. At the state and local government levels, user fees for highways and transit were approximately $54 billion and $12 billion, respectively. 2. Specialized Taxes – These sources are distinct from user fees because they are applied to and collected based upon nontransportation activities, but are dedicated to trans- portation. The major sources now utilized in this category are state and local option taxes, including sales and property taxes, but this category also includes leases and some forms of improvement district taxes or fees. This category also includes value capture techniques such as development impact fees and special assessment districts. Their critical difference from general taxes is the assurance given to voters who must approve them that that the money will be spent only on transportation. Admittedly, this is a weak distinction from general taxes (the third category below), except in terms of the interests of the transportation agencies which receive the dedicated resources. In 2004, these specialized taxes provided $15.4 billion for highways, and $9.5 billion for transit at all levels of government. 3. General Taxes – These sources are those that are collected and used for broad pur- poses, of which transportation may be one purpose. The largest sources in this cate- gory are income taxes, property taxes, general sales taxes, and other ad valorem taxes that are not dedicated for transportation. For the purpose of this study, general taxes include revenues from the general funds and other miscellaneous/public funds used for highway and transit as reported by the FHWA’s Highway Statistics and FTA’s National Transit Database. General taxes for highway and transit expenditures were reported at $31.1 billion and $12 billion, respectively in 2004. Table 2.3 summarizes the actual revenues by government level and by highway and tran- sit levied and used for surface transportation in Fiscal Year 2004 as reported by the Highway Statistics and NTD. Of the $168 billion total, Federal revenues used for highway and transit programs constitute approximately 22 percent of the total, state revenue about 42 percent, and local about 36 percent. Figures 2.6 and 2.7 depict the data in Table 2.3 by percent share for funding type and level of government, respectively. 8 Other operating revenues include parking fees, concessions, advertising income, and other reve- nues collected by the transit agency.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 2-11 Table 2.3 Highway and Transit Revenue Sources Allocated by Type, Mode, and Level of Government 2004 (Billions of Dollars) Highway Transit Highway and Transit Type of Tax or Fee Federal State Local Total Federal State Local Total Federal State Local Total User Fees 28.6 51.5 2.8 83.0 5.6 0.5 11.0 17.1 34.1 52.1 14.0 $100.1 Specialized Taxes 0.3 3.5 11.6 15.4 0.0 3.4 6.1 9.5 0.3 6.9 17.7 $24.9 General Taxes 2.0 7.4 21.7 31.1 1.4 3.9 6.7 12.0 3.4 11.3 28.4 $43.1 Totala $30.9 $62.5 $36.1 $129.5 $6.9 $7.8 $23.9 $38.6 $37.9 $70.3 $60.0 $168.2 Source: Cambridge Systematics based on data from FHWA Highway Statistics and FTA National Transit Database. aTotals may not add up due to rounding. Figure 2.6 2004 Highway and Transit Funding by Revenue Source Category Percent Share 0 10 20 30 40 50 60 70 80 90 100 Highway Transit Highway and Transit User Fees Specialized Taxes General Taxes

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 2-12 . Figure 2.7 2004 Highway and Transit Funding by Level of Government Percent Share Federal State Local 0 10 20 30 40 50 60 70 80 90 100 Highway Transit Highway and Transit Revenue Analysis and Projections The first step to generate the projections of existing revenue sources for the 2007-2017 period consisted of compilation of historical data and an analysis of the historical growth for all revenue sources, from which forecast assumptions were developed. Table 2.4 pro- vides a breakdown of the major revenue categories based on the revenue classification from Highway Statistics and NTD, and overall annual growth rates at the state/local level over the last decade. Further analysis of current state and local revenue sources is included in Appendix D for highways and Appendix E for transit. The projection assumptions out to 2017 are documented in Appendix A.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 2-13 Table 2.4 Major Revenue Categories from Highway Statistics and NTD and Historical Growth Rates for Last Decade Highway Revenues Average Annual Growth Transit Revenues Average Annual Growth Indirect User Fees Indirect User Fees • Motor Fuel Taxes 2.4% • Motor Fuel Taxes 3.5% • Vehicle Taxes 4.0% Direct User Fees Direct User Fees • Tolls 5.1% • Passenger Fares 3.5% • Other Operating Revenues 6.0% Specialized Taxes Specialized Taxes • Property Taxes (including Beneficiary Charges) 4.3% • Sales Taxes 8.5% • Other Taxes (Sales, Other) 7.5% (State)/ 7.6% (Local) • Other Taxes (Property, Income, Other) 6.9% General Taxes General Taxes • General Fund 7.5% (State)/ 7.7% (Local) • General Fund 0.7% • Miscellaneous 2.8% (State)/ 2.0% (Local) • Other Funds 7.5% For all states combined, funding sources other than motor fuel taxes have increased at a greater rate than motor fuel taxes. State general funds increased by 221 percent, tolls by 83 percent, other by 89 percent, and motor fuel taxes by 75 percent from 1982 to 2001 in real terms (Government Accountability Office (GAO) Trends in Federal and State Highway Investment, June 2003). As can be seen in Table 2.2 above and in Appendix A, the fastest growing revenue sources on the highway side are revenues from general fund appropria- tions and other taxes. Over the last decade, revenues from the general fund have increased at an average annual growth rate of 7.5 percent at the state level and 7.7 percent at the local level. Similarly, the annual growth of revenue from other specialized taxes dedicated to highways has been estimated at 7.5 and 7.6 percent at the state and local levels, respectively. At the same time, motor fuel taxes have increased at only 2.4 percent per year. For transit investments, revenues from specialized taxes have increased significantly over the last decade. Overall, revenues from dedicated sales taxes have increased at an average annual growth rate of 8.5 percent, whereas revenues from other specialized dedicated taxes (excluding motor fuel taxes) have grown at almost 7 percent per year. Transit fares, meanwhile, have grown at 3.5 percent per year.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 2-14 . The revenue projections were developed using 2004 Highway Statistics and NTD data as the base year. A detailed description of the methodology and assumptions for forecasting revenues from existing sources is provided in Appendix A. Growth assumptions were applied based on the evaluation of historical data and the potential for future growth of each revenue source. For instance, while the implementation of local sales taxes for transit has been a popular trend in the past 10 to 15 years, future uptake may be more limited since many of the significant transit areas already have adopted such measures. There- fore, sales tax growth for transit will be more a function of changes in socioeconomic fac- tors, disposable income, and inflation. Key resources to generate the revenue projections included forecasts of driving variables from these sources: • Growth of vehicle miles of travel (VMT) from the FHWA Highway Performance Monitoring System (HPMS);9 • Fuel-efficiency projections from the Department of Energy (DOE), (Note: see Appendix C for further analysis of fuel price and efficiency trends);10 • Consumer Price Index (CPI) projections from the Congressional Budget Office (CBO);11 and • Gross domestic product (GDP) growth rates from the CBO.12 Except for tolls, revenues are projected to grow no faster than the economy, i.e., long-run GDP growth, which the CBO estimates at 4.4 percent per year in current dollars. The resulting projections are shown in Figure 2.8. 9 Highway Performance Monitoring System (HPMS)-based vehicle miles of travel (VMT) forecasts as used in the Federal Highway Administration’s Condition and Performance Report to Congress, February 2006. 10 Department of Energy. Annual Energy Outlook 2006 with Projections to 2030. Table 7, Transportation Sector Key Indicators and Delivered Energy Consumption, February 2006. Available at http://www.eia.doe.gov/oiaf/aeo/aeoref_tab.html. 11 Congressional Budget Office. The Budget and Economic Outlook: Fiscal Years 2007 to 2016. Appendix E, Table E-1, January 2006. 12 Ibid.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 2-15 Figure 2.8 Highway and Transit Revenues Fiscal Years 2007-2017 0 50 100 150 200 250 300 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Year Year of Expenditure Dollars (in Billions) Highway Revenues Transit Revenues Total Revenues „ 2.3 The Shortfall National Shortfall The shortfall based on the analyses of needs versus revenues shows that to meet the need to “improve” the highway and transit systems, the gap is $105.3 billion in 2007, increasing to $134 billion in 2017. For the need to “maintain,” the gap is $50.7 billion in 2007, increasing to $66 billion in 2017. The cumulative gap over the entire 2007-2017 period is projected at $634.7 billion for the need to maintain, and $1.3 trillion for the need to improve. Figure 2.9 shows the annual funding gap from 2007 to 2017. The detailed gap closing analysis is included in Appendix A. One reason for the shortfall in revenues is that the Federal and most state motor fuel tax rates have not been indexed to inflation and have not been increased as frequently as in the past decades to offset inflation and increased construction costs and to meet the increasing needs.13 13 Florida, Maine, and Wisconsin index their motor fuel taxes to the consumer price index; several other states index to fuel prices.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 2-16 . Figure 2.9 Highway and Transit Needs and Revenues 2004 C&P Adj + O&M Year Year of Expenditure Dollars (in Billions) 0 50 100 150 200 250 300 350 400 450 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Average Gap to Maintain (2 010-2017) = $58 billion Average Gap to Improve (2007-2017) = $119 bil lion 2004 C&P Maintain Adj + O&M2004 C&P Improve Adj + O&M Revenues Highway Trust Fund Shortfall Congress has periodically increased Federal motor fuel taxes to keep pace with the nation’s transportation needs, but the last increase of 4.3 cents per gallon was in 1993. Federal motor fuel taxes have lost about one-third of their purchasing power to inflation since then. SAFETEA-LU did not provide for an increase in motor fuel taxes.14 It achieved temporarily higher funding levels by spending down the accrued balances in the trust fund accounts. Based on current Federal agency revenue projections, the HTF Highway Account will have insufficient balances by 2009 to sustain the authorized program level as shown in Figure 2.5. The shortfall problem accelerates after 2009 assuming that at least modestly growing program levels are desired in the next authorization period to meet growing needs. Figure 2.10 is based on 2007 Treasury Mid Session Review revenue esti- mates; spending assumptions from 2010-2015 are based on the current services baseline for Federal discretionary outlays at 1.15 percent growth per year. 14 U.S. Chamber of Commerce, National Chamber Foundation. Future Highway and Public Transportation Financing. Washington, D.C., 2005.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 2-17 Figure 2.10 Estimated Highway and Transit Program Levels and HTF Account Balances Through 2015a a Based on 2007 Treasury Mid Session Review revenue estimates; spending assumption 2010-2015 based on current services baseline for discretionary outlays at 1.15% growth per year. Dollars (in Billions) -30 -20 -10 0 10 20 30 40 50 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Year -40 Highway Acct Balance Transit Acct Balance Highway Program (HTF) Transit Program (HTF+GF)