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 3-1 3.0 Improved and New Revenue Options This section provides an analysis of the major options which could be used by various levels of government to increase funding for surface transportation through 2017. The analysis for this study included options at all levels of government. A comprehensive list and matrix of options was assembled (see Table 3.1) from previous studies and from a review of actual practice at the state and local level, including input provided by panel members. A comprehensive set of options was considered, while realizing that it was important to focus the work on those revenue and financing mechanisms with significant gap closing potential and with a significant likelihood that those sources will be feasible for funding highways and public transportation. The analysis focused most heavily on the current and emerging revenue measures shown in Table 3.1. Innovative financing and management tools, such as debt instruments and pri- vate participation that may help to accelerate project and program development but which are not strictly revenue measures, are covered in Section 4.0. Following Table 3.1 is a textual dis- cussion of each of the revenue tools and selected state or local examples of each tool. „ 3.1 Review of Specific Candidate Revenue Sources Revenue tools are presented in the three main categories discussed in Section 2.0: User Fees, Specialized Taxes, and General Sources. In this subsection, each revenue source is described, and examples are given of promising actions taken to enhance or utilize the source. Motor Fuel and Vehicle User Fees Motor fuel and vehicle fees (often referred to as user fees although they are not direct point of use fees such as tolls, pricing, or transit fares), are the mainstay of state highway programs as can be seen in Figure 3.1. The data shows that in 14 states, revenues from motor fuel taxes and motor vehicle taxes and fees account for over 90 percent of state highway funding and in the vast majority of states account for more than 50 percent of highway revenues.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 3-2 . Table 3.1 Candidate Revenue Sources Modes Scope Yield Highway/Bridge Transit Specific Revenue Tool Pr es er va tio n, M ai nt en an ce N ew C ap ac ity O pe ra tio ns , M ai nt en an ce C ap ita l Pr og ra m Pr oj ec t Po te nt ia la Yi el d Locations Used Fuel Taxes Motor fuel excise (per gallon) tax z z z z H All states, Federal Indexing of the motor fuel tax (can be indexed to inflation or to other factors) z z z z H FL, IA, KY, ME, NE, NC, PA, WV Sales tax on motor fueld z z z z H CA, GA, HI, IL, IN, MI, NY Petroleum franchise or business taxes z z z z H NY, PA Vehicle Registration and Related Fees Vehicle registration and license fees z z z H All states Vehicle personal property taxes z z z M CA, KS, VA Excise tax on vehicle sales dedicated to transportation z z z H CT, IA, KS, MD, MI, MN, MO, NC, NE, OK, SD, VA; Federal for heavy trucks Tolling, Pricing, and Other User Fees Tolling new roads and bridges z z z z M About half of states (e.g., TX, FL, VA) Tolling existing roads z z z z z L VA proposed, others considering HOT lanes, express toll lanes, truck toll lanes z z z z M CA, CO, GA, MN, TX VMT fees z z z z z H OR testing; recommended by 15 state- pooled fund study Transit fees (fares, park-and-ride fees, other) z z H All transit agencies Container fees, customs duties, etc. z z z M CA Beneficiary Charges and Local Option Dedicated property taxes z z z z z H Many local governments Beneficiary charges/value capture (impact fees, tax increment financing, mortgage recording fees, lease fees, etc.) z z z L Many states and localities (e.g., CA, FL, OR, NY) Permitting local option taxes for high- way improvements • Local option vehicle or registration fees z z z z M AK, CA, CTb, CO, HI, ID, IN, MSb, MO, NE, NV, NH, NY, OH, SC, SD, TNb, TX, VAb, WA, WI • Local option sales taxes z z z z H AL, AZ, AR, CA, CO, FL, GA, IA, KS, LA, MN, MO, NE, NV, NM, NYb, OH, OK, SC, TN, UT, WY • Local option motor fuel taxes z z z z M AL, AKb, FL, HI, IL, MS, NV, OR, VA, WA Permitting local option taxes for transit • Local option sales taxes z z z z H AL, AZ, CA, CO, FL, GA, IL, LA, MO, NV, NM, NY, NC, OH, OK, TX, UT, WA • Local option income or payroll tax z z z z M IN, KY, OH, OR, WA Other Dedicated Taxes Dedicate portion of state sales tax z z z z z H AZ, CA, IN, KS, MA, MS, NY, PA, UT, VA Miscellaneous transit taxes (lottery, cigarette, room tax, rental car fees, etc.) z z z z L Various states and localities General Revenue Sources General Revenuec z z z z H Most states and localities a Potential Yield; H= High, M= Medium, L= Low. b Revenues go into General Fund but can be earmarked or used for transportation. c For purposes of this report, the leveraging of tax subsidies through tax credit bonds and investment tax credits is treated effectively as producing revenue from general fund sources for transportation. d In some states, revenues from sales taxes on motor fuel are not dedicated or only partially dedicated to fund transportation needs.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 3-3 Figure 3.1 Fuel and Vehicle Taxes as a Percent of Total State Highway Funding Fiscal Year 2004 0 10 20 30 40 50 60 70 80 90 100 GA NJ OK MA VA IA KY PA CO SD MN NH WV ME NC TX ND RI MO CA WY OH NV SC IN MT State Percent of State Highway Funding MFT Vehicle Taxes Source: 2004 Highway Statistics, Table SF-1. DC AK DE NY HI VT MD AZ IL NM MI FL CT OR KS NE UT AL LA ID WA TN MS AR WI Motor Fuel Taxes The revenue options related to motor fuel taxes, reviewed in this task as potential sources of additional revenue for transportation investments, include: 1) raising the motor fuel excise tax; 2) indexing the motor fuel tax; 3) sales tax on fuel; and 4) other taxes such as an oil company franchise tax (Pennsylvania) or a petroleum business tax (New York). Local option motor fuel taxes are addressed with other local options taxes under the category of Specialized Taxes below. Motor fuel taxes account for most of the Federal revenues used for highway and transit programs and for almost half of the revenues used by states to fund highway needs. In 2004, $29.2 billion in motor fuel tax levies were spent at the state level for highways. Fur- thermore, motor fuel tax revenues exceed two-thirds of the funding used for highways in Arkansas, Indiana, Mississippi, Montana, South Carolina, and Wisconsin. Motor fuel tax revenues are typically dedicated to transportation by statute, and in some states, these

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 3-4 . revenues are restricted for highways. In addition to being one of the main revenue sources for state highway expenditures, state motor fuel tax levies also are commonly distributed to local governments and are used to pay debt service on bonds issued for transportation projects. At the local level, locally generated motor fuel taxes account for a small share of the funding used for highways. Highway Statistics reported that locally generated motor fuel taxes accounted for approximately three percent of the total local revenues for highways. Similarly, motor fuel taxes account for a small share of the revenue used for transit expen- ditures, accounting for two percent of the state and local revenues. At the local level, motor fuel tax revenues include those levies at the state level that are directly transferred to counties and municipalities, and local option gas taxes approved by voters at the local level. Motor Fuel Excise (per Gallon) Tax – All 50 states and the District of Columbia levy motor fuel excise taxes on a per-gallon basis. Some states have a fixed rate and an adjust- able rate, which could vary with changes in motor fuel price or other factors. As of October 2006, Georgia has the lowest excise tax rate, at 7.5 cents per gallon (note: Georgia has a sales tax on gasoline in addition to the 7.5 cent fuel excise tax), whereas Washington has the highest fuel excise tax rate, at 34 cents per gallon. However, three states (including New York, Connecticut and California) have higher total motor fuel tax rates than Washington after including their other types of fuel-related fees. See Appendix D for further analysis of state motor fuel tax rates. Examples Ohio and Washington State are among the states that have increased the motor fuel excise tax in recent years. • Ohio – In 2002, the Ohio Legislature designated a task force to evaluate the status of the state gas tax and to pro- vide recommendations on how to meet the State’s transportation needs. As a result, the motor fuel tax rate was increased by 6 cents per gallon to 28 cents per gallon. The motor fuel tax rate was increased gradually, over a period of three years. Other changes enacted in association with the motor fuel tax increase included the elimi- nation of motor fuel tax allocations to the Ohio State Highway Patrol. These revenues are now redirected to local governments. The key factors in the Ohio Legislature’s willingness to accept the tax increase – despite an ongoing recession and political pressure to reduce taxes generally – were the perception that Ohio DOT was operating as leanly and efficiently as possible; an acknowledgment that Ohio DOT had made a clear and com- pelling technical case for major, corridor-level, infrastructure improvements; and a consensus that the tax increase would benefit county and local governments as much as Ohio DOT. • Washington – Motor fuel tax rates have been increased twice during the last five years. First, the motor fuel tax rate was increased by five cents per gallon in 2003, as part of the 2003 “Nickel” Funding Package. This funding package also included an increase of 15 percent in gross weight fees on heavy trucks and a 0.3 percent increase in the sales tax on motor vehicles. The 2003 “Nickel” Funding Package will fund 158 projects over a 10-year period, for a total investment of $3.9 billion. The five cent per gallon increase will expire when the projects are com- pleted and when related debt is retired. A second motor fuel tax rate increase of 9.5 cents per gallon was enacted in 2005 as part of the 2005 Transportation Package. This program will fund 274 projects ($7.1 billion) over a 16-year period. The funding package consists of an increase to the motor fuel tax rate of 9.5 cents per gallon over four years, and other revenue tools, including a new vehicle weight fee on passenger cars. It should be noted that there is a continuing effort to repeal the sec- ond fuel tax increase.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 3-5 Indexing the Fuel Tax to Inflation or Prices – Indexing the fuel tax can protect existing fuel tax revenues from the impacts of inflation. Through indexing, fuel tax rates can be adjusted automatically with changing rates of inflation or with other factors. Currently, several states adjust all or a portion of motor fuel tax rates based either on the consumer price index (CPI) or changes in fuel prices. Florida, Maine, and Wisconsin adjust their fuel tax rates based on inflation annually; however, legislation authorizing Wisconsin to adjust the motor fuel tax rate has recently been repealed. Other states, such as Kentucky, Nebraska, North Carolina, Pennsylvania, and West Virginia have a variable component that is adjusted based on the price of motor fuel. Therefore, the variable component is subject to fluctuations in fuel prices. The impact of fuel price fluctuations is mitigated by: 1) including a fixed fuel tax rate in addition to the variable fuel tax rate; and/or 2) establishing a fuel price ceiling and/or floor for the calculation of the variable fuel tax rate. For instance, North Carolina has a fixed fuel tax of 17.5 cents per gallon, in addition to the variable fuel tax rate (7 percent of the average wholesale price of motor fuel). In Kentucky and West Virginia, the variable fuel tax rate formula sets the average wholesale price of gasoline at a minimum (floor) of $1.22 and $1.30 per gallon, respectively. In addition, some states average fuel prices over a specific period of time to estimate the variable fuel tax rate, and revise the average fuel prices periodically (up to every 12 months), such that states can predict future revenues more consistently and program funding uses accordingly. Examples Florida and North Carolina have indexed motor fuel taxes. • Florida – Florida’s motor fuel tax is adjusted annually in proportion to annual changes in the Consumer Price Index (CPI). While the motor fuel tax rate has been subject to adjustments since the early 1980s, the procedure to adjust the motor fuel tax rate was last modified in January 1997. The “tax floor” of 6.9 cents per gallon (in 1989 dollars) is indexed annually to the CPI. The state motor fuel tax rate was 10.5 cents per gallon in 2005, and increased to 10.9 cents per gallon in 2006. Florida also levies a further gasoline tax surcharge called the State Comprehensive Enhanced Transportation System (SCETS) tax, which also is adjusted to the CPI. The SCETS tax was enacted in 1990, and varies by county. The tax rate is equivalent to two/thirds of all local option fuel taxes, not to exceed four cents per gallon (1990 dollars). Because most counties in Florida levy at least six cents in local option fuel taxes, the SCETS tax rate is now constant in most counties (except for Franklin County, where only five cents per gallon of local option gas taxes are levied). The SCETS tax was 5.8 cents per gallon in 2005, and increased to 6.0 cent per gallon in 2006 (5.0 cent per gallon in Franklin County). The proceeds of the SCETS tax are not shared directly with local govern- ments, but they must be spent in the respective FDOT district and, to the extent feasible, in the county in which the funds were collected. • North Carolina – The motor fuel tax rate in North Carolina has two components: 1) a fixed rate of 17.5 cents per gallon; and 2) a variable rate based on seven percent of the average wholesale price of motor fuel, adjusted every six months. Because the variable rate is dependent of the average wholesale price of motor fuel, the variable rate has decreased when gasoline prices have dropped. In July 2002, the motor fuel tax rate went from 24.2 cents per gallon to 22.1 cents per gallon. The new motor fuel rate, effective January 2006, is 29.9 cents per gallon. Sales Tax on Motor Fuel – In addition to the traditional motor fuel excise taxes, some states also collect sales taxes on motor fuels, including California (6 percent), Georgia (4 percent), Hawaii (4 percent), Illinois (6.25 percent), Indiana (6 percent), Michigan (6 percent), and New York (4 percent). These rates do not include any county or local

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 3-6 . taxes that also may be levied on motor fuel in these states. In some instances, revenues from sales taxes on motor fuel are not completely dedicated for transportation, as is the case of California and Georgia, where a portion goes to the general fund. In Indiana and New York none of the receipts of sales taxes on motor fuels are dedicated for transporta- tion. In New York sales tax on motor fuel goes to the general fund; the rate is capped at 8 cents per gallon by recent legislative action. Revenues from sales taxes on motor fuel are subject to the volatility of fuel prices. Figure 3.2 shows how total motor fuel taxes (in equivalent cents per gallon, and including all types of taxes – from excise to local option) in these states have changed over the first three quarters of 2006. In most states, motor fuel tax rates increased by the second quarter of 2006, when gasoline prices rose significantly, and then decreased by the third quarter, when fuel prices fell. However, in New York, the increases in fuel prices caused the leg- islature to take action; revenues from the state sales tax on motor fuels were capped at eight cents per gallon. Other cities and counties imposed respective caps to local sales taxes on motor fuels. Figure 3.2 Quarterly Motor Fuel Tax Rates for States Levying Sales Taxes on Motor Fuels, 2006 (Cents per Gallon) 0 5 10 15 20 25 30 35 40 45 50 CA GA HI IL IN MI NY Cents per Gallon April July October Source: American Petroleum Institute. Note: In Georgia, the state sales tax on motor fuels is revised twice a year; quarterly variation is due to sales taxes on motor fuels at the local level.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 3-7 Examples California and Georgia have sales taxes on motor fuels. • California – California levies a motor fuel tax of 18 cents per gallon that goes into the Transportation Tax fund. In addition to the excise tax on motor fuel, sales taxes on fuel are collected at the state, county, and local level. The state sales tax rate is 7.25 percent (6 percent state and 1.25 percent county), of which one-fourth percent goes into Local Transportation Funds of counties, and 2 percent goes to the counties General Fund. Revenues from the remaining 5 percent sales tax on gasoline and diesel go into the Transportation Investment Fund (TIF) and the Public Transportation Account (PTA), providing funding for state and local highways and public transportation. The transfer of motor fuel sales tax levies from the General Fund into transportation-related accounts was first introduced in the Transportation Congestion Relief Act of 2000, and made permanent through the passage of Proposition 42 in March 2002. However, the transfer of sales tax revenues into the TIF has been suspended as an emergency measure due to General Fund shortfalls in the past few years. Proposition 42 allows for the suspension of sales tax revenue transfers upon a two-thirds vote by the state Legislature and by the Governor. The 2006 STIP assumes that sales tax revenues will be transferred into the TIF and PTF over the next five years. • Georgia – Georgia levies a four percent sales tax on motor fuels for highway investments, in addition to a motor fuel excise tax of 7.5 cents per gallon. Only the revenues from three percent of the sales tax are dedicated to transportation, with the remaining levies going into the State’s general fund. Starting on January 2004, instead of collecting the sales tax at the pump, motor fuel distributors and suppliers must collect a prepaid state tax on all motor fuel sold. The prepaid tax is calculated every six months, based on the average retail sales price of motor fuel. The prepaid tax was estimated at 7.7 cents per gallon in July 2006. Other Motor Fuel-Related Taxes – A few states have implemented or considered taxes on petroleum products in addition to traditional gallonage taxes. These taxes also can be dedicated and can provide revenues for transportation in a manner similar to other types of fuel taxes. Examples Pennsylvania and New York have alternative types of petroleum-related fees. • Pennsylvania Oil Company Franchise Tax – Pennsylvania levies an Oil Company Franchise Tax, which is esti- mated as 153.5 mills (gasoline) and 208.5 mills (diesel) on the revenue received on the first sale of petroleum products used for motor fuels, expressed in cents per gallon. Petroleum revenues are estimated by multiplying the total gallons of petroleum products by the average wholesale price of gasoline. The oil company franchise tax is collected only between the high and low limits on the wholesale price, which are statutorily set at $0.90 to $1.25 per gallon. The average wholesale price is revised annually, with new oil company franchise tax rates set in January every year. In January 2005, the Oil Company Franchise Tax was estimated at 18 cents per gallon for gasoline, and 23 cents per gallon for diesel. The tax rate increased by 3.2 cents per gallon, because of the average wholesale price increase from $0.919 per gallon in 2003 to $1.17 per gallon in 2004. In January 2006, the tax rate increased again to 19.2 and 26.1 cents per gallon of gasoline and diesel, respectively. Because the oil company franchise tax is now levied on its highest allowed statutory price of $1.25 per gallon, the statutory limit will have to be adjusted if fuel prices rise further. The Pennsylvania Transportation Funding and Reform Commission’s recently released recommendations include a proposed increase in this tax by the equivalent of 11.5 cents per gallon to finance the additional needs of highways and bridges in the state.1 • New York Petroleum Business Tax (PBT) – New York imposes a tax on petroleum businesses operating in the State. The tax rate is expressed in cents per gallon, and adjusted annually by the Producer Price Index (PPI) on refined petroleum products. However, the annual change is capped at 5 percent and in some cases the legislature held the rate constant as part of the annual budget process. In 2005, the PBT rate was 15.2 cents per gallon for motor fuel and 13.45 cents per gallon for automotive diesel. The PBT rate increased by 0.7 cents per gallon in 2006, to 15.9 and 14.15 cents per gallon for gasoline and diesel, respectively. Revenues from the PBT are dedicated to both high- way and transit. 1 Pennsylvania Transportation Funding and Reform Commission Report, November 2006.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 3-8 . Use of Motor Fuel (and Vehicle) Taxes for Transit Revenues from motor fuel and vehicle taxes and fees are sometimes used to support public transportation. One of the principal sources of Federal funding for transit is, in fact, the Federal motor fuels tax, a portion of which is deposited into the Mass Transit Account of the Highway Trust Fund and supports the programs of the Federal Transit Administration (FTA). At the state level, there are also examples of revenues from motor vehicle-related taxes and fees flowing to broad-based state transportation funds, a portion of which are used to support various types of transit investment in selected states. As frequently, however, the use of revenues from state motor vehicle taxes and fees, particularly gas tax revenues, has been restricted historically to investments in streets and highways. Currently, 30 states have either statutory or constitutional restrictions that preclude the use of revenues from motor fuel taxes on transit.2 Examples of revenues from motor fuel and vehicle taxes and fees flowing to transit include: • New York MTA – Motor fuels excise tax revenues, vehicle registration fees and driver license fees; • Arkansas – Rental car taxes; • California – Sales tax levies on motor fuels; • Connecticut – Motor fuel excise tax revenues, oil company tax, and motor vehicle fees; • Delaware – Gas tax, and vehicle registration fees; • Florida – Motor fuel excise tax revenues, vehicle registrations, and rental car surcharge; • Iowa – Use tax on sale of motor vehicles; • Maryland – Motor fuel taxes, motor vehicle excise taxes, and motor vehicle fees; • Michigan – Gas tax revenues, vehicle registration revenues, sales tax levies on automotive- related items; • Minnesota – Motor vehicle sales tax; • Montana – Gas tax, and motor vehicle license fees; • New Jersey – Motor fuel taxes; • Oklahoma – Motor fuel taxes; • Oregon – Non-highway use fuel tax; • Pennsylvania – Auto rental tax, and vehicle lease tax; • Rhode Island – Motor fuel excise tax; 2 The Brookings Institution. Transportation Reform Series – Fueling Transportation Finance: A Primer on the Gas Tax. March 2003. Washington, D.C.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 3-9 • South Carolina – Motor fuel excise tax; • Tennessee – Motor fuel excise tax; • Virginia – Motor fuel excise tax, and motor vehicle sales and use tax; and • Wisconsin – Motor fuel excise tax, and vehicle registration fees. Motor Vehicle Taxes and Fees Motor vehicle taxes and fees include vehicle registration, license and title fees, and excise taxes on motor vehicles, among others. These are commonly dedicated to transportation. In 2004, motor vehicle taxes and fees accounted for almost 27 percent of total state revenues dedicated to highway expenditures, representing the second largest source of revenue for most state DOTs. For half of the states, vehicle taxes accounted for over one- fourth of the highway revenues. In Colorado, vehicle taxes accounted for over 50 percent of the highway revenues in 2004. At the local level, vehicle taxes and fees account for about 2 percent of the total local revenues used for highway needs. Vehicle Registration or Related Fees – Vehicle taxes include registration and related fees and these are normally the largest source within this category. In 2004, states collected $14.4 billion in vehicle registration fees. Highway Statistics data show that 90 percent of California’s motor vehicle-related revenues came from motor vehicle registrations. Vehicle registration fees vary by vehicle-class. For light vehicles, many states have a flat fee, whereas other states base the vehicle registration fee on weight or a combination of weight, age, horsepower, and value. For heavy vehicles, most vehicle registration fees are based on weight, and are graduated based on each state’s unique, legislatively defined schedule for vehicles of different weights. The heavy vehicle fee categories are specific to each state. License and title fees generated approximately $2.5 billion in 2004. License and title fees generate modest revenues for transportation, and where dedicated for transportation, are mainly used to cover administrative costs, rather than provide a net source of revenue for capital projects or maintenance expenditures. Personal Property Taxes on Vehicles – Some states and localities levy a personal property tax on vehicles. These fees are in effect registration fees based on the value of the vehicle. These fees have been highly responsive to inflation, because the value of the vehicles owned has continued to increase. These fees have the strong advantage for vehicle own- ers in that they are deductible for those who itemize when filing their Federal income taxes. Motor fuel taxes, traditional registration fees, and sales taxes which also are major sources for transportation are not deductible. Thus, if a state wishes to raise revenues under the existing Federal tax structure, but with minimal impact on net taxes for its citi- zens, personal property taxes on vehicles are a very attractive source. Despite the advantages of such fees to a state and its citizens, opponents of such fees have recently mounted campaigns to reduce or eliminate these fees in Virginia and Washington State. These fees were targets at least partially because of their visibility. An individual

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 3-10 . taxpayer has to write a separate check for these fees, whereas a motor fuel tax collected at the pump may be relatively less visible and is paid over many purchases of motor fuel each year. Excise Tax on Vehicle Sales – Vehicle sales taxes are normally levied as a percentage of the sales price of a vehicle when it is purchased or first registered in a state. Currently, some states collect vehicle sales taxes that are dedicated for transportation, including Connecticut, Iowa, Kansas, Maryland, Michigan, Minnesota, Missouri, Nebraska, North Carolina, Oklahoma, South Dakota, and Virginia.3,4 Examples Nebraska and Missouri tax vehicle sales. • Nebraska – Sales tax collected on the purchase of motor vehicles are dedicated to transportation. The sales tax revenues on motor vehicles are collected by the counties and deposited into the Highway Trust Funds. The Highway Allocation Fund for local governments receives 46.7 percent of the revenues, and the Nebraska Department of Roads receives the remaining 53.3 percent. In FY 2005, $143.0 million were deposited into Nebraska’s Highway Trust Fund. • Missouri – In Missouri, a portion of the vehicle sales and use taxes are dedicated for transportation needs. Half of the revenues from the 4 percent sales tax on motor vehicles is distributed among the Missouri DOT (75 per- cent), cities (15 percent), and counties (10 percent) for transportation expenditures, including public transporta- tion (from the DOT’s share). Amendment 3, which was approved by voters in November 2004, redirects the sales tax levies that were deposited into the General Fund to the State Road Bond Fund, which will be used pri- marily to pay debt service through FY 2009. The transfer of sales tax revenues will be phased over a four-year period, starting in July 2005. After FY 2009, excess revenue in the State Road Bond Fund (after debt service payments are met) can be redirected to the State Road Fund to cover other transportation-related needs. A use tax of 4 percent on the purchase is collected on vehicles that are not subject to the Missouri sales tax at the time of purchase. From the 4 percent use tax on motor vehicles, the Missouri DOT receives all levies from 3 per- cent of the use tax on motor vehicle, and 75 percent of the remaining 1 percent use tax. Cities and counties receive 25 percent of the revenues from the 1 percent use tax. The Missouri DOT received $177.7 million in FY 2004 and $181.5 million in FY 2005 from the vehicle sales and use tax. Other User Fees (e.g., Tolls and Fares) Direct user fees such as tolling and pricing have historically contributed a relatively small share of highway revenues – currently about 5 percent of highway revenues at all levels of government – but are receiving a great deal of attention in recent years. For transit, user 3 U.S. Department of Transportation, Federal Highway Administration. Highway Taxes and Fees – How are they Collected and Distributed? Washington, D.C., 20001. Table S-106. Available at http://www.fhwa.dot.gov/ohim/hwytaxes/2001/index.htm. 4 In Minnesota, Motor Vehicle Sales Tax transfers from the General Fund for highway and transit expenditures were restored in 2003, after being entirely eliminated in 1991. In November 2006, a constitutional amendment will be presented to voters to dedicate all motor vehicle sales revenues solely to transportation by 2012. More information available at http://www.house.leg.state.mn. us/hrd/issinfo/ssmvst.htm.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 3-11 fees in the form of fares and related fees contribute a much larger share, about 28 percent at all levels of government combined, and for transit agencies, they account for well over 65 percent of revenues.5 Tolling, Pricing, and Other Direct User Fees As of December 2005, toll facilities in the United States accounted for approximately 5,100 miles of roads, bridges, and tunnels.6 In 2004, state and local governments used $6.6 bil- lion in tolls for highway investments or approximately seven percent of total revenues used for highways at the state and local level. Many states are using the promise of tolls as a way of generating new revenue. The most promising candidates for future toll facili- ties are for new roads or when adding additional lanes to existing roads. Texas has all but made the policy decision to fund new limited-access highway capacity at least partially through tolls, and to refrain from tolling of existing lanes. A number of states are consid- ering the idea, and yet others are not ready to embrace such policies. Tolling New Roads or Bridges – Users incur a toll for use of new roads, bridges, and spe- cial lanes. The toll rate typically does not vary by time of day or day of week. Listed below are some examples of toll road projects from Texas and Florida. Examples Texas and Florida have extensive programs to toll new roads. • Texas – In Texas, tolling currently is used primarily in the two large metropolitan areas of Dallas and Houston. The amount of revenue from tolling at all levels of government in Texas ranged from 2.5 to 5 percent in recent years according to Highway Statistics Tables SF-1 and HF-1. In Dallas, the Metroplex Toll Financing System (MTFS) allows TxDOT and/or the North Texas Tollway Authority (NTTA) to make toll projects available for investment by other entities that would then receive returns on their investments, as well as benefit through accelerated project development and completion. Candidate MTFS projects would be those toll projects that can reasonably be expected to generate toll revenues beyond the level necessary to pay debt and expenses. These candidates could be designated MTFS projects and represent an opportunity for local entities to partner in the investment, thereby, sharing in any surplus revenues generated by the toll project. For example, if City A were to contribute 10 percent of the funding for Project X, then that city would receive 10 percent of the surplus reve- nues from Project X. This surplus revenue could provide an ongoing funding source for the city to use in other transportation projects. In keeping with the premise of regional project support, first choice to invest in a MTFS toll project would belong to those cities and counties directly affected by a project. Contributions are not limited to cash, but include donated right-of-way, design, or other contributions to the value of the total project. Also in Texas, the Texas Mobility Fund is a revolving fund that is designed to back bonds that are pledged towards the construction of highway projects. The proceeds from the sale of these bonds could be used to finance construc- tion on state-maintained highways, publicly owned toll roads, and any other project that is eligible for the State’s Highway Fund.7 As of December 2005, nine toll projects were under construction or underway in the State of Texas, of which the largest is the State Highway 130 (SH 130) around Austin. 5 Federal Transit Administration, 2004 National Transit Database. Available at http://www. ntdprogram.com. 6 U.S. Department of Transportation, Federal Highway Administration. Toll Facilities in the United States, 2005. Available at http://www.fhwa.dot.gov/ohim/tollpage.htm. 7 Texas Department of Transportation, Texas Mobility Fund, http://www.dot.state.tx.us/txdotnews/ txmobilfundplan.htm.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 3-12 . Examples Texas and Florida have extensive programs to toll new roads. (continued) The Trans Texas Corridor (TTC) is an ambitious Texas initiative designed to relieve current congestion problems throughout the State while also establishing transportation corridors for the future. Four corridors have been identified as priority segments, all of which run parallel to existing or planned interstate highways. These corri- dors would parallel I-35 and I-37, sections of I-45, and I-10, and serve as the new I-69 corridor. The plan calls for a network of corridors up to 1,200 feet wide with six lanes for passenger vehicles and four separate lanes for trucks. In addition, the corridor will include six rail lines, with dedicated tracks for high-speed passenger ser- vice, high-speed freight service, and shared lines for conventional commuter and freight service. Finally, a 200- foot-wide strip alongside the road lanes and rail lines will be included for the placement of utilities. The total length of the corridors is 4,000 miles, with preliminary construction costs estimated at $125 billion and total pro- ject costs considerably higher. Funding for the project will be derived from a variety of sources, including tolls, public-private partnerships, and government funding. Comprehensive Development Agreements (CDA) will likely be used to reduce the time required for the completion of individual segments. A CDA currently is in negotiation with an international consortium for I-35 development. • Florida – Florida, which has an extensive network of toll roads, derived from 8.2 to 11.2 percent of its annual highway revenue for all levels of government from tolling in recent years according to Highway Statistics. Since 1990, Florida’s Turnpike opened nine new system interchanges, added 39 lane-miles of widening projects, and made substantial improvements to toll plazas, service plazas and other facilities. The Turnpike also made sub- stantial investments in electronic toll collection (ETC) and intelligent transportation systems (ITS). The current 10-year finance plan, covering the period FY 2003 through FY 2012, has a number of significant widening and improvement projects. These will produce a total of 150 lane-miles of widening and 11 interchange improve- ment projects.8 Florida also has a system whereby it encourages the development of new toll projects by lever- aging the revenue stream of the Turnpike Enterprise. It does this by providing loans from the Toll Facilities Revolving Fund, and also by providing revenue support for the early years of toll operation for new projects, with flexible and liberal payback terms. Tolling Existing Roads – Tolling existing facilities is a much more challenging undertaking and is prohibited on the Interstate System with a few exceptions. Although TEA-21 had provision for three states to test putting tolls on existing Interstate’s for reconstruction, no state successfully advanced a project. In early March 2003, the Virginia Department of Transportation requested approval to toll Interstate 81 (I-81) from the U.S. Secretary of Transportation and submitted an application for tolling. A toll impact study was conducted to determine the effects of traffic diversion from I-81 to other roadways as a result of implementing different toll scenarios. A DEIS has been completed as of spring 2006; the decision for tolling will be made after the final EIS is submitted to FHWA for approval. The Interstate reconstruction toll pilot provision was extended in SAFETEA-LU, with changes intended to make it easier for states to take advantage of them. Also, a new program to allow three new Interstate highways to be constructed as toll roads was added in SAFETEA-LU. Several states are now looking seriously at these provisions of SAFETEA-LU. Special Lanes (HOT, Express, Truck Lanes) High-Occupancy Toll (HOT) Lanes – These are lanes for which single-occupancy vehicles buy the right to use the excess capacity available in exclusive lanes that are otherwise 8 Florida’s Turnpike, http://www.dot.state.fl.us/turnpikepio/NewWebPages/future.html.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 3-13 reserved for high-occupancy vehicles (HOV) which pay no tolls. HOT lanes allow a single-occupancy vehicle (SOV) to pay a toll to use HOV lanes which have excess capacity. The first conversion of HOV lanes to HOT lanes opened in San Diego in the mid 1990s, and an extension of that project is now being planned. In May 2005, the first lanes on I-394 in Minneapolis opened to traffic, and the Interstate 25 (I-25) HOT lane opened in Denver in June 2006. Each of these is described below. Examples • Minnesota – I-394 HOT Lane (MnPASS) – The first HOT lane to open for quite awhile just opened recently in Minneapolis, where the existing HOV lane on I-394 was converted to a HOT lane. The project extends for nine miles in one direction (11 in the other), with part of the project a single lane in each direction, and the remainder two lanes reversible. I-394 is different from previous HOT lane projects in these ways: - Most of it is a single lane in each direction, with only a double-white stripe separating the HOV/Toll traffic from the general purpose traffic. There are zones where there are breaks in the striping to allow drivers to enter or exit the facility. This is in contrast to the single on- and off-points on previous projects. - There are two tolling zones, and prices change dynamically every three minutes, based on traffic density in the HOT lanes. Drivers are shown the price to use either one or both tolling zones at the beginning of their trip, with the price at entry guaranteed, regardless of any price changes by the time they get to the new section. - Enforcement of the HOV and tolling is done by roving patrol vehicles. Some patrol cars are equipped with enforcement transponders that allow them to query the transponders of vehicles in the toll lane that do not have more than one occupant.9 • Colorado – I-25 HOT Lanes. The I-25 HOT Lane Project in Colorado opened in June 2006. This project is a con- version of the existing I-25 HOV facility. State law currently maintains free access for HOV2+, motorcycles, Inherently Low-Emission Vehicles (ILEV), and hybrids. Colorado DOT currently is seeking a change in state statutes for the hybrids to become tolled. The important constraints on this project are as follows: - The full funding grant agreement between the Federal Transit Administration (FTA) and the Regional Transportation District (RTD) specifies that net revenues must go to transit; - Bus travel times take precedence over all others using the facility, meaning that the addition of SOV traffic should not impact bus operations; and - Entering and exiting loading constraints for the facility into the downtown Denver grid network mean that the pricing for this facility will be on a published toll schedule to be updated periodically, rather than with dynamic pricing. - The revenue priorities for this project are to cover operations, maintenance, enforcement, and rehabilitation. The project is not anticipated to generate additional net revenue within the first 10 years of operation.10 HOT lanes are not always conversions of existing HOV lanes. The 91 Express Lanes that opened in Orange County, California in the mid 1990s was a public-private venture that involved building four new toll lanes in the median of an existing freeway. On these lanes, HOV 3+ vehicles can drive for free during most hours, and must pay 50 percent of the full toll at the busiest times. 9 Minnesota Department of Transportation, MnPass, http://www.mnpass.org/. 10 Colorado Department of Transportation, North I-25 HOT Lanes Study, http://www. i25hotlanes.com/.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 3-14 . Other toll express lane projects are under consideration around the country, and are being encouraged through SAFETEA-LU with an Express Lanes Demonstration Program. Although these are toll facilities, in many cases, the tolls may not be adequate to pay for the cost of construction. However, such facilities are being considered for their effective- ness at providing congestion-free travel at all times of day, despite the fact that all capital costs may not be paid for by tolls. Other HOT lane proposals are being developed in the Washington, D.C. area of Virginia, Washington State, Texas, and Florida. Truck-Only Toll Lanes (TOT) – Toll roadways or lanes for exclusive truck use. TOT lanes have been studied in the Los Angeles region on SR 60 and I-710, both of which are heavily utilized by trucks accessing the Ports of Los Angeles and Long Beach. The pre- liminary Los Angeles region studies found that urban TOT lane facilities would need to overcome challenges that include truck trips of short lengths, limited travel-time savings during off-peak periods, and significant construction costs and geometric constraints related to adding lanes in an urban environment. Another TOT lane concept involves urban corridors, which do not necessarily allow longer or heavier vehicles. Such a system of TOT lanes has been recently studied in the Atlanta metropolitan areas, with the findings that TOT lanes had a high potential for relieving congestion, potentially even more than HOV or HOT lanes. Some of the scenar- ios studied involved the conversion of existing and planned HOV lanes to TOT lanes. Such a policy would be unprecedented, and be politically very difficult to implement. However, the study does point the way towards the potential for TOT lanes in dense urban regions with heavy truck demands.11 Vehicle Miles Traveled (VMT) Fees – Some states are anticipating a time when the fuel tax may not be adequate to fund transportation improvement needs, and are researching alternative fees based on vehicle miles traveled. A study on the viability of such a system using the Global Positioning System was conducted by the University of Iowa in 2002.12 The 2005 National Chamber Foundation study, “Future Highway and Public Transportation Financing” recommended VMT fees as a long-term system of funding that would reduce reliance on the fuel tax. The study recommended a two-tier VMT fee sys- tem: a state VMT fee that would gradually replace motor fuel taxes and a local option VMT fee (presumably with variable pricing) to manage congestion in metropolitan areas.13 11 Georgia State Road and Tollway Authority. Truck Only Toll Facilities: Potential for Implementation in the Atlanta Region, July 2005. Available at http://www.georgiatolls.com/. 12 Forkenbrock, David J., and Jon G. Kuhl. A New Approach to Assessing Road User Charges. Iowa City, Iowa: Public Policy Center, The University of Iowa, July 2002. 13 National Chamber Foundation, “Future Highway and Public Transportation Financing,” 2005.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 3-15 Examples The Oregon State Department of Transportation is conducting a pilot test designed to demonstrate the technical and administrative feasibility of implementing an electronic collection system for mileage-based user fees and con- gestion tolls. The on-board technology was demonstrated in May of 2004. The full pilot test began in the summer of 2006 and will continue for one year. A total of 260 trial participants in the Portland metropolitan area have a mileage-recording and global-positioning-system device installed in their vehicles, and are currently purchasing gas at select service stations in Portland equipped with wireless mileage-reading devices. The mileage-recording device in each car tracks miles driven in four categories: miles driven in Oregon; miles driven out-of-state; miles driven in the Portland metropolitan area during weekday rush hour (7:00 to 9:00 a.m. and 4:00 to 6:00 p.m.); and miles driven when no satellite signal was available (e.g., miles accumulated in underground parking garages, tunnels, etc.). During the first six months of the pilot test, participants are paying the gas tax as usual. In December 2006, participants will be randomly divided into different test groups: one group will continue to pay the gas tax; a second group will pay a mileage-based fee of 1.2 cents per in-state mile instead of the gas tax; and a third group will pay a mileage-based fee plus a congestion pricing fee for mileage accrued during weekday rush hours in the Portland metropolitan area. The pilot test is proceeding smoothly to date. Occasional equipment failures have been experienced, but the rate has not been unusual or problematic as yet. Following conclusion of the pilot test in summer 2007, Oregon DOT will prepare a report and present the findings to the Oregon State Legislature in 2009. At that time, next steps will be determined; these may include further testing, evaluation of additional geographic regions, or evaluation of different pricing schemes. Oregon DOT anticipates that adoption of a mileage-based fee system will require legislative support and additional funding for installation of vehicle and service-station technology; development of new state and Federal leg- islation governing administration, enforcement and privacy concerns; and coordination with vehicle manufacturers, the fuel distribution industry, and organizations representing the general public. Transit Fares and Other Fees – Transit fares and other operating revenues were reported at $10.9 billion in 2004, accounting for 28 percent of the total revenues used for transit expenditures at all levels of government. Although most agencies dedicate these revenues to transit O&M costs, a few agencies, like New York MTA and Chicago Metra Rail, use transit fares to support their capital programs. Other operating revenues also include parking fees, investment income, advertising revenues, leases, and concessions, to men- tion a few. While these revenues sources represent additional opportunities for agencies to generate additional resources, the revenue potential is limited compared to other sources, such as dedicated taxes. Examples • Chicago Metra – Since 1989, Metra has dedicated the farebox revenues from a 5 percent fare increase to its capi- tal program. In 2004, the capital farebox financing revenue was $9.1 million. In addition, Metra is required by statute to have an operating ratio (i.e., operating revenues/operating expenditures) of 55 percent. • New York Metropolitan Transportation Authority (MTA) – The New York MTA operates the bus, rapid transit, and commuter rail services in the New York Metropolitan Area. In addition, it operates seven bridges and two tunnels under the Triborough Bridge and Tunnel Authority. MTA toll revenues are used to pay for the operating expenditures and debt service of these bridges and tunnels, and the excess toll revenues are dedicated to support public transit needs (including debt service). Container Fees – The Alameda corridor freight rail project was the first to institute con- tainer fees to help pay for transportation infrastructure improvements. Up to $30 fees are paid on each container that use, or could have used, the corridor. The terminal operators in the ports of Los Angeles and Long Beach have also recently imposed daytime surcharge fees on container movements to encourage shifts to night time operation. California State

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 3-16 . Senator Lowenthal recently proposed the implementation of a $30 fee on every 20-foot cargo container moving through the ports of Los Angeles and Long Beach to help fund port and intermodal improvements to serve this commerce. This bill was passed by the state legislature in the summer of 2006 but vetoed by the Governor. Specialized Taxes The major sources of specialized taxes are state and local sales taxes, but this category also includes any tax revenue that is dedicated through voter’s approval for transportation purposes. This category also includes value capture techniques such as development impact fees and special assessment districts. The 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. In 2004, specialized taxes provided $15.4 billion for highways (12 percent to total highway revenues at levels of government), and $9.5 billion (25 percent) for transit at all levels of government. State Sales Taxes for Transportation Some states dedicate sales tax revenues for transportation expenditures. Transit agencies reported a total of $2.1 billion in sales tax revenues from states in 2004. Six states (i.e., California, Indiana, Massachusetts, New York, Pennsylvania, and Virginia) dedicate a portion of their sales tax levies to transit.14 Examples • The State that most recently joined this list was Massachusetts with the implementation in 2000 of the Massachusetts Bay Transportation Authority’s (MBTA) Forward Funding legislation. The Forward Funding legislation dedicates 20 percent of the State’s general sales tax revenues to the agency, and makes the MBTA fiscally responsible for its capital and operating expenses. Starting in 2000, debt service is not backed by the full faith of the State, and any bonds issued thereafter are backed by the agency’s dedicated revenues (including the sales tax and assessments paid by local communities served by the agency). • The states of Kansas and Utah allocate a portion of the state general sales taxes for highway expenditures.15 In 2004, $90.1 million in sales tax revenues were allocated into the Kansas State Highway Fund, accounting for 17 percent of the total revenues into this fund. The sales tax rate dedicated to transportation is one-fourth percent. In Utah, a 1/16 allocation of sales tax revenues is dedicated to the Centennial Transportation Fund since 1997, for a period of 11 years. The fund is used to pay for specific transportation investments. 14 2005 Survey of State Funding for Public Transportation. Joint report by the American Association of State Highway and Transportation Officials (AASHTO), the American Public Transportation Association (APTA), and the U.S. Department of Transportation Bureau of Transportation Statistics (BTS), May 2005. 15 U.S. Department of Transportation, Federal Highway Administration. Highway Taxes and Fees – How are they Collected and Distributed? Washington, D.C., 2001. Table S-106. Available at http://www.fhwa.dot.gov/ohim/hwytaxes/2001/index.htm.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 3-17 Local Option Taxes Local options taxes have been adopted in one form or another in at least 46 states as shown in Figure 3.3.16 They include mechanisms such as state authorized local options sales, gasoline, income, and vehicle taxes and fees. Its application and level could be at the local or regional level. These taxes are often dedicated to specific transportation pro- jects or programs. Figure 3.3 States with Local Option Taxes for Transportation Source: Institute of Transportation Studies, University of California at Berkeley, “Local Option Transportation Taxes in the United States,” March 2001. 16 Goldman, Todd, Sam Corbett, and Martin Wachs; Institute of Transportation Studies, University of California at Berkeley. Local Options Taxes in the United States, March 2001.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 3-18 . Local Option Taxes for Highway Investments • Local Option Gas Taxes (Florida) – Local governments in Florida have the option of implementing up to 11 cent per gallon on local gas taxes for funding transportation improvement projects, including transit. There are three types of local option gas taxes (LOGT): the First LOGT (up to 6 cents on gasoline and diesel), the Second LOGT (up to 5 cents on gasoline only), and the Ninth-Cent Gas Tax (1 cent on gasoline and diesel). Since 1994, the Ninth-Cent gas tax is no longer optional for diesel. Of the 67 counties in Florida, 16 counties levy the maximum rate (i.e., 11 cents per gallon) of local gas tax. Most counties levy at least six cents per gallon from the First LOGT. However, the First LOGT rate is five cents per gallon in Franklin and Union counties, although Union County also collects the Ninth Cent gas tax, which brings its local gas tax to six cents per gallon. • Local Option Vehicle Taxes (Ohio) – Local governments in Ohio can levy up to $20 in vehicle license registra- tion fees, in increments of $5. Revenues from the local motor vehicle license fees must be used for roadway and bridge projects. A study conducted in 2000 by the Ohio Legislative Budget Office found that 67 percent of the counties, 52 percent of the municipalities, and 23 percent of the townships have enacted vehicle license fees. • Local Option Sales Taxes (Missouri) – Local governments in Missouri have the authority (subject to voters’ approval) to implement local sales taxes, ranging from one-eighth to 1 percent, for capital improvements and transportation-specific improvements (including roadways, bridges, and transit capital and operations). Table B.1 in Appendix B shows the sales tax proposals included in the ballots in 2005. Of the five proposals, three were approved by voters. Local Option Taxes – Transit • Local Option Sales Taxes (Various States and Localities) – Most recent ballot initiatives for the approval of sales taxes for public transportation included either the extension or increase of existing sales taxes. Over the last three years, voters in local jurisdictions in Alaska, California, Arizona, Ohio, and Missouri approved the extension of existing sales taxes used for transportation. Sales tax rate increases and new sales taxes have been approved in Arizona, California, Colorado, South Carolina, Texas, Utah, and Washington. Table B.2 in Appendix B summarizes the most recent sales taxes enacted to support transit investments over the last three years. Of the 29 sales tax proposals in those states, 10 provide funding exclusively for transit investments; the others include a combination of transit and highway investments. Specific examples are highlighted below: − San Diego, California – San Diego County has sustained one of the most successful programs for local and regional transit and multimodal revenue-raising in the country. In 1987, under the leadership of the former Metropolitan Transit Development Board (MTDB), county voters enacted a 20-year one-half cent sales tax yielding $3.3 billion to support specific amounts and projects for transit expansion, highway expansion and local street and roadway improvements, called TransNet. In 2003, long-range transit planning, program- ming, and funding decisions were consolidated within SANDAG to streamline decision-making in commit- ting revenues to transportation improvements. Faced with continued rapid growth and the expiration in 2008 of the original TransNet measure, County voters in November 2004 approved a 40-year extension of the one-half cent TransNet sales tax which will generate $14 billion. Enactment occurred with over a 67 percent positive vote, meeting the statutorily required two-thirds minimum for enactment of new tax measures. TransNet revenues will be split one-third for transit, one-third for highways and one-third for local streets and roads with specific amounts dedicated to bicycle and pedestrian improvements. − Denver, Colorado – Denver, Colorado also has a highly successful and cost-effective regional, multimodal public transportation system in development. To support continued transit expansion in the region, citizens in November 2004 approved by a 58 to 42 margin, the new 12-year, $4.7 billion FasTracks program developed by the Denver Regional Transit District (RTD) along with a 0.4 percent increase in the RTD’s existing 0.6 per- cent regional sales tax. The sales tax increase will be used, in part, to support bonding to leverage the full investment needed to carryout the FasTracks program. The FasTracks Program will support 119 miles of new light rail and commuter rail, 18 miles of Bus Rapid Transit (BRT), 21,000 additional parking spaces at rail and bus stations and expanded bus service in areas of the region. − Phoenix, Arizona – In November 2004, voters in the Phoenix region passed Proposition 400 extending the Maricopa County one-half cent dedicated sales tax for transit 20 years. Revenues will be used to support creation of a multimodal transit network through $16 billion to be invested in a 27.7-mile expansion of light rail, new and enhanced service on 30 bus routes, creation of 10 new routes, service enhancements on 26 exciting BRT routes, introduction of 14 new BRT routes and a tripling of paratransit service in the region.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 3-19 Local Option Taxes – Transit (continued) • Local Option Property Taxes (Michigan) – Michigan legislation allows counties to implement property taxes dedicated to public transportation. In 2004, 13 counties in Michigan voted to continue or increase property taxes to support public transportation investments. In 2005, six property tax proposals were approved by voters, including a three mills renewal in the City of Saginaw that was defeated in 2004. Most recently, nine property tax proposals were approved in 2006 elections. • Local Option Income or Payroll Taxes (Oregon) – Lane County Transit and TriMet levy 0.6 percent and 0.6418 percent, respectively, in payroll and self-employment taxes, which are dedicated to public transportation. In the Lane County Transit District, payroll taxes generated approximately $21.3 million in 2005. For TriMet, payroll taxes accounted for almost 52 percent of the operating revenues, levying $157.3 million in 2005. In 2003, the Oregon Legislature authorized TriMet to increase the payroll tax rate by 1/100 percent every year, over a 10-year period. Use of Property Taxes for Transportation, Including Beneficiary Charges Property taxes play an important role for funding highway needs at the local level. In 2004, about 21 percent of the local highway funding came from property taxes, including local option and beneficiary charges. For example, local governments in Massachusetts and Vermont rely significantly on property tax revenues to support their highway-related investments. Property tax revenues represented only 1.4 percent of the total transit revenues. Property taxes are frequently used in small communities to support public transportation systems and services. Recent increases in millage levies for transit have been approved in: • Holland, Kalamazoo, Kalkaska, Macomb, Manistee, Oakland, Wayne, and Wexford, Michigan (2006); • Flint, Saginaw, and Holland, Michigan; San Carlos, California; Steubenville and Youngstown, Ohio (2005); and • Kalamazoo, Michigan; Lexington, Kentucky; and Parkersburg, West Virginia in 2004. Beneficiary Charges for Transportation Beneficiary charges are a special category of property taxes that are targeted to capture the benefits or cost of infrastructure that serves property development. The following mecha- nisms are the most commonly used by state and local governments. Impact Fees – Impact fees consist of one-time charges to developers on new development. Revenues from impact fees are used to pay for infrastructure improvements resulting from growth generated by new development, such as water, sewers, roads, parks, schools, and other infrastructure needs. Currently, 27 states have approved legislation that allows

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 3-20 . for the implementation of impact fees.17 In Maryland, Tennessee, and North Carolina, impact fees are authorized through special legislation for specific jurisdictions. The states with the highest number of communities that have adopted impact fees are California, Florida, Washington, Oregon, Colorado, and Texas.18 Impact fees for transportation facilities may be calculated based on average trips, numbers of units in a residential project, square footage in a nonresidential project, or other factors. Examples • California – In California, impact fees are widely used for road projects. The 2006 National Impact Fee Survey19 provides information on impact fees for several infrastructure needs levied in 39 jurisdictions in California. Average road impact fees in California are estimated at $4,210 for a single family house, whereas the national average is estimated at $2,305. Commonly, impact fees are not used to finance large scale projects, although such large-scale projects would have the greatest impact on property values. Impact fees typically do not generate nearly enough revenue to fully fund a large scale project. Also, since the fees are entirely dependent upon new development, they are highly speculative, and not easily bondable. Therefore, impact fee programs usually build projects on a pay-as- you-go basis. While they may be highly speculative from the viewpoint of backing bonds, there still are advan- tages to establishing impact fees that could generate revenues over and above toll proceeds. On projects that are not self supporting from toll revenues this can reduce the amount that would have to come from fuel taxes or general funds. Impact fees have been used to supplement the funding of large scale projects. In Orange County, California, impact fees are used (in addition to toll revenues) to pay for the debt service from the construction of three toll roads: the San Joaquin Hills Toll Road, the Eastern Toll Road, and the Foothill Toll Road. In 2005, impact fees generated $23.4 million, accounting for 11.6 percent of the total revenues.20 • Florida – Another example of wide implementation of impact fees is Florida. According to a national survey,21 at least 68 jurisdictions in Florida levy some form of impact fees, many of which include road impact fees. The average road impact fee is estimated at $2,790 for a single family house. Value Capture (Assessment Districts and Tax Increment Financing) – Value capture attempts to capture some of the increase in value due to the improvement which benefits the properties impacted. Assessment districts are special property taxing districts where the cost of infrastructure is paid for by properties that are deemed to benefit from the infrastructure. These assessments can be applied to the full value of the subject property, 17 Clancy Mullen, Duncan Associates. State Impact Fee Enabling Acts (June 2006). Available at http://www.impactfees.com. 18 University of Minnesota, Center for Transportation Studies. Development Impact Fees for Minnesota? A Review of Principles and National Practices. October 1999, page 21. 19 Clancy Mullen, Duncan Associates. 2006 National Impact Fee Survey (June 2006). Available at http://www.impactfees.com. 20 Audited financial statements, Fiscal Year 2005, for the San Joaquin Hills Transportation Corridor Agency and the Foothill/Eastern Transportation Corridor Agency. Downloaded from: http://www.thetollroads.com/home/about_news_annual.htm. 21 Mullen, op. cit.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 3-21 or use a Tax Increment Financing (TIF) technique in which bonds are issued to finance public infrastructure improvements, and repaid with dedicated revenues from the incre- ment in property taxes as a result of such improvements. To date, Arizona is the only state that has not enacted TIF laws. The use of TIF was initiated in California in the 1950s, and has been used extensively in other states, such as Illinois, Minnesota, and Wisconsin.22 Portland, Oregon has used TIF to fund transit investments, such as the Portland Streetcar and the MAX Yellow Line. Examples • Oregon – TIF has been used to support the construction of the Portland Streetcar. The additional property taxes are collected within two Urban Renewal Areas (URAs): the South Parks Blocks URA and the North Macadam URA. TIF revenues accounted for 22 percent ($19.7 million) of the total cost for the three project segments, including the final segment that is scheduled to begin operations in September 2006. For the MAX Yellow Line, the City of Portland provided $30 million in General Fund notes that must be repaid with TIF revenues generated by the Interstate URA. Community Facilities Districts (CFD) – CFDs are creative funding mechanisms for infra- structure projects where residential and commercial property owners are charged an annual fee for the benefit of infrastructure in their area. CFDs seem suited to regional projects and programs as they are not tied to a specific facility as is the case with most other beneficiary charges. They have been used in California and to a lesser extent in Arizona, Illinois, New Mexico, and Hawaii. Although they have seen limited use for transportation to date, there may be larger potential in the future. Other Miscellaneous Dedicated Sources for Transit – Because of the varying philoso- phies of governance and taxation, arriving at an acceptable mix of revenues to support public transportation has often resulted in the enactment of combinations of unique reve- nue sources suited to the political and budgetary landscape of individual areas and juris- dictions. Some of the more unique revenue sources committed to transit are highlighted in the examples below. 22 Sullivan, Gary, Steve Johnson, and Dennis Soden; Institute for Policy and Economic Development, University of Texas at El Paso. Tax Increment Financing Best Practices Study. Prepared for the Greater El Paso Chamber of Commerce, September 2002.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 3-22 . Examples • Mortgage Recording Tax – Mortgage Recording Tax (MRT) is collected for transit in the New York City region. The MRT is actually two taxes. The first, designated MRT-1, is a tax of 0.30 percent on debt secured by certain mortgages on property in the MTA service region, a rate that was increased from 0.25 percent on June 1, 2005. The second, MRT-2, is a tax of 0.25 percent on another type of mortgage, those for improvements of residential structures with one to six units. Both taxes are collected by New York City or one of the seven counties within the MTA service region, and transferred to the MTA. • Rental Car Taxes – At the state level, Arkansas, Florida, and Pennsylvania dedicate a portion of rental car taxes for transit. New York dedicates rental car taxes to the Dedicated Highway and Bridge Trust Fund. At the local level, Indiana, Kentucky, North Carolina, and Wisconsin have implemented rental car taxes to support transit. • Casino/Lottery Revenues – New Jersey allocates a portion of its casino revenues to fund elderly and disabled programs. In 2005, $25.3 million were dedicated to transit, accounting for about 5 percent of the total casino revenues. Oregon and Pennsylvania dedicate a portion of lottery revenues for transit. In Oregon, lottery bonds were issued for the TriMet light rail program. • Cigarette Tax – In Oregon, cigarette tax revenues provided $4.2 million to support transit expenses. Pennsylvania also derives transit revenue from the cigarette tax. Pennsylvania – Pennsylvania is an example of a state that has tapped a wide variety of dedicated revenue sources for transit. There are 42 urban and rural fixed route systems and more than 30 community transit systems serving all counties in the Commonwealth The cost for providing these services comes from Federal, state, and local sources. On average per year, Pennsylvania invests more than $1.3 billion dollars in transit. Of that, 29 percent comes from Federal funding sources; 62 percent from state; and 9 percent from local sources.23 Local subsidies are generated through various dedicated sources. In FY 2005, the State dedicated approximately $835 million for transit funding. Funds from the state level are primarily from the general fund (which is allocated by legislative formula), Public Transportation Assistance Fund (Act 26 of 1991) and the Supplemental Public Transportation Assistance Account (Act 3 of 1997) for the purpose of rebuilding, replacing, and maintaining transit infrastructure. • The Public Transportation Assistance Fund (Act 26) generates revenue from several sources. Some of these sources include the Tire Fee - a flat fee of $1 per new highway motor vehicle tire sold, Motor Vehicle Lease Additional Tax - a 3% tax imposed on the total lease price of a motor vehicle in addition to the current tax imposed, Motor Vehicle Rental Fee - a $2 fee per day imposed on the rental of a motor vehicle, and annual transfer of 0.937% from the sales tax. • The Supplemental Public Transportation Assistance Account (Act 3), which was approved by the Pennsylvania State Legislature and signed into law by the Governor of Pennsylvania on April 17, 1997, allocates revenue to this account at a rate of 1.22 percent of the state sales tax (capped at $75 million). Other unique sources of funding in Pennsylvania include the cigarette tax and the lottery. In 2005, funds gener- ated through the lottery accounted for $116.7 million or 13 percent of the total state funding commitment for transit. The recently released Pennsylvania Transportation Funding and Reform Commission report finds that the Real Estate Transfer Tax is a reasonable surrogate for a transit user fee and has recommended that the tax be increased and dedicated to transit at the local level.24 23 Pennsylvania Transportation Funding and Reform Commission, Investing in Our Future, Addressing Pennsylvania’s Transportation Funding Crisis, August 2006. 24 Pennsylvania Transportation Funding and Reform Commission Report, November 2006.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 3-23 General Revenue Sources General Revenue – States and local governments also use general fund appropriations to support transportation needs. About 15 percent of state and local transit revenue and 22 percent of highway revenue in 2004 came from general fund allocations. Highway Statistics data shows that local governments particularly rely on general fund appropriations to support their highway expenditures. In 2004, about 46 percent of the revenues used for highway expenditures at the local level came from the general fund. At the state level, general fund appropriations were reported at only 7.7 percent of the total revenues for highways. Only Massachusetts and Alaska received more than one-third of their highway funding from general fund appropriations in fiscal years 2003 and 2004. For transit, 2004 NTD data shows that general fund allocations accounted for 34.3 percent and 26.2 percent of the local (excluding agency revenues) and state funding, respectively. „ 3.2 Conclusion The key conclusion of this section is that a wide menu of current and emerging funding options is available for Federal, state, and local governments to help close the funding gap. Case examples are provided for each of the revenue options reviewed.