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

Chapter: 5.0 Prospective New and Enhanced Funding Options

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Suggested Citation:"5.0 Prospective New and Enhanced Funding Options." National Academies of Sciences, Engineering, and Medicine. 2006. Future Financing Options to Meet Highway and Transit Needs. Washington, DC: The National Academies Press. doi: 10.17226/23200.
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Suggested Citation:"5.0 Prospective New and Enhanced Funding Options." National Academies of Sciences, Engineering, and Medicine. 2006. Future Financing Options to Meet Highway and Transit Needs. Washington, DC: The National Academies Press. doi: 10.17226/23200.
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Suggested Citation:"5.0 Prospective New and Enhanced Funding Options." National Academies of Sciences, Engineering, and Medicine. 2006. Future Financing Options to Meet Highway and Transit Needs. Washington, DC: The National Academies Press. doi: 10.17226/23200.
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Suggested Citation:"5.0 Prospective New and Enhanced Funding Options." National Academies of Sciences, Engineering, and Medicine. 2006. Future Financing Options to Meet Highway and Transit Needs. Washington, DC: The National Academies Press. doi: 10.17226/23200.
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Suggested Citation:"5.0 Prospective New and Enhanced Funding Options." National Academies of Sciences, Engineering, and Medicine. 2006. Future Financing Options to Meet Highway and Transit Needs. Washington, DC: The National Academies Press. doi: 10.17226/23200.
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Suggested Citation:"5.0 Prospective New and Enhanced Funding Options." National Academies of Sciences, Engineering, and Medicine. 2006. Future Financing Options to Meet Highway and Transit Needs. Washington, DC: The National Academies Press. doi: 10.17226/23200.
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Suggested Citation:"5.0 Prospective New and Enhanced Funding Options." National Academies of Sciences, Engineering, and Medicine. 2006. Future Financing Options to Meet Highway and Transit Needs. Washington, DC: The National Academies Press. doi: 10.17226/23200.
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Suggested Citation:"5.0 Prospective New and Enhanced Funding Options." National Academies of Sciences, Engineering, and Medicine. 2006. Future Financing Options to Meet Highway and Transit Needs. Washington, DC: The National Academies Press. doi: 10.17226/23200.
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Suggested Citation:"5.0 Prospective New and Enhanced Funding Options." National Academies of Sciences, Engineering, and Medicine. 2006. Future Financing Options to Meet Highway and Transit Needs. Washington, DC: The National Academies Press. doi: 10.17226/23200.
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Suggested Citation:"5.0 Prospective New and Enhanced Funding Options." National Academies of Sciences, Engineering, and Medicine. 2006. Future Financing Options to Meet Highway and Transit Needs. Washington, DC: The National Academies Press. doi: 10.17226/23200.
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Suggested Citation:"5.0 Prospective New and Enhanced Funding Options." National Academies of Sciences, Engineering, and Medicine. 2006. Future Financing Options to Meet Highway and Transit Needs. Washington, DC: The National Academies Press. doi: 10.17226/23200.
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Suggested Citation:"5.0 Prospective New and Enhanced Funding Options." National Academies of Sciences, Engineering, and Medicine. 2006. Future Financing Options to Meet Highway and Transit Needs. Washington, DC: The National Academies Press. doi: 10.17226/23200.
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Suggested Citation:"5.0 Prospective New and Enhanced Funding Options." National Academies of Sciences, Engineering, and Medicine. 2006. Future Financing Options to Meet Highway and Transit Needs. Washington, DC: The National Academies Press. doi: 10.17226/23200.
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Suggested Citation:"5.0 Prospective New and Enhanced Funding Options." National Academies of Sciences, Engineering, and Medicine. 2006. Future Financing Options to Meet Highway and Transit Needs. Washington, DC: The National Academies Press. doi: 10.17226/23200.
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Suggested Citation:"5.0 Prospective New and Enhanced Funding Options." National Academies of Sciences, Engineering, and Medicine. 2006. Future Financing Options to Meet Highway and Transit Needs. Washington, DC: The National Academies Press. doi: 10.17226/23200.
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Suggested Citation:"5.0 Prospective New and Enhanced Funding Options." National Academies of Sciences, Engineering, and Medicine. 2006. Future Financing Options to Meet Highway and Transit Needs. Washington, DC: The National Academies Press. doi: 10.17226/23200.
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Suggested Citation:"5.0 Prospective New and Enhanced Funding Options." National Academies of Sciences, Engineering, and Medicine. 2006. Future Financing Options to Meet Highway and Transit Needs. Washington, DC: The National Academies Press. doi: 10.17226/23200.
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Suggested Citation:"5.0 Prospective New and Enhanced Funding Options." National Academies of Sciences, Engineering, and Medicine. 2006. Future Financing Options to Meet Highway and Transit Needs. Washington, DC: The National Academies Press. doi: 10.17226/23200.
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NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 5-1 5.0 Prospective New and Enhanced Funding Options All of the most promising alternative revenue sources developed in the study have been evaluated in accord with a comprehensive set of criteria that are commonly applied to transportation revenue proposals. These criteria were identified in the scope of work for this study and are discussed in detail below. „ 5.1 Criteria for Evaluating Revenue Sources Alternative revenue sources to close the gaps between revenues and needs have been evaluated in the matrices that are included here using the following criteria: 1) revenue yield, adequacy, and stability; 2) cost-efficiency (includes administrative cost to agencies, compliance costs to taxpayers, and evasion levels); 3) equity with regard to burden across different income groups and equity of revenues and costs attributed to different vehicle classes; 4) economic efficiency, with particular emphasis on efficiency in pricing; 5) political acceptability; and 6) technical feasibility. Revenue Yield, Adequacy, and Stability The first criterion, revenue yield, provides the initial and perhaps most significant screen in the evaluation of any alternative proposal to current motor fuel taxes. For the purposes of this evaluation, revenue yield means that the source can provide such a level of reve- nues that it is very significant in supporting the overall transportation program. Small sources of revenues such as some types of license fees may be helpful, but they are not worthy of major consideration because of low potential yield. Negotiating special project finance packages, such as for a specific mega-project, also does not meet the yield crite- rion, despite being very helpful in a unique circumstance. Most innovative finance involves borrowing against a future revenue stream, and is further limited to specific important projects. Thus, innovative finance is not an alternative to an enhanced future revenue stream, but rather an element that could enable the revenue stream and the transportation program to be managed more effectively.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 5-2 . Adequacy involves the judgment that current motor fuel taxes and alternative sources should be evaluated with respect to present and future revenues in comparison to needs for current and projected expenditures. Such a comparison will determine the adequacy of each revenue source in meeting needs, and will differentiate superior sources from those that are merely average or even inferior. Alternative revenue sources should provide at least a comparable or, ideally, larger stream of revenues to states and the Federal govern- ment than furnished by the current motor fuel taxes and other current sources. Moreover, alternative sources should have similar or improved stability and predictability in revenue generation in comparison to current sources, such as motor fuel taxes. Stability refers to whether there are uncertain revenue fluctuations that can impact upon an agency’s ability to manage resources. Motor fuel taxes on a per gallon basis have been very stable, because travel by highway does not fluctuate by much from year to year. When the economy slows, consumers and businesses can slow spending on discretionary items or major purchases. Most personal and business travel is nondiscretionary and, in addition, the marginal cost of travel is small in comparison to the fixed costs. Thus, the normal reaction of consumers in a period of economic slowdown is to postpone major expenditures such as purchases of new vehicles, rather than to alter day-by-day trips. Cost-Efficiency, Including Administrative and Compliance Costs and Evasion Efficiency refers to the maximizing of benefits in relation to the use of resources (cost of collecting the tax, to both the taxpayers and the government). This implies that adminis- trative costs to agencies and compliance costs to taxpayers incurred by alternative revenue structures should be kept to a minimum. Administrative cost refers to the actual costs incurred by an agency collecting and processing revenue sources. In some cases, this is not the transportation agency itself, and therefore administrative cost is more than an internal management issue. Compliance cost refers to the cost actually incurred by the taxpayer that is additional to the actual payment made. In addition, incentives and opportunities for tax evasion should be minimized as much as possible. Minimizing eva- sion is important not only in order to protect revenue streams, but also to assure that those who would act illegally do not get a benefit. The society wants at least a level playing field, or a playing field that rewards those who take legitimate actions. Current motor fuel taxes now tend to do fairly well on these criteria because they are mostly collected at the highest level of the hierarchy of the motor fuels distribution chain: at the major supplier or wholesaler levels. Collecting motor fuel taxes from the largest suppliers (the major petroleum companies) minimizes taxpayer compliance costs because only a few entities file tax returns, and it minimizes administrative costs because collection agencies only need to monitor those few entities. For the ultimate consumer, there are virtually no compliance costs, because the taxes are simply rolled into the price paid at the pump. This also reduces the ability of individuals or businesses to evade the tax (because it already has been paid) and makes it relatively inexpensive to administer.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 5-3 Equity Equity is employed as a criterion to assess fairness of tax burden among different eco- nomic groups. Theoretically, a tax burden should be commensurate with one’s “ability to pay.” User taxes, such as ones used to fund transportation, are somewhat less likely to have issues of equity with regard to income level. Equity concerns about the fairness of relative user fee payments by various types of vehicles have been the major sources of debate and conflict in highway taxation. An entire highway industry-specific set of “highway cost allocation” procedures for attributing highway costs among vehicle types has grown up around highway user equity. The Federal government and some states have conducted periodic “highway cost allocation” studies to assess the equity among vehicle classes. Adjustments are then proposed to various user fees in order to achieve more equity. Equity concerns in terms of the general taxation issues within our society have usually revolved around the relative payments by those with different levels of income. Although motor fuel taxes are somewhat proportional to income, they track less well with regard to income than income taxes or other types of consumption taxes such as general sales taxes, or taxes on surrogate measures of wealth, such as property taxes. The lowest-income groups (at least, those who own vehicles) spend a higher percentage of their incomes on motor fuel taxes than other income groups. The highest-income groups spend a lower percentage than average on motor fuel taxes, because people do not travel more and more miles if their incomes are higher. Economic Efficiency This criterion refers to the analysis of marginal cost, or the cost to society of one additional trip made, and whether the price paid for that trip is commensurate with the cost to society. The concept is most familiar in the congestion-pricing context, now sometimes referred to as value pricing. The current motor fuel taxes are not designed to price highway usage in a manner that approximates economic efficiency. In contrast, the road system is an example of a classically defined theoretical “market failure.” Because the impacts of additional vehicles on congestion and on losses in travel time increase nonlinearly after some point, the aggregate costs to all other users are not equivalent to the costs of the latest user. Each additional user thus inflicts much higher costs in terms of time penalties on all other users than that user pays in time or operating costs, including fees. Economic efficiency criteria have not been applied in the real world of highway travel, primarily because traditional ways of pricing travel are very familiar and considered to be more fair than auctioning off scarce roadway space. In addition, up to the current time, the technologies for applying theoretically efficient pricing were not developed enough to allow for reasonable administrative and compliance costs.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 5-4 . Political Acceptability Political acceptability is in part a combination, or “roll-up,” criterion of all others and, on the other hand, a stand-alone threshold in the decision process to employ alternative revenue schemes. Principally, a revenue source is acceptable when it is politically palat- able on the key, or most salient, criteria. That implies that the revenue source is adequate, fair, simple, effective, efficient, and easy to administer. While meeting the most important criteria is a necessary component, it may not be sufficient to obtain political acceptability (i.e., garner sufficient popular or legislative support to be implemented). For instance, a straight percentage increase of the current motor fuel tax rates would increase revenue without corresponding losses in the other criteria. However, this would require an act of law and an expenditure of “political capital” that may not be simple to attain; hence, the solution may not be politically easy, although it may appear to be sound on all other criteria. Technical Feasibility Technical advancements, including geographic information systems (GIS), global posi- tioning systems (GPS), and electronic transfer mechanisms, have reduced the cost of administration and compliance in a wide breadth of areas, including the field of finance and taxation generally and transportation-related taxation specifically. For instance, there are now successful applications of electronic clearance and payments for trucks at weigh stations and many successes for automated toll collection and smart cards at toll facilities. These technologies improve on past applications on the above criteria of cost-efficiency and economic efficiency by enabling a more simple, straightforward, and accurate alloca- tion of costs, as well as ameliorating a part of the market failure that exists when marginal costs of travel could not be easily measured and distributed. Advances in technologies also can pose difficulties for the traditional method of funding highways by collecting taxes on motor fuels at a fueling station. Electricity and natural gas can be dispensed at people’s homes or places of work. „ 5.2 Evaluating Promising Sources Against Criteria All criteria were applied to all promising revenue sources in the summary matrices below (Tables 5.1 through 5.6). For the purposes of presentation, the criteria in the matrices below were combined as appropriate. A last column discusses the types of actions that have been or might be taken to overcome barriers to implementation.

Ta bl e 5. 1 Pr om is in g So ur ce s fo r F ed er al a nd S ta te H ig hw ay s an d Tr an si t M ot or F ue l T ax es So ur ce a nd H is to ry Yi el d, A de qu ac y, an d St ab ili ty C os t-E ff ic ie nc y, E co no m ic Ef fi ci en cy , a nd E qu ity Po te nt ia l A pp lic ab ili ty an d A cc ep ta bi lit y Im pl em en ta tio n Is su es an d Po te nt ia l S tr at eg ie s to O ve rc om e Ba rr ie rs M ot or F ue l T ax es – E xc is e Ta x (P er G al lo n) – M os t s ta te s ha ve a tr ad iti on al “ ce nt s pe r ga llo n” e xc is e ta xe s on th e hi gh w ay u se o f m ot or fu el . So m e al so h av e va ri ab le ra te s ba se d on a n in fla tio n ad ju st - m en t o r a fu el p ric e ad ju st m en t. M ot or fu el ta xe s ar e co ns tit u- tio na lly d ed ic at ed to h ig hw ay s in m os t s ta te s, a nd th er ef or e, ad ju st m en ts to th es e ta xe s re su lt in h ig he r y ie ld s fo r hi gh w ay in ve st m en t. M ot or fu el ta xe s ar e ve ry e as y to a dm in is te r a nd h av e lo w co st s o f c om pl ia nc e. E va si on ha s be en a m aj or is su e, b ut st at es a nd th e FH W A h av e cu rt ai le d ev as io n. Th e m ot or fu el ta x co ul d ad d ce nt s pe r g al lo n or c ou ld b e in de xe d to in fla tio n or to fu el pr ic es a s i n so m e st at es . Ba se d on h is to ry , a dj us tm en ts th ro ug h le gi sl at io n to th e m ot or fu el e xc is e ta x ha ve b ee n th e m et ho d of c ho ic e in m os t st at es fo r m aj or n ew fu nd in g re so ur ce s to fi ll fu nd in g ga ps fo r s ta te h ig hw ay s. M ot or fu el ta xe s ha ve b ee n th e m os t i m po rt an t r ev en ue m ec h- an is m fo r h ig hw ay p ro gr am s at th e Fe de ra l a nd s ta te le ve ls . Th ey a ls o su pp or t t ra ns it pr o- gr am s at th e Fe de ra l l ev el a nd in s om e st at es . M ot or fu el ta xe s at ra te s s uf fi- ci en t t o fu nd a ll ne ed s w ill n ot ad d en ou gh to fu el p ri ce s to im pa ct tr av el v ol um es . M ot or fu el p ri ce s ha ve re ce nt ly in cr ea se d by a m ou nt s si gn ifi - ca nt ly h ig he r t ha n ta x ra te in cr ea se s t ha t c ou ld fu nd a ll ne ed s, w ith v er y m in im al im pa ct s on tr av el b eh av io r. Fl at ra te fe es p er g al lo n ha ve no t b ee n ad ju st ed fa st e no ug h to k ee p pa ce w ith n ee ds . M ot or fu el ta xe s m ay b e hi gh er pe r g al lo n th an in so m e ne ig hb or in g st at es . O pp on en ts of fu el ta xe s ge ne ra lly ra is e th e is su e of d iv er si on o f p ur ch as es to n ei gh bo ri ng s ta te s. M ot or F ue l T ax es – In de xi ng o f F ue l T ax es Th e yi el d of m ot or fu el ta xe s co ul d be e nh an ce d by in de xi ng to in fla tio n or , i n so m e ca se s to fu el p ri ce s. A c ei lin g an d a flo or o n th e ch an ge in th e in de xe d ra te is li ke ly . M ot or fu el ta xe s by th em se lv es ar e no t e qu ita bl e am on g ve hi - cl e cl as se s, si nc e th e la rg es t ve hi cl es m ay p ay le ss in fu el ta xe s re la tiv e to th e co st s im po se d on h ig hw ay s. In de xi ng th e ra te to in fla tio n is a ve ry p ro m is in g ad ju st m en t si nc e th e in de x to in fla tio n m ak es p ar tia l c or re ct io ns fo r ec on om ic c ha ng es . It co ul d al so b e in de xe d to n ee ds e st i- m at es o r t o co ns tr uc tio n pr ic es , m ak in g it re sp on si ve to a nt ic i- pa te d pr og ra m c os ts . NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 5-5

Ta bl e 5. 1 Pr om is in g So ur ce fo r F ed er al a nd S ta te H ig hw ay s an d Tr an si t ( co nt in ue d) M ot or F ue l T ax es So ur ce a nd H is to ry Yi el d, A de qu ac y, an d St ab ili ty C os t-E ff ic ie nc y, E co no m ic Ef fi ci en cy , a nd E qu ity Po te nt ia l A pp lic ab ili ty an d A cc ep ta bi lit y Im pl em en ta tio n Is su es an d Po te nt ia l S tr at eg ie s to O ve rc om e Ba rr ie rs M ot or F ue l T ax es – Sa le s Ta x on F ue l A s al es ta x on fu el is li ke ly to be m or e vo la til e, b ut c ou ld b e su bj ec t t o lim its in te rm s of th e m ax im um o r m in im um o r t he ra te o f c ha ng e ea ch y ea r. M ot or fu el ta xe s ar e m ild ly re gr es si ve a m on g in co m e gr ou ps . A s al es ta x on fu el a ls o is pr om is in g; s om e st at es h av e a po rt io n of th e to ta l t ax b as ed on s al es p ri ce s. Sa le s t ax es o n fu el h av e re ce nt ly b ee n of g re at er in te r- es t d ue to th e in cr ea se in fu el pr ic es . O th er T yp es o f P et ro le um Ta xe s O th er ty pe s of m ot or fu el ta xe s co ul d be u til iz ed . Pe nn sy lv an ia h as a n oi l c om - pa ny fr an ch is e ta x to c ol le ct fe es o n pe tr ol eu m fu el s. T hi s is c ur re nt ly c ap pe d at it s m ax im um a llo w ed ra te . So m e be lie ve th at p et ro le um ta xe s ha ve m or e vo te r a pp ea l be ca us e of a p er ce pt io n th at th ey a re im po se d on p et ro le um co m pa ni es ra th er th an o n in di vi du al d ri ve rs ; h ow ev er , su ch ta xe s ar e no rm al ly p as se d th ro ug h to d ri ve rs th e sa m e as ot he r t yp es o f m ot or fu el ta xe s. NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 5-6

Ta bl e 5. 2 Pr om is in g So ur ce fo r S ta te H ig hw ay s V eh ic le Re gi st ra tio n an d Sa les F ee s So ur ce a nd H is to ry Yi el d, A de qu ac y, an d St ab ili ty C os t-E ff ic ie nc y, E co no m ic Ef fi ci en cy , a nd E qu ity Po te nt ia l A pp lic ab ili ty an d A cc ep ta bi lit y Im pl em en ta tio n Is su es an d Po te nt ia l S tr at eg ie s to O ve rc om e Ba rr ie rs R eg is tr at io n an d O th er V eh ic le F ee s – A ll st at es h av e tr ad iti on al ty pe s of re gi st ra tio n fe es fo r l ig ht v eh ic le s an d so m ew ha t h ig he r a nd g ra du - at ed fe es fo r h ea vy v eh ic le s. Re gi st ra tio n fe es p ro vi de m aj or re ve nu e so ur ce s fo r s ta te s an d lo ca l g ov er nm en ts (t hr ou gh st at e al lo ca tio ns ) a nd m us t b e ad ju st ed th ro ug h le gi sl at io n. In a dd iti on to a dj us tin g ra te s, ot he r o pt io ns in cl ud e re vi si ng th e ty pe o f r eg is tr at io n fe e. Re gi st ra tio n fe es a re re la tiv el y in ex pe ns iv e to a dm in is te r i n re la tio n to p ot en tia l y ie ld , b ut no t a s i ne xp en si ve a s fu el ta xe s. R eg is tr at io n fe es c an b e va ri ed b y ve hi cl e si ze a nd c an be s et in ro ug h re la tio n to hi gh w ay c os t r es po ns ib ili ty , ex ce pt fo r t he im pa ct s of d if- fe re nt m ile ag e by s im ila r s iz ed ve hi cl es . Re gi st ra tio n fe e ad ju st m en ts ar e ve ry p ro m is in g as b ot h a sh or t- an d lo ng -te rm o pt io n fo r fu nd in g hi gh w ay s. Re gi st ra tio n fe es a llo w fo r c ol - le ct io ns fr om v eh ic le s us in g al te rn at iv e fu el s w ith ou t es ta bl is hi ng n ew m ec ha ni sm s fo r c ol le ct io n. Eq ui ty a m on g ve hi cl e cl as se s w ou ld in di ca te th at p ar al le l ad ju st m en ts in re gi st ra tio n fe es sh ou ld b e m ad e ap pl ic ab le to al l v eh ic le s. R eg is tr at io n Fe es B as ed o n V al ue – P er so na l P ro pe rt y Ta xe s – A re gi st ra tio n fe e ba se d on v al ue c an b e st ru c- tu re d as a p er so na l p ro pe rt y ta x an d be d ed uc tib le fr om Fe de ra l i nc om e. A fe e on th e va lu e of a v eh ic le co ul d ra is e su bs ta nt ia l r ev e- nu e, a nd c ou ld b e st ru ct ur ed to be d ed uc tib le fo r F ed er al in co m e ta x pu rp os es , t hu s in cr ea si ng th e st at e’ s re ve nu e yi el d w ith ou t a n eq ua l i nc re as e in n et to ta l t ax p ay m en ts . Re gi st ra tio n fe es fo r l ig ht v eh i- cl es , i f c ol le ct ed o n a fla t b as is , ar e so m ew ha t r eg re ss iv e by in co m e cl as s. R eg is tr at io n fe es fo r l ig ht v eh ic le s on th e ba si s of v al ue a re p ro gr es si ve . Re gi st ra tio n fe es (i n ac tu al ity , pe rs on al p ro pe rt y ta xe s on ve hi cl es ) b as ed o n va lu e ha ve th e be st re ve nu e ge ne ra tin g po te nt ia l a nd a re le ss c os tly to ta xp ay er s in th e st at e. So m e st at es h av e re ce nt ly el im in at ed o r r ed uc ed s uc h fe es d es pi te th ei r a dv an ta ge s in co m pa ri so n to c ol le ct in g ot he r st at e ta xe s th at a re n ot de du ct ib le fo r f ed er al in co m e ta x pu rp os es . Sa le s Ta xe s on V eh ic le s Sa le s t ax es o n ve hi cl es c an b e us ef ul re ve nu e so ur ce s. Sa le s ta xe s o n ve hi cl es w ill b e fa ir ly p ro gr es si ve . Sa le s ta xe s o n ve hi cl es h av e su bs ta nt ia l r ev en ue ra is in g po te nt ia l. A ll sa le s ta xe s a lr ea dy m ay b e de po si te d in to g en er al re ve nu e ac co un ts . NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 5-7

Ta bl e 5. 3 Pr om is in g So ur ce fo r S ta te o r L oc al H ig hw ay s To lls So ur ce a nd H is to ry Yi el d, A de qu ac y, an d St ab ili ty C os t-E ff ic ie nc y, E co no m ic Ef fi ci en cy , a nd E qu ity Po te nt ia l A pp lic ab ili ty an d A cc ep ta bi lit y Im pl em en ta tio n Is su es Po te nt ia l S tr at eg ie s to O ve rc am e Ba rr ie rs Tr ad iti on al T ol ls Se le ct ed h ig hw ay s an d se le ct ed b ri dg es h av e hi st or ic al ly b ee n to ll fa ci lit ie s. Ex is tin g to ll fa ci lit ie s ha ve b ee n pr ov en to b e re lia bl e an d st ab le ge ne ra to rs o f r ev en ue . Th e bo nd s of to ll ag en ci es a re hi gh ly m ar ke ta bl e. To lli ng c os ts m or e to a dm in is - te r a nd fo r c om pl ia nc e th an m ot or fu el ta xe s, a lth ou gh th es e co st s a re re du ce d gr ea tly th ro ug h el ec tr on ic to ll co lle ct io n. To lls a nd p ri ci ng m ay b e co ns id er ed to be h ig hl y pr om is in g op tio ns fo r a pp li- ca tio n to n ew h ig hw ay c ap ac ity in th e lo ng er te rm , w ith p er ha ps s om e lim - ite d sh or t-t er m o pp or tu ni tie s. A fe w e xi st in g to ll fa ci lit ie s ha ve b ee n le as ed to in te rn a- tio na l c om pa ni es , s ub st i- tu tin g sh or t-t er m re ve nu e ga in s by p ub lic a ge nc ie s f or le ss er lo ng er -te rm re ve nu es . To lli ng N ew L an es Le gi sl at io n m ay b e ne ce ss ar y to en ab le n ew ty pe s of to lls o r pr ic in g in iti at iv es . El ec tr on ic pr ic in g co ul d si gn ifi ca nt ly ex pa nd fu tu re o pp or tu ni tie s. To lls c an b e se t t o ac hi ev e eq ui ty a m on g ve hi cl e cl as se s. C on ce rn s ab ou t t he im pa ct s of to lli ng o n eq ui ty a m on g in co m e gr ou ps h av e be en a dd re ss ed in se ve ra l a na ly se s. M aj or p os iti ve o pp or tu ni tie s ex is t t o to ll ne w fu tu re c ap ac ity . So m et im es th is c ou ld b e ac co m pl is he d w ith to lls co ve ri ng o nl y a po rt io n of n ee de d re ve nu es , w hi ch p ro vi de s m or e to ta l re ve nu e an d ca pa ci ty th an n o to lli ng o f ne w fa ci lit ie s. S pe ci al ty pe s o f t ol l fa ci lit ie s su ch a s fo r t ru ck la ne s or H O T la ne s co ul d be p ro m is in g. A ct s al lo w in g Re gi on al M ob ili ty A ut ho ri tie s (R M A ) an d a PP P ac t c ou ld e xp an d fu tu re p os si bi lit ie s fo r to lli ng . So m e st at es d o no t ye t h av e a PP P ac t p ar al le l to th at o f o th er st at es , w hi ch w ou ld e na bl e pr iv at e pa rt ie s to in iti at e pr op os al s t o de ve lo p ne w fa ci lit ie s or to ad d to ll la ne s to e xi st in g fa ci lit ie s. To lli ng E xi st in g La ne s To lli ng e xi st in g la ne s c ou ld pr ov id e ve ry su bs ta nt ia l a dd i- tio na l r ev en ue s. To lli ng e xi st in g la ne s c ou ld pr ov id e fo r g re at er e qu ity th an ot he r s ou rc es o f n ew re ve nu es , bu t i s w id el y pe rc ei ve d as in eq ui ta bl e (“ pa yi ng tw ic e” ). Li ttl e sh or t-t er m o pp or tu ni ty is th ou gh t t o ex is t t o to ll ex is tin g fr ee la ne s. T hi s d oe s no t m ea n th at s uc h op po rt un iti es m ig ht n ot e xi st in th e fu tu re , p ar tic ul ar ly w ith n ew ty pe s of ap pr oa ch es to to ll co lle ct io n an d pr ic in g, in cl ud in g el ec tr on ic s a nd PP Ps . Se nt im en t i s a ga in st to lli ng an y cu rr en tly fr ee h ig hw ay la ne s. L ik ew is e, li ttl e op po rt un ity e xi st s f or to lli ng ex is tin g fr ee b ri dg es . NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 5-8

Ta bl e 5. 4 Pr om is in g So ur ce fo r S ta te a nd L oc al H ig hw ay s an d Tr an si t V M T Fe es So ur ce a nd H is to ry Yi el d, A de qu ac y, an d St ab ili ty C os t-E ff ic ie nc y, E co no m ic Ef fi ci en cy , a nd E qu ity Po te nt ia l A pp lic ab ili ty an d A cc ep ta bi lit y Im pl em en ta tio n Is su es an d Po te nt ia l S tr at eg ie s to O ve rc om e Ba rr ie rs V M T Fe es – F ee s on V M T co ul d be lo ng er -te rm o pt io ns th at c ou ld s up pl y re ve nu es w ith ou t b ei ng d ir ec tly ti ed to fu el c on su m pt io n. V M T fe es c ou ld b e se t t o yi el d an y le ve l o f d es ir ed re ve nu es . V M T fe es d o no t c on fli ct w ith th e ne ed to re du ce e ne rg y co st s, re du ce th e ba la nc e of pa ym en ts , o r r ed uc e fo ss il fu el co ns um pt io n. V M T fe es c ou ld b e in de xe d to ca rb on o ut pu t i f a ju ri sd ic tio n ch oo se s. V M T fe es a re sl ig ht ly m or e re la te d to v eh ic le u se e qu ity th an fu el ta xe s o r r eg is tr at io n fe es . V M T fe es , e sp ec ia lly if a pp lie d as c on ge st io n pr ic in g fe es , s en d st ro ng er p ri ci ng s ig na ls to tr av el er s. In th e lo ng ru n, V M T fe es a nd co ng es tio n pr ic in g co ul d re pl ac e al l o r a p or tio n of c ur - re nt u se r f ee s. O re go n is d em on st ra tin g th e te ch no lo gi es fo r c ol le ct in g V M T fe es a t t he fu el p um p. V M T fe es o r c on ge st io n pr ic in g fe es re qu ir e th e te ch no lo gy to co lle ct th os e fe es re lia bl y an d al so th e po lit ic al w ill to im pl em en t a n ew a pp ro ac h. C on ge st io n Pr ic in g – C ou ld be a pp lie d as a s pe ci al k in d of V M T fe e, w ith fe es v ar yi ng ba se d on th e le ve l o f c on ge s- tio n on th e ro ad . V M T fe es o r c on ge st io n- re la te d fe es th em se lv es w ou ld h av e to be in de xe d to re sp on d to in fla tio n. C on ge st io n fe es c ou ld b e in de xe d to c ar bo n ou tp ut if a ju ri sd ic tio n ch oo se s. V M T fe es w ill re qu ir e m uc h m or e ad m in is tr at iv e an d co m - pl ia nc e ef fo rt s t ha n m ot or fu el ta xe s. V M T fe es w ill b e ab ou t a s re gr es si ve a m on g in co m e gr ou ps a s m ot or fu el ta xe s, si nc e D O E da ta s ho w sm al l di ffe re nc es in fu el e ffi ci en cy b y ve hi cl es o w ne d by d iff er en t in co m e gr ou ps . V M T fe es m us t b e gr ad ua te d by v eh ic le w ei gh t a nd c ha ra c- te ri st ic s to ra is e fe es e qu ita bl y am on g th e va ri ou s ve hi cl e cl as se s A 2 00 5 st ud y of h ig hw ay a nd tr an si t r ev en ue o pt io ns fo r t he U .S . C ha m be r o f C om m er ce ’s N at io na l C ha m be r F ou nd at io n id en tif ie d V M T fe es a nd co ng es tio n pr ic in g fe es a s a pr om is in g op tio n in th e lo ng te rm (1 5 or m or e ye ar s) . Th er e ar e no t y et a ny V M T fe es or c on ge st io n pr ic in g fe es in th e U ni te d St at es th at a re n ot as so ci at ed w ith to ll fa ci lit ie s. NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 5-9

Ta bl e 5. 5 Pr om is in g So ur ce fo r S ta te a nd L oc al H ig hw ay s an d Tr an si t Lo ca l O pt io n Ta xe s a nd B en efi ci ar y Ch ar ge s So ur ce a nd H is to ry Yi el d, A de qu ac y, an d St ab ili ty C os t-E ff ic ie nc y, E co no m ic Ef fi ci en cy , a nd E qu ity Po te nt ia l A pp lic ab ili ty an d A cc ep ta bi lit y Im pl em en ta tio n Is su es an d Po te nt ia l S tr at eg ie s to O ve rc om e Ba rr ie rs Lo ca l O pt io n Ta xe s – H av e be en w id el y us ed in m an y st at es to su pp or t h ig hw ay an d tr an si t i nv es tm en ts . Lo ca l g ov er nm en ts in m os t st at es h av e im pl em en te d so m e ty pe o f l oc al o pt io n ta x, w hi ch m us t b e sp ec ifi ca lly al lo w ed b y st at e en ab lin g le gi sl at io n. Lo ca l o pt io n ta xe s fo r t ra ns - po rt at io n in ve st m en ts in cl ud e m ot or fu el , v eh ic le , p ro pe rt y, sa le s, a nd in co m e ta xe s. Sa le s ta xe s t en d to h av e th e hi gh es t y ie ld c om pa re d to ot he r l oc al o pt io n ta xe s. M ot or fu el a nd v eh ic le ta xe s te nd to g en er at e le ss re ve nu e co m pa re d to o th er lo ca l op tio n ta xe s. Ex ce pt fo r m ot or fu el a nd ve hi cl e ta xe s, o th er lo ca l op tio n ta xe s t en d to b e in de xe d w ith in fla tio n. S al es ta xe s re sp on d to e co no m ic gr ow th . Fl uc tu at io ns in e co no m ic co nd iti on s te nd to a ffe ct s al es ta x yi el d. G as ol in e ta xe s an d in co m e ta xe s al so c ou ld b e im pa ct ed to so m e le ve l b y flu ct ua tio ns in th e ec on om y. C ol le ct io n m ec ha ni sm s al re ad y ar e in p la ce to le vy th es e ta xe s at th e st at e or lo ca l le ve l. M os t l oc al o pt io n ta xe s do n ot se nd p ri ci ng s ig na ls to dr iv er s. M os t l oc al o pt io n ta xe s ar e re gr es si ve (e xc ep t f or in co m e ta xe s) . H ow ev er , s al es ta xe s te nd to re ce iv e st ro ng er s up - po rt th an o th er lo ca l o pt io n ta xe s. P eo pl e co ns id er th at sa le s ta xe s ar e m or e “f ai r,” si nc e ev er yo ne p ay s, w he th er th ey a re v eh ic le o r t ra ns it us er s. St at e le gi sl at io n m us t b e in pl ac e th at a llo w s lo ca l g ov - er nm en ts to im pl em en t l oc al op tio n ta xe s. Sa le s t ax es h av e be en w id el y us ed b y tr an si t a ge nc ie s to su pp or t o pe ra tio ns a nd c ap i- ta l i nv es tm en ts . Ra te s of s uc ce ss w ith b al lo t m ea su re s to fu nd tr an sp or ta - tio n ha ve b ee n in cr ea si ng , a s do cu m en te d by th e C en te r f or Tr an sp or ta tio n Ex ce lle nc e. C om m on ly , l oc al o pt io n ta xe s re qu ir e vo te rs ’ a pp ro va l. W hi le a n ex pe nd itu re p la n th at s pe ci fie s pr oj ec ts a nd /o r pr og ra m s to b e fu nd ed w ith th e ne w lo ca l o pt io n ta x le vi es is n ot a lw ay s re qu ir ed , l oc al op tio n ta xe s ha ve b et te r ch an ce s of s uc ce ss fo r i m pl e- m en ta tio n w he re e xp en di - tu re s an d us es a re c le ar ly de fin ed . Im pl em en ta tio n pl an s th at a re w el l d es ig ne d ha ve re su lte d in v er y hi gh s uc ce ss ra te s fo r ba llo t m ea su re s to e nh an ce tr an sp or ta tio n re ve nu es . NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 5-10

Ta bl e 5. 5 Pr om is in g So ur ce fo r S ta te a nd L oc al H ig hw ay s an d Tr an si t ( co nt in ue d) Lo ca l O pt io n Ta xe s a nd B en efi ci ar y Ch ar ge s So ur ce a nd H is to ry Yi el d, A de qu ac y, an d St ab ili ty C os t-E ff ic ie nc y, E co no m ic Ef fi ci en cy , a nd E qu ity Po te nt ia l A pp lic ab ili ty an d A cc ep ta bi lit y Im pl em en ta tio n Is su es an d Po te nt ia l S tr at eg ie s to O ve rc om e Ba rr ie rs Be ne fi ci ar y C ha rg es Im pa ct F ee s – Im pa ct fe e le g- is la tio n ex is ts in 2 6 st at es (e xc lu di ng F lo ri da ). Im pa ct fe es fo r t ra ns po rt at io n im pr ov em en ts a re w id el y us ed in C al ifo rn ia a nd F lo ri da . V al ue C ap tu re – T he se te ch - ni qu es h av e be en in p la ce si nc e th e 50 s, s ta rt in g in C al ifo rn ia . O nl y A ri zo na d oe s n ot h av e en ab lin g le gi sl at io n to a llo w Ta x In cr em en t F in an ci ng (T IF ) to fi na nc e in fr as tr uc tu re n ee ds . Re ve nu es fr om im pa ct fe es a re ty pi ca lly d ed ic at ed fo r c er ta in ro ad a nd tr an si t i m pr ov em en ts th at w ou ld se rv e th e ne w de ve lo pm en t. In a dd iti on , re ve nu es fr om im pa ct fe es w ill be h ig hl y de pe nd en t o n de ve l- op m en t o pp or tu ni tie s in th e ar ea w he re im pl em en te d. V al ue c ap tu re to ol s ar e su bj ec t to in cr ea se s i n pr op er ty v al ue re al iz ed b y in fr as tr uc tu re im pr ov em en ts . Be ne fic ia ry c ha rg es s en d m od es t p ri ci ng s ig na ls to en co ur ag e ef fic ie nt tr an sp or ta - tio n an d la nd u se d ec is io ns . Th es e ch ar ge s c an b e re la tiv el y ef fic ie nt a nd e qu ita bl e if pr op - er ly s tr uc tu re d. B en ef it di s- tr ic ts c an ta rg et th e sp ec ifi c be ne fic ia ri es . W hi le im pa ct fe es a re d ir ec tly ch ar ge d to d ev el op er s, th ey pa ss th os e ch ar ge s to b uy er s, in cr ea si ng th e co st o f r ea l es ta te . TI F al lo ca te s a po rt io n of th e ad di tio na l p ro pe rt y ta xe s re su lti ng fr om th e in cr ea se in pr op er ty v al ue s. C om m un iti es a nd lo ca l a ge n- ci es c ou ld a rg ue th at im pl e- m en ta tio n of T IF w ou ld ta ke aw ay re ve nu es th at o th er w is e w ou ld b e us ed to m ee t o th er pu bl ic n ee ds . Im pl em en ta tio n is su bj ec t t o en ab lin g le gi sl at io n th at a llo w s th e co lle ct io n of im pa ct fe es an d th e fo rm at io n of a ss es s- m en t d is tr ic ts . Th es e to ol s te nd to b e m os t ap pl ic ab le in h ig he r g ro w th st at e or lo ca lit ie s. Im pa ct fe es a re o nl y ap pl ic ab le to n ew d ev el op m en t. T IF a nd ot he r p ro pe rt y as se ss m en ts m ay re qu ir e th e fo rm at io n of di st ri ct s, w he re p ro pe rt y ta x le vi es a re d ed ic at ed fo r t ra ns - po rt at io n im pr ov em en t. T hi s m ay re qu ir e vo te rs ’ a pp ro va l fr om d is tr ic t r es id en ts a nd bu si ne ss o w ne rs . Be ne fic ia ry c ha rg es h av e be en th e su bj ec t o f n um er ou s la w - su its in m an y ar ea s. NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 5-11

Ta bl e 5. 6 Su m m ar y of P ro m is in g Pr oj ec t D el iv er y To ol s fo r H ig hw ay s an d Tr an si t a t St at e an d Lo ca l L ev el s In no va tiv e F in an ce a nd P ub lic -P riv at e P ar tn er sh ip s So ur ce a nd H is to ry Yi el d, A de qu ac y, an d St ab ili ty C os t-E ff ic ie nc y, E co no m ic Ef fi ci en cy , a nd E qu ity Po te nt ia l A pp lic ab ili ty Im pl em en ta tio n Is su es , P ot en tia l St ra te gi es , an d Ex am pl es In no va tiv e Fi na nc e M os t s ta te s ha ve u se d on e or m or e fo rm s of th e IF fi na nc in g to ol s. IF fi na nc in g to ol s ar e us ed to le ve ra ge c ap ita l i n th e fo rm of d eb t o r e qu ity . Th ey re ly on e xi st in g or n ew re ve nu e so ur ce s to p ay th e in de bt ed ne ss . In cu rr in g lo ng er -te rm d eb t he lp s ad va nc e pr og ra m s an d pr oj ec ts th at w ou ld o th er - w is e ta ke y ea rs to d ev el op if at a ll. Th ey a re w id el y ap pl ic ab le an d ca n be u se d fo r p ro gr am an d in di vi du al p ro je ct de liv er y. Th e ap pl ic ab ili ty o f f in an ce to ol s i s m ar ke t d ri ve n, w ith th e fin an ci al c om m un ity ra tin g ea ch p ro je ct o r d ea l. St at es m ay re qu ir e en ab lin g le gi sl a- tio n to is su e G A RV EE b on ds . M os t in no va tiv e fin an ce g ra nt m an ag em en t to ol s ar e co di fie d un de r T itl e 23 U .S .C . an d re qu ir e no sp ec ia l a ct io n fr om st at es to b e us ed . To te st n ew g ra nt m an ag em en t t oo ls , s ta te s m ay a pp ly to U .S . D O T un de r t he S EP -1 5 or TE -0 45 p ro gr am s. D eb t m ec ha ni sm s m us t b e ba la nc ed ag ai ns t l on g- te rm re ve nu e so ur ce s. M an y st at es c ap th e am ou nt o f d eb t th at c an b e is su ed . Pu bl ic -P riv at e P ar tn er sh ip s ( PP P) PP Ps a re a lo ng -te rm o pp or tu - ni ty to im pa ct o n pr oj ec t a nd pr og ra m d el iv er y. P PP s ar e co m m on ly u se d in E ur op e to re du ce p ub lic -s ec to r c os ts to co ns tr uc t, op er at e, a nd m ai n- ta in h ig hw ay fa ci lit ie s bu t a re no t y et w id el y us ed to s up po rt si m ila r p ro je ct s in th e U ni te d St at es . St at es a nd o th er p ub lic sp on so rs in cr ea si ng ly c on - si de r p ri va te -s ec to r in vo lv em en t a s a w ay to sp ur im pl em en ta tio n of la rg e pr oj ec ts . PP Ps c an fa ci lit at e ac ce ss to pr iv at e ca pi ta l a nd b ri ng in no va tiv e co st -s av in g pr oj - ec t d el iv er y m et ho ds . Se ve ra l s ta te s ar e us in g PP Ps to o pe ra te a nd m ai nt ai n po rt io ns o f t he ir h ig hw ay sy st em s. T he re is p ot en tia l fo r l ar ge -s ca le P PP s. T he U .S . D O T ha s p re lim in ar y ev al ua tio ns w hi ch in di ca te th e po te nt ia l f or s ig ni fic an t co st s av in gs a nd im pr ov e- m en ts in th e qu al ity o f hi gh w ay s er vi ce s pr ov id ed to th e pu bl ic . Sp ec ifi c pr oj ec t p ro po sa ls n ee d to b e ev al ua te d to d et er m in e if it w ill b e co st -e ffe ct iv e. M ay re qu ir e en ab lin g le gi sl at io n. M or e th an 2 0 st at es h av e ex pl ic it PP P ac ts th at p ro vi de m ea ns to b ri ng th e pr iv at e se ct or in to fu nd in g an d m an - ag em en t o f h ig hw ay s. V ir gi ni a’ s ac t ha s fo st er ed a w id e ra ng e of pr op os al s. NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 5-12

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 5-13 „ 5.3 Summary Review of the Promising Revenue and Financing Options Revenue Options Fuel Taxes As with Federal revenues, the single most effective revenue mechanism for states in the short term is to adjust motor fuel taxes or to innovate with motor fuel taxes, including indexing state motor fuel taxes for inflation, collecting a sales tax on motor fuel, and pur- suing other petroleum taxes, such as in Pennsylvania and New York. Dual fees on fuel and/or petroleum products seem to be an effective strategy in a number of states. Collecting sales taxes on motor fuel, in addition to gallonage taxes appears to be a particularly promising strategy that a number of states and localities have adopted. Taxes on motor fuel sales are particularly attractive today because the price of gasoline is rising, and many observers are willing to bet that the price of gasoline will rise over the next decades. However, there is no guarantee that prices will rise or be stable from year to year. This means that yields from motor fuel sales taxes could fluctuate greatly as prices fluctuate at the pump. If a state were heavily dependent on motor fuel sales tax revenues, it could be difficult to reliably forecast revenues and plan longer-term programs. Several states have implemented upside and downside limits on motor fuel sales tax revenues to protect against boom-and-bust cycles as well as the political fallout from windfall gas tax revenues. The current high fuel price environment calls for innovation. Roll back of traditional fuel taxes are being touted by politicians. Even indexing has had a recent setback in Wisconsin with repeal of their fuel indexing to inflation which has been in place for a couple decades. Pennsylvania’s dual system of fuel taxes and oil franchise taxes seems to be working well, although the adjustable oil company franchise tax is at its statutory maximum level ($1.25 per gallon) and additional revenues are needed. Vehicle Taxes States continue to rely significantly on vehicle registration and related licensing fees as an important source of highway revenues, and states periodically increase registration fees, attempting to keep up with inflation and needs. Annual registration fees based on value (or personal property taxes) have been tried in several jurisdictions but have not been particularly successful. Virginia’s personal property tax on vehicles became a campaign issue in the governor’s race and was subsequently reduced over a period of time. A more promising second tier vehicle-related tax may be use of sales tax on new and used vehicle purchases. Where dedicated to transportation, this tax has shown significant yield poten- tial in several states.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 5-14 . Increased Use of Tolling SAFETEA-LU significantly expanded the authority for states to advance toll and value pricing projects and many more states and local authorities are considering tolling options, particularly for new capacity. Toll revenues collected by state, local, and certain private operators represent an important, although still small, portion of the overall reve- nues available to fund highway investments. Despite the more than 50 percent increase in total (nominal) annual toll revenues since liberalization of toll options in ISTEA and sub- sequent authorizations, the proportion of the total transportation funding represented by tolling has remained about constant, at near 5.0 percent. The dollar contribution at all lev- els of government has grown from $3.0 billion in 1993 to $6.7 billion in 2004. From 1994 through 2004, toll revenue collections nationally have grown steadily at an average annual rate of 5.0 percent, a rate higher than inflation. This growth reflects toll increases (which tend to lag inflation), increasing traffic on existing toll roads, and new toll projects coming on-line (as well as those from which tolling was removed). Toll reve- nues are used for capital investment in the toll highways, as well as operating and main- tenance expenses of those highways. In some places, it also is used for other purposes, such as supporting a larger roadway system or subsidizing transit services. Of the toll revenues collected nationwide each year, about two-thirds is used to fund capital outlays, and of that, about one-fourth represents user-backed capital investment in new stand-alone projects. The rest is for capital reinvestment on existing highways, some of which includes new capacity. There also are a few projects where tolls were put on previously toll-free HOV lanes to increase the utilization of these lanes. These facilities are called high-occupancy toll (HOT) lanes. Although tolling only represents about 5 percent of all national highway revenues, toll roads have represented 10 percent of new limited access highway miles (lane-miles) in the United States over the last 10 years.1 While toll revenues are still a relatively small part of the United States highway program, tolls already are an important source of income for some state DOTs. Bellwether projects in several growing states have shown that tolls can play a significant role in state and local road development. Regarding revenues from state and local toll roads (not including bridges), five states have over $400 million in toll road receipts – Florida and New Jersey with between $800 and $900 million, and Texas, Pennsylvania, New York, Illinois each with around $400 to $500 million. These receipts are often used as the basis of bond issues which can provide an infusion of capital in the short term.2 1 FHWA Future Directions of Innovative Finance; Cambridge Systematics for FHWA, 2004. 2 Current Toll Road Activity in the U.S.A. Survey and Analysis; Perez and Lockwood for FHWA, August 2006.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 5-15 Constrained revenue streams at all levels of government, together with the opportunity to build and operate toll roads or special toll lanes without toll collection plazas, has led to a resurgent interest in tolling to fund new highway capacity. State DOTs and transit authorities can facilitate the creation of revenue-generating assets by assuming responsi- bility for a portion of the capital costs or operating expenses that cannot be supported by projected revenues. Based on experience to date, few start-up highway projects are likely to be completely self- supporting. In a recent GAO survey of state transportation officials, for example, the most frequently cited reason for not pursuing tolling was insufficient revenue.3 Many of the respondents were unwilling (or perhaps legally unable) to consider tolling unless the projected toll revenue was sufficient to cover the capital costs and the anticipated operating and maintenance expenses. Tolling and related user fees, however, can be bene- ficial from both a financial and operational perspective even in situations where public investment or subsidy is required. Tolling can be used in combination with Federal or state financing tools such as loan guarantees, bonding, and tax credits to advance such projects. In addition, tolling allows highway operators to use variable pricing techniques to help manage congestion. Progress on tolling will depend on individual decisions of states, regions, and special purpose authorities to move such projects ahead in coming years. Local Option Taxes and Beneficiary Charges Local option and beneficiary charges have proven effective primarily for local government use for both highway and transit programs and should be considered more widely. They have been aggressively pursued over the last 10 years and offer significant opportunity in the next 10 years as well although the recent growth rate of these specialized taxes may be hard to sustain. Some form of local option tax already is applied in 46 states although the applications within the states continue to grow. Of the various local options, sales tax ini- tiatives have been the most widely implemented. Approximately 40 percent of all state and local ballot measures with a transportation finance component incorporated a sales tax, either through a new levy, increasing existing rates, or renewing an expiring tax. With a success rate of 54 percent, sales taxes also provided the largest amount of special ballot transportation funding between 2000 and 2005 and are typically a dedicated one- quarter or one-half-cent levy.4 Beneficiary charges are a niche tool for both highway and transit programs in faster growing states and localities but can be an important part of a local package of strategies. For example, transit value capture through leasing of excess property around stations and mortgage recording fees in transit service areas are effective tools to capture beneficiaries of transit service. 3 States’ Expanding Use of Tolling Illustrates Diverse Challenges and Strategies, GAO-06-554. 4 Center for Transportation Excellence, Transportation Finance at the Ballot Box: Voters Support Increased Investment and Choice, 2006.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 5-16 . Financing Tools and Public-Private Partnerships So called “Innovative” financing tools have emerged rapidly since the mid-1990s. On top of the earlier innovations, SAFETEA-LU reauthorized and expanded the TIFIA program and authorized a new $15 billion Private Activity Bond program. States continue to expand their use of finance tools and public-private partnerships (PPP) to leverage existing resources and spur program and project delivery. Increasing use of PPPs can complement the introduction of tolling and innovative financing tools. PPPs can play an important role in expediting projects, bringing innova- tion and, under certain circumstances, even attracting capital. Yet the fundamental resource issue remains. PPPs may facilitate the use of innovative procurement, manage- ment and finance techniques, but they are not revenue sources per se. Their ability to address the investment gap depends on generating new, usually project-related, revenue streams. A very recent trend is for existing public toll authorities to enter into a long-term lease (99 years in case of the Chicago Skyway and the Virginia Pocahontas Parkway and 75 years for the Indiana Toll Road) with international companies; in effect, exchanging a long-term toll revenue stream for a short-term infusion of cash for current public projects. In the case of the Chicago Skyway, the cash proceeds did not go for transportation. In the Indiana case, the $3.8 billion raised from the deal will be used to pay for other major transportation projects within the State. PPPs encompass a range of contractual arrangements by which public (Federal, state, local government, and special authorities) and private entities collaborate in the development, operation, ownership, and financing of a transportation infrastructure project or program. The precise form of these arrangements is shaped by the legal, political, and financial structure of the state or local project sponsor. As discussed earlier, at least 21 states and Puerto Rico have some form of PPP legislation and others are considering it. „ 5.4 Conclusions Prospective Revenue Sources Of the short-term funding mechanisms, increasing, indexing, and applying sales taxes on motor fuel and petroleum products would have the most immediate and substantial impact on revenue shortfalls at the Federal and state level. Indexing the motor fuel tax would improve future yield of transportation revenues by ensuring that motor fuel tax revenues keep pace with costs. Dual taxes (e.g., gallonage and sales taxes) on motor fuel or petroleum products have proven successful in several states. The current fuel tax-based revenue system is generally viewed as equitable; however, indexing fuel taxes can have significant political challenges. Only a few states have successfully indexed their motor fuel taxes to inflation and as witnessed by Wisconsin’s

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 5-17 recent repeal of indexing, they can be politically vulnerable particularly at times of high fuel prices such as now. Many have raised concern about the future viability of fuel taxes given the potential shift to alternative fuels and propulsion systems, including the possibility of higher prices speeding this trend. The recent report of the Transportation Research Board Committee for the Study of the Long-Term Viability of Fuel Taxes for Transportation Finance con- cluded that such erosion of fuel tax revenues is not expected to be a significant concern in the next 10 to 15 years (the time period for the NCHRP 20-24(49) study) and that fuel price increases alone (without additional regulation) probably will stimulate only a small improvement in fuel economy in this period.5 Motor fuel and vehicle registration and related fees, therefore, are expected to continue to play a primary role in highway and transit funding for at least 15 years. Increasing and indexing Federal and state fuel taxes must be part of the short-term gap closing effort. Vehicle registration fees play an important second tier role in most states and will con- tinue to be an important revenue source for the foreseeable future. Introduction and dedi- cation of motor vehicle sales taxes for transportation purposes can be an important additional tier of vehicle fees that are inflation responsive. SAFETEA-LU significantly expanded the authority for states to advance toll and value pricing projects and many more states and local authorities are considering tolling options, particularly for new capacity. Tolls are often considered an attractive source of transportation revenue because they are viewed by the public as a direct user fee and can be tied to specific new facilities. Variable price tolling can be used to better match demand to supply, potentially reducing the need for expensive capital investment to add capacity. Further, these projects provide a rich learning laboratory for the likely longer term transition away from fuel taxes to direct user charging such at VMT-based fees. Despite the promise of tolling and pricing, there also are obstacles. Some regions are accustomed to tolling, and implementation of new toll facilities is relatively straightfor- ward. In other regions new to the idea, there can be significant negative public reaction to the idea of tolling, where historically roads have been provided “for free.” Newer con- cepts, such as HOT lanes and express toll lanes also can have a difficult time getting off the ground, as there can be significant issues related to traffic operations and safety, as well as real and perceived concerns related to fairness and equity. The reality is that the revenues that can be generated by tolling new facilities and highly congested existing facilities are limited by the number of these facilities that will come on line over the next decade. A recent report surveying national toll activity for FHWA6 con- cluded that “As Federal and state revenues (not including local) rise during SAFETEA-LU 5 TRB Special Report 285, The Fuel Tax and Alternatives for Transportation Funding, 2005. 6 Current Toll Road Activity in the U.S.A. Survey and Analysis; Perez and Lockwood for FHWA, August 2006.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 5-18 . to the $130 billion level, toll revenues appear likely to maintain their current share in the short run. The implied rate of investment for the 2,600 miles of toll roads and HOT lanes included in this survey is $4 to $6 billion per year over the next 5 to 10 years compared to the total Federal and state current capital investment in new capacity estimated to be about $13 to $17 billion, thus maintaining its current share as overall spending increases. At this level, the revenues at current toll rates might reach the $7 to 10 billion level. Rising above this level – and increasing in proportional share – is not out of the question, but depends on the response to several issues…” Among these issues are how aggressively tolling will be used with new projects in the pipeline, the willingness to consider tolling on existing Interstate facilities as allowed in the SAFETEA-LU pilots, and how quickly metropolitan networks of HOT/express lanes emerge. In Section 6.0 of this report, gap closing scenarios are considered that increase tolling’s share of total highway revenue. Such scenarios would include aggressive tolling of new capacity plus the possibility of tolling on existing Interstate facilities which states have been historically reluctant to do. But even with relatively aggressive assumptions, the portion of total revenue from tolling would likely only increase a few percent over the next decade and therefore would not be able to significantly fill the gap over the period to 2017. Local option and beneficiary charges have proven effective for local government use for both highway and transit programs and should be considered more widely. Some form of local option tax already is applied in 46 states although the applications within the states continue to grow. Beneficiary charges are probably a niche tool for faster growing locali- ties and can be an important part of a local package of strategies. State and local governments will continue to also rely on general fund appropriations to support surface transportation needs. About 15 percent of state and local transit revenue and 22 percent of highway revenue in 2004 came from general fund allocations. Local governments particularly rely on general funds to support their highway expenditures, with about 46 percent coming from that source in 2004. However, given the pressures for spending on education, health care, and other vital services at the state and local level it is probably not reasonable to assume that the general fund share of highway and transit revenues will increase much, if any. Prospective Financing Tools The use of finance tools and PPP can play an important role in stimulating additional investment and advancing project delivery as discussed in Section 4.0 of this report but in most cases will not directly generate significant new revenue. These tools typically lever- age existing or new revenue streams such as fuel taxes and tolls. SAFETEA-LU extended the TIFIA credit assistance program and authorized up to $15 billion of highway/ intermodal private activity bonds to help foster public-private partnerships. At least 21 states and Puerto Rico have adopted some form of PPP authorizing legislation and others are considering such measures.

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TRB’s National Cooperative Highway Research Program (NCHRP) Web-Only Document 102: Future Financing Options to Meet Highway and Transit Needs explores the viability of a range of conventional and innovative options for financing investments and operations of highway and transit systems.

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