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 6-1 6.0 Gap Closing Strategies and Estimates This section reports on options to increase funding for highway and transit systems for the period from 2007 through 2017. It examines potential short-term funding mechanisms at all levels of government as follows: • Federal revenue options that would directly increase HTF revenues; • Other Federal options to increase transportation revenues; • State revenue options; and • Local options. Appendix F describes the assumptions used in estimating the revenue that could be gen- erated by these short-term funding mechanisms at all levels of government. As further discussed in Section 7.0, implementation strategies will be key. Resistance to transporta- tion funding increases from various sources is inevitable. Section 7.0 includes some of the key steps from experience around the country that are necessary to successfully propose and enact new or enhanced revenue measures in support of national, state, local, and regional highway and transit programs. 1 „ 6.1 Federal Revenue Options Highway Trust Fund Revenues Indexing Federal Motor Fuel Taxes Starting in 2010 Indexing Federal motor fuel taxes starting in 2010 – equivalent to an increase of approxi- mately 0.385 cents per gallon each year – would raise $0.8 billion in 2010 and $7.6 billion in 2017 annually for the HTF. This option would index today’s 18.3 cent Federal gasoline tax to the consumer price index (CPI). The tax rate would increase with inflation to about 21.8 cents in 2017. Of this, 18.38 cents would go to highways and 3.40 cents to transit. Average annual additional funding is estimated at $4 billion, and cumulative revenue over the 2007 to 2017 period is estimated at approximately $32 billion. 1 It should be noted that several of the transportation revenue options discussed in this section would involve transfers from sources that now accrue to the general fund at various governmental levels, e.g. customs duties and interest on HTF balances.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 6-2 . Increase Federal Motor Fuel Tax by 5 Cents in 2010 This scenario assumes that the current Federal gasoline tax rate will be increased by 5 cents in 2010 to gain half of the purchasing power it has lost since it was last increased in 1993. It is assumed that the motor fuel tax will continue to be indexed to the CPI beyond 2010. In 2010, additional fuel tax revenue from this scenario is projected at $9.6 billion, increasing to $19.0 billion by 2017. Average annual additional funding is estimated at $14 billion, and cumulative revenue over the 2007 to 2017 period is estimated at approxi- mately $113 billion. Increase Federal Motor Fuel Tax by 10 Cents in 2010 This scenario assumes that the current Federal gasoline tax rate will be increased by 10 cents in 2010, which is equivalent to the tax rate increase from indexing retroactively to 1993, to recapture the purchasing power loss due to inflation. A similar option was originally proposed in 2004 by Chairman Don Young of the House Transportation and Infrastructure Committee to index the 1993 tax rate to the CPI. It is assumed that the motor fuel tax will continue to be indexed to the CPI beyond 2010. In 2010, additional fuel tax revenue from this scenario is projected at $19.4 billion, increasing to $31.7 billion by 2017. Average annual additional funding is estimated at $25 billion, and cumulative revenue over the 2007 to 2017 period is estimated at approximately $203 billion. Federal Sales Taxes on Motor Fuel This scenario explores the revenue potential of implementing a sales tax on motor fuel (assume 3 percent) at the Federal-level as is done in a number of states, starting in 2010. Average annual additional revenues are estimated at $12.3 billion. The cumulative reve- nues from this option through 2017 are estimated at $98 billion. Eliminate Current Federal Highway Trust Fund Exemptions Eliminating the HTF cost of current Federal tax exemptions beginning in 2008 would add an average of $1.2 billion annually to the HTF and $12.3 billion cumulatively through 2017. State and municipal vehicles and certain agricultural vehicles are exempted from the Federal motor fuel tax. The Administration’s SAFETEA proposal had assumed adop- tion of this proposal with such exemptions being reimbursed from the General Fund rather than the HTF. Unlike the other HTF revenue enhancement proposals which are assumed to start at the beginning on the next authorization cycle in 2010, the treatment of the cost of exemptions could be dealt with simply as a transfer from the HTF to the General Fund (similar to the ethanol provisions) during any budget cycle. This provision is particularly appealing because it could provide short-term revenue to help avoid the currently projected 2009 shortfall in the Highway Account of the HTF. Recapture Interest Earnings on the Highway Trust Fund Balances Recapturing interest earned on HTF cash balances could add an average of about $0.5 billion annually to the HTF and $5.0 billion cumulatively through 2017. This estimate

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 6-3 assumes that both the highway and transit account balances are maintained at “minimum prudent” levels approximately equal to or slightly smaller than today’s. Prior to enact- ment of TEA-21, the HTF was credited with interest earnings on its invested cash balances. The enactment of TEA-21 in 1998 discontinued that practice. Heavy Vehicle Use Tax The current Heavy Vehicle Use Tax (HVUT) is between $100 and $550 for heavy vehicles over 55,000 pounds. Revenues from this user fee go into the Highway Account of the HTF. The fee (maximum $500) has remained constant for more than two decades. This scenario assumes that the HVUT would be adjusted for inflation starting in 2010. Cumu- lative revenues through 2017 from this option are estimated at $1.5 billion. Average annual additional funding is estimated at $180 million. Another scenario for HVUT assessed the revenue potential of adjusting the current fees in 2010 by indexing back to 1997 to gain half the purchasing power lost since 1984. Under this scenario, cumulative HVUT revenues through 2017 are projected at $23.1 billion, and average annual additional funding is estimated at $2.9 billion. In both scenarios it is proposed that the cap at 80,000 pounds be lifted as more vehicles now operate at weights over 80,000 pounds under special permit. Vehicle Tax on Passenger Cars and Light-Duty Trucks Currently, new heavy vehicles (over 33,000 pounds) are subject to a 12 percent sales tax on the retail price. Revenues from this sales tax on heavy vehicles are deposited into the Highway Account of the HTF. This option analyzes the reimplementation of a Federal sales tax on new passenger cars and light-duty trucks (prior to 1971 there was a Federal 7 percent sales tax on the manufacturer’s price of new light-duty vehicles; however, it was not dedicated to transportation). It is recognized that this option, as with other potential revenue measures, may meet some political resistance. For example, passenger vehicle taxes are already widely used by the states as a transportation revenue source and this could be viewed as a Federal intrusion into state taxing mechanisms. It is estimated that a dedicated 3 percent sales tax on new light-duty vehicles could gener- ate about $15 billion to the HTF in 2010, increasing to $20.4 billion by 2017. Average annual additional funding is estimated at $17.6 billion, and cumulative revenue over the 2007 to 2017 period is estimated at approximately $141 billion. Other Federal Options to Increase Transportation Revenues Dedicating 5 to 10 Percent of Current Customs Duties for Investment in Nationally Significant Port and Intermodal Freight Projects Dedicating 5 percent of current U.S. Customs duties for investment in important port and intermodal freight projects would generate about $1.8 billion annually and $20 billion

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 6-4 . cumulatively in revenues for state and local transportation providers. Dedicating 10 percent of current Customs revenues would yield $3.6 billion annually and $40 billion cumulatively through 2017. These estimates were derived from the Mid-Session Review of the President’s FY 2007 Budget. Customs revenues currently go to the General Fund and certain other designated pro- grams. Gill Hicks and Associates, among others, has advocated that a portion of existing Customs duties (e.g., 5 to 10 percent) should be utilized to pay for necessary port and intermodal improvements.2 Customs revenues are derived from duties on imported goods passing through international gateways. The transportation of these goods imposes significant costs on ports, intermodal facilities, and the surrounding communities. Although this option would represent a significant new source of revenue for transporta- tion, it would not reduce highway and transit systems investment needs by the full $20 billion (at 5 percent) or $40 billion (at 10 percent) because port and intermodal invest- ment needs are only partially reflected in the current highway and transit needs estimates. Cambridge Systematics estimates that only 30 percent of the redirected Customs revenues would fund projects represented in the C&P highway and transit systems investment needs estimates. Based on this assumption, the average annual additional funding for investments covered by the C&P report is estimated to be between $0.6 billion (5 percent scenario) and $1.2 billion (10 percent scenario), and cumulative revenues over the 2007 to 2017 period are estimated between $6 billion (5 percent scenario) and $12 billion (10 percent scenario). Tax Credit Bonds Tax credit bonds are assumed to generate $5.0 billion annually beginning in 2007, for a total of $55 billion through 2017. This sizing mirrors the proposal discussed in the National Chamber Foundation finance report.3 Under this example, the sale of tax credit bonds over a six-year period would yield $30 billion for investment in surface transporta- tion projects. For the purpose of this study, it is assumed that the bond issuance would be reauthorized every six years, generating an average of $5.0 billion per year in capital investments. A tax provision normally would not be considered a revenue measure. But by leveraging Federal tax subsidies to generate net new investment in transportation infrastructure, tax credit bonds effectively act as a gap-closing source of general fund revenue. This funding mechanism has been proposed in several forms, most recently by Senators Jim Talent (R-Missouri), Ron Wyden (D-Oregon), and others in February 2005 as “Build 2 Customs Duties as a Potential Source of Revenue for Marine Transportation System Infrastructure Needs, Gill Hicks and Associates, August 2003. 3 National Chamber Foundation. Future Highway and Public Transportation Financing – Phase II, November 2005.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 6-5 America Bonds.” The tax credit bonds would be long-term debt obligations issued by states, local governments, or other non-Federal entities such as a Federally chartered non- profit corporation. In lieu of interest payments, investors would receive an annual tax credit, which they could use to offset their Federal income tax liabilities. In most cases the bond issuer would be responsible for securing principal repayment through project or other revenue streams. In some proposals, a portion of the bond proceeds would be invested in an escrow fund to provide for repayment of principal at maturity. Although state and local governments would issue the tax credit bonds and make the transportation investments with net proceeds, a Federal tax code change would be neces- sary to enable this mechanism. Also, the Federal tax incentive being utilized to stimulate capital investment effectively is leveraging what otherwise would be general fund resources. For this reason, tax credit bonds are presented as an alternative Federal revenue option (outside the HTF) in this study. Investment Tax Credits to Fund Intermodal Projects Investment tax credits represent another form of tax incentive to stimulate capital invest- ment. Several proposals have been advanced in recent years to help finance freight and intermodal projects through this mechanism. A recent example is Senate Bill 3742, the “Freight Rail Infrastructure Capacity Expansion Act,” which was introduced in July 2006. It would provide incentives for investments in capacity enhancing freight rail infrastruc- ture through both tax credits and tax deductions. The proposal calls for a 25 percent tax credit for any taxpayer making certain capital expenditures for new freight rail infra- structure. In addition, the proposal would allow such capital outlays (less the amount of any tax credits claimed) to be expensed in the year they are made, rather than depreciated over time. Qualifying capital expenditures would include those made for the following property types: • Railroad grading, bridges, tunnels, marshaling yards, etc., excluding the cost of land; • Addition of mainline track capacity or new and extended sidings to existing right-of-way; • Construction of new intermodal transfer facilities; • Technology-based expansions, such as signaling and communications equipment; and • New locomotives that increase the horsepower capacity of a railroad’s fleet. This tax incentive program is designed to stimulate private capital investment by railroads as well as shippers, intermodal carriers and other companies that make qualified expen- ditures for capacity expansion projects as described above. Investment tax credits differ from tax credit bonds in that the taxpayer claiming the credit must be the owner of the property. But like tax credit bonds, they leverage Federal tax subsidies to generate net new investment in transportation infrastructure. Thus, invest- ment tax credits also effectively act as a gap-closing source of general fund revenue and are presented here as an alternative Federal revenue option.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 6-6 . This mechanism is seen as a way for the Federal government to support projects involving freight rail, intermodal, or even intercity passenger infrastructure that might not otherwise be eligible for grant funding under the existing Federal Title 23 or Title 49 programs, yet nonetheless generate substantial public benefits. The potential of investment tax credits to generate new infrastructure depends on the level of financial subsidy and the extent of investments made and credits claimed. As described in the National Chamber Foundation report, a program modeled after the draft proposal developed by Representative Sam Graves (R-Missouri) could offer substantial support to freight infrastructure.4 By authorizing investors in eligible projects to claim up to $500 million annually in tax credits over a 20-year period, it is estimated that such a program could generate new private investment capital of about $6 billion over a five-year period. At $1.2 billion per year, this mechanism could generate as much as $13 billion over the 2007 to 2017 period. This maximum estimate assumes that the annual tax credit rate is established at a level that enables the project sponsor to realize a 70 percent present value subsidy. It also assumes that the tax credits could be transferred to other investors if the project sponsor lacked internal tax capacity or if the project sponsor were a tax-exempt entity such as a public agency. More conventional program structures, with smaller subsidies and less flexible tax credits, would produce substantially less investment potential. Although this option, depending on the structure, could represent a significant new source of investment capital for intermodal freight transportation, it would not reduce highway and transit systems investment needs by the full amount because intermodal and particularly rail investment needs are not reflected in the current highway and transit needs estimates. Cambridge Systematics estimates that only about 15 percent of the investment tax credit revenue potential would fund projects represented in the C&P highway and transit systems investment needs estimates (e.g., highway-rail grade cross- ings). At 15 percent of the estimated investment potential of this mechanism, average annual additional funding for highway and transit systems is only about $180 million, and the cumulative impact on C&P highway and transit-related needs over the 2007 to 2017 period is about $2.0 billion. Container Fees This revenue option assumes the implementation of a $30/TEU fee on import and export containers moving through the ports, starting in 2010. In California, State Senator 4 National Chamber Foundation, Future Highway and Public Transportation Financing – Phase II, November 2005. The aggressive assumptions included in this proposal are that investors would claim, in aggregate, up to $500 million annually in 20-year tax credits for qualified projects; that the tax credit streams would be monetized up-front; and that the annual tax credit rate would be established such that the sponsors of qualified investments would receive a 70 percent present- value subsidy for their projects.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 6-7 Lowenthal 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 intermo- dal improvements to serve this commerce. This bill was passed by the state legislature but recently vetoed by the Governor. If a similar fee is applied at all U.S. ports, average annual additional funding is estimated at $2.2 billion and cumulative revenues are esti- mated at $17.5 billion through 2017. „ 6.2 State Government Revenue Strategies Index State Motor Fuel Taxes A scenario was developed to estimate the additional revenues generated by indexing state motor fuel tax rates similar to the way the Federal motor fuel tax would be indexed. For the purpose of our estimate, it was assumed that states currently not indexing for inflation would begin indexing their motor fuel tax rates by 2007, with full implementation by 2010. It was assumed that in 2007, 25 percent of the currently non-indexed state motor fuel tax revenues will be indexed to inflation, gradually increasing until all state fuel tax revenues are adjusted for inflation by 2010. Indexing state motor fuel taxes is estimated to generate an additional $31.9 billion between 2007 and 2017, for an average annual additional reve- nue of $3.8 billion. Increase Motor Fuel Tax Rate to Account for Inflation Losses Since 2000 According to FHWA Highway Statistics, the average state motor fuel tax rate in 2000 was 19.29 cents for gasoline, and 19.96 cents for diesel.5 Since that time, some states have increased their motor fuel tax rates through indexing, while others have enacted one-time increases to the excise rate. By adjusting the average state motor fuel tax rate to 2010 dol- lars would add 5.23 cents for gasoline and 5.41 cents for diesel to the average state motor fuel tax rate. This scenario assumed that the tax rate increase would be gradually adopted through 2010 by states that have not increased their motor fuel tax rate in recent years. In 2010, the additional fuel tax could generate $6.6 billion, increasing to $7.4 billion by 2017, and $65.3 billion cumulatively over the 11-year analysis period. Another option would be to assume that the additional tax rate will be indexed to infla- tion beyond 2010. Under this scenario, in 2010, the additional fuel tax could generate $6.6 billion, increasing to $8.6 billion by 2017, and $70 billion cumulatively over the 11-year analysis period. The average annual additional revenue generated by this alternative is estimated at $7.6 billion. 5 Excludes some variable tax rates and sales taxes on motor fuel.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 6-8 . Sales Taxes on Motor Fuel A few states currently levy sales taxes on motor fuels, and dedicate all or a portion of these revenues to transportation. This scenario explores the revenue potential of dedi- cating a portion (assume 3 percent) of sales tax on motor fuels, excluding: 1) states that already collect from this revenue source and dedicate a portion or all revenues to transportation; and 2) states that do not collect sales taxes.6 For instance, in Georgia, of a 4 percent sales tax collected on motor fuels, 3 percent is dedicated to transportation (i.e., 75 percent of the total revenues). Average annual additional revenues are estimated at $10.1 billion. The cumulative reve- nues from this option through 2017 are estimated at $94.3 billion assuming gradual implementation by the states through 2010. Vehicle Increase Vehicle Registration Fees The average vehicle registration fee in the United States is estimated at about $31 (for light-duty vehicles), according to FHWA’s Highway Taxes and Fees (2001). Vehicle regis- tration fees are class-specific. For light vehicles, about half the states have flat fees, and others have variable fees based on weight, age, horsepower, and value, or some combina- tion of these factors. For heavier vehicles, registration fees are usually based on weight. None of these fees are adjusted to account for inflation, and revenues are expected to increase based on vehicle registration growth and changes in vehicle fleet. This scenario estimates the revenue potential of adjusting vehicle taxes and fees periodi- cally to keep pace with inflation; full phase in is assumed by 2010. Average annual addi- tional revenue is estimated at approximately $4.0 billion, and the cumulative revenues from this option through 2017 are estimated at $33.4 billion. Vehicle Excise Sales Taxes This scenario estimates the revenue potential from implementing a 1 percent sales tax on vehicle sales. The analysis excludes those states already dedicating vehicle sales tax reve- nues to transportation,7 and those states where sales taxes are not collected.8 If states were to dedicate vehicles excise sales taxes for transportation (assume full phase in by 2010), approximately $67 billion would be raised through 2017, and average annual additional revenues are estimated at $7.2 billion. 6 The forecast excludes the following states: California, Georgia, and Hawaii. The analysis also excludes those states where no sales taxes are collected, such as Alaska, Delaware, Montana, New Hampshire, and Oregon. 7 The following states currently dedicate at least a portion of their sales tax on motor vehicles to transportation: Connecticut, Iowa, Kansas, Maryland, Michigan, Minnesota, Missouri, Nebraska, North Carolina, Oklahoma, South Dakota, and Virginia. 8 Alaska, Delaware, Montana, New Hampshire, and Oregon do not collect statewide sales taxes.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 6-9 Tolling In 2004, toll facilities generated $6.6 billion, accounting for 5.1 percent of the total reve- nues. Under the baseline scenario (i.e., annual growth remains at 10-year average), toll revenues will account for approximately 6.5 percent of the total highway funding. The increasing share of toll revenues as part of the overall highway funding is the result of declining share of motor fuel tax revenues. Increased use of tolling, including Federal authorization of tolling on Interstate highways, could generate additional annual revenues for state and local government of $20 million by 2007 and $8.9 billion cumulatively through 2017. Cambridge Systematics anticipates the trend toward increased use of tolling will be accelerated by expanded Federal authori- zation of tolling on Interstate highways and other related provisions such as value pricing. Therefore, the rate of growth in toll revenue is estimated to increase gradually from its current level of 5 percent per year to a rate of 7.5 percent per year by 2015 and 10 percent by 2020. This will generate approximately $8.9 billion in additional toll revenue through 2017, and average annual additional funding estimated at $1.1 billion. At this rate of growth, toll revenues will account for 7.6 percent of the total highway funding by 2017 representing a 50 percent increase in share over the 10-year period. Tolling can be used in combination with Federal financing tools such as loan guarantees, bonding, and tax credits to attract additional state, local government, and private sector capital investment. This combined strategy can help advance major capital projects that would otherwise have to be delayed or staged if funded on a pay-as-you-go basis. General State Sales Taxes Ten states currently dedicate a portion of general sales tax revenues for transportation. This scenario estimates the revenue potential of dedicating one-half percent sales tax to transportation. The amount of revenues dedicated from this funding source varies widely, from 1.7 percent to 20 percent of the total sales tax levies. For instance, Utah dedicates an equivalent of one-sixteenth percent sales tax to transportation, whereas Massachusetts dedicates a 1 percent sales tax for transit (i.e., 20 percent of the total sales tax revenues). If all states that impose sales taxes on goods were to dedicate one-half percent of state sales taxes collected to transportation by 2010, $9.0 billion would be generated in 2010, increasing to $12.0 billion by 2017.9 Average annual additional funding is estimated at $10.5 billion, and cumulative revenues over the 2007 to 2017 period are estimated at $108.8 billion. 9 Excludes Arizona, California, Indiana, Kansas, Massachusetts, Mississippi, New York, Pennsylvania, Utah, and Virginia, where revenues from general sales taxes are being dedicated to transportation. Again, it also excludes the states where no sales taxes are collected, as listed in Footnote 8.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 6-10 . „ 6.3 Local Government Revenue Strategies If all states permitted local option taxes and if local jurisdictions were to implement these local option taxes, about $96 billion could be raised, of which approximately one-third (i.e., $33 billion) will go to transit investments. This option assumes that the 10-year growth in local specialized taxes (i.e., 8 percent) will be sustained in the future through additional implementation of various local option taxes, impact fees, and other miscella- neous revenue to support highway and transit investments. There are a wide variety of miscellaneous sources that are used and offer additional potential at the local level, including transit lease income, mortgage recording taxes in transit districts, lottery income, cigarette taxes, tire taxes, etc. For the base case we assumed that this rate of growth would abate somewhat due to the fact that many of the higher growth counties in states like California already have enacted these measures. „ 6.4 State Highway and Transit Revenue Level of Effort In this study, it was assumed that states would uniformly adopt the revenue measures discussed above. It should be noted, however, that all states are not at the same relative level of effort in revenue generation. Twenty-seven states fall below the national average in at least two of four measures we reviewed in this study. The analysis results are shown in Appendix G, Table G.1. The tables show state highway and transit revenue levels of effort across four measures of revenue generation; per capita, per 1,000 vehicle miles of travel, per $1,000 of personal income, and per $1,000 of state GSP. We estimated what additional revenue would be added if those 27 states were brought up to the average level of effort across a composite of the four measures. The states with lower relative levels of effort collectively would generate $9.7 billion (2005 dollars) annually if they moved up to the national average. Of course there are many factors, other than the four measures selected, that could affect a particular state’s needs and revenue picture. It is suggested that states identify appropriate peers and further analyze level of effort based on criteria that are thought to be most significant for their states. „ 6.5 Summary of Gap Closing Potential of Various Revenue Strategies Table 6.1 summarizes the gap closing potential of the above revenue strategies at the dif- ferent levels of government.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 6-11 Table 6.1 Potential Contribution of Short-Term Funding Mechanisms to Federal, State, and Local Highway and Transit Needs YOE Dollars Short-Term Funding Mechanisms Revenue Generation 2010 Revenue Generation 2017 Average Annual Revenue 2010 to 2017 Revenue Generation Cumulative 2007 to 2017 Comments Federal Revenue Options to Increase Highway Trust Fund Revenues Index Federal fuel taxes retroactive to 1993 to capture full loss due to inflation $19.4 billion $31.7 billion $25.3 billion $202.6 billion Would result in 10 cent gas tax increase in 2010 with indexing to CPI thereafter. Capture half of the loss due to inflation since 1993 $9.6 billion $19 billion $14.1 billion $113 billion Would result in 5 cent gas tax increase in 2010 with indexing to CPI thereafter. Index Federal fuel taxes starting in 2010 $0.8 billion $7.6 billion $4.0 billion $32.3 billion Index fuel tax rates to CPI starting in 2010; first year of next reauthorization cycle. Implement motor fuel sales taxes at the Federal level $10.8 billion $14.0 billion $12.3 billion $98.4 billion Assume 3 percent sales tax on motor fuels, starting in 2010. Reinstitute Federal light duty vehicle sales tax on new vehicles $15 billion $20.4 billion $17.6 billion $140.8 billion Seven percent rate phased out in 1971. Assume tax is rein- stituted in 2010 at 3 percent. Index Heavy Vehicle Use Tax (HVUT) retroactive to 1997 $2.1 billion $3.7 billion $2.9 billion $21.3 billion Has been fixed at maximum of $550 since 1984; assume indexing retroactive to 1997 to capture one-half loss due to inflation. Index HVUT starting in 2010 $30 million $374.3 million $200 million $1.5 billion Assume indexing to CPI implemented in 2010. Eliminate exemptions to HTF starting in 2008 $1.2 billion $1.3 billion $1.2 billion $12.3 billion As proposed in President’s 2006 budget; shift exemptions to general fund. Recapture interest on HTF balances starting in 2008 $0.5 billion $0.5 billion $0.5 billion $5.0 billion Depends on HTF balances; estimates assume minimal balances through next reau- thorization cycle. Other Federal Revenue Options Authorize tax credit bonds (modeled after the Senate- proposed “Build America Bonds” – assumes $5 billion in net proceeds per year) $5 billion; General Fund supported $5 billion $5 billion $55 billion Debt-oriented financing tech- nique that leverages a Federal tax subsidy to generate new transportation funding. Utilize 5 to 10 percent of cur- rent Customs duties for port and intermodal improvements $1.7 billion at 5 percent $3.3 billion at 10 percent $2.2 billion at 5 percent $4.5 billion at 10 percent $1.9 billion at 5 percent $3.9 billion at 10 percent $20.0 billion at 5 percent $40.1 billion at 10 percent These funds would be set aside for port and intermodal purposes; 30 percent assumed to offset highway needs, such as intermodal connectors. Authorize freight/intermodal investment tax credits (assumes $500 million annual limit on monetization of 20- year tax credit streams) $1.2 billion $1.2 billion $1.2 billion $13.2 billion Modeled after the Graves proposal. Only 15 percent of ITCs are estimated to fund highway or transit needs such as highway-rail grade crossings. Container fees $1.7 billion $2.7 billion $2.2 billion $17.5 billion Start in 2010; applied on all import and export containers.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 6-12 . Table 6.1 Potential Contribution of Short-Term Funding Mechanisms to Federal, State, and Local Highway and Transit Needs (continued) YOE Dollars Short-Term Funding Mechanisms Revenue Generation 2010 Revenue Generation 2017 Average Revenue 2010 to 2017 Revenue Generation Cumulative 2007 to 2017 Comments State Revenue Options Index state motor fuel taxes $1.4 billion $6.5 billion $3.8 billion $31.9 billion If all states indexed fuel taxes by 2010. Increase state motor fuel taxes to catch up for inflation losses since 2000 $6.6 billion $8.6 billion $7.6 billion $70.0 billion If all states were to catch up for inflation losses by 2010; results in average 5.2 cent increase. Implement motor fuel sales taxes $8.9 billion $11.6 billion $10.1 billion $94.3 billion Three percent assumed dedi- cated to transportation. Raise motor vehicle registra- tion fees to keep up with inflation $1.8 billion $6.4 billion $4.0 billion $33.4 billion If all states were to raise in concert with inflation starting in 2007. Use vehicle sales tax for transportation $6.2 billion $8.4 billion $7.2 billion $66.6 billion If all states who have sales tax dedicate at least 3 percent of vehicle sales tax to transportation. Portion of state sales tax dedicated to transportation $9.0 billion $12 billion $10.5 billion $108.8 billion Assume one-half percent dedication to highway and/ or transit. Increase tolling/pricing revenues (above current 5 percent per year increase) $0.2 billion $2.4 billion $1.1 billion $8.9 billion Estimate based on aggressive use of tolling and pricing opportunities in SAFETEA-LU. VMT fees (future); transition from short-term toll/pricing innovation High potential but wide- spread deployment assumed after 2015. Local Revenue Options Increased use of specialized dedicated local taxes, e.g., local option taxes, impact fees – Highway $3.5 billion $11.6 billion $7.2 billion $63.4 billion Assume more aggressive growth rate of last 10 years continues. Increased use of specialized dedicated local taxes, e.g., local option taxes, impact fees, miscellaneous transit fees – Transit $1.8 billion $6.0 billion $3.7 billion $32.8 billion Assume more aggressive growth rate of last 10 years continues.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 6-13 Federal Highway Trust Fund Revenue Measures • At the Federal level, fuel tax strategies have the largest potential for impacting Highway Trust Fund revenues in the time period considered for this study. Specifi- cally, $25 billion could be raised per year and almost $203 billion cumulatively from 2010 to 2017 by retroactively indexing fuel taxes to 1993 to recoup losses due to infla- tion (i.e., 10 cent fuel tax increase in 2010), and indexing thereafter. Recouping half the loss due to inflation since 1993 would result in a 5 cent increase in 2010 and with indexing forward would raise $14 billion per year and $113 billion cumulatively by 2017. Implementing a 3 percent sales tax on motor fuels at the Federal level could raise $12 billion per year and $98 billion cumulatively by 2017. • Imposition of additional vehicle taxes (indexing the HVUT and reinstituting a 3 per- cent Federal light-duty vehicle tax) would be the next most effective strategy. • Finally, eliminating HTF exemptions and recapturing interest would add modest addi- tional resources during this period, about $17 billion cumulatively. For this study, we have assumed that the remaining HTF exemptions would be shifted to the general fund in 2008, as proposed in the President’s 2006 budget proposal and that interest on HTF balances would be recaptured starting in 2008; this would likely alleviate the projected budget shortfall in the HTF Highway Account in 2009. • A full package of the most aggressive of the Federal HTF-oriented revenue strategies above would generate $47.6 billion per year and almost $384 billion cumulatively from 2007 to 2017. Other Potential Federal Revenue Measures • Other potential Federal strategies reviewed to improve freight and intermodal systems include customs duties, investment tax credits, and container fees. If these three tools were implemented in combination, they could raise $7.2 billion per year and $71 bil- lion cumulatively for intermodal freight improvements. Finally, tax credit bonds, with interest subsidized by general revenues, could raise $55 billion over the next 10 years for a broad array of surface transportation improvements. State • At the state level, fuel tax strategies have the largest potential for impacting revenues in the time period considered for this study. Specifically, $21.5 billion could be raised per year and approximately $196 billion cumulatively from 2007 to 2017 from the fol- lowing array of strategies:

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 6-14 . − Index state fuel taxes; − Recapture purchasing power back to 2000; and − Sales tax on fuel. • Vehicle taxes, another mainstay of state highway revenues, are an effective strategy with the potential to raise $11 billion annually and $100 billion cumulatively: − Increase vehicle registration rates in concert with inflation; and − Dedicate sales tax on vehicles purchases to transportation. • Assuming aggressive pursuit of expanded SAFETEA-LU authority to advance toll and value pricing projects and enhanced financing tools and public-private partnership opportunities, states and other authorities could potentially generate about $9 billion of additional revenue over this period based on aggressive tolling of projects being considered in the pipeline. An additional benefit of additional toll revenue streams is the ability to leverage an early infusion of capital to advance major projects quicker than with a pay-as-you-go strategy. • Initiatives to dedicate small portions of state sales taxes to transportation, most notably for transit, have been successful in a number of states and if implemented more widely, i.e., one-half-cent of state sales tax dedication, could generate $109 billion cumulatively over the next 10 years nationwide. Local • Local option and beneficiary charges have proven very 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. There also are a wide variety of miscellaneous sources that are used and offer additional potential at the local level, including transit lease income, mortgage recording taxes in transit districts, lottery income, cigarette taxes, tire taxes, etc. If we assumed a more aggressive strategy than in the base case forecast (assuming these dedicated fees would continue the aggressive rate of growth of last 10 years), an additional $11 billion could be generated per year and $96 billion cumulatively. • It is probably not reasonable to assume that government entities will be successful in generating a significantly greater share of general revenues for transportation given the pressure from nontransportation programs such as health care and education so no revenue enhancements are assumed from general funds.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 6-15 „ 6.6 Packages of Actions to Close the Gap Two scenarios or illustrative packages of highway and transit revenue measures are developed to illustrate the national gap closing potential of a mix of current and emerging revenue measures at all levels of government. Scenario 1 – Assume the most aggressive options above for enhancing revenues, specifically: • At the Federal level, all of the revenue enhancements in Table 6.1 are included (except sales tax on fuel) at their most aggressive levels, e.g., recapturing fuel tax purchasing power lost to inflation since 1993; and • Include all state and local revenue enhancements from Table 6.1. The annual and cumulative national gap closing potential of this illustrative aggressive package of revenue enhancement strategies at all levels of government would: • Fully close both the annual gap to maintain by 2017 and the cumulative gap to main- tain through 2017 (see Figures 6.1 and 6.2); and • Close the annual gap to improve by 2016 and the cumulative gap to improve through 2017 by 75 percent (see Figures 6.1 and 6.2). Scenario 2 – This package includes many of the same measures but at less aggressive lev- els of revenue enhancement, specifically: • At the Federal level, all of the revenue enhancements in Table 6.1 are included but at less aggressive levels, e.g., recapturing only half of the fuel tax purchasing power lost to inflation since 1993, resulting in a 5 cent increase in fuel taxes in 2010. • Include state revenue enhancements from Table 6.1 as follows: − Sales tax on gasoline; − Sales tax on motor vehicles; − Tolling; and − General sales tax at one-half percent. • Local revenue measures as shown in Table 6.1. This less aggressive package at all levels of government, also would fully close the gap to maintain but close only 76 percent of annual gap by 2017 and about 56 percent of the cumulative gap to improve (see Figures 6.1 and 6.3).

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 6-16 . Fi gu re 6 .1 A nn ua l G ap C lo si ng P ot en tia l o f R ev en ue S ce na ri os G ap ‘M ai nt ai n’ G ap ‘I m pr ov e’ Fu nd in g Sc en ar io # 1 Fu nd in g Sc en ar io # 2 02040608010 0 12 0 14 0 2 00 7 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 17 D ol la rs (i n Bi lli on s) G ap to ‘I m pr ov e’ G ap to ‘M ai nt ai n’ Sc en ar io # 1 S ce na ri o #2

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 6-17 Fi gu re 6 .2 C um ul at iv e G ap C lo si ng P ot en tia l o f R ev en ue S ce na ri os (S ce na ri o #1 ) 0. 00 20 0. 00 40 0. 00 60 0. 00 80 0. 00 1, 00 0. 00 1, 20 0. 00 1, 40 0. 00 H V U T to 1 99 7 H TF Ex em pt io ns H TF In te re st LD V F ed Sa le s Ta x C us to m s @ 1 0% TC B IT C sC on ta in er Fe es In de x St at e M FTI nc re as e M FT Sa le s Ta x on M ot or F ue lsIn de x M V F ee s Sa le s Ta x on M V C um ul at iv e Fu nd in g G ap - C os t t o “I m pr ov e” = $1 .3 tr ill io n C um ul at iv e Fu nd in g G ap - C os t t o “M ai nt ai n” = $6 35 b ill io n G ap C lo si ng P ot en ti al x% to “ M ai nt ai n” /y % to “ Im pr ov e” 32 % /1 5% 2% /1 % 0. 8% /0 .4 %2 2% /1 1% 9% /4 % 2% /1 % 0. 3% /0 .2 % 3% /1 % 5% /2 % 11 % /5 % 15 % /7 % 5% /3 % 10 % /5 % 15 4% /7 5% 4% /2 % G en er al Sa le s Ta xe s Fe de ra l M FT Ye ar o f E xp en di tu re D ol la rs (i n Bi lli on s) To lli ng Lo ca l Ta xe s C om bi ne d Fu nd in g 17 % /8 % 1% /1 % 15 % /7 % Fe de ra l St at e Lo ca l C om bi ne d Fu nd in g

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 6-18 . Fi gu re 6 .3 C um ul at iv e G ap C lo si ng P ot en tia l o f R ev en ue S ce na ri os (S ce na ri o #2 ) 0. 00 20 0. 00 40 0. 00 60 0. 00 80 0. 00 1, 00 0. 00 1, 20 0. 00 1, 40 0. 00 C um ul at iv e Fu nd in g G ap - C os t t o “I m pr ov e” = $1 .3 tr ill io n C um ul at iv e Fu nd in g G ap - C os t t o “M ai nt ai n” = $6 35 b ill io n G ap C lo si ng P ot en ti al x% to “ M ai nt ai n” /y % to “ Im pr ov e” H V U T H TF Ex em pt io ns H TF In te re stLD V F ed Sa le s Ta x C us to m s @ 5 % TC B IT C s C on ta in er Fe es Sa le s Ta x on M ot or F ue lsSa le s Ta x on M V G en er al S al es Ta xe s To lli ng Lo ca l Ta xe s 18 % /9 % 3% /1 % 0. 6% /0 .3 % 22 % /1 1% 9% /4 % 1% /0 .5 % 0. 3% /0 .2 % 3% /1 % 15 % /7 % 10 % /5 % 17 % /8 % 1% /1 % 15 % /7 % 11 5% /5 6% 0. 2% /0 .1 % C om bi ne d Fu nd in g Fe de ra l M FT Ye ar o f E xp en di tu re D ol la rs (i n Bi lli on s) Fe de ra l St at e Lo ca l C om bi ne d Fu nd in g

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 6-19 „ 6.7 Illustrative Scenario for Ensuring HTF Solvency during SAFETEA-LU and Addressing Needs during the Next Authorization Cycle Recent projections of current-law HTF revenues indicate that the Highway Account of the HTF may not be able to support the Federal highway and safety program funding levels authorized in SAFETEA-LU. Based on an analysis of HTF revenues contained in the Mid- Session Review of the FY 2007 Budget and assumed expenditures resulting from SAFETEA-LU authorizations, it is estimated that the Highway Account will experience a shortfall of about $2.0 billion by the end of 2009. Although current revenues will support authorized Federal spending for public transportation programs through the end of SAFETEA-LU, it is estimated that the HTF resources dedicated to transit programs will face a similar solvency crisis early in the next authorization cycle (perhaps as soon as 2012). Furthermore, the current Federal revenue streams and funding levels will continue to fall well short of the amounts necessary to support investments that would merely maintain (much less improve) the condition and performance of the nation’s highway and transit systems. In order to demonstrate the potential use of revenue mechanisms described in this study, we have constructed a scenario designed to preclude the impending HTF solvency crisis as well as begin to address critical investment needs in the next authorization cycle and beyond. The options employed are not necessarily recommended and may not be viewed as optimal for budgetary, economic, or political reasons. But they do illustrate how cer- tain measures could be employed to alleviate short- and medium-term funding problems at the national level while longer-term solutions are analyzed and implemented. This illustrative Federal revenue scenario consists of the following measures: • Eliminate the cost to the HTF of certain Federal excise tax exemptions beginning in 2008; • Credit interest earnings on HTF balances to the HTF beginning in 2008; • Increase the Federal fuels taxes by 5.0 cents per gallon beginning in 2010 (this would effectively recapture half of the purchasing power lost due to inflation since the last fuels tax increases in 1993); and • Index the Federal fuels taxes to the CPI beginning in 2011 (to prevent a similar loss of purchasing power going forward). Implementation of the first two measures beginning in 2008 would generate an estimated $2.6 billion for the Highway Account and $3.6 billion for the HTF overall during the final two years of SAFETEA-LU – revenue likely sufficient to avoid the impending solvency crisis and enable full funding of the authorized amounts for highway and safety programs through 2009. Implementation of the other two measures would put Federal spending on a path supporting highway and transit investments that would fully meet the levels required to maintain system condition and performance. In aggregate, the package of

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 6-20 . revenue measures in this scenario would generate about $125 billion of additional revenue for highway and transit system investments through 2017. Implementation of all four measures contained in this scenario would enable significantly higher funding levels in the next authorization cycle as shown in Figure 6.4. It is esti- mated that the combined Federal highway and transit funding could increase by about 39 percent from the SAFETEA-LU authorization level of nearly $54 billion in 2009 to about $75 billion by 2015. Assuming the continuance of historical relative shares of system investment between Federal and non-Federal levels of government, this scenario could enable Federal funding that reaches about 73 percent of the annual Federal share of the “cost to improve” funding target by 2015, the end of the next Federal authorization cycle. The enhanced Federal funding levels enabled by this scenario are summarized in Table 6.2. The Highway Account of the HTF maintains a prudent balance throughout the next authorization based on this scenario, however, the Transit Account reaches a precipitously low level by 2015; other revenue enhancements such as greater use of General Funds may be needed to sustain the Transit Account at a prudent balance. Figure 6.4 Illustrative HTF Revenue Enhancement Scenario Eliminate HTF Exemptions and Recapture Interest Starting in 2008; Enact 5 Cent Fuel Tax Increase in 2010 and Index Forward 0 5 10 15 20 25 30 35 40 45 50 55 60 65 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Year Dollars (in Billions) Highway Program (HTF) Transit Program (HTF+GF) Highway Acct Balance Transit Account Balance

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 6-21 Table 6.2 Projected Federal Funding Levels through Implementation of Proposed Funding Strategies Surface Transportation Mode 2006 Funding (Estimated) 2009 Funding (SAFETEA-LU) 2015 Funding (Enhanced Scenario) 2015 Funding Targeta Percent of Target Achieved Highway and Safety Programs $39.5 billion $43.6 billion $61.5 billion $83.9 billion 73% Public Transportation Programsb $8.5 billion $10.3 billion $13.5 billion $19.2 billion 70% Total Federal Investment $48.0 billion $53.9 billion $75.0 billion $103.1 billion 73% a These amounts represent the estimated Federal share of highway and transit capital funding that would be necessary to attain the annual “cost to improve” investment level, based on historical shares of relative funding by all levels of government. b These amounts include assumed general fund contributions at the current-level in future years. „ 6.8 Conclusions The significant gap closing potential of traditional and emerging revenue strategies at all levels of governments has been demonstrated in this section. The real issue is how to suc- cessfully implement these strategies at all levels of government over the next 10 years to achieve the investments that are needed in our surface transportation systems. That is the subject of the next and final section of the report.