Reforming Transportation Finance: Needs, Opportunities, Constraints

Martin Wachs, Director

Institute of Transportation Studies

UC-Berkeley

Overview of my talkReview of Current Needs; Summarizing

Points Made by Earlier SpeakersCriteria by Which to Evaluate Policy

Responses to NeedsReview of Current OpportunitiesReview of Constraints….Mostly Political

History of Transportation FinanceMotor fuel taxes enormously popularSupported by wide variety of

constituenciesAdopted in every state by 1940Federal motor fuel tax in thirtiesFundamental finance mechanism for

Interstate System in fifties

History of Transportation FinanceUser fees in USA became associated

with “trust funds” and non-diversion constitutional provisions in many states

Elastic definition of user fees allowed expansion to transit and to environmental mitigation in many states

“Hypothecation not common worldwide, but key to popularity in USA

Motor Fuel Taxes Usually Expressed as “Cents per Gallon” Must be Raised by Act of Legislature Revenue Does Not Rise Automatically with

Inflation as Does Income Tax or Sales Tax Improving Fuel Economy Lowers Revenue

per Mile of Driving Revenue Declining Precipitously in Relation

to VMT

Fuel Tax Changes, 1957-2002 Average of Fifty States

State Fuel Tax in 1957: 5.7¢/gal If adjusted for Inflation in 2002: 31.0¢/gal Actual Current Fuel Tax: 20.3¢/gal Difference 10.7¢/gal

Fuel Tax Changes, 1957-2002 California

State Fuel Tax in 1957: 6.0¢/gal If adjusted for Inflation in 2002: 32.5¢/gal Actual Current Fuel Tax: 18.0¢/gal Difference 14.5¢/gal

Eroding Buying Power of Fuel TaxesOnly Three States Have Raised Fuel

Taxes Sufficiently Since 1992 to Keep Even with Inflation

Improved Fuel Economy Lessens Revenue Per Gallon

California Would Have to Triple its Motor Fuel Tax to Restore Buying Power Per VMT to the Level of 1957

Changes in State & Local Transportation Revenue,1995-99

(National Totals) Billion$/Year % Change

State User Fees 36.2-42.7 +18%

Local Property Taxes 5.2-6.4 +22%

Local General Funds 12.3-15.9 +29%

Other State Taxes 6.6-8.6 +30%

Other Local Taxes 4.5-7.1 +58%

State Borrowing 4.3-8.3 +92%

Criteria by Which to Judge Alternative Approaches Revenue ProductionEquityPolitical AcceptabilityContribution to Operational Efficiency

The measures may differ short term versus long term with respect to these criteria

Review of Current OpportunitiesReassert Reliance on User Fees

Raise Fuel Taxes Indexing the Fuel TaxesShift to More Direct User Fees: tolls/congestion pricing/hot lanes/ VMT

FeesIncrease Borrowing….defer user fees Continue to Increase Local Sales Taxes (via

Voter Approved Measures)

Raising the Fuel Tax Has Been Popular in the Past Increases Small in Comparison with Market

Fluctuations Easy and Cheap to Administer Encourages Increased Fuel Economy Regressivity Tempered by Limiting Incidence Has Obvious Limit in Long Term as we

Transition to Alternative Energy Sources

Indexing the Fuel Tax Has Been Done Dozens of Times in

States and Often RetractedWhat should be the Basis of

Indexing….Fuel Price, CPI, Highway Cost Index, Expenditures?

If Not Done Right Can Add to Price Volatility

Shift to More Direct User Fees Tolls Difficult to Implement on Existing Toll-Free

Roads Greatly Aided by Widespread Acceptance of

Electronic Toll Collection HOT Lanes Incremental Toll Increases on Existing Roads

and Bridges Toll Financing of New Capacity

VMT Road User ChargesTechnology getting CloserGPS Measurement of UseUnit Price Charged Based on Time of

Day and Particular Facility and Particular Class of Vehicle

Very Promising for Longer Range – 20+ Years for Cars, sooner for Trucks

Increased Borrowing Borrowing Used Less in Transportation

than Other Infrastructure Programs Interest is an Operating Cost That Can

be Substantial; But Often WarrantedBorrowing Can be Justified by Timing of

Flow of Costs and BenefitsBorrowing More Easily Justified for

Capital Costs than Operating Costs

Local Option Transportation Taxes---Already Growing Quickly 44 Transportation Finance Ballot Measures in

US in 2002

32 Local/Regional in Nature 9 Statewide

20 Dealt with sales taxes 5 Property taxes 1 Gasoline tax 9 Bond issues

Major Features of LOTTs

Majority vote or supermajorityProject lists/categoriesSunset dates/reauthorizationImplemented by local govts.

Issues Raised by LOTTs Move Away from User Fee Philosophy Sales Tax is Broad Based Tax Regressive Consistency with Regional Transportation

Plans Project Delivery Local Authority and Responsibility Flexibility versus Specificity Salience of Issue of “Trust”

Issues Raised by LOTTsChristmas Tree MeasuresPay to Play Measures may be Even

Worse (California Proposition 51)Dissociation between projects and

efficiency of system

A Mixed Strategy Most Likely Local Measures Appropriate for Local Serving

Facilities (Including Transit), NOT for Major Interstates, for Example.

Local Measures Will Be a Major Transitional Finance Mechanism, but Should Not be Centerpiece of our Strategy

There is a Limit to Local Financing Capacity Transportation Competes with Other Local

Needs in Post-Proposition 13 World

Increasing Use of Tolls New Capacity Expansion/Toll Roads Specialized Toll Roads: Truck Only Lanes, Hot

Lanes/ Electronic Tolling Congestion Pricing in Particular Locations but

Growing Gradually Truck User Fees Before Widespread VMT

Applications A 20-30 Year Transition The Need for Revenue Will Dominate Over

Reluctance to Use Toll Mechanisms

Borrowing Some Uses, Facility Specific Focus on

New Capital Expansions, Not on Operating Costs, Rehabilitation, Maintenance

Interim Bridging Measures Fuel Tax Increases and/or Indexing

Appropriate Now for Short Term Transition Effectiveness Significant in Short Term,

Weakening in a Decade or Two Probably Devolving to States and Even to

Regional Fuel Taxes More than Relying Upon National Fuel Taxes to Grow as Rapidly

Political Considerations Reluctance of Elected Officials to Raise New

Taxes is Greater than Unwillingness of Constituents to Have them

Related to Trust of Elected Officials By Citizens Tolls: Paying Twice for Same Roads Tolls: A Tax on Foreigners Living Abroad Sales Taxes: Concentration Versus Dispersion Privacy Threats Inherent in Some Approaches

That’s What I See Coming

How About You?

Thanks for your attention