Commission's Report To Urge "Transformation" In Surface Transportation Funding

Ken Orski

The new year is shaping up as the most eventful period in the history of the federal transportation program since the enactment of the Interstate Highway Program more than 50 years ago. 2009 promises "transformational change," to use a currently fashionable phrase. It will be the year in which the transportation sector may expect the injection of an unprecedented sum of money in the form of an economic stimulus. It also will be the year in which the administration of President-elect Barack Obama, a new team at US DOT, and a heavily Democratic Congress will be putting their own stamp on a new multi-year transportation authorization. Lastly, it will be the year in which the federal transportation program is expected to undergo fundamental reform to respond to the changing needs and circumstances of the 21st century.

One key development is the long-awaited report of the congressionally chartered National Surface Transportation Infrastructure Financing Commission which is about to be released later this month. What follows is a brief summary of the Commission’s findings, based on the open record of the Commission’s public meetings, supplemented by interviews and informal conversations with individual Commissioners. We believe that no significant changes will occur in its key conclusions as presented below.

Multi-pronged Approach

The Commission has concluded that the current federal surface transportation funding structure is unable to generate sufficient revenues to support the country’s future transportation needs. Hence, the nation must begin to shift to a more sustainable system that is able to raise substantially greater revenues. A search for alternative funding mechanisms has led the Commission to focus on the potential of direct user charges, and particularly on a charge system based on vehicle-miles-traveled (VMT). Such a funding framework is consistent with the Commission’s guiding principle that users and direct beneficiaries should bear the full cost and pay more directly for the services they use.

However, a transition to a VMT-based charge system cannot occur overnight, and the immediate needs are simply too critical to wait. Therefore, the Commission will recommend a two-phased approach. To accommodate transportation infrastructure needs in the near and intermediate term (i.e. possibly over the next two authorization cycles), the Commission will recommend a program of incentives to help states and local governments finance infrastructure investments through tolling and other user fees. To enable the federal government to meet its share of capital funding  (currently this share amounts to about 40-45 percent of total national system-wide infrastructure investment), the Commission recommends a one-time increase of 10 cents/gallon in the federal gasoline tax and a 15-cent increase in the federal diesel tax, both taxes to be indexed for inflation. In the long term, as the nation converts to a VMT-based charge system, the federal fuel taxes should be progressively phased out. Because of the complexity inherent in transitioning from the current system to a VMT-based system (both institutionally and technologically), the Commission believes the transition process must begin immediately.

State & Local Incentives Program

State and local governments have always been major partners in the funding of transportation infrastructure. In recent times, they have contributed nearly 60 percent toward the funding of highway and transit infrastructure. To enhance their future ability to invest in infrastructure, the Commission will recommend a number of incentives aimed at facilitating the use of tolling and other direct user charges. Specifically, Congress should (1) allow tolling of new highway capacity and of existing Interstate highway capacity in large metropolitan areas; (2) continue and expand the Interstate Highway Reconstruction & Rehabilitation Program which allows tolling of existing Interstates for the purpose of reconstruction and rehabilitation (currently the program is limited to only three projects); (3) authorize pre-feasibility assistance for toll projects and "gap financing" for projects that cannot be fully supported through toll financing alone; (4) reauthorize the existing federal credit (TIFIA) program at a higher annual volume of credit support than currently allowed; and (5) continue and expand the Private Activity Bond (PAB) Program. In addition, the Commission will offer certain observations and  make certain recommendations as to how Congress should consider proposals to create a  National Infrastructure Bank (NIB). Some Commissioners think the incentives program is a key to getting states and localities to embrace tolling and invest in transportation infrastructure. 

Private Sector Financial Participation

The Commission wishes to encourage private sector financial participation where such participation is necessary to get projects to move forward or where it can improve project cost effectiveness and accelerate project delivery. The Commission believes that appropriate governmental controls should be put in place to protect the public interest. Appropriate provisions should be enacted to govern concession arrangements for new toll facilities ("greenfield" projects) and for long-term leases of existing transportation assets ("brownfield" projects).

Federal Fuel Tax Increase

To fund the near-term federal capital contribution to transportation infrastructure investment, the Commission will recommend a one-time 10-cent increase in the federal gas tax and a 15-cent increase in the federal diesel tax (neither of which has been increased since 1993). All future fuel taxes should be indexed for inflation. Part of the proposed diesel tax increase should be dedicated to freight-related investments. The Commission estimates that the proposed tax increases would generate an additional $20 billion per year to the Highway Trust Fund. (This would still leave a $10 billion annual shortfall, assuming a $66 billion annual budget for surface transportation as proposed by the House Transportation and Infrastructure Committee.) 

Transition to a VMT-based Charge System

The Commission will recommend that Congress define a clear roadmap for a transition to a VMT charge system as part of the next reauthorization of the federal surface transportation program. The Commission also will recommend a comprehensive program of technology development, pilot test programs and standards development to support the transition to a mileage-based user fee system. Lastly, the Commission will recommen that Congress and the U.S. Department of Transportation should initiate and support extensive public outreach to raise awareness and understanding of the need for a shift to a VMT-based charge system. Public support will be essential to a successful transition to a new funding system.

Analysis

Only time will tell how influential the Commission’s thinking will be in shaping and reforming the federal transportation program, and what impact the Commission’s report will have on future legislation. Our own sense is that the Commission’s report will confirm and add authority to the already widely held notion that the current fuel tax-based system must eventually be replaced with a more robust charge system based on vehicle-miles-traveled (VMT). We also think that the Commission’s support of tolling and public-private partnerships will add legitimacy to these concepts and strengthen the states' resolve to expand their use.  We hope that the Commission’s proposed program of incentives for tolling and other direct user fees will be embraced by Congress and the Obama administration and contribute to mainstreaming these measures and realizing their full potential as both a source of revenue and a tool of congestion management. As for the Commission’s recommendation for an increase in the federal gas tax, we reserve our judgment. Looming over this recommendation is the almost certain prospect of a massive economic stimulus bill, a sizeable portion of which is expected to be dedicated to infrastructure (a recent proposal by a group of governors would devote $350 billion to infrastructure investments out of a total stimulus package of $675-775 billion or more). Such a huge injection of capital over two years would be bound to affect the need for and the politics of a federal gas tax increase in ways that cannot  yet be fully assessed.