USA: New Financing Proposals Offer a Chance for Historic Change
Thanks to Key Orski for his good work on this.
For the record dear colleagues, fourteen of the fifteen commissioners running this exercise are male. Is that really tenable? You can check it out at http://financecommission.dot.gov/commissioners.htm
Vol. 20, No. 1
January 5, 2009
As we enter the New Year — and celebrate our 20th year of publication— we look forward to what 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 to be a year of "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.
We begin our 2009 coverage with a report of two finance-oriented initiatives that promise a chance for historic change. The first initiative is the long-awaited report of the congressionally chartered National Surface Transportation Infrastructure Financing Commission which is about to be released later this month. The second is a provocative proposal by Charles Krauthammer— respected columnist, astute political analyst and TV commentator. In a feature article in the January 5 issue of The Weekly Standard, Krauthammer makes a case for a significant zero-sum gas tax increase, which he calls a once-in-a-generation opportunity to begin weaning us off foreign oil and putting us on the road to energy independence. While we find some of Krauthammer’s logic and arguments debatable, we believe his bold proposal, along with the Financing Commission’s recommendations, deserve serious consideration by Congress and the Obama administration as part of the ongoing search for innovative solutions to the fiscal, energy and transportation challenges confronting the nation.
The Financing Commission’s Recommendations
After 20 months of intensive, often spirited deliberations conducted in an always collegial atmosphere, the National Surface Transportation Infrastructure Financing Commission is in the final stages of formulating its conclusions and recommendations. What follows is a brief summary of the Commission’s findings. The summary is based on the open record of the Commission’s public meetings, supplemented by interviews and informal conversations with individual Commissioners. The Commission expects to make its report public later this month. The present account reflects the status of the Commission’s findings as of early January. While the Commission still has certain issues to resolve, we believe that no significant changes will occur in its key conclusions as presented below.
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 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.
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). 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.
The Case for a Net-Zero Gas Tax Increase
After pump prices peaked in August at more than $4/gallon, it looked like we might be on the cusp of a fundamental shift in travel behavior. Gas consumption declined by 5.6 percent—the largest ever year-on-year decline recorded in a single month, according to the U.S. Department of Transportation. High gas prices also were beginning to affect consumers’ choice of vehicles and travel modes, with sales of SUVs plummeting by 60 percent and national transit ridership rising by 3.5%. But since then, with oil prices in a free fall, from a peak of $147 a barrel to $39, and with the price of gasoline at the pump dropping to $1.55, the memories of the $4 gas are fading and people are resuming their former driving habits and vehicle purchasing patterns. This comes as a disappointment to those who had hoped that higher gas prices would cause a permanent reversal of the prevailing trends and lead to a "greener" future, characterized by declining vehicle-miles of travel, a pronounced shift to fuel-efficient cars with attendant greenhouse emission reductions, steadily increasing transit ridership and reduced dependence on foreign oil.
With gas prices returning to levels not experienced since January 2004, people might be more willing to accept a boost in the fuel tax. After all, even a one dollar tax increase today would still leave the price of gas more than one-third below its July peak. The trouble is that in the midst of a severe recession and rising unemployment, a gas tax increase might be economically inadvisable. It would further reduce disposable incomes just when increased consumer spending is needed to bolster the economy.
Political analyst Charles Krauthammer offers a solution. If an increase in the gas tax were made revenue neutral, that is, if the average driver was left with no net loss in income, the economic objections to enacting a higher gas tax would be minimized. Revenue neutrality could be achieved by reducing the drivers’ payroll (FICA) tax or, in the case of retired people, by increasing their monthly social security payment.
To illustrate the point, Krauthammer assumes that the average motorist buys roughly 14 gallons of gasoline a week. Thus, a $1 boost in the federal gas tax would take an additional $14 out of the motorist’s pocket. This loss of disposable income would be compensated by an immediate $14 a week reduction in his payroll (FICA) tax or, in the case of retired people, by a $56 increase in the monthly social security check. Should a one dollar increase in the gas tax prove to be insufficient to make a significant dent in fuel consumption, the tax could be raised further. The price elasticity of gasoline demand could be empirically tested and refined, and the precise amount of the tax adjusted to achieve any desired level of reduction in fuel consumption, argues Krauthammer.
A net-zero gas tax increase would not only reduce the incentive to drive, it would also accelerate a shift to fuel-efficient cars and put us on the road to energy independence, says Krauthammer. Further, it would obviate the need for government-dictated fuel efficiency standards that have proven devastating to Detroit. Additionally, reduced domestic fuel demand would keep world oil prices down, improve our trade balance and reduce the influence of OPEC and other oil producing countries. "A time of $1.65 gasoline is our chance to enact a net-zero gas tax," writes Krauthammer. "It is a once in a generation opportunity that we cannot afford to miss."
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