Bridging The Funding Gap

The highway law that took so much effort over the past five years is just six months old, but now it's time to start again. As the U.S. Department of Transportation still unpacks the two-year, $105 billion measure passed last summer, Congress and transportation interests are gathering to return, once more, unto the breach.

The law, Moving Ahead for Progress in the 21st Century, expires Sept. 30, 2014. That gives Congress less than two years to draft and pass the next highway bill. Work will begin in this session of Congress. MAP-21 makes

important reforms at the DOT. It contains no earmarks, gives states more say over how they spend highway dollars, consolidates overlapping and duplicative DOT programs, and eases permitting restrictions that have slowed the process of getting approval for projects.

But it tapes over the core issue of funding, applying a temporary fix rather than providing a reliable, long-term revenue stream.

Funding falling short

The need for infrastructure investment is starkly clear. Study after study has found that highway maintenance and improvement are falling behind.

The National Surface Transportation Infrastructure Financing Commission, chartered by Congress to prepare an objective, in-depth analysis, found that the system needs about $200 billion a year.

MAP-21 provides a little more than $50 billion a year, with no sustainable path forward.

The Highway Trust Fund — the principal funding mechanism for national highway transportation — is in a woeful state.

The fund was $ 13.4 billion to the good in 2012, but the balance is on track to cross into red territory in 2015 and then plummet year-by-year until it's $109.6 billion in the red by 2022, according to Congressional Budget Office data.

That is what will happen if current spending levels continue, if fuel taxes or other revenue sources don't go up and if the fund does not receive any more transfers from general revenues.

This doesn't even take into account the decline in fuel tax revenues as vehicles become more efficient.

When federal fuel taxes were last increased, in 1993, the standard for new cars was an estimated 27.5 mpg, and for light trucks, 20.4 mpg. Both will have to meet a combined 34.1-mpg standard in 2016. The requirement could go as high as 54.5 mpg by 2025, said the Government Accountability Office in a recent report on the Highway Trust Fund.

The fuel efficiency gain is good news, but it also will reduce the intake of funds needed to maintain, improve and expand the national highway infrastructure.

Options to repair the fiscal pothole

The choices are apparent to everyone. CBO lists the obvious ones: spend less, take more money out of general revenues, or raise fuel taxes. There are other ways to raise highway-specific money, such as a vehicle-mile tax or fees on new energy extraction, but the fuel tax is by far the quickest, most direct and most efficient.

The problem is, it's politically impossible — at least it has been for the past 20 years. The resistance to raising the fuel tax is visceral rather than logical.

Business in general, and the trucking industry in particular, supports higher fuel taxes.

“I think it's about time we quit fooling around with it,” says Thomas Donohue, president and CEO of the U.S. Chamber of Commerce. “We don't need a lot. You do a little bit a year for a couple of years, and it will make a big difference.”

John Horsley, executive director of the American Association of State Highway and Transportation Officials, is proposing that instead of taxing fuel by the gallon, the government should impose a sales tax on fuel.

“The cost of the reform to taxpayers would be less than $ 1 per week, per vehicle,” Horsley says.

American Trucking Associations supports a higher tax on diesel, and some political leaders are saying much the same thing.

New York City Mayor Michael Bloomberg, former California Gov. Arnold Schwarzenegger and former Pennsylvania Gov. Ed Rendell head up an action group, Build for America, that is calling for substantial new investment in infrastructure.

Maybe the public's opposition arises from the daily close encounter with the fuel pump, says Janet Kavi-noky, executive director of transportation and infrastructure at the U.S. Chamber of Commerce.

“People are really focused on gasoline prices and the changes at the pump,” she says. “The general public has very little understanding of how much they pay, how they pay or where the money goes.”

The fight against hikes in fuel taxes

The public's sensitivity is grist for the politics of the day. From it Republicans in Congress derive their opposition to tax increases of any kind, and the Obama administration derives its opposition to a fuel tax hike in particular.

When the subject came up during debate over the last highway bill, DOT Secretary Ray LaHood said the administration could not support an increase during difficult economic times.

So far, this calculation has overmatched the observation that fuel taxes are reasonable, considering what the public gets for them.

The average car owner pays less than $ 100 a year in federal fuel taxes, according to the GAO. State taxes vary widely, from 8 to more than 37 cents per gallon, but the average cost comes to less than $116 per year.

That $216 per year buys the mobility provided by the greatest national highway system in the history of the world.

There are other fees and funding sources, but when it's all added up it amounts to less than most people pay for utilities such as heat, electricity or clean water, notes Doug Foy, CEO of the consulting firm Serrafix and Massachusetts Secretary of Commonwealth Development under former Gov. Mitt Romney.

Foy says he personally paid on the order of $160 in federal and state gas taxes last year, versus an average of $2,000 for the utilities.

“It's crazy. We need to get people to understand the scope of that network. People hate the fuel tax because they think it's gigantic.”

Darrin Roth, director of highway operations at ATA, agrees. “When you look at the real impact of a modest increase in fuel taxes for the individual motorist, it's very small,” he says. “The investments that would flow from the increase will be greater than the cost.”

The U.S. Chamber of Commerce has considered the idea of a national effort to educate the public about how roads are funded, but the expense would be prohibitive, Kavinoky says.

“This is going to be solved with leadership in Congress and the White House, and it's going to be solved by realizing that if you can fix the transportation problem you can also help address the debt and deficit problems.”

The deficit opportunity

We will find out soon enough if Congress and the White House can turn the debt and deficit crisis into an opportunity for transportation.

Two deadlines loom over the next several months.[PAGEBREAK]

In March, the $ 110 billion in automatic spending cuts contained in the sequestration deal will kick in unless Congress and the White House can agree on an alternative.

And in May, Congress will have to come to terms on how to manage the debt ceiling or put the country at risk of defaulting on its obligations.

Transportation experts hold out hope that some sort of funding mechanism could be included in the deals to resolve these issues.

Kavinoky thinks there's a good argument for it. There's a win-win proposition in using transportation to address the big picture of the deficit, she says.

For some time Congress has been keeping the Highway Trust Fund whole by feeding it from the general fund. Over the past four years, that transfer has amounted to $48 billion.

“If you actually go back to paying for transportation with the excise taxes that come from transportation, you can take over the next 10 years about $ 150 billion off the plate of the general fund, and solve the transportation [shortfall],” Kavinoky said.

Another transportation expert whose glass is half-full is Marcia Hale, president of Building America's Future.

“I actually think that if we can get past some of the fiscal hurdles we have right now, and if the economy begins to improve, you can become a little more hopeful,” Hale says.

Hale worked on the last fuel tax hike for the Clinton White House in 1993.

“I am quite aware of how painful that vote can be,” she said. “But it gets less painful once the economy begins to improve. [The economy] is improving but it needs to improve a lot more before [a fuel tax hike] can go on anyone's plate.”

State funding initiatives

In the absence of leadership from Congress, states are stepping up to fill the funding gap.

The National Conference of State Legislatures found in a 2012 survey that states anticipate having to carry more of the infrastructure burden than they have in the past.

“The federal government is providing less money, so we need to find additional capital if we are going to meet the needs,” said one respondent to the survey.

The legislators, who place infrastructure third in their list of priorities after education and economic development, reported that bonding, fuel and vehicle taxes and other fees are their main funding tools.

Around half of the states are using public-private partnerships and tolling, while 37% are using a sales tax to fund transportation.

The vehicle mile tax is way down on the list, at 1.4%.

While a number of states are considering fuel tax hikes, Virginia is headed in the opposite direction.

Republican Gov. Bob McDonnell has proposed to abolish the state's gas tax and replace it with a 0.8% increase in the sales tax, new registration fees and new fees on alternative-fuel vehicles.

This would make Virginia the first state to get rid of the gas tax. The diesel tax would remain in place.

He bills the move as the only way to save transportation funding.

“The gas tax is a stagnant revenue source, and no changes to it will provide a reliable growth mechanism for transportation in the state,” he said in a statement.

The U.S. Chamber of Commerce takes the more traditional view that the people who use highways should pay for them.

“You can't grow an economy in a significant way without a strong supply chain, without strong infrastructure,” Donohue says. “You need money for it and it ought to be paid for by the users.”

Kavinoky says McDonnell is making a political calculation in electing to abolish the gas tax.

“If you mention the words gas tax, people tend to go crazy,” she says. “The question is if they can do it without losing transportation support because money is coming from general revenues.”

Other states are sticking to more tried-and-true approaches:

• Massachusetts Gov. Deval Patrick is pushing for $ 1.02 billion in new gas taxes, higher tolls and increased fees.

• Pennsylvania Gov. Tom Corbett is showing interest in raising the tax paid by gas-station owners.

• A Minnesota advisory committee put together by Gov. Mark Dayton is recommending an immediate 10-cent bump in the fuel tax, followed by a 1.5-cent increase annually for the next 19 years.

• Wisconsin Gov. Scott Walker op poses any increase in the gas tax but has not ruled out tolling as a funding alternative.

• A committee in the Wyoming legislature has endorsed increasing the fuel tax by 10 cents a gallon, and rais ing registration fees by $10.

• The Mississippi DOT is pushing to raise the gas tax for the first time in 25 years, from 18 cents to 28 cents a gallon.

The states will do what they must do, but the federal government still needs to step up, Kavinoky says.

“There needs to be a strong federal role,” she says. “Federal money should help guide dollars to federal chal lenges, to dealing with interstate com merce. We think there still needs to be a federal presence.”[PAGEBREAK]

Shuster to tackle transportation

Much of the weight for highway funding falls on Rep. Bill Shuster, R-Pa., the new chairman of the HouseTranspor-tation and Infrastructure Committee.T&I has primary responsibility in the House for drafting the next highway bill.

Shuster's first priority is a water resources bill, followed by a railroad reauthorization measure, but he plans to start work on highways soon.

Key to the effort will be figuring out how to pay for the investment, he said.

“With the Highway Trust Fund facing its own version of a fiscal cliff in the coming years, we must find a way to pay for transportation improvements without borrowing from our children,” Shuster said in a recent editorial.

He said he will listen to all ideas on how to do that, and transportation people take that to mean he will at least contemplate fuel taxes.