Transportation Reform, Funding, and Financing

Providing community residents with a range of affordable and convenient transportation options requires both adequate funding and effective prioritization of limited resources. Funding for transportation is a responsibility of the federal, state, and local levels of government.

Regional governmental entities such as Metropolitan Planning Organizations (MPOs) also often play a key role in system performance evaluation and investment prioritization. More than 80 percent of the US population resides in metropolitan areas, but states, rather than MPOs, largely control federal transportation funding. The FAST Act provides no meaningful increase in local control over federal sources of funding, instead continuing to defer almost all authority to states. As a result, metropolitan areas contribute significantly more in federal gas-tax receipts than they receive in allocations.

The federal government does allow suballocation of federal funding directly to metropolitan areas, but federal funding makes up only a small share of overall funding. Metropolitan areas have few funding options other than local sales tax (which is regressive) with which to fund regional projects such as light rail. Greater suballocation of federal dollars directly to MPOs would provide these areas with more money and flexibility to invest in the transportation options that residents deem best suited to their cities.

Transparency and accountability—National performance goals for federal highway programs include benchmarks for safety, infrastructure condition, congestion reduction, system reliability, freight movement, economic vitality, environmental sustainability, and reduced delays in project delivery. Missing from this list are goals related to increased mobility and access for transportation-disadvantaged people (including older nondrivers, people with disabilities, people with low incomes, and children).

Nonetheless, other federal programs do recognize the importance of these other goals. Under Sec. 5301, a stated purpose for federal support for public transportation is to “deliver high quality service to all users, including individuals with disabilities, seniors, and individuals who depend on public transportation.”

Performance measurement works best when it tracks both investments made and benefits derived from those investments, such as increased safety, improved commutes, increased economic output, and improved quality of life. However, the current system does not do this adequately. For example, The Federal Highway Administration (FHWA) information system tracks costs, but only for contracts, not projects. The information that is readily available, such as the FHWA’s highway statistics series, does not provide robust data at the local level. Moreover, the National Transit Database requires only transit systems receiving federal funding to report ridership data, operation characteristics, revenue, and expenditure information. This archaic data collection system makes it difficult for stakeholders and the public to understand how transportation revenue is raised and where money is spent. It also adds to the difficulty of making comparisons across investments in different modes of transportation.

Funding alignment with transportation needs—our nation’s transportation funding and investment choices have an impact on the availability of mobility options, the environment, and economic opportunity. Meanwhile, policy framework continues to favor highway investment over other forms of transportation.

Federal funding for core highway programs outstrips public transportation funding by a ratio of four to one. In addition, the practice of funneling federal funds through state departments of transportation rather than through MPOs has disempowered local decisionmakers from supporting projects that best address local mobility, economic, and environmental challenges. States have been reluctant to use federal dollars to fund public transit. As of 2011, 26 states prohibit the use of state gas-tax revenue for transit investment. The FAST Act maintains the historic four-to-one split between highway and transit funding. Over the five-year life of the bill, highways receive $225 billion compared with $61 billion for transit.

Moreover, bureaucratic requirements favor highway investment over other types of transportation. States do not seek permission to build or expand highways. Once they receive their appropriations, states can distribute the money among projects as they see fit, contingent upon the projects clearing environmental review.

In contrast, cities, metropolitan areas, and states must compete for funding for new public transit projects in a lengthy and highly regulated process. Transit projects must demonstrate cost-effectiveness and financial capability in addition to passing an environmental review. The procedural hurdles, coupled with higher local and state matching requirements, may encourage decisionmakers to pursue road investments rather than transit, despite the many benefits of public transportation.

Transportation funding options—local governments provide 36 percent of overall transportation funding. They provide an even higher share of funding for public transportation (58 percent, including the 25 percent of revenue derived from fares). As communities have increased public transportation investments, they have had to find additional sources of revenue. Local general sales taxes have been a popular means of doing so.

Though states and the federal government have historically relied upon a user-fee model of revenue generation to fund roads through motor fuel taxes, that is changing. Inflation and increasing vehicle efficiency have eroded more than one-third of the federal fuel excise tax’s purchasing power relative to 1993, the last year Congress raised the gas tax.

A few states have tried to address their shortfalls by raising their own gas taxes, and some have looked to road pricing and mileage fees. Other major sources of revenue include vehicle registration fees, driver license fees, sales taxes on vehicles, sales taxes on fuel, general funds, and general sales taxes on a variety of goods and services.

General sales taxes—general sales taxes have become an increasingly popular way of funding transportation investments. Yet sales tax is not a preferred funding for several reasons. First, sales tax revenue is highly volatile. Retail sales decline more rapidly in a recession than gasoline consumption. Second, it is an inefficient revenue source because nondrivers subsidize drivers. Third, sales taxes erode a long-standing commitment in the US to finance transportation with user fees. Fourth—and most important—it is regressive (see Chapter 3, Taxation). Many states do not subject services frequently used by higher-income households to sales taxes, for example, dry-cleaning, housecleaning, landscaping, legal services, accounting services, and the like. Sales taxes that are used to fund highway investments are especially regressive, as households with low incomes are less likely to have access to an automobile.

This is less the case where sales tax revenue is dedicated to public transportation. But even then, it may still be somewhat regressive if it the sales tax revenues go primarily toward rail projects. This is because people with low incomes, along with older adults, make greater use of lower-cost bus services. In addition, although older adults’ use of fixed-route public transportation has been growing along with that of the general public, it is lower than that of younger people, even among older nondrivers. And 60 percent of public transportation trips of nondrivers age 65 and over are on specialized transit, such as curb-to-curb dial-a-ride service—twice the rate of nondrivers age 5-64.

Another equity consideration is whether people with low incomes can afford to live in the housing located in proximity to transit stations. Sometimes new transportation investments price existing residents out of a community, even though they paid a large portion of their income in the sales taxes used to finance the investment.

Gas taxes—the fuel tax, popularly referred to as the gas tax, is the primary source of federal funding for transportation. Drivers pay a gasoline fuel tax of 18.4 cents per gallon, while commercial truckers pay 24.2 cents per gallon for diesel. These together provide the bulk of the revenue for the Highway Trust Fund (HTF), which the federal government uses to invest in transportation projects. The federal government also charges a variety of heavy vehicle taxes (such as taxes on truck tires or sales taxes on trailers).

The HTF is somewhat of a misnomer, as it now funds transportation for older adults, sidewalks, and bicycle infrastructure in addition to highways. Since 1982, 2.86 cents per gallon has been set aside in a mass-transit account for public transportation investments. Every state also levies a gas tax as an essential transportation funding source.

Although the gas tax has provided a reliable stream of revenue for transportation since 1956, many now question its long-term viability. Federal policymakers have been unwilling to increase the gas tax since 1993. Unlike a sales tax, the tax on each gallon of gas does not change with the price of gas. Higher fuel efficiencies, coupled with less driving in some metro areas, led to a negative HTF balance sheet by September 2008. To address the shortfall, Congress has added a total of $140 billion to the HTF from the general fund since 2008. Reforming the funding mechanism for highway programs remains a challenge. Options for increasing revenue from the gas tax include raising the tax rate, indexing it to inflation, or imposing a sales tax on gasoline.

The gas can be regressive to the extent that households with low incomes spend a greater share of their income on fuel. This is especially true for rural residents, who typically put more miles on their vehicles each year. It can also be true of suburban and urban residents with low incomes who lack adequate public transportation options. Households with no or low gasoline outlays—city residents who use public transportation—are better off with a gasoline tax than a sales tax.

The gas tax may encourage people to reduce driving. As a result, communities can benefit from decreased congestion on area roadways, improved air quality, and a reduction in greenhouse gas emissions. On the flip side, many economists argue that the gas tax leads to inefficiencies in the transportation system. For instance, although hybrid-vehicle owners pay less tax than those who drive less fuel-efficient vehicles, hybrids take up more or less the same amount of space on the road and cause roughly the same wear and tear.

Mileage fees—levying a tax on each mile people drive creates a more direct user fee than the gas tax. This system captures the actual amount of transportation-facility use and can be linked to vehicle fuel efficiency. Like the gas tax, it provides an incentive to drive less and avoids having nondrivers subsidize drivers. Thus, mileage fees could help manage system demand and improve the environment. Oregon tested the feasibility of this idea in a pilot study taxing drivers based on distance traveled, roads used, and time of day.

Privacy protection is one major hurdle to implementation, as the system requires a computer chip to be installed in each vehicle. At each refueling stop, the fuel pump collects data from the device, and the tax is calculated on mileage and other factors.

Road pricing—under road pricing plans, drivers pay a user fee, which can be assessed in a variety of ways:

• Traditional toll collection.
• Variable-price lanes—these include high occupancy toll lanes, in which those who have a certain number of passengers are exempted from tolls and others must pay to enter. This also includes congestion pricing, in which the amount of the toll varies based on road congestion to ensure free-flow traffic conditions.
• Cordon pricing—vehicles are charged a fee to enter a specific area, typically a city center, during peak hours. This fee can vary based on road congestion.

Variable pricing offers advantages over traditional toll roads. Along with generating income, it allows administrators to manage the level of demand and thus ensure efficiency. It also distributes pricing more equitably toward those who benefit most.

Economists have argued that road pricing allows facility managers to offset some of the negative environmental and social effects of automobile travel, such as air and water pollution. Road pricing can also have economic benefits. For example, people of all income levels use the congestion-pricing corridor on California State Route 91 at least on occasion. Faster-speed corridors could allow parents of young children to get to day care on time, thus avoiding late fees. This could help lower- and middle-income workers, who may not have flexible schedules, arrive at work on time.

Variably priced lanes are regressive when households of low income cannot avoid paying the toll by using either parallel traffic lanes or competitive transit service. Variably priced lanes also pose difficulties for many drivers with low incomes when payment systems require a substantial up-front cash outlay or a checking or credit card account for automatic debits. Policymakers can reduce the regressive nature of a variably priced facility by channeling a portion of the revenue toward improved transit service, using payment systems that do not penalize people with low incomes, and offering tax credits for people with low incomes.

Road pricing is a supplemental source of revenue rather than a replacement for the gas tax. Road pricing revenues are typically invested in the corridor where the revenue is generated. This means that road pricing revenues are not used to fund other important projects such as local roads, sidewalks and bus stops, paratransit service, and local bus service.

Carbon pricing—a carbon tax would set a fixed price on every ton of emissions. A cap-and-trade program would limit (or “cap”) total emissions and establish a market for buying and selling (or “trading”) permits to emit a specific amount of greenhouse gases. This would allow the market to determine the price of emissions. The transportation sector contributes one-third of the nation’s carbon output. Revenue raised through carbon taxation or trading could be channeled back to transportation projects that reduce the nation’s carbon footprint. Such projects might include public transportation, pedestrian and bicycle infrastructure, and clean vehicle research and technology (see also Chapter 10, Utilities: Telecommunications, Energy, and Other Services—Sustainable Energy and Climate Change).

Public-private partnerships—although state transportation departments can own and operate a priced transportation facility—such as a highway—they often lack the up-front funds to build one on their own. As a result, some state and local governments have turned to public-private partnerships by, for example, having a private firm pay to construct a road in return for the right to operate a toll there for a specific period of time. The danger of this model is that the public sector gives up its right over a transportation investment for a significant period of time. Officials may not be able to fully assess the future value of an asset to the public.

Negotiating this kind of asset transfer is complex. The government needs to carefully consider the following:

• maintenance requirements;
• the portion of revenue to be channeled to improve public transportation services in the corridor;
• revenue-sharing provisions to ensure that the public sector reaps some rewards if toll revenues are higher than projected;
• ample public involvement in project design and the fulfillment of all applicable planning and environmental requirements;
• transparency (including any tax incentives given to private-sector partners), with confidentiality limited only to when it is legally required;
• removal of non-compete clauses to ensure that local governments can build or improve adjacent facilities; and
• objective analysis to establish proof of value. This analysis should demonstrate that private-sector financing provides better value than public financing, while considering the loss of federal tax revenue from tax-exempt municipal bonds and the tax consequences of depreciation.

National infrastructure bank—several policy organizations have endorsed the concept of establishing a national infrastructure bank, which could be structured similarly to the World Bank, the Federal Deposit Insurance Corporation, a private investment bank, or any other entity that evaluates project proposals and assembles a portfolio of investments to pay for them. The bank would be an independent entity responsible for evaluating and financing capacity-building infrastructure projects of substantial regional and national significance perhaps through some form of a competitive discretionary program. Potential projects could include construction and rehabilitation of publicly owned transit systems, high-speed rail, roads, bridges, drinking water supplies, wastewater systems, broadband networks, the electricity grid, schools, and housing developments.

Consumer expenditures—policies that have an impact on consumer expenditures in transportation—which account for more than 20 percent of the average family’s annual spending—can have a large impact on a household’s budget.

Infrastructure investments that enable people to choose lower-cost travel increase the efficiency of the overall transportation system. In addition, changes to the tax code and private-sector pricing on transportation-related goods and services may directly affect out-of-pocket costs and consumer travel choices. The cost of gas is also directly associated with how much people drive; when prices go up, people are more likely to combine trips and use public transit.

Employer-sponsored transit programs also affect consumer transportation expenditures for those who drive or use public transit. Employers may offer a transportation reimbursement benefit to employees for certain commuting costs for those who commute by car or public transit. For those who bike or walk to work, benefits are typically more limited. In 2008, Congress approved a measure that allowed employers to exclude up to $20 per month from an employee’s taxable wages for expenses associated with maintaining or buying a bicycle. Employers establish how they administer the cycling tax credit and are able to deduct the credit from their corporate taxes. Those who walk to work or arrive via another non-motorized means are not covered. However, employers can offer a cash-out equivalent to extend the commuter benefit to those who bike or walk to work.

The private sector can support alternative travel or safe driving by appropriately pricing other transportation goods and services. One example is voluntary pay-as-you-drive (PAYD) auto insurance (see Chapter 11, Financial Services and Consumer Products—Insurance). This bills policyholders on a per-mile basis rather than as a lump sum per vehicle, which may encourage people to drive less. Some insurance companies have designed PAYD insurance to offer discounts to drivers based on how hard they accelerate and brake. Such programs also consider the days and times of travel in addition to miles travelled. Consumers voluntarily plug a device into their car’s onboard diagnostic computer to record these measurements, which helps insurance companies predict an individual’s driving risk.

(For more on these issues, see Chapter 3: Taxation—Excise Taxes on Individual Commodities or Services.)