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2005 Forum
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2005 Oberstar Forum — Orski's Speech
The Future of Transportation Finance
By C. Kenneth Orski
Reprinted from Innovation Briefs, May/June 2005
Each year for the past four years, the University of Minnesota's Center for Transportation Studies has hosted a forum named in honor of Minnesota's Congressman James L. Oberstar, ranking member of the House Transportation and Infrastructure Committee and a respected national transportation leader. The purpose of the forum is to explore how transportation in the United States is changing in the light of political, economic, social, and technological forces affecting society. National and Minnesota transportation leaders are invited to participate with faculty members from the University of Minnesota and other academic experts.
This year's Oberstar Forum, held on April 18, had as its theme "The Future of Transportation Finance: 'Gas Tax Plus' and Beyond." The aim of the forum was to explore short and long term options for financing the nation's surface transportation system. A resource paper prepared by Forum consultant Steven Lockwood provided participants with valuable background information on the state of federal, state and local finance (the paper can be accessed at www.cts.umn.edu/events/oberstarforum/pdf/2005lockwoodpaper.pdf [479 KB PDF]).
Reproduced below are some reflections on the meeting, delivered by your editor at the concluding session of the Forum.
In any discussion of the Future of Transportation Finance it is useful to distinguish between two parallel debates. One debate, currently taking place in Washington, has to do with the future shape of the federal-aid highway and transit programs and the future of the Highway Trust Fund. The other debate is taking place at the local level across the nation in forums such as this. This latter debate is every bit as important for it has to do with the 80 percent of transportation funding that comes from the state and local level.
The debate about the future of the Highway Trust Fund is driven by concerns about its continued adequacy to support the federal surface transportation programs. Traditionally, the Trust Fund has supported roughly 20 percent of overall surface transportation expenditures. Now, as we have heard, a variety of factors — inflation, increased vehicle fuel efficiency, growing penetration of hybrid vehicles — threatens to reduce the purchasing power and the flow of tax revenues into the Trust Fund and disturb the traditional 20/80 federal/state fiscal equilibrium.
Compounding the problem — at least from the viewpoint of the highway fraternity — is the growing diversion of Trust Fund revenues to non-highway purposes (however worthy and legitimate those purposes may be). There is also a growing tendency for Congress to earmark funds for local projects. Together, it is estimated these diversions and earmarks reduce the federal dollars available for highway core programs by as much as 30 percent.
How much the federal government should contribute to the nation's highway and transit programs is currently being debated in Congress— a debate in which Congressman Oberstar has taken a prominent role. Both the House and the Senate authorizing committees have endorsed the White House's proposed level of $284 billion in obligation (spending) authority over six years.
The size of the federal contribution over the next six years is thus pretty much firmed up. What remains for each state to do is to determine the amount of its own annual contribution. In doing so, states and localities will use a menu of funding sources that includes fuel taxes, motor vehicle sales taxes, tolls, state property and sales taxes, real estate value capture, debt financing and general fund contributions.
The type and mix of funding sources used will vary widely from state to state. For example, vehicle fuel taxes constitute more than 50% of state and local transportation budgets in only 22 states. No doubt some states will choose to raise the state gas tax to meet rising transportation needs — although state legislatures have been on the whole reluctant to do so. Many other states will prefer to tap their general funds or raise motor vehicle sales and registration taxes. Local governments may elect to hike their sales tax or rely more heavily on developer contributions to fund new roads. Some states may even look into long term leasing of state owned toll facilities to the private sector — following the example of the City of Chicago which realized a windfall of almost $2 billion from the lease of the city-owned Chicago Skyway.
The local decisions as to the level and mix of funding will be influenced by a complex set of factors, many of which we heard discussed this morning. For example:
- What should be the right level of cost-sharing between state and local governments?
- What should be the proper allocation of funds between urban and rural roads?
- What ought to be the appropriate percentage level of personal income that should properly be devoted to transportation taxes – and hence, how high should the state gas tax be allowed rise?
- How well will the various transportation taxes maintain their purchasing power?
- What is the expected volatility of various taxes — i.e. how much can one depend on each of them as a steady and reliable source of funds ?
- What assumptions should be made concerning inflation?
- How much flexibility should one allow between the different sources of funding – bearing in mind possible constitutional constraints on transfer of dedicated funds?
- How much should one depend on pay-as-you-go vs. debt financing?
Not surprisingly, we also heard a lot of discussion about the potential of tolling and pricing. In this respect, our interest mirrored the growing attention to this topic by the transportation community across the country. Tolls are attracting attention because, in the longer term, they seem like a logical source of additional transportation revenue. They are easy to collect using electronic toll collection technology. And they are a true user tax: you pay only when you use a particular facility and the revenue remains within the state – indeed often within the corridor – in which the fee is collected.
Variable tolls are also an effective tool of congestion management— and this has made them popular with local transportation officials who are under pressure to do something about traffic congestion. What is more, there is growing evidence that the public welcomes the option of priced lanes that offer congestion-free travel. As a long-time proponent of HOT lanes, I was pleased to read that a University of Minnesota survey found 64% of the people living in the I-394 corridor liking the idea of a HOT lane. In Minnesota as well as elsewhere, the moniker "Lexus Lanes" no longer is taken seriously given the solid evidence that drivers of even modest means choose to use priced lanes when they are pressed for time. Most transportation user groups also have become vocal advocates of tolling.
Congress and the Bush Administration have taken notice of the changing attitudes toward tolling. Both the House and the Senate version of the reauthorization bill reduce existing statutory barriers to tolling. The US DOT's position is that states should be given maximum flexibility to use tolls and experiment with pricing to control demand and reduce congestion. Hence the Administration's SAFETEA proposal would eliminate all barriers to tolling on the entire federal-aid highway system, including the Interstates.
But tolling should not be a federal mandate. Rather, it should be a state prerogative. As federal transportation officials like to stress, they want Congress and the federal government to "get out of the way" and let states freely exercise this option if they so choose.
Looking into the future, the 21st century toll roads will bear little resemblance to the turnpikes of the past half century. They will be financed and built by states in partnership with the private sector. They will offer premium level service— offering value for the money in the form of congestion-free travel. And they will take many innovative forms such as HOT lanes and HOT networks, express toll lanes or FAST lanes along Interstate highways, and toll truckways.
C. Kenneth Orski is editor/publisher of Innovation Briefs. Innovation Briefs are published by Urban Mobility Corporation (UMC), a Washington-based consulting firm, established in 1982, and specializing in transportation management and technology transfer. More about Innovation Briefs may be found online at www.innobriefs.com.