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2005 Oberstar Forum — Rep. Oberstar's Speech

The Future of Transportation Finance: 'Gas Tax Plus' and Beyond

Remarks by Congressman James Oberstar, April 18, 2005

Origins of Financing the Federal-Aid Highway System

The story is often told of a young Army officer who in 1919 accompanied a convoy of 79 Army vehicles to travel across the continent from Ft. Myer near Washington to the Presidio in San Francisco. On the journey, heavy vehicles crashed through old wooden bridges; wheels got mired in sand and mud; and the convoy wound its way through small towns across America. Years later, that young Army officer became Supreme Commander of allied troops in World War II and he was greatly impressed by the Germans’ ability to move military materiel rapidly across Germany on its autobahns.

We all know that the young officer, Supreme Commander, and future President was Dwight D. Eisenhower and the Interstate system is rightfully named for him. But Eisenhower is not truly the father of the Interstate. He did not conceive of the system. Then, why, beyond the great story of his travels in the U.S. Army, is Eisenhower viewed as the father of the Interstate? Because under his watch, and with his leadership, Congress created a financing mechanism to make the 1939 MacDonald Report, outlining a national system of Interstate highways, a reality.

Congress had authorized the Interstate system in 1944. But 10 years later, little had been done. In the early 1950’s, the Subcommittee on Roads of the Committee on Public Works, working with the Bureau of Public Roads, examined highway needs and options for financing the system, including the feasibility of toll roads and the Clay Committee’s proposal to create a Federal corporation to issue long-term bonds to finance construction of the Interstate. In 1956, Congress, working together with President Eisenhower, imposed a 3-cent-per-gallon federal excise tax on motor fuels (commonly known as the gas tax) and deposited the revenues into a Highway Trust Fund. This would be the pay-as-you-go system to finance Interstate construction.

The Gas Tax

The lesson we learned from this experience was that an ambitious highway construction program could not be successfully launched without a steady stream of dedicated revenue to support the program. Highway projects take a long time to plan, design, and build, even in the early years of the federal program when the process did not include environmental review. Moreover, the dedicated revenue stream needed to provide: stability, continuity, sustainability, and, most importantly, certainty to the process of building our highways. The gas tax did that, and continues to do so to this day.

Moreover, the gas tax was a fair and equitable method of financing development of our highways. The tax is paid by all users of the system, and, although the system is not perfect, the amount of tax each user pays is generally equivalent to miles driven and use made of the system. It is for these reasons that Congress and President Eisenhower adopted the pay-as-you-go gas tax financing system and did not establish a national Interstate system of tolls or bond financing.

Although the gas tax provides a good basis for developing our transportation system, it has been less effective than it could have been, for the simple reason that the revenues generated by the tax were not always invested. Rather, some revenues were allowed to accumulate to produce a surplus in the Trust Fund to offset deficits in the rest of the budget. Beginning in 1969, the unified budget consolidated more than 100 trust funds, including the Highway Trust Fund, into a unified system in which trust fund surpluses offset deficits in the portion of the budget funded by general revenues. By the mid-1990’s, the Highway Trust Fund had built up an enormous surplus ($22.4 billion in FY1997).

In response to this disturbing development, Congress, with passage of the Transportation Equity Act for the 21st Century (TEA 21) in 1998, established a budgetary firewall around the Highway Trust Fund to ensure that all revenues generated by the Trust Fund would be invested. As a trade-off for this legislative protection, TEA 21 included provisions writing off most of the surplus in the Trust Fund, and ending the payment of interest on any surplus.

With TEA 21, we have significantly increased infrastructure investment in our highway and transit programs. However, our infrastructure needs greatly outstrip the revenues generated by the current gas tax.

The Post-Interstate Era: Increasing Demand

For almost 50 years, the gas tax has served as a basis for construction of the 42,800-mile Interstate system. Our $114 billion Federal investment in the Interstate has paid phenomenal returns in mobility, productivity, and economic growth: 1 percent of highway miles (the Interstate) carry 24 percent of traffic.

As we firmly step in to the post-Interstate era and examine the continued Federal financing of our highway and transit infrastructure, we must begin with a clear recognition of the continued need for a robust federal program.

The use of our highways is dramatically increasing:

  • Increased Vehicle Registration. Vehicle registration went up by 18.3 percent between 1993 and 2002.
  • Increased Vehicle Miles Traveled. Between 1993 and 2002, total vehicle-miles traveled rose by 19 percent.
  • Increased Household Vehicle Miles Traveled. While the number of households in the U.S. grew by 72 percent between 1969 and 2001, household vehicle-miles traveled shot up by 193 percent.
  • Just-in-Time and Increased Truck Travel. Using the just-in-time method, our businesses are ordering component parts and inventory stocks in smaller batches but delivered more frequently. Deliveries to the final destinations are most often made by trucks traveling on our roads and highways. Trucks have essentially become rolling warehouses and truck traffic grew at an even faster rate than passenger vehicles.

The results of the last decade simply compound the historical trend of travel demand outstripping almost all other indicators (growth in population, capacity of the system, etc.). Over the past 30 years (1970-2002), total vehicle-miles traveled by trucks leaped by 245 percent, outpacing even the enormous growth for passenger cars and light trucks (173 percent). Heavy trucks, with all the attendant increased stress on our highway infrastructure, make up a larger share of the overall traffic on our highways than ever before.

The gap between the growing demand and the existing transportation infrastructure capacity has widened even further. The Texas Transportation Institute’s 2004 report found that congestion in the largest 85 urban areas cost an estimated $63.2 billion annually in 2002. This cost represents 3.5 billion hours of wasted time and 5.7 billion gallons of wasted fuel due to traffic delays. The cost of congestion has quadrupled in the last 20 years ($14.2 billion in 1982) and there is no reason to expect the trend not to continue.

Highway/Transit Infrastructure Financing Options

It is in this context that this forum will discuss innovative ways to finance our highway and transit infrastructure. This forum can begin to examine the options that the “National Commission on Future Revenue Sources to Support the Highway Trust Fund,” established in the TEA 21 reauthorization bill (H.R. 3), will consider in the coming year. The nine-member Commission will consider alternative long-term sources for revenue to support the Highway Trust Fund at levels sufficient to fund our increasing transportation needs.

As the forum, and soon the Commission, begins to examine this critical issue, I would like to briefly discuss several possible financing options for increasing investment in our highway and transit infrastructure:

  • Restoring the purchasing power of the gas tax;
  • Expanding existing innovative finance programs (TIFIA and SIBs);
  • Expanding the use of tolls;
  • Establishing a tax-credit bond program;
  • Establishing a weight- or vehicle-distance tax;
  • Establishing an ad valorem fuels tax; and
  • Establishing a broad-based energy tax.

Although there are many options, it is critical that the financing system continue to meet the thresholds established in 1956 with the federal gas tax: stability, continuity, sustainability, and, most importantly, certainty to the process of building our highways and fairness for the users of the system.

Restoring the Purchasing Power of the Gas Tax

The amount of the federal gas tax, currently 18.3 cents per gallon, has remained unchanged since 1993. It is a flat tax, and does not increase as the price of gas does. In addition, inflation has seriously eroded the purchasing power of the tax revenues. Over the last decade, the current gas tax has lost more than one-quarter (27.5 percent) of its purchasing power. Today, one dollar in the Highway Trust Fund is equal to about 46 cents in 1980, and about 21 cents in 1970. Restoring the purchasing power of the gas tax to the level it equaled in 1993 would result in an increase of about 5.5 cents a gallon. Preserving this purchasing power by indexing the gas tax to adjust it for inflation would increase the tax by about 1⁄2 cent per gallon per year.

Each one-cent increase in the gas tax adds between $1.3 billion and $1.5 billion to the Trust Fund every year. This indexing approach to the gas tax was the linchpin to the Committee on Transportation and Infrastructure’s $375 billion highway and transit proposal in the 108th Congress. I consider the T&I bipartisan proposal to be a fair and equitable adjustment to the federal gas tax. Another advantage is that once the indexing is enacted, the tax would be adjusted without additional legislative action. Unfortunately, the Bush Administration vehemently opposed this approach and, in the current political climate (in which the House and Senate Republican Leadership’s are unwilling to challenge the White House), a gas tax increase appears unlikely.

The gas tax financing mechanism could also be adversely affected by future increased fuel efficiency. Over the past 15 years, the fuel economy of the total passenger fleet has remained static (and has actually declined slightly since 1987). In 2004, the average fuel economy of the U.S. passenger fleet was 20.8 miles per gallon. However, although fuel economy has remained stagnant to date, the introduction of hybrid and other alternative fuel vehicles holds promise of significantly increasing fuel economy in the near future. While increased fuel economy is better for our environment, as fuel economy increases gas taxes collected will decrease. Thus, fuel economy increases, together with possible changes in the fleet mix of passenger vehicles (e.g., decreased percentages of SUVs and light trucks which currently represent 48 percent of sales), present a concern for the long-term viability of the gas tax as a financing mechanism.

TIFIA and SIBS

TEA 21 authorized two innovative finance programs to supplement the Federal-aid highway program’s traditional grant reimbursement program.

Transportation Infrastructure Finance and Innovation Act (TIFIA)

Inspired by the successes of the Alameda Corridor rail separation project and the Orange County toll road, Congress established a federal credit assistance program in TEA 21 called TIFIA. The program is designed to help finance projects that don’t fit neatly into the federal-aid highway programs. Since its establishment, a total of 12 highway, transit, and passenger rail projects have received financial assistance under the program, 11 of which involved direct loans and one which was supported by a loan guarantee. The total credit amount of these projects is in excess of $3.5 billion, and at a federal cost (in terms of budget authority) of only $174 million.

The program did not develop to the level originally anticipated partly because the program requirements were either too restrictive (as relating to project size) or confusing (as relating to credit worthiness). H.R. 3 includes several modifications to broaden the program’s appeal and usefulness.

Although TIFIA is useful for certain large projects, particularly projects that generate revenue streams, it cannot replace our current gas tax-based financing mechanism. TIFIA loans will have to be repaid, and we still need a basic revenue source to fund highway investment. TIFIA will continue to be an adjunct for financing transportation programs.

State Infrastructure Banks (SIBs)

In the 1995 National Highway System Designation Act, Congress authorized a 10-state pilot program to establish state infrastructure banks (SIBs), which would make loans for infrastructure development. The pilot program was a means for states to provide direct loans for, or enhance the credit worthiness of, eligible highway and transit projects. The program allowed states to use up to 10 percent of their apportioned highway funds to capitalize their SIBs. In a subsequent appropriations act, Congress authorized a separate SIB pilot program for 29 states and provided specific funding for the program. In TEA 21, Congress continued four pilot SIBs in California, Florida, Missouri, and Rhode Island. Congress ensured that title 23 requirements (including Davis Bacon) applied to all projects funded by the SIBs and a subsequent appropriations act added a fifth pilot project (Texas).

The program has been successful in advancing projects of marginal credit quality or low priority among transportation projects in the state. H.R. 3 will make the pilot program under TEA 21 permanent and expand it to all 50 states. But like TIFIA, there needs to be a source of revenue to repay SIB loans and SIBs can only be a supplement to a traditional financing mechanism.

Tolls

Tolls have been proposed as an added source of revenue to build new roads, maintain existing roads, and to reduce congestion by reducing demand at periods of peak use.

I would be reluctant to see heavy reliance on new tolls. First, we are already seeing increased reliance on existing tolls. Toll authorities have significantly increased tolls and more than one third of the 5,000 miles of toll roads have seen increases in the past year:

  • Pennsylvania Turnpike … 43 percent increase;
  • Illinois Tollway … 56 percent increase; and
  • Dulles Toll Road … 100 percent increase.

Second, tolls have an element of inequity. Drivers paying tolls are also paying a gas tax for each mile driven on a toll road, so these drivers are in a sense paying twice. Tolls averaged out on a per mile basis tend to have a much higher cost per mile than the gas tax.

In addition, the burden on low-income drivers is more severe. I am not persuaded by the notion that toll roads benefit low-income drivers as these roads drain away some of the traffic from the non-tolled roads and ease traffic congestion for everyone, including low-income drivers. Nor am I convinced that low-income drivers are just as willing to pay tolls as higher income drivers. When your budget is tight, every dollar that goes to transportation, including paying tolls, is a dollar that is not available to buy food, pay rent, or obtain health care. If we must use tolls on our highways, we must take steps to ensure that equity is adequately addressed.

As part of the bipartisan compromise on the bill, H.R. 3 contains several toll-related programs: high occupancy toll (HOT) lanes, the congestion pricing program, the three-state interstate system reconstruction and rehabilitation pilot program, and a new three-state interstate system construction pilot program. These provisions authorize a limited number of new tolling projects, so that we can further evaluate the desirability of tolling.

These programs also include a number of requirements to ensure that the public interest is protected and that the programs will be fair and equitable to all motorists. At my request, the bill, as reported by the Committee on Transportation and Infrastructure, included a requirement that states that impose tolls under the pilot programs establish policies and procedures to charge low-income drivers reduced tolls. States will have total discretion in how they design and implement the programs to meet the policy goal. Unfortunately, that requirement was removed during House consideration of the bill. I intend to fight to restore the requirement in the conference committee with the Senate on this bill to lessen the financial burden on low-income drivers.

In addition, if we are to expand the use of tolling (even through pilot programs), we need assurance that the terms of an agreement for a toll project between a state or local transportation agency and a private investor do not prevent the public agency from building other projects to rectify pressing traffic needs.

This has happened in the past. California State Road 91 between Los Angeles and Riverside was constructed using private financing and it included a “non-compete” clause which prohibited the state from expanding the capacity of adjacent highways. When traffic diverted to nearby non-toll roads, the state was powerless to make necessary highway improvements.

I have insisted that H.R. 3’s toll pilot programs specifically prohibit such non-compete clauses.

Tax-Credit Bonds

Bonds have often been touted as an alternative financing option for transportation programs. Bonds are used to fund much capital infrastructure such as airports and schools. However, I would be reluctant to see bonds largely replace pay-as-you-go financing for the federal highway program. Using debt financing to fund transportation programs would shift the cost of repaying the debt to future generations.

However, tax-credit bonds could be used as an effective means to bridge specific gaps in transportation investment. For example, they could be used to finance projects of national and regional significance, otherwise known as “megaprojects.” These high-cost projects can take up a significant share of a state’s annual apportionments. No state can afford to build such projects. In addition, their benefits are often diffused and are spread over a multi-state region. Without the ability to capture all the benefits, no state will pay for these projects.

At this time, the Administration has specifically rejected the idea of using tax-credit bonds to finance highway and transit infrastructure investment.

Weight- or Vehicle-Distance Tax

A weight- or vehicle-distance tax is also a possible supplement or alternative to the gas tax.

Heavy trucks do a great deal of damage to our highways and bridges. The question has been raised as to whether truckers pay their fair share for the use of the infrastructure.

For many years, Oregon has had a weight-distance tax on trucks. The Oregon Department of Transportation (ODOT) believes it is better to charge trucks according to their use. But truckers always view this type of tax with suspicion. They believe this is a subtle method to shift the overall transportation funding burden to them and an indirect way to raise their highway tax.

Passenger vehicles such as cars, pick-up trucks, SUVs, motorcycles, vans, and minivans pose a different problem. While they don’t wear out the highways and bridges to the extent heavy trucks do, they tend to clog up the roads by their sheer numbers. This is a problem that gas tax indexing does not address.

A user fee based on the distance traveled may approximate more closely the use by passenger vehicles regardless of the price of gas or the fuel economy of the vehicles.

This type of tax tends to raise the thorny issue of privacy, especially when the distance traveled or perhaps even the location of the vehicle is recorded and transmitted electronically as part of the tax calculation.

This November, ODOT will begin a pilot program to examine the feasibility of such a road user fee. A GPS device will track the miles traveled, with the information stored on board the vehicle. During fill ups, the mileage data are transmitted using short-range radio frequency and a computer will calculate the proper user fee. The fee is added to the fuel purchase and charged at the pump. To protect privacy, no vehicle location information is stored in the vehicle and only the data on mileage are transferred—and only during refueling. Although this seems like an elaborate arrangement to protect driver privacy, the efficacy of the system will be evaluated during the pilot.

Ad Valorem Fuels Tax

As noted earlier, increased fuel efficiency presents a concern for the long-term viability of the gas tax as the primary source of funding for the Highway Trust Fund. Without any change in the current system, more fuel efficient cars and trucks could clog our roads without helping to adequately finance additional capacity to relieve congestion.

Some have advocated changing our gas tax from a fixed price per gallon to an ad valorem tax that is keyed to the amount of sale. As countries such as China and India step up their economic and industrial development, they compete for a larger share of the world’s limited oil supply and drive up the price of oil. Under an ad valorem tax system, as the price of motor fuels go up, more revenues will be generated for the Trust Fund at the same percentage tax rate.

A difficulty with this tax is that with the price of fuel so variable, it would be difficult to forecast annual revenues for a percentage tax. This, in turn, would create uncertainties as to how much funding the states would get each year.

Broad-Based Energy Tax

Finally, as technologies develop and mature, more alternative-fuel vehicles will be traveling on our highways. Alternative-fuel vehicles are often charged a lower tax rate than gasoline- or diesel-powered vehicles. For example, liquefied natural gas is taxed at the equivalence of 11.9 cents per gallon, and liquefied petroleum gases (propane) are taxed at the equivalence of 13.6 cents per gallon. Similarly, until last year, ethanol was taxed at a reduced rate that significantly affected Trust Fund revenues and the ethanol-user states like Minnesota. Other vehicles, such as fuel cell vehicles that run on hydrogen, pay no tax at all.

As the number of alternative-fuel vehicles grow, we need to ensure that energy policy goals such as promoting alternative fuels are balanced with their potential effect on the highway financing system. A broad-based tax on the energy of the fuel used may be an option. A number of questions immediately come to mind with such an idea. Which fuels should be included in the system? What method should be used to put them on equal footing so different fuels as well as different classes of vehicles would be paying their fair shares? How could the tax be collected without too much bureaucracy or cost?

Conclusion

This forum is an appropriate venue to thoroughly discuss the pros and cons of the various alternative financing mechanisms. We seek short-term answers to increase investment to address our enormous infrastructure needs and long-term options to consider as a sensible supplement or alternative to the current motor fuels tax. The thresholds set 50 years ago with adoption of the gas tax remain: stability, continuity, sustainability, certainty, and fairness.

Rep. Oberstar delivered these remarks April 18, 2005, at the fourth James L. Oberstar Forum, hosted by the Center for Transportation Studies and held at the University of Minnesota.