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June 2004
Finance shifting from fuel tax to local measures, tolls
Martin Wachs
The nature of transportation finance is changing fundamentally and on a large scale, but the change is happening gradually and without much notice or broad discussion. Is the current direction of change desirable? According to Professor Martin Wachs of the University of California at Berkeley, the answer may well be no. Wachs explained why he believes this at the May 4 conference luncheon, in a speech titled "An Unseen (or Quiet) Revolution in Transportation Finance."
Finance has been shifting away from a historical reliance on user taxes—primarily the gas tax—toward a new dependence on a variety of local taxes, most commonly the sales tax, Wachs said. Fuel taxes were popular for decades at the state and federal levels, and, as a user fee, were supported by a wide variety of constituencies. The fees also provided incentives for efficiency—albeit as a "second-best" option to tolls, which were more desirable but less workable until electronic collection.
Today, however, there are "gathering storm clouds regarding the motor fuel tax," he said. A huge issue is that the tax must be raised by legislation. What's more, revenue does not rise automatically with inflation as does the income tax or sales tax. "It's a political discussion each and every time," he said.
As a result, a "quiet revolution" in finance has been underway nationally. State legislatures, reluctant to raise user fees and increasingly reluctant to directly raise fees or taxes at all, are instead putting measures on the ballot for voters to enact instead of taking action, especially in California.
This inaction means fuel taxes have been falling behind. Looking at a national average between 1957–2002, the state fuel tax in 1957 was 5.7 cents per gallon. If adjusted for inflation in 2002, the tax would be 31 cents, while the actual current average fuel tax is 20.3 cents per gallon. Minnesota's actual current fuel tax, at 20 cents per gallon, hasn't been raised since 1988.
While taxes lag, vehicle fuel economy is improving and inflation is reducing the value of revenue. At the same time, construction and maintenance costs have soared (by approximately 850 percent since 1957), vehicle ownership has grown faster than population growth, and vehicle-miles traveled is growing faster than population and economic growth. "This is a serious problem that demands our attention," Wachs declared.
In his research, Wachs learned that a sea change in transportation finance has occurred since 1970. Previously forbidden from collecting transportation taxes, local governments have been granted this authority in a number of states. For example, 15 states allow local motor fuel taxes to support transportation facilities, 33 allow local vehicle license/registration fees, and 33 allow local-option sales taxes. Moreover, the change is happening quickly: there were 44 transportation finance ballot measures in the U.S. in 2002 (half were approved), and 32 were local/regional in nature.
Nationally, fuel tax revenues from 1995–99 rose 18 percent and are still by far the largest source of revenues. Yet other taxes are growing more rapidly: local property taxes, up 22 percent; local general funds, 29 percent; other local taxes, 58 percent; and state borrowing, a whopping 92 percent. "We're not doing this through rational debate but by fiscal necessity," Wachs said.
Local-option sales taxes (LOSTs) are the most popular and fastest growing approach; a growing proportion require a two-thirds vote to pass. Most list specific projects or categories and include sunset dates—timeframes, for example, of 15 to 20 years and getting longer—and require reauthorization.
While becoming the dominant way of financing, LOSTs raise a number of issues. They move away from the user fee philosophy and provide no incentive for efficiency. They also make it more difficult to have consistency with regional transportation plans. "They trade flexibility for specificity in local measures, which is not the best way to decide complex decisions in a democracy," Wachs warned.
What's more, LOSTs are "Christmas tree measures," Wachs said, because "there has to something under the tree for everyone in order to get the two-thirds vote needed to pass." Thus, the list is not rationally determined but rather is a deal by politicians to pass the measure. The result is a "disassociation between passage and the ultimate efficiency of the system," he said.
Wachs believes the user fee concept is still valid and appropriate. The fuel tax will be used for decades, and attitudes toward tolls are changing. He predicts a higher probability of tolls on new capacity in order to avoid public perception of double taxation of existing roads. In the long term, Wachs sees the replacement of petroleum fuels and the use of road pricing using global positioning systems. "The shift is already happening," he observed.
In closing, he advised policymakers to consider the shift to local-option transportation taxes an interim measure. "In the reasonably short term there may be a need to raise taxes and tolls," he said, and "in the longer term—20-plus years—we need to change the entire basis of user fees."
To learn more about Wachs's research, please visit www.uctc.net and click on Research Papers.