Meeting the Nation’s Transportation Funding Needs -- What’s Needed and How to Pay For It

1. Meeting the Nation’s Transportation Funding Needs --What’s Needed and How to Pay For It Presentation to Virginia Rail Policy Institute By Alfred Harf November 18, 2009

2. The Problem In Brief • Existing transportation funding source(s) have not been increased since 1993 • The purchasing power of existing sources has eroded substantially • More serious erosion looms on account of alternative fuels and continuing inflation • Needs substantially exceed available resources • Congestion and time spent in transport mounting • Infrastructure conditions deteriorating • Cost of doing business increasing • Existing funding sources do not promote efficiency or equity • Pricing does not reflect real costs • Costs not fairly borne

3. Existing Highway Trust Fund Revenues & Yields By Source

4. Allocation – Comparing Costs Vs. User Charges By Vehicle Class Ratios under 1.0 are instances of underpayment http://www.fhwa.gov/policy/hcas/addendum.htm (11/7/2009 5:07.14 pm)

5. The Problem Is Widely Recognized • Two commissions established in SAFETEA-LU* to examine the problem and recommend a course of action • National Surface Transportation Policy and Revenue Study Commission (the “Policy Commission”) • National Surface Transportation Infrastructure Financing Commission (the “Financing Commission”) • Both have concluded their work, and there’s a remarkable degree of consensus • While the Congress has yet to act, there are encouraging signs that the commissions’ stark conclusions and provocative recommendations will play an important part in the legislative debate *Safe Accountable Flexible Efficient Transportation Enhancement Act-A legacy for Users

6. Three Fundamental Issues to Resolve What are the needs? What is the federal role in addressing these needs (as distinct from state and local government)? How should the federal cost be borne?

7. Needs – What the TwoCommissions Concluded • Aggregate surface transportation investment required is multiple times the prevailing level • Policy Commission estimate: 3 – 3.5 x • Financing Commission est.: 2.4 – 3 x • Methodologies varied somewhat • Policy Commission analysis modally all-encompassing • Both formulated more than one scenario (baseline and beyond baseline) • Both affirm need for expanded federal role in passenger and freight rail as discussed later • Strong endorsement of user fees to achieve equity and efficiency aims • Policy Commission champions creation of new tax rate setting body to insulate needed indexing from the political process

8. Equal Time for the Policy Commission Dissenters – What Was Their Beef? • Fuel tax increases are not the solution • Ineffective ( a poor proxy for user pays) • Breeds wasteful spending • Unnecessarily large federal role • Role should be defined by what’s in the national interest, not by a percentage share of overall investment rooted in history • Needs not as well supported as they should be • Recommendations fail to fully exploit pricing opportunities • New rate setting body to establish future tax rates bad public policy • Too much earmarking (still)

9. A Closer Look At Rail Needs • Arguably the weakest element of both commissions’ analysis • Policy Commission addressed frontally; Finance Commission peripherally • Policy Commission conclusions – rail freight • Simply embraced AAR’s National Rail Freight Infrastructure Capacity & Investment Study* findings • Demand driven – “to maintain market share” • No Benefit/Cost analysis • System expansion alone (no rehab) • Rail freights resistant to disclosure of rehab needs • Supposition—rail freights can handle rehab without public support • Supplemental analysis of a “20% increased market share” scenario • Overall need is $5.3 – 5.7B / year on average through 2055 ( additional $2B / year in “20% increased market share” scenario) *American Association of Railroads 2007

10. A Closer Look At Rail Needs(Continued) • Policy Commission conclusions – passenger rail • Bottom up analysis (corridor-by-corridor) produced based on available information and expert knowledge of a Passenger Rail Working Group formed expressly for this purpose • Not demand driven • No Benefit/Cost analysis • Overall need is $8+B per year on average through 2055 (interesting comparison – Stimulus discretionary funding attracted over $100B of requests) • Investments as embraced by Policy Commission could accommodate 8-9 x current rail passenger revenue miles (5.5 million miles was the base)

11. Needs Estimates – Comparisons from Various Assessments (Federal Share Only) • Policy Commission’s needs estimates include $14-16B per year for passenger and freight rail • Finance Commission’s needs estimates do not include funding expressly for passenger and freight rail

12. Needs – Federal Role • Both commissions call for federal share to be sustained at 40-45% of total investment • Implicit expectation that state and local investments will increase proportionately • Policy Commission envisions substantial change in federal role • Performance-based outcomes • Program simplification • More state / local enablement • Tolling / congestion pricing • Infrastructure banks • Expanded private sector participation • Tax credit bonding (an idea that Financing Commission espouses for passenger / freight rail and other goods movement projects

13. Revenue Options Considered and Evaluation Summary

14. How to Pay for It – General Observations • Both commissions strongly endorsed migration from fuel-based tax to mileage-based tax by 2020-2025 • Both commissions called for stop-gap funding plan featuring federal fuel tax hike(s) and indexing thereafter, supplemented by other revenue raising strategies • Policy Commission – 5-8¢/gallon each year for next five years (25-40¢/gallon all told) • Finance Commission – 10¢/gallon for gas and 15¢/gallon¹ for diesel immediately and indexing thereafter • Other revenue raising strategies • Federal truck taxes raised proportionately • Customs duties (partial dedication)² • Federal freight fee – e.g., container charge, freight waybill surcharge² • Federal ticket tax on transit trips (Financing Commission spurned this) _ ¹ 2¢ of the 15¢ expressly for freight / good movement investments ² Expressly for freight / good movement investments

15. How to Pay for It – General Observations(Continued) • Both commissions champion “user pays” principle as a means of achieving equity and efficiency aims • The Policy Commission anticipated climate change legislation and called for a share of the resultant revenue from transportation sources to be designated for GHG-reducing transportation investments – as a supplement, not substitute, for its transportation funding recommendations

16. Why Is There A Need For A Stop-Gap Plan? • Mileage-based tax poses a host of challenges requiring time to resolve • Public acceptance • Aversion to tolling / pricing (“double taxation” argument) • Social / rural equity concerns • Cost to outfit nation’s vehicle fleet with sophisticated mileage-based tax technological capability is prohibitive if done instantaneously • Privacy concerns • Successful execution requires careful planning • Consensus about policy objectives • Appropriate technology choices • Getting the pricing right to bring about desired efficiencies • While careful planning requires a decade or longer to accomplish (more on that subject later), the current “HTF insolvency” problem can’t wait

17. Highway Trust Fund Balance Without Some Form of Relief American Association of State Highway and Transportation Officials

18. Implications of Not Fixing the Problem

19. Prescription for a Mileage-Based Tax (and Supplements) • Both commissions strongly endorse • User pays principle (with exceptions) • Allocation commensurate with costs that users impose on system • Weight as a factor (Policy Commission confines this to only state / local sources) • Congestion as a factor • Pricing structure designed to achieve efficiency and equity objectives • VMT* tax as principal but not only source • VMT* taxes identified in reports are heavily caveated because they are averages and don’t account for possible supplemental sources of revenue (“If entire federal share had to be borne by VMT tax…”) * Vehicle Miles Tax

20. Financing Commission’s Illustrative VMT Fees

21. Angst About 2020-2025 Timeframe(Can It Be Done More Quickly?) • Fuel tax revenue yields have declined faster than expected • NCHRP* Study (# 143) prompted by AASHTO; completed in June 2009 • More in-depth analysis of plausible courses of action examining • Metering methods • Billing methods • Enforcement methods • Evaluation criteria • Implementation costs • Functional considerations • Institutional considerations • User acceptability *National Cooperative Highway Research Program

22. Policy Objectives and Metering Capabilities They Require

23. Conclusions • 2015 timeframe possible with concerted effort • Three most promising course of action • Fuel consumption-based mileage estimation • On-board diagnostics 2nd generation (“OBD II”) port • Coarse resolution GPS • All three require special handling of trucks to deal with “weight” and “route taken” issues • “Opt-in” enticements could be an effective means of inducing greater / faster public acceptance

24. The Policy Advice Has Been Rendered – Now What? • House T&I Committee has reported out its authorization bill • Roughly doubles level of federal investment • Philosophically in concert with call for simplification and performance outcomes, but not “fully baked” structurally • Does not address question of how to pay for it – that’s up to the House Ways & Means Committee • Senate bill awaited • Limping along with very short term extensions • Debate about timing of actual authorization • White House favors 18 month short term extension • House favors limiting short term extension to three months • Senate views have not coalesced as yet • Debate about how to pay for it • Fuel tax increase is a tough sell • Short term extensions relying on general fund appropriations, “kicking the can down the road”