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How Not to Fix, and Fix, Federal Surface Transportation Policy

A lot of misinformation and scaremongering swells around transportation infrastructure policy in Washington. We are told our highway network is on the verge of collapse (false), that the federal role is the most critical component of government transportation infrastructure funding (false), and that things will only get worse unless we submit to massive federal gas tax increases (false). To be sure, there are many transportation projects that should be completed over the next two decades. But the “crisis” is politically manufactured. The infrastructure lobby does no one any favors by overstating the problem and supporting reckless and inefficient tax-and-spend policies.

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A Sea of Bad Policy Non-Fixes
A User-Based Path Forward

The “Crisis” in Context: Blame Mass Transit?

Let’s start with the problem. As of January, the Congressional Budget Office (CBO) is projecting a 10-year $168 billion shortfall in the federal Highway Trust Fund (HTF). By 2025, CBO is projecting that the outlays from the HTF’s Highway Account will exceed revenues and interest by $16 billion (47 percent), with outlays from the HTF’s Mass Transit Account exceeding revenues and interest by $6 billion (150 percent). The HTF’s Mass Transit Account is in much worse shape over the long-run. It is also important to note that virtually every penny of the HTF’s Mass Transit Account is diverted revenue collected from drivers—2.86 cents of the 18.4-cents-per-gallon federal gasoline excise tax and 24.4-cent federal diesel excise tax is dedicated to the Mass Transit Account.

Why is there a Mass Transit Account in the Highway Trust Fund? Because President Reagan made a foolish decision in 1982 to dedicate 1 cent of the federal fuel excise taxes to mass transit, as urban liberals would have otherwise refused his gas tax increase for Interstate projects on equity grounds (fuel taxes can be quite regressive). So, this misguided horse trade from The Gipper is why nearly 20 percent of all federal surface transportation funds are now directed to mass transit, a mode that accounts for less than 5 percent of commuting trips. But it gets worse. Less than 2 percent of total trips, both commuting and non-commuting, are completed by mass transit in the United States. When we consider expenditures from all levels of government—federal, state, and local—we observe that mass transit receives approximately 25 percent of the nearly $210 billion spent annually on surface transportation. That’s 25 percent of total funding for less than 2 percent of trips.

In most places in the U.S., transit is a white elephant mode backed by powerful environmentalists, developers, and unions that does nothing to mitigate traffic congestion, which was its primary stated purpose in the 1970s when the federal government first began making large capital grants for local transit systems. More troubling, the U.S. Department of Transportation currently estimates that America’s mass transit systems have an $86 billion deferred maintenance backlog and that transit agencies need to increase annual system preservation spending from $10 billion to $18 billion just to tread water. No one knows where this additional money will come from, yet politicians continue pushing disastrous transit system expansion plans.

If we were to redirect federal highway-user revenues that are currently automatically directed to mass transit from FY 2016-2025, CBO’s projected HTF revenue-outlay imbalance would be reduced from -$168 billion to -$77 billion over 10 years. Ending the major highway-dollar diversion to transit is unlikely to happen, but it is important to remember that political pandering to the transit lobby is responsible for more than half of CBO’s current projected HTF fiscal woes. But even without ending HTF diversions to mass transit, given the federal government’s small role relative to those of state and local governments, that projected $168 billon HTF shortfall would only account for about 8 percent of total surface transportation expenditures through FY 2025 assuming no increases in state and local spending. Some “crisis,” eh?

A Sea of Bad Policy Non-Fixes

The HTF has faced similar problems for a decade. In the lead up to the last reauthorization in 2012, I criticized a variety of HTF bailouts ranging from “drilling for roads” (failed) to “pension smoothing” (succeeded). This time around, members of Congress have a bold new set of plans to finally address the HTF’s revenue-outlay imbalance once and for all. Just kidding! The proposals so far are just as worthless and unserious as past proposals. Drilling for roads is back. Private pensions, having been excessively smoothed in July 2014’s highway bill extension, are no longer a source of made-up revenue. But lawmakers in both parties are now considering corporate tax repatriation schemes to bail out the HTF. In addition to the Paul-Boxer proposal, Rep. John Delaney (D-Md.) and President Obama are pushing tax repatriation HTF bailouts.

In addition to the bad ideas floating around Capitol Hill, the Eno Transportation Center has proposed ending federal user taxes and the Highway Trust Fund—the rule since the Federal-Aid Highway Act of 1956 established the Interstate Highway System and Highway Trust Fund. Eno’s proposal has been widely panned by free-market transportation policy scholars as well as industry stakeholders, as few wish to risk subjecting very large, multi-year transportation projects to the whims of the annual appropriations process. So, ending dedicated transportation funding is DOA, at least for the foreseeable future.

Despite industry’s opposition to ending the Highway Trust Fund, their support for significantly increasing the federal fuel excise tax rates will prove about as uninfluential as Eno’s report. The U.S. Chamber of Commerce, American Trucking Associations, and AFL-CIO have all supported dramatic increases in the federal fuel excise tax rates. This proposal is opposed by both House Speaker John Boehner and President Obama, as well as a large majority of Americans, so it is unlikely to go anywhere. Big Business and Big Labor tried and failed to do the same thing in the 2011-2012 lead up to the previous highway bill reauthorization. But it is important to remember that whenever Big Business represented by the Chamber and Big Labor represented by the AFL-CIO team up, you can be almost positive that the rest of us will lose. Like Eno’s support for killing the HTF, this proposal also appears DOA for this reauthorization.

Of all the DOA non-fixes, though, perhaps the most thoughtful comes from the Tax Foundation. They propose increasing the gasoline excise tax rate (currently 18.4 cents per gallon) by over 50 percent to around 28 cents per gallon. They would then index the gas tax to inflation. In addition, reductions in other non-transportation taxes would render the fuel tax increase “revenue-neutral.” However, as I see it, there are a few problems with the Tax Foundation report.

First, it is unclear if they recognize that diesel and gasoline motor fuels are taxed at different rates. Their proposal mentions a 10-cent increase that would bring the year-one tax rate up to around 28 cents. Clearly, they are discussing the gasoline tax rate, which has been set at 18.4 cents per gallon since 1993. The diesel tax, also last changed in 1993, is currently set at 24.4 cents per gallon. The reason for the disparity is that heavy trucks are responsible for most of the pavement and roadbed damage generated by highway users (damage increases at the third to fourth power of axle weight). Would the diesel tax be equalized with the gasoline tax (a very wrongheaded idea) or would the diesel tax increase to approximately 34 cents per gallon? Tax Foundation doesn’t say and it is unclear based on what they provide to readers how this would factor into their future revenue estimates.

Second, their inflation measure appears to be the same one recommended by Rep. Earl Blumenauer (D-Ore.) in his UPDATE Act as introduced in the previous Congress. Blumenauer’s indexing proposal can be found in Section (3)(c) of his bill, which refers to the cost-of-living adjustments contained in 26 U.S.C. § 1(f)(3). And what is this inflation measure? The Consumer Price Index (CPI)! But if the purpose behind indexing fuel tax rates to inflation is to account for changes in cost over time, why would such a broad measure be the ideal choice? In fact, we have another inflation measure specifically for transportation infrastructure, the Federal Highway Administration’s (FHWA) National Highway Construction Cost Index (NHCCI).

The Oregon Transportation Forum produced a comparison of a variety of inflation indices, displayed below:

One thing you should notice is that NHCCI fell during the recent economic downturn while CPI continued trending up. Yet, NHCCI more closely reflects road construction-related prices. If CPI rather than NHCCI had guided FHWA cost projections during the past few years, the agency would have overestimated construction costs. Before that, relying on CPI would have led agencies to greatly underestimate construction costs. It seems odd for Tax Foundation to recommend CPI when NHCCI is available. Perhaps it is because CPI is more predictable than NHCCI, but is not the purpose of indexing tax rates to inflation to better reflect changing costs into the future?

Finally, my biggest problem with the Tax Foundation analysis is that it proposes to lump transportation policy decisions in with general tax policy. I get the tendency for mission creep—this is the Tax Foundation—and believe Tax Foundation offers a better approach than the proposed repatriation schemes, drilling for roads, replacing the Highway Trust Fund with general appropriations, and much of the other nonsense floating around Washington, D.C. However, contrary to Tax Foundation’s claim that increasing the gas tax would somehow allow members of Congress to “focus on bigger questions,” shoring up the Highway Trust Fund will let lawmakers ignore the medium- and long-run problems with a user-pays mechanism that relies primarily on fuel excise taxes. That said, if members of Congress must adopt any of these proposals, the Tax Foundation approach is the most sensible.

A User-Based Path Forward

Many transportation policy observers estimate that rapid increases in fuel efficiency spurred by federal Corporate Average Fuel Economy regulations will cause the current fuel tax–reliant Highway Trust Fund to implode sometime within 15 years. Prior to this implosion, the fuel taxes would have become extremely regressive, as the wealthy would avoid the taxes with their highly fuel efficient or all-electric vehicles, shifting the fuel tax burden to the working poor. This is an outcome no one wants to see.

I am a supporter of devolving federal surface transportation responsibilities to the states, ending highway user revenue diversions to mass transit, repealing federal fuel taxation, and abolishing the Highway Trust Fund. However, such a proposal is also DOA at this time. Instead, I propose what I like to call “de facto devolution.” There are two element to this approach: 1) equalize outlays with estimated Highway Trust Fund revenues and hold tax rates constant, and 2) eliminate impediments on states to generate their own user-based revenue.

Innovation Briefs’ Ken Orski has done a great job of highlighting states taking the lead on transportation funding and finance, with a number increasing their state fuel tax rates, looking at public-private partnerships and innovative financing mechanisms, and expanded road user charges such as all-electronic tolling.

To the Obama administration’s credit, they have endorsed some common sense reforms to transportation law. The two big ones are ending the current federal prohibition on states tolling their own Interstate segments (codified at 23 U.S.C. § 129) and uncapping and expanding the eligibility of Private Activity Bonds with a new bonding program called Qualified Public Infrastructure Bonds. Expanding all-electronic tolling and private financing to Interstate reconstruction is an approach developed and championed by the Reason Foundation’s Bob Poole. Critics of tolling, namely the trucking industry, will likely oppose federal and state efforts to enhance user charging, but Poole has also developed what he calls “value-added tolling” to address these concerns. Policy makers would be wise to examine these proposals if they wish to continue the traditional user-pays framework.

All-electronic tolling is right now the best user-based regime available. However, direct, comprehensive road pricing may not be far off in terms of technical and fiscal feasibility. Oregon is leading the way with its Road Usage Charge (RUC) program. Their program will likely be a cost-effective and fair revenue-raiser while protecting road user privacy and compliance choices. Their 5,000-volunteer pilot program is set to launch this July. We will be watching the RUC pilot closely.

Proponents of sound transportation policy in Congress would be wise to “think outside the box” and look to new mechanisms and technologies to solve this problem, rather than just patching the hole in the status quo. The bonus for Congress is they need to do very little in terms of actually embracing more robust user fees—they really just need to let states take the lead. But for this to happen, Congress must first untie the hands of the states.

For a few other ideas, see the Surface Transportation Reauthorization entry from CEI’s recently released Agenda for Congress.