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June 19th, 2009
The no. 13 line
Looking for a New Way to Fund Transportation Infrastructure – a Road Less Traveled

As the sage Yogi Berra once said, “When you come to a fork in the road, take it!” When it comes to financing transportation infrastructure, our nation has come to a fork in the road and we must take action. With President Barack Obama’s Administration warning that the trust fund for highway construction will go broke in August without a temporary fix, we have a choice to make: to hobble down the same federal funding path, or try something new.

Since the creation of the federal interstate highway system in 1956, Congress has relied on the Federal Highway Trust Fund to build and maintain roads. But the primary source of revenue for the fund, taxes on fuel, began to decline in late 2007 following a drop in driving and the growing popularity of fuel-efficient vehicles that guzzle less gas.

As a way to make up revenue, at least two congressionally mandated bi-partisan commissions have proposed increasing the gas tax, which has been 18.4 cents per gallon since 1993, at least as a short-term fix. The National Surface Transportation Infrastructure Financing Commission has recommended a gas tax increase of 10 cents per gallon and 15 cents per gallon for diesel, both indexed to inflation. We think those numbers are too low. For too long, the United States has lagged developed nations in Europe, where gas taxes can make up as much as 75 percent of the cost of a gallon of gas. During the last fuel crises in 1979 President Jimmy Carter recommended a 50-cents-per-gallon gas tax to get us weaned off foreign oil and get more efficient in transportation. Just imagine what our infrastructure would be like today had we followed Carter’s advice. No infrastructure crisis, impeccably maintained bridges, hi-speed rail and much more. Now fast forward to 2039; we hope people won’t similarly look back wistfully to 2009 and wish we had taken action.

A gas tax increase, however, should only be used as a short-term fix, rather than a long-term source of revenue. Why? Because relying on the gasoline tax creates a conundrum. If the gas tax is high enough to encourage citizens to drive less or to drive more efficient cars, as it should, then revenue dwindles. It reminds me of when I was New York City’s Traffic Commissioner and I reduced illegal parking so much the budget office was dismayed with lower fine collections. As Congress scrambles to come up with the roughly $7 billion it will need to plug the hole in the highway trust fund this summer, it is rightfully looking to industry experts for advice on funding alternatives to a gas tax hike. This soul searching couldn’t come a moment too soon.

The nation’s infrastructure system has deteriorated terribly. The American Society of Civil Engineers this year gave a D average to the country’s drinking water, wastewater, inland waterways, roads, and the new category: levees. The grade is not surprising given our mounting neglect to the system. The United States only spends about 2 ½ percent of its gross domestic product on infrastructure, compared with 9 percent in China and 4 to 5 percent in Europe. We should be reinvesting in ourselves as they do, with at least 4 to 5 percent investment annually.

There are a number of infrastructure funding proposals floating around at the moment that deserve to be road tested, while others may need to be redirected.

Much of the debate lately has swirled around the idea of taxing drivers by the miles they travel, a plan known as the vehicle-miles-traveled (VMT) tax. Such a system would harness the power of modern technology by using onboard tracking devices such as a Global Positioning System (GPS) to count the miles a car is driven. The Financing Commission in its February report to Congress recommended implementing this type of user fee system by 2020, and estimated that to maintain and improve the current amount of federal infrastructure spending the government would need to charge about 2.3 cents per mile for cars (equivalent to a 48.4 cents gas tax.)
Critics say a potential drawback to the VMT tax is that it wouldn’t encourage people to drive more fuel-efficient cars because drivers would be charged per mile regardless of whether they were driving a Prius or an SUV. A better system would take into account factors such as a car’s fuel economy, the time of day travelled, and the type of road travelled. Joe Giglio, a professor at Northwestern University and author of several books on transportation issues, favors a similar system that he calls “value pricing,” where technology could track multiple factors and drivers could essentially be tracked and charged for any lane on any roadway that they use. Rather than investing in pouring concrete for new roads, Giglio says, we should be investing in technology to implement value pricing, particularly in large metropolitan areas. The “net” from building fewer highway lane miles and revenue from user fees would be a savings to America.

At the moment, however, neither the VMT tax nor an increase in the gas tax is gaining much political momentum. Obama’s Administration has made it clear that the VMT tax is not an option at this time, and Congress isn’t too keen on raising gas taxes during the economic downturn. In that case, another good option on the table is to increase existing user-fees. We agree with the Financing Commission’s recommendations to expand the state and local governments’ ability to charge tolls on the interstate road system; and to double the heavy vehicle use tax, which has not been increased since 1983.

Another important funding idea that is gaining momentum is the use of public-private partnerships or “PPPs” as they are called in the industry. Cash-strapped state and local government entities would do well to seek out private funding sources to help modernize aging bridges, roads and other transportation infrastructure. And private investors would do well to step up. Infrastructure projects offer an opportunity for long-term investment. In a recent edition of Merrill Lynch Advisor, Andrew Obin, an analyst for Banc of America Securities, states that global stimulus spending on infrastructure “could offer some important and compelling opportunities.”

The public also appears ready for private investors to take part in our nation’s infrastructure. A new poll sponsored by the investment banking firm Lazard found that 59.8 percent of those questioned support private investment in public assets like roads, airports or stadiums, up from a support level of 52.2 percent last year.

Finally, we support Obama’s idea to create a National Infrastructure Reinvestment Bank. The enabling legislation says the fund would target large capacity-building projects not adequately served by current financing mechanisms, and calls for the bank to issue $60 billion in long-term bonds which could be leveraged to ten times that number. The bottom line is that it’s time to re-envision how our nation will pay for our infrastructure. The gas tax can no longer be relied on as a long-term solution. As transportation expert Gabriel Roth points out, back when the interstate highway system was created, in the late 50s, Congress agreed that when the system was finished in the 1970s, fuel taxes were to be abolished. He would like to see the Federal Highway Trust Fund expire, and fuel taxes expire along with it, so that financing returns to the states. We’re not ready to abandon federal support but we do agree with Roth that states should look long and hard at funding formulas that suit them. In our mind, user fees and PPP’s should get long hard looks.

The Obama Administration and its policy makers would do well to heed the warning of the Financing Commission and find a new long-term funding solution quickly. If the federal government fails to act now and to act dramatically, the Commission warns, the nation will face increasingly deteriorating roadways, bridges and transit systems; transportation-related crashes and fatalities will increase; and we will spend more time stuck in traffic. On a global level we will move toward the “second tier” of developed countries. We are better than that; let’s start acting like it.

  • William D. Ankner

    Once again the solution to our problems is debt. The National Infrastructure Bank has value but not as a stand alone solution. We need revenue solutions that are not tied to siloed modal funding sources.

    The Highway Trust Fund is endangered by the move from user based funding to general funds- this is a good thing. It needs to be replaced by a federal Transportation Trust with similiar quarantees like contract authority and firewalls. The Transportation Trust Fund would be intermodal and such a Fund would allow transportation officials to invest in the best transportation solutions their communities/states/regions believe are the best mobility solutions.

    Congress would fund the Transportation Trust Fund by an increase in the income tax, at the same time it is removing the federal motor fuels and aviation taxes.

    It is time to finance transportation at the national level on the bases of those who benefit from transportation- all of us and the business community; and not rely on consumption base taxes that encourage the wrong transport policies and behaviour. Think of the stupidity of how we finance transportation today- the consumption of a non renewable commodity. Every DOT head, unfortunately, has to wish for its citizens to go out and buy a Hummer and drive it 1000 miles a week to improve its revenue stream to build more roadways to meet the 1000 mile a week demands.

    Moving to a benefit approach with a protected Transportation Trust Fund funded by the general fund is probaly the best possibility for the future of public sector finance transportation.

    The funding level would be determined by transportations’ contribution to the national GNP, around 11-12%. Congress should allocate 11-12% of GNP to the Transportation Trust and disband the Highway and Aviation Trust funds and allow the states to keep or void the user fees collected in their states.The contribution to GNP also serves as a performance measure for future transportation funding levels. Now funding is based on the effeciency and effectiveness of the transport system to the economy. Multimodal decisions are then possible.

    A general fund Transportation Trust fund is not shackled by the arguments that a certain portion has to be dedicated to a certain transport mode, because it was generated fom users of that mode. The current way we fund transportation has created modal silos that are ineffecient and ineffective to met todays problems.
    Neither will VMT funding improve how we do business today.
    These ideas were expressed by me in a study in 2004 entitled “Financing Intermodal Transportation.”

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