Reforming Transportation Finance: Needs, Opportunities, Constraints Martin Wachs, Director Institute of Transportation Studies UC-Berkeley

Overview of my talk  Review of Current Needs; Summarizing Points Made by Earlier Speakers  Criteria by Which to Evaluate Policy Responses to Needs  Review of Current Opportunities  Review of Constraints….Mostly Political

History of Transportation Finance  Motor fuel taxes enormously popular  Supported by wide variety of constituencies  Adopted in every state by 1940  Federal motor fuel tax in thirties  Fundamental finance mechanism for Interstate System in fifties

History of Transportation Finance  User fees in USA became associated with “trust funds” and non-diversion constitutional provisions in many states  Elastic definition of user fees allowed expansion to transit and to environmental mitigation in many states  “Hypothecation not common worldwide, but key to popularity in USA

Motor Fuel Taxes  Usually Expressed as “Cents per Gallon”  Must be Raised by Act of Legislature  Revenue Does Not Rise Automatically with Inflation as Does Income Tax or Sales Tax  Improving Fuel Economy Lowers Revenue per Mile of Driving  Revenue Declining Precipitously in Relation to VMT

Fuel Tax Changes,  Average of Fifty States  State Fuel Tax in 1957: 5.7¢/gal  If adjusted for Inflation in 2002: 31.0¢/gal  Actual Current Fuel Tax: 20.3¢/gal  Difference 10.7¢/gal

Fuel Tax Changes,  California  State Fuel Tax in 1957: 6.0¢/gal  If adjusted for Inflation in 2002: 32.5¢/gal  Actual Current Fuel Tax: 18.0¢/gal  Difference 14.5¢/gal

Eroding Buying Power of Fuel Taxes  Only Three States Have Raised Fuel Taxes Sufficiently Since 1992 to Keep Even with Inflation  Improved Fuel Economy Lessens Revenue Per Gallon  California Would Have to Triple its Motor Fuel Tax to Restore Buying Power Per VMT to the Level of 1957

Changes in State & Local Transportation Revenue, (National Totals) Billion$/Year % Change State User Fees % Local Property Taxes % Local General Funds % Other State Taxes % Other Local Taxes % State Borrowing %

Criteria by Which to Judge Alternative Approaches  Revenue Production  Equity  Political Acceptability  Contribution to Operational Efficiency  The measures may differ short term versus long term with respect to these criteria

Review of Current Opportunities Reassert Reliance on User Fees Raise Fuel Taxes Indexing the Fuel Taxes Shift to More Direct User Fees: tolls/congestion pricing/hot lanes/ VMT Fees Increase Borrowing….defer user fees Continue to Increase Local Sales Taxes (via Voter Approved Measures)

Raising the Fuel Tax  Has Been Popular in the Past  Increases Small in Comparison with Market Fluctuations  Easy and Cheap to Administer  Encourages Increased Fuel Economy  Regressivity Tempered by Limiting Incidence  Has Obvious Limit in Long Term as we Transition to Alternative Energy Sources

Indexing the Fuel Tax  Has Been Done Dozens of Times in States and Often Retracted  What should be the Basis of Indexing….Fuel Price, CPI, Highway Cost Index, Expenditures?  If Not Done Right Can Add to Price Volatility

Shift to More Direct User Fees  Tolls  Difficult to Implement on Existing Toll-Free Roads  Greatly Aided by Widespread Acceptance of Electronic Toll Collection  HOT Lanes  Incremental Toll Increases on Existing Roads and Bridges  Toll Financing of New Capacity

VMT Road User Charges  Technology getting Closer  GPS Measurement of Use  Unit Price Charged Based on Time of Day and Particular Facility and Particular Class of Vehicle  Very Promising for Longer Range – 20+ Years for Cars, sooner for Trucks

Increased Borrowing  Borrowing Used Less in Transportation than Other Infrastructure Programs  Interest is an Operating Cost That Can be Substantial; But Often Warranted  Borrowing Can be Justified by Timing of Flow of Costs and Benefits  Borrowing More Easily Justified for Capital Costs than Operating Costs

Local Option Transportation Taxes---Already Growing Quickly  44 Transportation Finance Ballot Measures in US in 2002  32 Local/Regional in Nature  9 Statewide  20 Dealt with sales taxes  5 Property taxes  1 Gasoline tax 9 Bond issues

Major Features of LOTTs Majority vote or supermajority Project lists/categories Sunset dates/reauthorization Implemented by local govts.

Issues Raised by LOTTs  Move Away from User Fee Philosophy  Sales Tax is Broad Based Tax  Regressive  Consistency with Regional Transportation Plans  Project Delivery  Local Authority and Responsibility  Flexibility versus Specificity  Salience of Issue of “Trust”

Issues Raised by LOTTs  Christmas Tree Measures  Pay to Play Measures may be Even Worse (California Proposition 51)  Dissociation between projects and efficiency of system

A Mixed Strategy Most Likely  Local Measures Appropriate for Local Serving Facilities (Including Transit), NOT for Major Interstates, for Example.  Local Measures Will Be a Major Transitional Finance Mechanism, but Should Not be Centerpiece of our Strategy  There is a Limit to Local Financing Capacity  Transportation Competes with Other Local Needs in Post-Proposition 13 World

Increasing Use of Tolls  New Capacity Expansion/Toll Roads  Specialized Toll Roads: Truck Only Lanes, Hot Lanes/ Electronic Tolling  Congestion Pricing in Particular Locations but Growing Gradually  Truck User Fees Before Widespread VMT Applications  A Year Transition  The Need for Revenue Will Dominate Over Reluctance to Use Toll Mechanisms

Borrowing  Some Uses, Facility Specific Focus on New Capital Expansions, Not on Operating Costs, Rehabilitation, Maintenance

Interim Bridging Measures  Fuel Tax Increases and/or Indexing Appropriate Now for Short Term Transition  Effectiveness Significant in Short Term, Weakening in a Decade or Two  Probably Devolving to States and Even to Regional Fuel Taxes More than Relying Upon National Fuel Taxes to Grow as Rapidly

Political Considerations  Reluctance of Elected Officials to Raise New Taxes is Greater than Unwillingness of Constituents to Have them  Related to Trust of Elected Officials By Citizens  Tolls: Paying Twice for Same Roads  Tolls: A Tax on Foreigners Living Abroad  Sales Taxes: Concentration Versus Dispersion  Privacy Threats Inherent in Some Approaches

That’s What I See Coming How About You? Thanks for your attention