SPECIAL REPORT: New financing options sought for transportation

| 11/12/2003

Federal and local transportation officials are looking at new ways to fund transportation at a time when many states are experiencing the worst financial crisis since the Great Depression, according to a September 2003 report.

The study, "Financing Intermodal Transportation," was completed by a group called Reconnecting America and written by William J. Ankner, a former director of the Rhode Island Department of Transportation.

Reconnecting America is a national non-profit organization. It is backed by foundation grants and government funding, including assistance from the Packard Foundation, the Surdna Foundation, the McCune Foundation, the Turner Foundation and the MacArthur Foundation, as well as funding from the Federal Transit Administration and the U.S. Environmental Protection Agency.

"The past six financially good years prior to 2002 saw a pattern of state tax cuts and debt issuances," Ankner wrote. "Weak economic times now see even more reliance on debt at the same time revenues to pay the debt are declining."

For example, states like New Jersey have 61 percent of their Transportation Trust Fund going toward dept. service and 100 percent by 2006. New Mexico is so leveraged from leveraging federal funds they are unable to fund any new capital activities for the next 10 years, the report says. And other states, like Rhode Island, see 46 percent of their gas tax revenues going to debt service.

Moody's Investor Service has placed California's bond rating under review for possible downgrade and California is "already tied with New York as the state with the lowest rating from Moody's," the report says.

The study uses data from Thomson Financial that says states issued $90.78 billion in long-term debt in fiscal 2001, but that figure shot up to $130.66 billion in fiscal 2002. For fiscal year 2003, which for 46 states ended on June 30, 2003, states have issued $176.08 billion in long-term debt.

Part of the crunch comes from the traditional reliance on user fees. According to the Federal Highway Administration, about $133 billion in revenue for highway spending came from federal and state gas taxes in 2001.

The federal gas tax is 18.4 cents a gallon. The primary federal high user fees are: the gas tax, vehicle taxes and fees, heavy vehicle use, tires, truck and trailers, diesel and other special motor fuels and gasohol.

Ankner's report proposes to keep the user fee approach, but add other financing options, including:

  • A value-added tax on cargo;
  • A national vehicle-miles-traveled fee;
  • A national vehicle registration fee;
  • Tax-credit bonds; or
  • A shift away from modal funding to the income tax.

The VAT and cargo tax options

Most manufactured goods and consumables dependent on transportation are moved by container, box, trailer or package. For that reason, the report proposes assessing a value added tax, or VAT, on the total value of goods in the country on an annual basis.

The estimated annual value is $11 trillion - a VAT of .25 percent would yield about $27 billion; and .25 percent of $4 trillion would yield about $10 billion - a more likely number, since the $11 trillion includes double and triple counting as the freight moves from one mode to the next.

Money from the VAT would be placed in a "Last Mile Fund," - however, the report notes, collection of the surcharge would be difficult and expensive.

On the other hand, since everyone shares the value of the goods transported, the VAT approach would be fair, the report says. "The producers and carriers would improve their efficiencies as the barriers to intermodalism and connectivity are reduced by the new transportation investments," the report said. In addition, none of the modes suffer from a loss of funding, since this is new revenue that applies to all freight carriers.

A similar approach to a VAT would be a dollar surcharge collected at the point of generation on each metric ton, which is expected to yield about $1 billion. The proceeds would be placed in the Last Mile fund, and would apply to all cargo tonnage, not just imports.

The report says this would be fair since the surcharge would apply to containers, trailers, boxes, rails, cars and packages originating from all places and modes, and does not penalize any single mode.

On the other hand, collection would be hard and the surcharge would be seen as unfairly targeting foreign goods, raising the price of those goods. A trade challenge would be expected, the report said.

Vehicle miles traveled fee

Motor fuel tax receipts are declining at the same time vehicle miles traveled continues to grow. FHWA Administrator Mary Peters testified recently that VMT are expected to grow by 42 percent by 2020. So, a user tax based on the actual use of the vehicle could be assessed, the report suggests.

Transponders and Global Positioning Satellite devices would be used to capture use on the transportation system. This however, would probably cause strong arguments about the use of technology and privacy.

On the other hand, VMT tax would supplement motor fuel taxes. It would be fair in that those who use the system most pay more for the system, the report says. In addition, the tax might be adjusted to the weight of the vehicle or also tied to fuel efficiency.

National vehicle registration tax

The user concept also applies to the vehicle itself - there are now more cars in U.S. households than drivers, the report says - so, a national tax on the value of the vehicle could be assessed.

This would be fair since it would apply to users of the roadway and bridge system. However, critics would seek to keep such a tax for highway purposes only, and would argue that other modes are not paying their fair share.

Tax credit bonds

Similar to housing's FANNIE MAE or the taxable tax-credit bonds to renovate schools in poor neighborhoods, a Transportation Finance Corporation would be set up to fund transportation by issuing tax-credit bonds. The concept could leverage $20 billion into an additional $43 billion over 10 years.

The American Association of State Highway Transportation Officials backs this idea and proposed indexing the federal motor fuel tax to finance the debt.

On the positive side, the Congressional Budget Office would support the idea in that there is no immediate drain on the treasury and the approach would provide the needed increase to make the TEA-21 reauthorization possible without raising taxes. However, there would be some loss to treasury funds.

Since the debt is 20 years, the costs could range from $40 to $50 billion in new paper, the study said.

The income tax

This approach would levy a percentage of the Gross National Product to fund the transportation system. In addition, the tax would be collected through use of the income tax system for business and individuals.

The income tax revenues would be collected into a federal Transportation Trust Fund. "With one transportation trust fund, the need to fracture federal transportation policy into modes is removed," the report said.

Allocation to states, cities and local government, transit providers, airports, ports intercity passenger and freight providers, ports, etc. would be determined by transportation needs and the entities' performance in achieving new federal transportation goals and needs.

The report adds: "(This) would save tens of billions in collection and administrative costs compared to the existing system - savings could go directly into the transportation system and this single tax would eliminate all other federal taxes.

On the down side, there is little political support for new taxes. Moreover, creating a Transportation Trust Fund out of the income tax would be politically difficult due to budget policies and rules.

By Dick Larsen, senior editor

Dick Larsen can be reached at Dick_Larsen@landlinemag.com