Insights on Transportation Funding From AASHTO

The United States transportation sector faces a perfect storm of dwindling resources and growing needs. Over the past five years numerous panels and blue-ribbon commissions have been created to study how to fund our transportation system. There is no shortage of transportation proposals. However, many of the proposals are unrealistic or politically impossible.

While federal programs funding local pet projects should be eliminated. Eliminating all of these programs and dedicating the funds to national needs will not net sufficient transportation revenue.

In my February 2012 interview with Associate Director for Finance and Business for the American Association of State Highway and Transportation Officials (AASHTO) Joung Lee, we discussed the association’s views on transportation funding priorities, current funding mechanisms and funding options offering the most potential over the next 20 years.

According to Lee, generally AASHTO favors a robust mix of transportation options including gas taxes, vehicle miles traveled (VMT) taxes, bonds, Transportation Infrastructure Finance and Innovation Act (TIFIA) loans, toll-roads and public private partnership. AASHTO wants to provide states the maximum flexibility to choose the funding option best for each state. And AASHTO is against federal restrictions on tolling or VMT fees.

The biggest challenge to finding sufficient revenue for transportation is political. While funds are always limited, we have many different revenue sources to choose from. While none is perfect, together they can raise many times the amount of revenue that we need. Below is a portion of the interview. The full interview is available here.

Baruch Feigenbaum, Reason Foundation: Our primary funding resource, the federal gas tax, no longer provides a steady stream of revenue for several reasons. First, a small but significant portion of the tax supports transit and non-motorized transportation projects. Second, the tax is not indexed to inflation. The same $18.4 cent tax yields significantly less than in 1994. Third, vehicles are becoming more fuel-efficient. Is the gas tax still the best funding option? Is there another more optimum solution?

Joung Lee, Associate Director for Finance and Business: With increasing political gridlock in Washington, there is no one optimal solution. There is no perfect funding mechanism. AASHTO believes a mix of funding sources including gas taxes, VMT fees, bonds, PPPs and toll-roads is the best approach.

Feigenbaum: Is making changes to one transportation funding stream more realistic than another?

Lee: In years past, changing the gas tax was considered easier than changing other mechanisms. Today, making any financial change is difficult. Although, recently several legislators in both parties have suggested either increasing the gasoline tax or indexing it to inflation. Still, this will be a hard sell to Congress and the President as a whole.

Feigenbaum: Researchers have suggested more than 20 different funding streams. I want to ask you about some of the most common. Please detail the funding streams and the advantages and disadvantages of each one: Increase the gas tax by 10-15 cents?

Lee: Increasing the gas tax is easier than implementing a new funding mechanism. It is a long-standing successful revenue stream. The administration costs are low and the yield per rate change is high. For example, increasing the tax by one cent for both gasoline and diesel raises $1.8 billion per year. At the same time, with increasing fuel-efficient vehicles, the tax will not collect as much per cent as in the past. The gas tax is also somewhat regressive.

Feigenbaum: What is the potential of VMT fees?

Lee: VMT fees have a lot of potential. First, they are as technically perfect a user fee as you can get. They do a stronger job of paying the actual costs of travel than fuel taxes. (With fuel taxes the amount a motorist pays depends on the fuel-efficiency of his vehicle, not how far he/she travels.) There are some privacy issues, but since people do not seem to mind being tracked on their smart-phones the privacy issues especially for the younger generation may not be as big a problem. The biggest problem may be the administration costs. Estimates range from 15% to 40% of the total amount collected will go towards administration. There are 200,000,000 drivers and each one will need to have an account. Contrast this with the fuel tax that only requires the 1400 fuel distributors across the country to have accounts.

Feigenbaum: What are the advantages of TIFIA Loans?

Lee: The biggest advantage for TIFIA loans is that the cost of capital does not get any lower. The cost matches the treasury rate; the loan comes subordinated at this very low rate. TIFIA loans have ten times the amount of leverage of other loans. TIFIA loans are different from loans by a commercial bank that by nature has a profit motive. There are negatives. With any loan there has to be some sort of revenue stream. Also, we do not want TIFIA to become a geographic issue in which only certain states take part. This will turn it into a political issue.

The complete interview is available here