State Transportation Funding in 2007

Ronald Snell
October, 2007

Transportation funding issues continued to trouble legislators in 2007. There's general agreement that the capacity and maintenance of highways and other forms of transportation falls short of meeting the nation's transportation needs. A recent NCSL report discusses the issues and possible funding mechanisms for addressing them: Matt Sundeen and James B. Reed, Surface Transportation Funding: Options for States (Denver, Colorado: National Conference of State Legislatures, May, 2006).

The Problem of Transportation Finance

The traditional source of much state transportation funding, the gasoline excise tax, is failing to keep pace with highway use. The chart below depicts California's experience from 1991 through 2006, and is a clear demonstration that inflation-adjusted collections from the motor fuel tax are falling in terms of vehicle-miles on roads in the state. Other states' experience is comparable. The California problem, like that of other states, results from motor fuel taxes that have not kept up with inflation, construction cost increases that outstrip general inflation, and, possibly, cars with greater fuel economy.

Figure 1. California Road Use and Gas Tax Revenues, 1991-2006

There's little likelihood of a federal bailout. Spending from the U.S. government's Highway Trust Fund is up, and, as in the states, revenues are not keeping pace, and for the same reasons. Some predict that the trust fund will run out of cash in federal fiscal year 2009--which begins less than a year from now.

Legislators are well aware of the issues and they are looking at solutions, as shown in the findings of the survey NCSL carried out in March 2007 in connection with its survey of state fiscal conditions. The survey asked three questions about transportation:

What is the leading transportation issue facing your state?
What is the estimated cost to address this issue?
What action has been taken in your 2007 session to address this issue?

Although few states had acted to address transportation funding issues at the time of the survey in March, the responses made it clear that policy makers in many if not all states were deeply concerned with long-term transportation needs, for highways, bridges, mass transit and in some cases freight rail. Many respondents summarized their states' long-term needs, for example:

The California Transportation Commission estimates additional funding needs of more than $100 billion over the next 10 years.
The Iowa Department of Transportation estimates a need for $200 million annually over the next 20 years to cover basic needs.
The Maine Department of Transportation foresees a funding shortfall of $2 billion over the next 20 years.
Nevada estimates a need for $3.8 billion in expenditures between 2008 and 2015.
Utah estimates a need of $16.5 billion over 15 years to maintain highway capacity in the face of population growth and increased travel.

Respondents also reported on proposals to address funding issues. These included:

Allowing the use of highway funds for mass transit.
Reallocating revenue streams from the state's general fund to a dedicated highway or transportation fund.
Authorizing public-private partnerships to build toll roads.
Bonding in anticipation of the receipt of federal highway funds (GARVEE bonds).
Using surplus or reserves.
Monetizing assets (as Indiana did in leasing the right to operate its turnpike) to provide funds for other projects.
Authorizing local or regional optional taxes for transportation.
Increasing motor fuel or other taxes.
Registration fees and other transportation fee increases.

As this range of proposals indicates, states are willing to experiment with new methods of solving the transportation funding crisis, and some states did indeed consider innovative funding methods in 2007. Other states provided additional funding for transportation by reallocating revenues from other purposes to transportation, a practice facilitated by the good fiscal years states have just experienced. The rest of this report focuses on their efforts.

Two traditional funding methods – increases in motor fuel taxes and bond issues submitted to the voters – were rare in the case of bonds and non-existent in the case of fuel tax increases in 2007. Exceptionally among the states, Maryland in late 2007 increased a variety of taxes other than motor fuel taxes and dedicated a substantial portion of the expected revenue increases to transportation.

No state has increased its excise tax rate on gasoline in 2006 or 2007; the most recent rate increases occurred in three states in 2005. In 2007, two states increased their diesel fuel tax to parity with the gasoline fuel excise tax. Also in 2007, the Minnesota legislature passed a motor fuel tax increase that the governor vetoed. The Maryland General Assembly, in its late-fall special session, refused to adopt the governor's proposal to index the motor fuel tax to the cost of construction materials. This possibly unique proposal would have at least partially solved one of the issues of motor fuel tax support for transportation--the failure of fuel tax growth to match inflation in the cost of construction. The Maryland increase would have been capped at $0.01 a year.

Few bond issues have been sent to state voters in recent years, and there have been none that require tax increases for funding. This is the list of transportation-related bond issues that legislatures have submitted to voters since 2004. All of these were approved by voters except for the 2005 Colorado referendum. The list excludes issues of debt that did not require a popular vote.

Figure 2. State Transportation Funding Referendums, 2004-2007

State

Issue

Maine (2007)

$113 million for a wide variety of transportation purposes

Texas (2007)

$5 billion for highway improvement

California (2006)

$19.9 billion for a wide variety of transportation purposes

Rhode Island (2006)

$88.5 million for highways and transit; approved by voters

Colorado (2005)

$2.1 billion for transportation, education, and other state purposes

Maine (2005)

$33 million for a wide variety of transportation purposes

New York (2005)

$2.9 billion for a wide variety of transportation purposes

Rhode Island (2004)

$66.5 million for highways and transit.

Alternatives to Traditional Funding

Instead of seeking voter approval of bond issues and in lieu of motor fuel tax increases, state governments have sought alternatives, including new toll facilities, the monetization of existing toll roads or toll collections to fund additional projects, use of reserves, and the redesignation of existing tax and fee collections to transportation funding.

New Toll Facilities. Toll roads and bridges are a time-honored alternative to funding transportation improvements from taxes. Before the federal Interstate Highway program began in the early 1950s, a number of states authorized toll highways like the Massachusetts and Pennsylvania Turnpikes. New toll road construction came to a halt while federally-subsidized interstate highways were under construction, but funding pressures have led to a revival of interest.

The federal government encourages states to consider toll facilities as a means of addressing transportation needs, as U.S. Secretary of Transportation Mary Peters emphasized in her remarks at the NCSL Fall Forum in Phoenix on November 29.

Texas and Florida have taken the lead in building new toll roads. There have been a number of successful new projects, some of them public-private partnerships that bring private-sector funding to the table.

Texas legislation in 2003 authorized public-private partnerships to build toll roads, authorized the Texas Transportation Commission to convert state highways to toll roads, and authorized the Trans-Texas Corridor –a project to build 16 lanes of toll road plus rail, pipelines, and transmission lines across the state. But by 2007, opposition to tolls and public-private partnerships led the legislature to pass a bill to limit toll projects sharply. The governor vetoed that legislation, but replacement legislation puts a partial moratorium in place and establishes new limits on private participation in toll road projects.

The Texas Department of Transportation has proposed tolls for existing interstates, producing "outraged responses" according to some informed observers. The two Texas Senators and a number of Representatives have announced their opposition to tolls on existing highways. U.S. Senator Kay Bailey Hutchison (R-Texas) has filed a bill to prohibit tolls on existing federal highways.

In fact, proposals to impose tolls on existing interstate highways have caused a number of members of Congress to protest. In addition to Senator Hutchison, Congressman Leonard Boswell (D-Iowa) has filed legislation to prohibit collection of tolls for the use of any highway, bridge or tunnel constructed in whole or part with the use of federal funds unless the federal funds and interest have been repaid to the federal government from non-federal sources. Pennsylvania congressmen opposed to tolls on I-80 (discussed below) have co-sponsored Representative Boswell's bill.

"Monetizing" Existing Toll Facilities

Indiana made headlines in 2006 when the governor signed legislation permitting the lease of the Indiana Toll Road to a private company for 75 years, gaining $3.85 billion by doing so. Much of the money Indiana received has been invested for future use. The proceeds will allow Indiana, by current projections, to quadruple transportation spending from $231 million in 2005 to $874 million in 2015, with new projects to be spread throughout the state over the decade.

No other state has yet followed Indiana's lead. But the possible benefits of leasing or selling toll highways have attracted other governors and legislatures.

In Pennsylvania, the legislature initially rejected Governor Ed Rendell's proposal to lease the Pennsylvania Turnpike as Indiana had done. The state has since adopted a far more complex plan. It is seeking federal approval to levy tolls on Interstate 80, which links New York City and Chicago across central Pennsylvania. In the expectation of approval, the state has authorized the Pennsylvania Authority (which would collect the hoped-for I-80 tolls) to issue $9.6 billion in bonds over 16 years. Turnpike and I-80 tolls will cover the bonds. Turnpike tolls will increase by 25 percent by 2010 and more slowly thereafter. Tolls on I-80 presumably would follow a similar course. Proceeds of the Turnpike borrowing will be divided between mass transit agencies and the Pennsylvania Department of Transportation.

Governor Jon Corzine of New Jersey also has been drawn to turnpike revenues to shore up state finances. He has not yet made a formal proposal, but one idea reportedly is to increase tolls to fund bonds whose proceeds would be used to repay existing state debt. That would reduce debt carrying charges, providing more flexibility in state finance, though not necessarily increasing state transportation funding.

Use of Reserves

Solid state revenue growth in fiscal years 2006 and 2007 allowed some states to address highway funding issues by direct appropriation from revenues that exceeded original estimates. Louisiana, for example, appropriated $600 million from "surplus" for highway construction. Arkansas identified $80 million to appropriate for state, county and city use, for transportation or other projects as local governments may choose.

Redesignation of Existing Revenue Sources

Nevada took three unusual steps to increase highway funding without tax increases. The legislature authorized the Las Vegas Convention and Visitors Authority to issue up to $300 million in bonds, backed by the Las Vegas hotel room tax, for the state department of transportation to use for transportation projects in Clark County (where Las Vegas is located).

The legislature also reassigned some local property taxes for transportation projects. Previous state law allowed any county in Nevada to levy a property tax of as much as $0.05 per $100 for capital projects. Clark County and Washoe County (the home of Reno) both levied the full $0.05. The new law requires the two urban counties to transfer $0.03 of their $0.05 levy to the state department of transportation for projects in the county where the money is raised. The process is expected to provide about $1.2 billion in revenue from 2008 through 2033.

A third measure was the reassignment to the state transportation department of a portion of a surcharge that rental car companies may collect to offset vehicle licensing fees and taxes. The maximum rental companies could collect was 4 percent of the amount of the rental, but not all companies collected the maximum. In 2007, the legislature imposed the 4 percent rate statewide, and then required that one percentage point of the four be transferred to the State Highway Fund. This is expected to generate between $4 million and $8 million a year for the highway fund.

Maryland provided a substantial funding increase for transportation in its special session in late 2007 that Governor Martin O'Malley called to address structural problems in the state's budget. Among the issues the governor identified was a backlog of transportation projects totaling $40 billion. Although the General Assembly rejected the governor's proposal to index motor fuel tax rates to the cost of construction materials, it approved changes that will increase collections from the state sales, personal income, corporate income, hotel room, vehicle excise, and tobacco taxes. Some of the increased revenues are dedicated to transportation. The state Transportation Trust Fund is expected to receive an additional $467 million in fiscal year 2009, and $542 million in fiscal year 2012.

Ohio in 2007 completed the gradual removal of funding for the state highway patrol from motor fuel taxes (begun with legislation enacted in 2003). Motor fuel taxes that formerly funded the highway patrol will be available for transportation uses. The 2003 estimate was that the redesignation would increase transportation funding by $191 million a year by fiscal year 2008.

Virginia provided a variety of revenue sources, totaling about $377 million a year, to support $300 million in transportation bonds and provide other continuing funding for transportation. One component of the package was an innovative "abusive driver fee," increases as high as $3,000 in fines levied for moving vehicle violations. The abusive driver fees were expected to produce about $62 million a year, but they have provoked several district court rulings of unconstitutionality and may be overturned in the next legislative session. The other more traditional sources of revenue include:

Increased vehicle registration fees,
Heavy truck registration fee increase,
Redirection of insurance premium taxes from general revenue to transportation,
Redirection of $0.03 of the recordation fee collected on purchases of property or refinances of mortgages, and
Equalization of diesel and gasoline motor fuel tax rates.

The bill authorizes $3 billion in debt, to be issued at $300 million a year for 10 years. The insurance premium tax revenue listed above will amortize the bonds.

The legislation addressed regional transportation issues by creating two regional transportation authorities for Northern Virginia and Hampton Roads. They are authorized to raised specific taxes in specific amounts to raise $168 million a year in Hampton Roads and $325 million a year in Northern Virginia. The taxes are a patchwork--motor vehicle rental fees, the driver's license fee, safety inspections; a regional registration fee; a sales tax on motor vehicle repairs and property taxes on commercial property.

The Washington Legislature enacted a $1.1 billion bond issue in 2007, based on the fuel tax increases of 2003 and 2005. Those were $0.05 in 2003 and $0.095 in 2005. The latter was subject to an initiative repeal, which failed. Taxes in both instances were pinned to specific transportation projects, which may have been a factor in the voters' refusal to overturn the $0.095 tax.

Conclusion

The collapse of I-35 bridge in Minneapolis on August 1 dramatized the sorry state of America's transportation infrastructure. The difficulty of finding money to replace it dramatizes the dilemmas policy makers face in dealing with transportation finance [note 1]. It seems clear that state legislators are on the front line of the battle, and cannot expect solutions to come from Washington. Probably the solutions will lie in the patchwork of funding sources--tolls, borrowing, monetization of public assets, redesignation of general revenues, and tax increases--this paper has identified from 2007 legislative actions. Such patchwork solutions themselves are testimony to the difficulty of winning taxpayer support for expenditures that most taxpayers agree are essential. The difficulties may increase if, as seems likely at the end of 2007, state fiscal conditions worsen over the next year or two. The road ahead looks bumpy.

Acknowledgments

Corina Eckl and NCSL's transportation experts in Denver, Jim Reed and Matt Sundeen, offered comments and valuable advice on this paper.

Note

Chronicled by Minnesota Public Radio at http://minnesota.publicradio.org/collections/special/2007/bridge_collapse/

Posted December 2007.
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