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Paying for Highways: No free ride

Nov. 10, 2014
While none may be appealing, all may be needed to shore up infrastructure

It’s no stretch of the imagination to think that most involved in trucking would view choosing between paying higher fuel taxes, mileage-based usage fees, or highway tolls as akin to deciding whether to stay put in a hot frying pan or jump into the fire.  In short, all are unpleasant options because all increase the costs of hauling freight.

Yet roadways and related infrastructure such as bridges can’t be built for free.  The question, then, is which financial instrument—taxes, fees or tolls—provides the best mechanism for funding the needs of U.S. transportation infrastructure now and in the future.

In fact, many transportation experts believe this debate does not revolve around either/or solutions, but rather which combination of all three options is best to generate the necessary monies.

“Fuel taxes alone are not generating sufficient revenue to satisfy transportation demands in our country,” notes C. Kenneth Orski, a transportation consultant who served as associate administrator of the Urban Mass Transportation Administration under President Richard Nixon and President Gerald Ford.  “Now we’re seeing states looking for ways to generate supplemental revenue through highway tolls or other fees.  That’s connected to a larger trend of states taking a more active role in taking care of their own transportation needs, as they’ve seen the limits Congress can go to in terms of raising fuel taxes.”

Congressional wrangling over ways to increase transportation funding is due largely to the decrease in  revenue generated by federal taxes on gasoline (18.4¢/gal.) and diesel (24.4¢/gal.) for two reasons: Neither tax is indexed to inflation, and increasing vehicle fuel efficiency is reducing fuel consumption and thus tax collections.
Orski points out that those two trends are reducing the monetary flow into the Highway Trust Fund (HTF), complicating Congressional efforts to pay for transportation needs.

According to the Congressional Budget Office (CBO), a six-year transportation bill, for example,  would require roughly $320 billion, or $53 billion annually, to maintain current spending levels, yet HTF revenue and interest over that same period are only expected to bring in some $240 billion, leaving a shortfall of $80 billion.

“Even a stop-gap one-year bill would require an extra $15 billion and increasing amounts in subsequent years to prevent future shortfalls if spending was maintained at 2013 levels,” Orski says.

Orski believes that rather than wrangle over federal funding mechanisms, individual states should be given broader freedom to bring their transportation infrastructure up to a state of good repair with locally raised revenue, supplemented with regular federal highway funds.

As for large-scale reconstruction and system expansion projects that are beyond the fiscal capacity of states to fund on a pay-as-you-go basis, let them be financed with long-term credit and private investment capital, he argues.

“While this might limit new investment to creditworthy projects, such as those that generate revenue or are backed by dedicated taxes, a vast majority of transportation megaprojects already fall into that category,” he points out.

No free lunch

In fact, Orski thinks this is precisely what’s happening all across the U.S., albeit in a quiet under-the-radar manner.  “A growing number of states aren’t waiting for the financially troubled federal government to come to the rescue with new money and are taking matters into their own hands and taking control of their infrastructure agendas,” he notes, pointing out that eight states are financing big-ticket highway and bridge projects with long-term credit and private financing without direct federal funding.

“Indeed, except for mass transit projects, there are no major transportation facilities under construction or on the drawing board today whose completion hinges on federal appropriations,” he says.

Yet how to generate such funds remains the ticklish part of the process, one that is often times divorced from reality. 

Neil Newhouse, a partner and co-founder in the polling firm Public Opinion Strategies, recently conducted a poll for the American Trucking Assns. (ATA). In it, Newhouse found that only K-12 public education elicited more support than transportation among the public when it came to allocating funds. The disconnect occurs, though, with the question of how to pay for that infrastructure.

Each participant in the poll was asked to rate four choices to fund infrastructure projects and each was soundly rejected, ranging from 62% to 76% disapproval rates. Those choices were:

  • Raising federal income taxes by 1%, earmarking the additional HTF monies.
  • Raising federal taxes on gas and diesel 5¢ a year every other year for the next eight years.
  • Doubling the state fee to register vehicles.
  • Placing a toll on all Interstate highways in the country.

“Infrastructure is not free and it’s not cheap and it’s not going to be repaired, be built and be expanded by osmosis,” explained Bill Graves, president and CEO of ATA, during a speech at the trade group’s annual convention this year.  “That’s why it’s so critical that our national leaders start leading on the issue and stop politically pandering and posturing, posturing that is having the very negative and unintended consequence of fooling Americans into believing that there really are ‘pennies from heaven.’”

Graves also believes that “devolving” transportation funding oversight to the states is not the answer.  “Devolution is simply code for passing the buck or in this case passing the responsibility for raising a buck to someone else,” he emphasized.

One method suggested to make funding transportation needs fairer is a mileage-based user fee (MBUF) that would involve eliminating or phasing out fuel taxes and creating a vehicle miles traveled (VMT) tax that would require those who use the infrastructure most to pay more.

Additionally, a weight-based VMT tax, in which a vehicle’s weight is used in combination with miles traveled to calculate the tax, could alleviate concerns about heavy freight traffic.

Michelle Godfrey, public information officer for the Oregon Dept. of  Transportation’s Office of Innovative Partnerships and Alternative Funding, notes that the Beaver State became one of the first to create a per-mile charging system back in 2013 to test whether a mileage-based tax could successfully replace fuel taxes. Oregon’s Road Usage Charge Program is currently assessing a 1.5¢/mi. charge for up to 5,000 cars and light commercial vehicles and issues a fuel tax credit to those who volunteer to participate.

Road charges

Opinions on this funding model vary, from generally positive to vehemently opposed.  And there are many misperceptions about what the program will do,” Godfrey notes.  Yet she stresses that the main point is that this “road charge” works as a replacement for the gas tax, not an additional tax.

“Participants in the Road Usage Charge Program will receive a credit or refund of gas tax paid while they are in the program. The system will calculate gas consumed, and gas tax paid, as it also calculates the per-mile charge,” Godfrey explains. “If the two are equal, the motorist pays nothing. If the gas tax paid exceeds road charges billed, the driver will be eligible for a refund. And if the road charge exceeds what was paid in gas tax, the excess amount will be due from the motorist.”

As it stands, she says traditional fuel taxes are becoming obsolete as vehicles consume less fuel.  “Over time, older vehicles will phase out and the entire fleet of vehicles will become highly fuel-efficient, vaporizing the gas tax,” Godfrey adds. “Oregon’s Road Usage Charge Program is a fair and sustainable funding model that will ensure our roads are maintained safely for every motorist well into the future.”

Tolling pitfalls

Such mileage-based tax structures come with their own set of issues, however. Many worry that rural users would actually be disproportionately affected by such VMT/MBUF tax structures as rural drivers tend to have longer but fewer trips than urban drivers and also have a tendency to own larger, more fuel-reliant vehicles.

“By comparison, tolling offers a fairly simple revenue collection method and is generally a more accepted method—something a VMT tax does not share,” Orski notes. “The VMT is also a largely untested alternative and is really still years away from effective use.”

Increasing the use of tolling is another revenue-generating method drawing its share of ire, too, and not just from the trucking industry but from the general motoring public as well, says Julian Walker, spokesman with the Alliance for Toll-Free Interstates (ATFI), which includes the ATA among its members.

“It is a misconception to view highway tolls as a concern exclusive to the trucking industry,” he stresses. “While tolls are an industry issue, they also impact families traveling for vacation, people commuting to work, and millions of drivers accustomed to freely accessing America’s highways.  While transportation funding policy is complex, the data show tolls are not the right way to fund infrastructure.”

In ATFI’s view, following are several problems created by increased tolling:

  • Tolls take a bite out of family budgets and increase commercial shipping costs to bring goods to market. That destructive double whammy leaves consumers with less disposable income and leads to higher prices at the register.
  • Tolling previously toll-free roads diverts traffic onto local roads, causing congestion that imperils public safety by delaying police, fire and rescue workers from responding to emergencies. Such traffic diversion also hastens road deterioration and accelerates the need for costly road repairs. That burdens governments with repair bills,  which local taxpayers eventually absorb.
  • Tolls are also regressive, meaning they are especially harmful to the working poor. For some people, tolls can mean having to work an extra hour each day just to pay the toll between home and work. Such conditions stifle economic growth and job creation.
  • Placing tolls on existing Interstate lanes is “double taxation” —motorists are charged twice for roads they have already paid for through other taxes.

Taxing fuel

The group believes that fuel taxes continue to offer the most efficient way to generate transportation infrastructure funds, especially when compared to tolls.

Walker says about 99% of the proceeds from fuel taxes actually go toward highway improvements rather than administrative overhead, whereas tolling can eat up as much as one-third of revenue generated due to collection, enforcement, maintenance and bureaucratic expenses.

“Just as troubling are the documented instances of drivers in several states being billed in error by toll collectors,” he notes. “When that happens, drivers are forced to navigate a frustrating bureaucracy or deal with third-party contractors to resolve errors.”

In an age of license-plate-reading cameras and electronic toll transponders that can be tracked, Walker points out that  data collection methods used by toll operators also raise legitimate concerns about individual privacy. All that being said, though, he emphasizes that ATFI is not anti-toll across the board.  “We are just particularly concerned by efforts to impose tolls on existing Interstates that presently are toll-free,” he points out.

Robert Poole, director of transportation policy at the Reason Foundation, believes a different policy approach to tolling, which he dubbed value-added tolling, outlines a new way forward in this debate. 

“It calls for tolling advocates to listen to highway users’ concerns and take them seriously in crafting a set of safeguards that would make next-generation tolling a true and pure highway user fee, not a cash-cow to solve a state’s overall transportation needs,” he stresses.

There are two concerns raised by the trucking industry that can be dealt with via a value-added approach to tolling, explains Poole.  The first is the legacy congestion, emissions, and collisions at toll plazas. This can be addressed through increased use of all-electronic tolling such as EZ Pass transponders that can eliminate the need for toll plazas and the associated congestion and emissions, the Reason Foundation says.

The second revolves around reducing the high cost of toll collection.  On so-called legacy toll roads, collection costs eat up 20% to 30% of toll revenue, compared with 2% to 5% of fuel tax revenue needed to cover collection costs. But brand-new toll roads, designed from the outset for AET and a streamlined AET business model, can achieve collection costs as low as 5% of toll revenue.

Poole adds that the goal of the value-added tolling concept is to make tolling a true highway user fee, not a hybrid of toll and tax, and to positively address the longstanding concerns of highway user groups. It accomplishes this by doing the following:

  • Limiting the use of toll revenues to the tolled facilities.
  • Charging only enough to cover the capital and operating costs of the tolled facilities.
  • Beginning tolling only when construction or reconstruction is finished.
  • Using tolls to replace existing fuel taxes.

Falling funds

He stresses, though, that more funds need to be generated in some way because the 47,000 mi. of the U.S. Interstate Highway System will need to be rebuilt over the next two decades to make it serviceable for another 50-plus years.

“In addition, several hundred major interchanges are horrible bottlenecks and need to be replaced with more modern designs. Some corridors need additional lanes to cope with growth, especially in truck travel,” he cautions. “That’s why we estimate the cost of Interstate reconstruction and modernization at $1 trillion. That sum is far beyond what current federal and state highway funding can provide.”

Back in June of this year, analysis conducted by Fitch Ratings concluded that increasing federal fuel taxes alone won’t be enough to solve U.S. transportation infrastructure funding needs. The company said that other mechanisms will be needed, principally more roadway tolling.

To keep up with actual transportation infrastructure needs in the U.S. as estimated by the Congressional Budget Office, Fitch projects the federal fuel tax would need to rise to between 75¢/gal. and 80¢/gal., which appears both politically and economically untenable.

“Even if the gas tax is raised, increasing corporate average fuel economy regulations will reduce the [fuel tax] benefits over the longer term,” according to the firm. “Those regulations will lower gas consumption by raising the fuel efficiency of all new cars to an average of 54.5 mpg by 2025.  We estimate these requirements would result in a 13% reduction in receipts from today’s levels by 2032. This illustrates the need for other sustainable long-term sources of revenue to address the country’s growing transportation funding requirements.”

Covering costs

That view is echoed by the nonpartisan Tax Foundation, which concluded in its own study earlier this year that revenues from fuel taxes and tolls pay for only about half of state and local spending on roads.
Alaska and South Dakota come in last in transportation funding derived from gas taxes and tolls at 10.5% and 21.5%, respectively; Delaware and Hawaii rank the highest at 78.6% and 77.3%, respectively.

“State and local governments spent $153 billion on highway, road, and street expenses but raised only $77.1 billion in user fees and user taxes, $12.7 billion in tolls and user fees, $41.2 billion in fuel taxes, and $23.2 billion in vehicle license taxes,” says Joseph Henchman, the group’s vice president-state projects. The rest was funded by $30 billion in general state and local revenues and $46 billion in federal aid.

“The lion’s share of transportation funding should be coming from user taxes and fees such as tolls, [fuel] taxes and other user-related charges,” he adds. “When road funding comes from a mix of tolls and gasoline taxes, the people who use the roads bear a sizeable portion of the cost. By contrast, funding transportation out of general revenue makes roads ‘free’ and consequently, overused or congested—often the precise problem transportation spending programs are meant to solve.”

Henchman points out that with Americans driving about 3 trillion mi. each year, total road spending by state and local governments averages out to 5.1¢/mi. driven.

To cover these costs, Americans paid an average of 0.4¢/mi. in tolls and user fees, 1.4¢ in state fuel taxes, and 0.8¢ in vehicle license taxes, he says. The remaining 2.5¢ was covered by general state and local revenues (1.0¢) and federal aid—some 0.9¢ derived from the federal gasoline tax and 0.6¢ from general federal revenues, Henchman notes. Altogether, states raised about 48% of their transportation spending from user taxes, fees, and other charges, he explains.

“Expanding tolls and indexing gasoline taxes for inflation may not be politically popular, even though transportation facilities and services are highly popular,” Henchman emphasizes. “Given that transportation spending exists, states should aim to fund as much of it as possible from user fees and user taxes,” he continues. “Subsidizing road spending from general revenues creates pressure to increase income or sales taxes, which can be unfair to non-users and undermine economic growth for the state as a whole.”

About the Author

Sean Kilcarr | Editor in Chief

Sean previously reported and commented on trends affecting the many different strata of the trucking industry. Also be sure to visit Sean's blog Trucks at Work where he offers analysis on a variety of different topics inside the trucking industry.

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