Thinking Beyond the Gas Tax

<div> <em>&quot;We must respond to the reality that the gas tax, the traditional source of revenue for transportation investments at both the state and federal level, is not expected to keep pace with transportation needs in the future.&quot; With these words, New York Transportation Commissioner Astrid C. Glynn welcomed participants to a New York State DOT-sponsored symposium, &quot;Beyond the Gas Tax: Funding Future Transportation Needs.&quot; The event, organized by Prof. Robert (Buz) Paaswell, Director of the University Transportation Research Center at City College of New York, drew some 200 participants to Syracuse N.Y. on October 7. Emil Frankel, former Assistant Secretary for Policy at the U.S. Department of Transportation and currently head of the National Transportation Policy Project at the Bipartisan Policy Center, gave the keynote address. He was followed by a group of </em><em>national and state speakers who examined the status of state and federal transportation finances and explored the funding options for the future.</em>

October 12, 2008, 2:36 PM PDT

By Kenneth Orski


"We
must respond to the reality that the gas tax, the traditional source of
revenue for transportation investments at both the state and federal
level, is not expected to keep pace with transportation needs in the
future." With these words, New York Transportation Commissioner Astrid
C. Glynn welcomed participants to a New York State DOT-sponsored
symposium, "Beyond the Gas Tax: Funding Future Transportation Needs."
The event, organized by Prof. Robert (Buz) Paaswell, Director of the
University Transportation Research Center at City College of New York,
drew some 200 participants to Syracuse N.Y. on October 7. Emil Frankel,
former Assistant Secretary for Policy at the U.S. Department of
Transportation and currently head of the National Transportation Policy
Project at the Bipartisan Policy Center, gave the keynote address. He
was followed by a group of
national and state speakers who
examined the status of state and federal transportation finances and
explored the funding options for the future.

A
sober assessment of the present state of the financial markets was
offered by a senior Wall Street executive highly knowledgeable in
transportation financing. The full spectrum of debt-funded
infrastructure funding alternatives is under pressure, he reported.
Most states are in a massive budget review as the impact of reduced
revenues is beginning to emerge. Credit spreads have widened
significantly and the overall borrowing costs, including Private
Activity Bonds, have increased appreciably. There has been a record
postponement of new bond issuances and a cancellation of at least one
proposed PPP deal, the $800 million Missouri Safe and Sound Bridge
Improvement Program --victim of the changing credit market conditions.
Looking to the future, the Wall Street executive saw a changing capital
market, with more costly municipal financing and severely constrained
bank financing driving down valuations and reducing the number and size
of projects.
(However, in a follow-on discussion, the executive
saw a ray of hope--several municipal bond deals totalling in excess of
one billion dollars have come to market in the last few days, albeit at
elevated interest rate yields).

In our own
remarks as moderator of a panel on "Options Beyond the Gas Tax" we took
a longer view. The text of our remarks follows.

We have been asked to discuss in this panel session "options beyond the
gas tax," but this should not be construed as a requiem for the gas
tax. To paraphrase Mark Twain, the reports of its death are greatly
exaggerated. The gas tax has served us well for the past 50 years and
it will continue to provide us with a steady source of revenue for a
good many years to come. At least $40 billion in federal gas tax money
will continue to flow to the states annually in the years ahead. I am
aware of the recent decline in vehicle miles traveled (VMTs) and gas
tax receipts as reported earlier in this conference, but I take the
long view. Sooner or later the financial crisis will pass, confidence
will return, the recession will end and the revenue losses will be
erased.

Still, to rely on the gas tax as the sole source of
investment capital for transportation infrastructure --especially new
infrastructure -- is no longer thought to be a realistic assumption.
Such, in essence, was the considered judgment of a great majority of
participants in a survey that we conducted not too long ago. State
officials told us they are obliged to commit a major part of their
tax-supported transportation budgets to preserving, modernizing and
replacing existing infrastructure, leaving little money for new
construction. What's more, higher gas prices are causing people to
drive less and buy more fuel-efficient vehicles - and this will leave
even less revenue for capital investments in the days ahead. As Allen
Biehler, Secretary of PennDOT stated recently. "We are struggling to
have enough money to hold together what we have, let alone be able to
think about the level of investment that would be needed to provide new
infrastructure." I think Commissioner Glynn and many of her fellow DOT
commissioners could readily identify with this assessment.

To be sure, a boost in the federal gas tax is not off
the table - in fact it is almost certain to be part of the surface
transportation authorization proposal next year. But any modest boost
in the federal gas tax---and only a modest increase has a chance of
passing muster with the congressional tax writing committees and
obtaining a filibuster-proof majority support in the Senate--will be
consumed by ever-growing demands for maintenance and preservation of
the Interstate System and other parts of the highway network. It will
leave little revenue to invest in new facilities. Moreover, an increase
in the federal tax would go only part way toward a solution. That's
because the federal program contributes only about 40-50 percent toward
the capital cost of transportation infrastructure. The remaining 50-60
percent has traditionally come from state and local budgets. There is
no guarantee that states, including the state of New York, will be able
to meet their part of the bargain through local tax increases---be it
gas or sales taxes.

So I am led to conclude that any politically realistic
increase in the gas tax will fall short of generating enough capital to
fund major reconstruction of existing facilities or entirely new
infrastructure. Instead, states will be obliged to look for new sources
of capital. Where will the money come from? Again, I am taking the long
view. As we heard earlier from Jim Calpin, at this point in time the
credit markets are virtually frozen. But these conditions will not last
forever. Eventually, liquidity in the banking system will be restored
and infrastructure asset financing will resume, albeit on more
conservative terms.

Some states will be able to fund infrastructure
investments with borrowed capital - as California has done two years
ago with its massive Strategic Growth Plan bond referendum. But many
states will be foreclosed from borrowing funds in the municipal bond
market because they will run into a statutory debt ceiling or because
of citizen opposition to further bond indebtedness. At the very least,
borrowing in the municipal bond market will become more costly. Even
after the market returns to more normal conditions, the cost of
borrowing will rise because the structured-finance instruments that
formerly made borrowing less costly, will be replaced by the more
expensive old fashioned fixed-rate bonds. On top of that, the sheer
magnitude of the need for new infrastructure is likely to overwhelm the
bonding capacity of most state and local governments.

Another option to generate new capital for
infrastructure investments could be some kind of new federal financing
initiatives that would create a de facto national capital budget for
transportation projects "of regional or national significance." The
most prominent financing initiatives considered in Congress today are
the National Infrastructure Bank (NIB) and the Build America Bonds
proposals. The NIB proposal has gained political traction by receiving
the support of House Majority Leader Nancy Pelosi and presidential
candidate Barack Obama and thus stands a good chance of enactment
during the next session of Congress. But these revenue sources - $60
billion over 10 years in the case of the National Infrastructure Bank
and $50 billion in the case of the Build America Bonds program - would
be but a drop in the bucket considering the huge infrastructure gap
that exists today--- $1.6 trillion according to the American Society of
Civil Engineers (and that's just to bring the existing infrastructure
into a state of good repair.)

All this suggests to me that a purely federal-centric
approach---be it a gas tax increase or a federal capital budget, or
even a combination of both---cannot by themselves make up for decades
of under-investment and meet future demands for increased transportation capacity.

What we are likely to end up with instead is a hybrid funding approach.
Part of it will be a modest increase in the federal gas tax. Another
part may involve some kind of a new federal financing initiative - most
likely a National Infrastructure Bank. But this will still leave a
major portion of future additions to road capacity to be financed by
toll revenue and the private sector. Private investment will most
likely take the form of project-based private toll concessions. In New
York State, the new Tappan Zee Bridge would be a prime candidate for
such a concession.

Tolling and toll revenue financing of new highway
capacity is being accepted by most states as a necessary and inevitable
consequence of budgetary shortfalls and the limitations of the
pay-as-you-go system of financing. By our count, a total of 22 states
are contemplating the use of tolls and toll revenue bonds to support
the expansion of infrastructure capacity. The technology of electronic
toll collection (ETC) has made tolling user friendly and widely
accepted by the driving public. ETC not only allows collection of tolls
at highway speeds thereby eliminating delays at toll plazas; it also
allows for the management of traffic flow through variable (congestion)
pricing--- the technique that underlies the increasingly popular
concept of HOT lanes.

Some states will choose the traditional approach of
using tax-exempt debt and design-build contracts. But our survey showed
that many other states will opt for private toll concessions financed
with a combination of bank loans, private equity capital and Private
Activity Bonds. Their motivation for partnering with the private sector
is not entirely fiscal. It also includes a recognition of other
positive benefits of private sector involvement such as access to
equity capital, faster project delivery, ability to introduce
innovation and to assume operating and financial risks.

There has been some speculation that private
concessions might run into opposition on Capitol Hill when the federal
surface transportation program comes up for a new authorization next
year. But recent statements by Congressman De Fazio, chairman of the
influential House Highways and Transit subcommittee, suggest that
congressional lawmakers will not object to private toll concessions for
new projects so long as PPP agreements contain adequate safeguards to
protect the public interest. These safeguards could involve a cap on
toll increases (or on the rate of return), prohibition on noncompete
clauses, revenue sharing requirements, recapture of excess profits,
prohibition against diversion of funds and limits on length of
concession agreements.

Availability of private funding will depend, of
course, on the willingness of the private sector to invest in public
infrastructure assets. On that score, there seems to be little doubt.
While the age of highly leveraged deals such as the Indiana Toll Road
concession may be over, there are still billions of dollars in domestic
and foreign infrastructure funds waiting to be invested in
transportation facilities. Toll roads appeal to long-term investors
such as pension funds because they generate strong demand even in times
of slower economic growth and produce steady and predictable cash flow
relatively unaffected by economic downturns. And pension funds require
stable, income-oriented investments to match their long-term
liabilities and payout obligations. Given the current volatility of the
equities market, the low interest rates of the government bond market
and the risky nature of investments in corporate credit instruments and
real estate, infrastructure is now seen as a "safe haven" for long-term
investors, a senior bank official told us. Financial News
calls it "a rare bright spot in a tumultous market." Again, I am aware
of the current decline in toll revenue (caused by reduced VMTs) which
makes investment in toll facilities less attractive, but I consider
this a cyclical phenomenon tied to a recessionary economy. In the long
run, toll roads have lost none of their revenue earning potential.

However, the future of PPPs
depends on how private investors will perceive the expected government
oversight placed upon private participation. If the capital market
should conclude that legal restrictions and regulatory barriers placed
on private concessions are too onerous and burdensome, investors
(especially foreign investors) may decide that investing in U.S.
infrastructure is not worth the trouble and they will turn instead to
infrastructure investment opportunities abroad. That, in my view, would
be most unfortunate for it would deprive fiscally strapped state and
local governments of a much needed source of capital to modernize and
expand America's infrastructure.

In the long-term, we must find the means not just to
supplement the gasoline tax but to replace it with a more stable source
of revenue. The most likely candidate appears to be a mileage tax (VMT
fee), i.e. a fee based on trip length and possibly vehicle size and
weight. Such a revenue system would reflect more closely the actual
usage of the road system and would not rely on taxing a commodity whose
use we are actually trying to discourage. It is possible that a VMT fee
will be phased in progressively, with commercial trucks being the first
to be subject to it. With many trucking concerns already using the
Global Positioning System to monitor and track their trucks' movements,
a mileage fee for commercial trucks could be introduced relatively
quickly and with fewer complications. Precedent for truck VMT fees
already exists. A satellite-based mileage fee system for heavy trucks,
called TollCollect,
has been operating successfully in Germany since January 2005. There
are currently 640,000 vehicles equipped with TollCollect transponders.
Last year they generated $5.15 billion in fees. But a mileage-based
revenue system in this country is for the long term. Estimates range
between 10 and 25 years before a VMT tax is fully tested and ready to
be implemented nationwide. In the meantime, we must devise other ways
to supplement the inadequate stream of revenues from the gas tax.

###
In
welcoming us to the Symposium, Commissioner Glynn noted that the gas
tax, the traditional source of revenue for transportation investments,
isn't keeping pace with the State's growing transportation needs. I
hope my presentation has made it clear that there do exist other
funding options, not the least of which are toll revenue bonds, private
equity capital and the mechanism of public-private partnerships. I was
pleased to note that the potential of PPPs to contribute to New York
State's fiscal situation will be investigated by a special study
commission headed by Deputy Secretary Charlotte Hitchcock.
In
announcing the Commission, Gov. Paterson said, "Public-private
partnerships offer an opportunity for the State to more effectively
make long-term capital investments, even in a period of economic distress"
(italics added). His endorsement of PPPs at this critical time will be
greeted warmly by all advocates of private investment in public
infrastructure.

Kenneth Orski

C. Kenneth Orski is editor and publisher of Innovation NewsBriefs, an influential and widely read transportation newsletter, now in its 19th year of publication. Mr. Orski has worked professionally in the field of transportation for close to 40 years.

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