Chapter 5: What Revenue Sources Are Available for Financing Surface Transportation Improvements?

Current Surface Transportation Revenue Sources

Surface transportation improvements are financed from a variety of user fees, general taxes, special purpose taxes, and private charges. Funds for highway and transit improvements come from all levels of government as well as the private sector. Freight rail improvements are financed almost entirely from charges to customers although some public-private partnerships (PPPs) recently have been established. Within each of the modes, there are differences in how individual projects are financed, depending on characteristics of the projects and the State or local area in which they are being constructed. This section provides an overview of the current surface transportation finance system and options for the future.

Highways

The Federal, State, and local governments all play substantial roles in financing the Nation’s highway system. The Federal government established the Highway Trust Fund (HTF) in 1956 to guarantee revenue for constructing the Interstate Highway System and other Federal-aid highways. In 2005, motor-fuel and vehicle taxes deposited in the HTF generated about $31.2 billion. State and local governments raised $78 billion and $44 billion, respectively, for highway purposes in 2005. Exhibit 5-1 shows a breakdown of highway revenue by level of government.

Exhibit 5-1: Highway Revenue By Level of Government

This exhibit shows 2005 revenues for highway purposes by level of government.

Source: 2005 Highway Statistics, Table HF-10

Exhibit 5-2 shows highway revenues by source for each level of government. Fuel taxes represent about 90 percent of total revenues to the Federal HTF. Federal fuel tax rates have remained unchanged since 1993. Since that time, however, the real Federal gasoline tax rate has decreased by 40 percent as measured by changes in the Producer Price Index for Highway and Street Construction. The other taxes supporting the Federal HTF are truck-related taxes. The largest of those taxes, the truck sales tax, increases with the sales price of trucks and truck trailers. The other Federal taxes—the tire tax and the Heavy Vehicle Use Tax—do not vary with either prices or costs. In 2005, about $3 billion came from sales taxes on trucks and trailers, $1 billion from the annual Federal Heavy Vehicle Use Tax, and about $500 million from the Federal tax on tires rated for heavier loads. In total, Federal revenues accounted for 21 percent of the total of $155 billion spent for highways by all levels of government in 2005.

Exhibit 5-2: 2005 Revenues Used For Highways (By Collecting Agencies) In Millions And Percent

This exhibit shows 2005 revenues for highway purpose by level of government and source of revenues.

Source: 2005 Highway Statistics, Table HF-10

At the State level, a broader variety of taxes supports highway construction, but fuel taxes are still the largest source of revenue. Other sources of revenue for highways at the State level include vehicle registration fees, motor carrier taxes, tolls, general fund appropriations, other taxes and fees, and the sale of bonds. There are significant differences in the extent to which individual States rely on these various revenue sources. State revenues accounted for just over 50 percent of total funds spent for highways in 2005.

Local highway revenues come from a variety of sources including motor fuel and motor vehicle taxes, tolls, property taxes, other special taxes, bonds, and general fund appropriations which are the largest of the local revenue sources. In total, local revenues accounted for approximately 28 percent of total funds generated for highways in 2005.

Exhibit 5-3 shows trends in revenues from the various Federal highway user taxes since 1980. Receipts from the Federal gas tax (including gasohol) represent about two-thirds of total HTF revenues, diesel taxes 23 percent, and the remaining truck taxes about 12 percent. Relative shares of revenue from each source have remained relatively stable over time. The fastest-growing tax in recent years has been the truck sales tax.

Exhibit 5-3: Taxes Supporting the Highway Trust Fund

This exhibit shows increases in Highway Trust Fund revenues in current dollars between 1980 and 2005.

Source: Highway Statistics 2005, Table FE-210

While HTF revenues have grown substantially since 1980 in current dollars, the growth in constant dollars has been much slower.

Exhibit 5-4 shows the growth in HTF revenues from 1987 to 2005 in 1993 dollars, deflated by the Bureau of Economic Analysis Producer Price Index for Highway and Street Construction. The average annual growth in real HTF revenues between 1987 and 2003 was 3.5 percent. The spike in 1999 was attributable to a provision in the Taxpayer Relief Act of 1997 that allowed taxpayers to delay the deposit of estimated fuel tax liabilities due in August and September of 1998 until October 5, 1998. Since 2003 HTF revenues have fallen by 4 percent a year in real terms.

Exhibit 5-4: Change in Highway Trust Fund Revenues in Constant 1993 Dollars

This exhibit shows the change in Highway Trust Fund revenues in constant 1993 dollars between 1987 and 2006.

Source: Commission Staff analysis.

Exhibit 5-5 shows how Federal fuel tax rates have changed since 1983, the first year that a portion of Federal gasoline taxes was dedicated for transit purposes. In 1990 the gas tax was raised from 9 to 14 cents per gallon, with half the increase going to the General Fund for deficit reduction. In 1993 the gasoline tax was raised another 4.3 cents per gallon, all of which went for deficit reduction. The amount for deficit reduction was reduced to 4.3 cents per gallon in 1995, and in 1997 the remaining 4.3 cents was returned to the HTF. Although the Federal gasoline tax rate has more than doubled since 1983, the real value in terms of purchasing power is at about the same level as in 1983 due to inflation. In 1957 the Federal gasoline tax rate was 3 cents per gallon; it would have to be raised to 22 cents per gallon to have the same buying power today that it had in that year.

Exhibit 5-5: Federal Gasoline Tax Rates

This exhibit shows the change in Federal gasoline tax rates since 1983 and the amounts going to the Highway and Transit Accounts of the Highway Trust fund and to the Federal General fund.

Source: 2005 Highway Statistics, Table HF-10.

Since 2000, balances in the Highway Account have been declining because expenditures from the Account have exceeded revenues. As will be discussed later in this chapter, the Highway Account is projected to have a negative balance of about $4.3 billion at the end of FY 2009.

Exhibit 5-6 shows the growth in Federal, State, and local highway revenues from 1980 to 2005. The relative shares of total revenues have remained fairly constant over time. Federal revenues were between 21 and 27 percent of total revenues during this period, State revenues between 47 and 53 percent of the total, and local revenues between 24 and 29 percent of the total.

Exhibit 5-6: Federal, State, Local Highway Revenue 1980 - 2005

This exhibit shows growth in Federal, State, and local highway revenues between 1980 and 2005.

Source: Highway Statistics (various years) Table HF-10.

Fuel taxes, motor vehicle fees, and other traditional highway user taxes account for over 70 percent of total State highway revenues, while tolls, general funds, and other specialized taxes have accounted for the remainder. Shares of each of these revenue sources have remained fairly stable over the period, although other specialized taxes doubled from 3 to 6 percent of total revenues over the period. This reflects in part the difficulty some States have had in raising fuel taxes to fund new highway construction.

Exhibit 5-7 shows gasoline tax rates for each State. All States have a per-gallon excise tax, and many States impose additional taxes on gasoline and other motor fuels. Total excise taxes range from 8 cents per gallon in Alaska to 36 cents per gallon in Washington. Most fuel tax revenues are dedicated to highway and transit purposes, and in fact a number of States have Constitutional prohibitions against diversion of fuel tax revenues for non-highway purposes. Many States, however, also dedicate a portion of their fuel tax revenues for non-transportation purposes. Nationwide about 6 percent of total State motor fuel tax receipts went for purposes other than highway and transit in 2005. While there are large differences in State motor fuel tax rates, many States rely heavily on motor vehicle fees to finance their highway systems. Nationwide fuel taxes accounted for about 56 percent of total State highway user revenues, excluding tolls, in 2005; but, for individual States. that percentage ranged from 28 percent in Vermont to 98 percent in South Dakota.

Transit

Unlike highways where the bulk of funding comes from Federal and State sources, most transit funding is local. Federal funds accounted for 17 percent of total transit funding in 2005. About 80 percent of the Federal revenues were from gasoline taxes deposited in the Transit Account of the Highway Trust Fund. Since 1997, 2.86 cents per gallon have been deposited to the Transit Account of the HTF; the remainder came from general funds. State funds represented 20 percent of total transit funding in 2005; but, unlike the Federal Government, only a small portion of State transit funding was from gasoline and other highway user taxes. Almost all State funds for transit were from either special purpose taxes or State general funds. Local funds accounted for over 60 percent of total transit funding in 2005. Over 45 percent of those funds came from fares and other user fees, 25 percent from special purpose taxes, and the remainder from local general funds. Exhibit 5-8 shows the revenues and their sources.

Exhibit 5-8: 2005 Revenues Used for Transit (by Collecting Agencies) in Millions and Percent

This exhibit shows 2005 transit revenues by level of government and source of funds.

Source: National Transit Database.

Exhibit 5-9 shows the growth in transit revenues from Federal, State, and local governments, and fares and miscellaneous transit agency revenues from 1993 to 2005. As with highway revenues, the relative shares of transit revenues have not changed substantially over the 12-year period. Federal revenues have accounted for between 15 and 19 percent of total revenues over the period, State revenues between 18 and 21 percent, local revenues between 18 and 22 percent, and transit agency fares and miscellaneous revenues between 40 and 48 percent of the total.

Exhibit 5-9: Federal, State, Local, Agency Transit Revenue, 1993 - 2005

This exhibit shows the growth in transit revenues between 1993 and 2005.

Source: National Transit Database.

Exhibit 5-10 shows the distribution of transit revenues by source since 1993. No one source predominates to the extent that user taxes dominate for highways. Perhaps the biggest change in transit funding has been the growth in property, sales, and other specialized taxes dedicated to transit and the decline in the amount of funding coming from general funds at all levels of government. Specialized taxes now represent the largest source of transit funding, accounting for 40 percent of the total.

Exhibit 5-10: Distribution of Transit Revenues, 1993-2005

This exhibit shows changes in the sources of transit revenues between 1993 and 2005.

Source: National Transit Database.

Freight Rail

Freight rail infrastructure and operations are financed almost entirely by the private sector. This is especially true for the large Class I railroads, whose capital expenditures for infrastructure totaled $8.5 billion in 2006. Of this total, about $1.5 billion was spent on equipment, and $7.0 billion on roadway and structures. Combining operating and capital spending and adjusting for depreciation, 40 percent of the Class I railroads’ revenue is spent on maintenance, replacement, or expansion of their track, structures, and equipment. In 2006, the Class I railroads spent $10.6 billion maintaining and improving their infrastructure, and another $8.7 billion on equipment. 1. Short line and regional railroads have received State and local funding in recent years to provide needed service to their jurisdictions that cannot be provided economically without public assistance. Short line railroads have also been the beneficiaries of a tax credit that is intended to assist them with upgrade and maintenance of their track to handle increasingly heavier rail traffic. State funding comes primarily from general funds and may be in the form of either loans or direct grants.

Currently, there are two Federal loan programs that may be used to provide both passenger and freight railroads with funding for rehabilitation or the development of significant transportation infrastructure. These include the FRA’s Railroad Rehabilitation and Improvement Financing (RRIF) Program and the Transportation Infrastructure Finance and Innovation Act (TIFIA) loan program. The RRIF program was established by the Transportation Equity Act for the 21st Century (TEA-21) and amended by the Safe, Accountable, Flexible, and Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU). Under this program, the FRA Administrator is authorized to provide direct loans and loan guarantees up to $35.0 billion. Up to $7.0 billion is reserved for projects benefiting freight railroads other than Class I carriers. The TIFIA program provides Federal credit assistance to nationally or regionally significant surface transportation projects, including highway, transit, and rail. The program is designed to fill market gaps and leverage substantial private co-investment by providing projects with supplemental or subordinate debt.

Intermodal freight facilities are funded primarily through private operating revenue, although greater flexibility has been provided in SAFETEA-LU to finance public intermodal facilities from the HTF. These facilities are unique because they often link public and private infrastructure. This factor makes financing decisions difficult because of the intricate relationships among the public and private entities. There are no data that break out funding from all sources for intermodal facilities, but the public sector’s role has been predominant in recent years.

Passenger Rail

Almost all intercity passenger rail services in the country are operated by Amtrak, known more formally as the National Railroad Passenger Corporation. Amtrak was established by Congress in 1971 to provide intercity passenger rail in the United States. In 2006, Amtrak’s operating revenues were about $2 billion and its operating expenses were about $3 billion. Exhibit 5-11 highlights Amtrak’s revenue sources. In order to maintain operations, Amtrak requires annual Federal grants for both operations and general capital funding. Amtrak operates most of its trains on tracks that are privately owned by the freight railroads, except for a portion of the Northeast Corridor.

Exhibit 5-11: Amtrak Revenue Sources

This exhibit shows the source of Amtrak revenues in 2006.

Source: Amtrak Annual Report - 2006.

Most Amtrak lines do not earn sufficient passenger revenues to cover operating expenses. The Northeast Corridor is the notable exception. In total, fares and other system revenues cover about 60 percent of operating expenses; Federal and State funds make up the difference. About 47 percent of total revenue comes from fares and other passenger revenues, almost 40 percent comes from Federal and State grants, 3 percent comes from contractual arrangements to operate commuter services, and 10 percent comes from other sources.

For a period Amtrak experimented with some limited freight transportation, but has largely given up that business except for hauling mail in some corridors. As congestion increases in competing highway and air corridors, Amtrak should be able to increase fares in those corridors. It may also be able to earn additional revenues by operating commuter services in certain corridors. Fourteen States currently provide operating support to Amtrak for intercity passenger service within their jurisdiction.

Ports and Waterways

Ports and inland waterways are critical components of the Nation’s freight transportation system. As highways and railroads become increasingly congested, ports and waterways can help relieve the pressure on the freight transportation system.

Exhibit 5-12 shows the sources of revenues used to finance port improvements between 2001 and 2005, based on surveys of members of the American Association of Port Authorities. 2. Different ports are represented in the data for individual years, so no trend analysis is possible and data cannot be directly compared from one year to another.

Exhibit 5-12: Revenues to Finance U.S. Port Improvements, 2001-2005 ($ thousands)

This exhibit shows the sources of port-related revenues between 2001 and 2005.

Source: USDOT, Maritime Administration, U.S. Public Port Development Expenditure Report (FYs 2005 & 2006-2010), July 2007.

Over the 5-year period covered by the surveys, port revenues amounted to over half of all revenues supporting U.S. port improvements. Another third represented bond sales, some of which will be repaid from port revenues. The remainder came from loans, grants, and other sources.

The Federal Government participates in the cost of port feasibility studies, construction, and operating and maintenance (O&M) expenses. The maximum Federal share for harbor navigation projects varies depending on the size of the harbor, ranging from 80 percent for harbors less than 20 feet to 40 percent for harbors greater than 45 feet. These funds come from general revenues. The Federal Government pays 100 percent of O&M costs for harbors less than or equal to 45 feet in depth and 50 percent of the cost for deeper harbors. The O&M costs come from the Harbor Maintenance Trust Fund, which receives proceeds from a 0.125 percent ad valorem tax on commercial port users collected by U.S. Customs. The Federal Government’s participation generally is limited to the navigable channels. Individual berths and piers are generally dredged by the port or terminal operators.

Inland waterway navigation improvements are financed entirely by the Army Corps of Engineers. Feasibility studies, O&M costs, and 50 percent of construction costs are paid from general revenues, while the remaining 50 percent of construction costs are paid for through the Inland Waterways Trust Fund (IWTF). The IWTF receives proceeds of a 20-cents-per-gallon fuel tax on commercial vessels using inland waterways.

Future Surface Transportation System Financing Issues

This section discusses issues facing future financing of the surface transportation system. It presents forecasts of future revenues from existing sources and recommendations for meeting increased surface transportation investment requirements discussed in Chapter 4. Long-term alternatives to the fuel tax are also discussed.

Keeping the Highway Trust Fund Solvent

It is widely known that balances in the HTF are falling, especially in the Highway Account. Exhibit 5-13 shows projected cash balances in the Highway and Transit Accounts of the HTF from 2006 to 2012. The Highway Account balances are projected to decline from $9.2 billion in 2006 to -$4.3 billion in 2009 if corrective actions are not taken. Without action, Highway Account balances would become increasingly negative, reaching -$26 billion by 2012; Transit Account balances are projected to increase slightly through 2008 but then decline to -$0.7 billion in 2012. The Commission recommends that legislation be passed in FY 2008 to keep the Highway Account of the HTF solvent and prevent highway investment from falling below l