Policy Analysis | May 2014

Latest State Transportation Funding Proposals

Sujit M. CanagaRetna

(The information presented here is in response to a request for the latest state transportation funding proposals, i.e., proposals that were discussed and, in certain cases, enacted in 2013 and 2014)

There are significant challenges associated with the funding position of the federal Highway Trust Fund (HTF), one of the more important sources of funding for state transportation and infrastructure programs. As a result of inflation, more fuel-efficient vehicles and changing driving habits, the HTF is seriously underfunded.* In fact, the latest estimates indicate that spending from the HTF currently outpaces tax receipts by $1.25 billion per month. While the current iteration of the federal transportation reauthorization is scheduled to expire at the end of the federal fiscal year (September 30, 2014), there is a great degree of uncertainty as to the specific approach that Congress might take in devising the successor to this legislation.

In late April 2014, the Obama Administration forwarded a four-year, $302 billion transportation reauthorization plan to Congress with recommendations on repairing and replacing the nation’s aging transportation infrastructure, while allowing for the needs of an expanding population. Even though transportation experts had recommended a slightly longer time horizon (six years) and larger amount ($330 billion), the four-year plan is an improvement on the current 27-month authorization, Moving Ahead for Progress in the 21st Century Act (MAP-21). It is left to be seen as to what Congress will agree on, both in terms of the length and financial size, of the new transportation reauthorization.

At the federal level, experts highlight the following avenues as ways to generate the extra revenue to bolster the HTF:

  1. Increasing and indexing the federal gas and diesel taxes, a proposal endorsed by the U.S. Chamber of Commerce and often considered the most straightforward option: This solution is considered highly unlikely since there is no appetite in the U.S. Congress to raise taxes. Leaders in Congress, in both chambers and on both sides of the aisle, have indicated that the upcoming reauthorization will not include a gas and diesel tax increase.
  2. Employing General Funds to supplement HTF revenue, an approach that has been pursued as a stop gap funding measure in the past: This solution also is considered highly unlikely since the bipartisan budget agreement negotiated between the U.S. Senate and the U.S. House in late December 2013 requires any General Fund transfers into the HTF to be fully offset during the year in which the transfer occurs. In fact, there is widespread acceptance in Congress that General Fund transfers are "not a sustainable formula for the future".
  3. Expanding the use of highway tolling, a strategy that dozens of states have adopted in recent years: Experts note that existing toll roads in 28 states generate more than $10 billion per year in revenue, an amount equal to nearly one-third of the annual federal gas tax revenues. The April 2014 Obama Administration transportation reauthorization plan does encourage states to directly raise more funds for transportation projects by relaxing certain restrictions on tolling federal interstates. It is left to be seen whether future action by Congress in the form of the new reauthorization would also promote this recommendation. It should be noted that since revenues from tolling flow directly into state treasuries (or the state-based tolling authorities) as opposed to the federal HTF, they will not promote the long-term solvency of the HTF.
  4. Initiating a comprehensive overhaul of the U.S. federal tax system, including corporate tax reform, and then allocating new revenues that would be realized towards transportation and infrastructure spending, an approach favored by both the White House and the Secretary of the U.S. Department of Transportation: There is very little likelihood that such reforms would pass in 2014, an election year; this approach also is not a long-term solution to the HTF’s funding challenges, notwithstanding the one-time windfall amount the tax reform effort might generate.

Given the enormous challenges at the federal level, a number of states have sprung into action and devised a number of strategies to generate revenue for their transportation and infrastructure projects. While the level of funds the states will raise on their own will be insufficient to fund all the required projects, they still are an important element in upgrading our nation’s aging infrastructure system. Virginia is an SLC state that enacted major reforms to generate revenue for transportation projects in 2013. Some of the key elements of the Virginia legislation involved the following:

  • Replacing the 17.5 cents per gallon gas tax with a new 3.5 percent wholesale gas tax;
  • Converting the tax on diesel from a flat per-gallon tax to a 6 percent wholesale tax;
  • Raising the state sales tax 0.3 percent and gradually increasing the dedication toward roads from 0.5 percent to 0.675 percent by 2018;
  • Assigning 57 percent of the projected Internet sales tax revenue in the state to transportation, provided the Marketplace Fairness Act -- that allows states to require Internet sellers to collect sales taxes on online purchases ‐ succeeds in the Congress;
  • As a safeguard, if the Marketplace Fairness Act does not succeed in the U.S. Congress, the wholesale tax on gas would rise from 3.5 percent to 5.1 percent;
  • Raising the vehicle title tax to 4.15 percent from 3 percent over four years;
  • Increasing the sales tax an additional 0.7 percent on top of the 0.3 percent statewide increase in the Northern Virginia and Hampton Roads areas, the two most populous areas of the state with the highest level of need in terms of transportation infrastructure;
  • Hiking the hotel tax by an additional 2 percent in the Northern Virginia area;
  • Instituting a regional congestion relief fee of $0.15 for every $100 of real estate transactions, once again, in the Northern Virginia area;
  • Increasing the wholesale tax on motor fuels an additional 2.1 percent over the statewide level in the Hampton Roads area; and
  • Placing a lockbox on transportation funds so they cannot be used for other purposes.

These assorted measures in Virginia are expected to generate $1.4 billion annually for transportation projects in the state.

Also, in 2013, experts document that over two dozen states initiated a range of different transportation-related revenue initiatives and some of these were:

  • Hiking the gasoline tax (MD, WY, MA, VT);
  • Moving to a tax on fuel at the wholesale level (PA);
  • Enacting dedicated sales taxes for transportation (AR);
  • Floating toll revenue bonds (OH);
  • Adopting a voluntary vehicle mileage-based (VMT) user fee system (OR);
  • Securing an additional $91 million from the General Assembly in recurring annual funding for bridge, resurfacing and interstate projects (SC);
  • Enacting a constitutional amendment that might raise $1.2 billion per year for the state's highways by diverting half of the revenue from the state’s oil and gas production Rainy Day Fund (TX);
  • Raising the state gas tax by 10 cents (DE);
  • Securing a recommendation from a House legislative panel for a 10-cent per gallon gas tax increase (IA); and
  • Proposing the formation of an enterprise dedicated to fostering public-private partnerships to fund transportation infrastructure projects (CO).

During their 2014 legislative sessions, there has been a flurry of activity in the states and some of the measures discussed include the following:

  • Introducing bills to raise state gas taxes or index them to inflation (ID, IA, NH, NM, SC and UT);
  • Entering into the first public private partnership (P3) for maintenance of the Denver-Boulder highway (CO);
  • Passing a $12.7 billion bond bill for transportation over the next five years for commuter rail expansion, local road improvements and highway improvements (MA);
  • Authorizing $200 million in transportation funding to be released from a savings fund created last year (IN);
  • Approving a $685 million budget for transportation (VT Senate);
  • Introducing a bill (NJ Senate) to raise the motor fuel tax by 5 cents per gallon. (The bill is projected to generate an extra $250 million annually over the 3-year life of the tax);
  • Passing a $358 million bill for transportation, a 1.5 percent increase over the current year (IA);
  • Studying tolls as a potential funding source for Interstate 73 construction (SC);
  • Unveiling (Governor Bill Haslam in Tennessee) a three-year $1.5 billion transportation budget that will fund 14 statewide programs and projects in 41 counties;
  • Passing a one cent increase in the sales tax (MO House) dedicated to transportation projects across the state, a move that was followed by the MO Senate passing a 3-fourths cent increase in the sales tax for funding transportation projects. The one cent sales tax increase in the MO House is projected to generate $720 million annually, while the increase advocated by the MO Senate will result in $534 million annually. Once the two chambers agree on an identical measure, it will be placed as a constitutional amendment on the ballot in the upcoming 2014 November election;
  • Announcing a six-year, $8.6 billion construction program that is planned to improve 1,845 miles of highway and replace or rehabilitate 384 bridges across the state (Governor Pat Quinn in Illinois);
  • Unveiling (Governor John Kasich in OH) a $2.5 billion road construction program for 2014 that will include 900 construction projects across the state. These projects will be funded partly with the proceeds of the Ohio Turnpike toll revenue bonds mentioned above;
  • Proposing (Governor Danniel Malloy in CT) a 2015 transportation budget that represents a 165 percent increase in funding compared to 2010 levels and includes $1.4 billion to fund the largest transportation capital program in the state;
  • Approving a fuel revenue indexing measure (NV) that will result in $700 million in new revenues that will help finance new transportation projects;
  • Reviewing different ways to fund transportation (Governor Scott Walker in Wisconsin), including new revenue mechanisms as part of an overall tax reform effort given the unsustainability of the federal gasoline tax;
  • Announcing a proposed $3.7 billion capital program for transportation improvements in fiscal year 2015 (New Jersey DOT), including $1.2 billion for NJ TRANSIT;
  • Signing a $4.1 billion road construction bill into law (Governor Steve Beshear in Kentucky) even though the bill does not include the 1.5 cent per gallon gas tax increase previously passed in the House that was supported by the governor;
  • Establishing (AZ) a study committee to look at a vehicle miles traveled (VMT) fee and advertising for food, hotel and gas service to be installed at 300 exits in Phoenix, Tucson, Yuma and Flagstaff, a move expected to raise up to $10 million;
  • Exploring (FL) moving to a mileage-based user fee (VMT) and introducing additional tolls roads, encouraging more cellphone towers on state property to raise transportation funds, and allowing businesses to put up signs on state nature and recreational trails to help pay for their maintenance (a spending area gas tax funds currently go toward);
  • Proposing (ID) a number of new revenue measures to fund transportation, including increasing the sales tax to 7 percent and assigning the increased revenues for transportation; hiking vehicle registration fees; increasing taxes on rental cars; increasing Idaho’s existing 25 cents per gallon gasoline tax; and channeling the cigarette tax receipts currently assigned to pay off bonds on the state Capitol renovation to road work and water projects in 2015, once the bonds are paid off;
  • Discussing an increase in the state (IL) gas tax and vehicle registration fees alongside adding a sales tax on oil changes and auto repairs;
  • Applying the state’s sales tax to pay for road repairs (approved by Governor Terry Branstad in Iowa) which would take 10 percent of the first 2 cents from the state's 6 cent sales tax and apply that to roads. In addition, an Iowa House Study Committee Bill calls for a 3 cent per gallon gas tax increase on July 1, 2014, followed by another 3 cent increase on July 1, 2015 and a further 4 cent boost on July 1, 2016;
  • Proposing (MI) an increase in the state’s gasoline and diesel tax to 33 cents per gallon (from 19 cents per gallon and 15 cents per gallon, respectively); hiking registration fees by 60 percent for passenger vehicles and light trucks and 25 percent for large trucks; devoting a portion of sales tax revenue to transportation; and allowing counties to raise additional money for local roads and public transportation via a tax on the price of vehicles. These moves, if enacted, would raise $1.2 billion in additional revenue per year;
  • Advocating (MN) for an increase in the sales tax by half a cent in the seven-county Twin Cities metro area of St. Paul and Minneapolis with the additional revenue being assigned to transportation.

Sources: Footnotes:

* The HTF is financed through the 18.4 cent per gallon federal gasoline tax and the 24.4 cent per gallon diesel tax; both taxes were last raised in 1993.