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Beyond The Gas Tax

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Beyond The Gas Tax

“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 ( pictured below, right) welcomed participants to a  New York State DOT-sponsored symposium, “Beyond the Gas Tax: Funding Future Transportation Needs.”
We moderated a panel on “Options Beyond the Gas Tax.” An edited text of our remarks follows. 
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A 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. 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 will be able to meet their part of the bargain through local tax increases – be it gas or sales tax.
States will be obliged to look for new sources of capital. Where will the money come from? 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. 
Transportation Funding Needs Likely To Exceed Bonding Capacity
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.
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.
Hybrid Funding Model To Emerge
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.
Congressional Concerns On P3s Can Be Met 
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 Peter DeFazio(D-4th, Ore.), 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.
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.
Vehicle Mileage Tax Eyed, In Long-Term
German Precedent – Trucks
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.