State-Federal Role Reversal in Transportation Funding

State-Federal Role Reversal in Transportation Funding
August 19, 2014

Kenneth Orski

Kenneth Orski (korski@verizon.net) is editor and publisher of the Innovation Briefs newsletter. (read full bio)

(Editor’s note: On July 31, Congress approved a $10.8 billion, 10-month "patch" to the Highway Trust Fund, averting what could have become significant delays in state reimbursements during the height of the construction season.)

What will happen after next May is anybody’s guess. A six-year surface transportation measure that transportation stakeholders want would require roughly $330 billion to maintain current (FY 2014) spending levels. But Trust Fund revenue and interest over the same period is projected by the Congressional Budget Office to bring in only $230 billion—leaving a truly staggering funding gap of $100 billion.

The only feasible way to raise this kind of money would be to substantially increase the federal gas tax—a solution favored by many in the transportation industry. But a boost in the gas tax remains political anathema. Only three senators—Democrats Tom Carper of Delaware and Chris Murphy of Connecticut and Republican Bob Corker of Tennessee—and one House Democrat, Earl Blumenauer of Oregon, have come out publicly in favor of raising the tax.

On the other hand, House Majority Leader Kevin McCarthy—and the White House—recently reiterated their opposition. There is good reason for their position: An April 2013 Gallup poll found two-thirds of Americans are against raising the gas tax, even if it goes toward infrastructure improvements. 

With the Republicans likely to control the Senate next year and the presidential elections casting a shadow over any new proposal to raise taxes, there will be a huge temptation for Congress to kick the can down the road once again, beyond the presidential election and into the next Congress. 

States Taking the Reins

Many states are moving to compensate for the lack of congressional action on long-term funding by raising additional revenue of their own. More than 30 states have launched transportation-related fiscal initiatives in just the past two years. 

Some states have increased local fuel taxes (Massachusetts, Maryland, New Hampshire, Vermont, Wyoming). Others have introduced fuel taxes at the wholesale level (e.g., Pennsylvania), floated toll revenue bonds (e.g., Massachusetts, Ohio), or raised highway tolls (e.g., Delaware). Still others have enacted dedicated sales taxes for transportation—as Arkansas did in November 2012. As Sen. Roger Wicker (R-Mississippi) observed, states have become veritable "laboratories for fiscal experimentation."

At the local level, things have not been standing still either. A growing number of local jurisdictions are approving bond issues and dedicated sales taxes to support local transportation improvements

Collectively, these measures are generating billions of additional dollars for state and local transportation programs—and making up for the absence of increased federal funding. As the latest congressional votes suggest, the states' revenue initiatives also may have reduced the sense of urgency to act on a long-term funding bill at the federal level. Indeed, for a growing number of states that have secured a stable multiyear source of funding for their transportation programs, a long-term federal transportation authorization no longer is an imperative

Financing Major Transportation Investments

For further fiscal independence, many states have turned to financing large-scale construction projects with long-term credit—borrowing front-end capital and repaying it over extended periods of time with dedicated sources of revenue. To raise capital, states are using a variety of financing tools such as TIFIA loans, Private Activity Bonds, toll revenue bonds, and private equity contributions.

In turning to long-term credit to finance major transportation investments, states are following in the footsteps of the private sector. All the nation’s privately owned infrastructure—railroads, pipelines, telecommunications networks, power plants, and refineries—are funded with loaned capital. So are many transportation improvements at the local level, using tax-exempt municipal bonds. Now state roads and bridges are joining the ranks of infrastructure projects that are increasingly financed with long-term investment capital.

In sum, states are not standing idly by, waiting for Congress to come to the rescue with more money. Instead, governors, state legislatures, and local governments are taking aggressive steps to reduce their dependence on federal aid. They are increasing fuel taxes, passing local bond referenda, financing large-scale construction projects with long-term credit, and entering into investment partnerships with the private sector. States are taking matters into their own hands and becoming masters of their own transportation destiny. 

Rethinking State-Federal Relationship

Will the states' growing fiscal independence—this de facto devolution, as some call it—make the Highway Trust Fund superfluous? I doubt it—at least not in the foreseeable future. At an estimated $34 billion a year, federal fuel taxes provide the states with essential, hard-to-replace help in maintaining and modernizing the Interstate Highway System. 

But big-ticket capital investments no longer will have to be funded with Trust Fund revenue. They will be increasingly financed with long-term capital. At least that's the scenario envisioned by some visionaries looking for a permanent solution to the Highway Trust Fund crisis.

As for the states, greater fiscal independence will help them gain a substantially enhanced role in transportation; it will empower them to set their own spending priorities and do away with burdensome federal mandates. Conversely, increased state fiscal autonomy combined with continuing federal budgetary constraints will lead de facto to a more limited, more clearly defined federal role in transportation.

Kenneth Orski (korski@verizon.net) is a public policy consultant and former principal of the Urban Mobility Corporation. Excerpted from the author’s remarks at the Legislative/Fiscal Plenary Luncheon, Council of Governments’ Southern Legislative Conference, Little Rock, Arkansas, July 27. Used with permission of Innovation NewsBriefs, www.innobriefs.com.

Kenneth Orski

Kenneth Orski (korski@verizon.net) is editor and publisher of the Innovation Briefs newsletter. (read full bio)