A Guide to Transportation Funding Options

Motor fuel taxes have been the most important revenue mechanism for highway programs at the Federal and state levels.

Most states have traditional "cents per gallon" excise taxes on the highway use of motor fuel. Some also have variable rates based on an inflation adjustment or a fuel price. Several alternative fuels currently are taxed on an energy equivalent basis to gasoline or diesel.

Fuel taxes also support transit programs at the Federal level and in some states.

Motor fuel taxes are inexpensive to administer and have low compliance costs. Evasion has been a major issue, especially for diesel fuel, but states and the FHWA have reduced evasion levels.

Motor fuel taxes at rates sufficient to fund all needs would not add enough to fuel prices to significantly impact travel volumes.

Fuel taxes vary with highway use, but this relationship will become less direct as we move toward more fuel efficient vehicles and greater use of alternative fuels.

Raising fuel taxes without at the same time raising truck taxes reduces the equity of the overall highway user fee structure because trucks would pay a lower share of their overall highway cost responsibility.

Motor fuel taxes are applicable to financing programs of improvements, but not individual projects. All levels of government can and do impose motor fuel taxes.

Recent studies suggest the fuel tax will be a viable revenue source for highway and transit programs for at least 15 to 20 years, but after that moves to alternative fuels and more fuel efficient vehicles will increasingly erode the ability of the fuel tax to serve its current role as the major revenue source for Federal and State highway programs.

Based on history, adjustments through legislation to the motor fuel excise tax have been the method of choice in most states for major new funding resources to fill funding gaps for state highways.

Flat rate fees per gallon have not been adjusted fast enough to keep pace with needs.

Motor fuel taxes may be higher per gallon in some States than in neighboring states. Opponents of fuel taxes generally raise the issue of diversion of purchases to neighboring states with lower tax rates.

About 5 States currently index their fuel tax to some measure of inflation.

Motor fuel taxes by themselves are not equitable among vehicle classes, since the largest vehicles pay less in fuel taxes relative to the costs imposed on highways.

Indexing the fuel tax does not affect its applicability.

A ceiling and floor on the change in the indexed rate may be desirable to prevent large changes in tax rates.

Many see indexing as just a backdoor way of increasing the fuel tax.

Several States impose a tax on the sales price of fuel.

Motor fuel taxes are mildly regressive among income groups. Basing the rate on the sales price of fuel would make them more regressive.

Basing the fuel tax on the price of fuel rather than on a gallonage basis would not affect its applicability.

Sales taxes on fuel have recently been of greater interest due to the increase in fuel prices

Fuel taxes by their nature are applicable only at the program level.

Some believe that petroleum taxes have more voter appeal because of a perception that they are imposed on petroleum companies rather than on individual drivers; however, such taxes are normally passed through to drivers the same as other types of motor fuel taxes.

The U.S. is one of the few countries that does not have a value added tax. The tax is similar to a sales tax, but is levied at every stage in the production process, not just on final consumption as the traditional sales tax.

Administrative costs would be higher than for the fuel tax since there are many taxpayers and considerable documentation involved. This potentially could also make it subject to evasion.

The VAT could be applicable to general transportation purposes. It would be applicable to financing programs of transportation improvements, but not individual projects. It almost certainly would be limited to the national level.

A general VAT has been discussed for many years, but rejected. Estimating just the value added by transportation could be difficult.

All states have traditional types of registration fees for light vehicles and somewhat higher and graduated fees for heavy vehicles.

At the Federal level the Heavy Vehicle Use Tax is similar to a registration fee but it applies only to the heaviest trucks.

Registration fees are relatively inexpensive to administer in relation to potential yield, but not as inexpensive as fuel taxes. The fact that registration fees do not vary by miles traveled is a major source of inequity and inefficiency. Registration fees allow for collections from vehicles using alternative fuels without establishing new mechanisms for collection.

Like fuel taxes registration fees are applicable at the program level, but not the project level. The federal Heavy Vehicle Use Tax is similar to a registration fee and all States have registration fees.

Equity among vehicle classes would indicate that parallel adjustments in registration fees should be made applicable to all vehicles.

A registration fee based on value can be structured as a personal property tax and be deductible from Federal income.

Registration fees for light vehicles, if collected on a flat basis, are somewhat regressive by income class. Registration fees for light vehicles on the basis of value are progressive.

Levying fee on the basis of a vehicle's value would not change the overall applicability of registration fees.

Some states have recently eliminated or reduced such fees despite their advantages in comparison to collecting other state taxes that are not deductible for federal income tax purposes.

The Federal Government and many States have sales taxes on vehicles. The Federal tax applies only to heavy trucks, but formerly had been applied to all vehicle sales.

Sales taxes on vehicles will be fairly progressive. Administrative costs are relatively low, but especially with trucks there are issues concerning what specialized equipment should be exempt from taxation.

Sales taxes are much more applicable to the program level than the project level. They are particularly applicable at the local level, but could be used at the State level as well.

All sales taxes already may be deposited into general revenue accounts.

Selected highways and selected bridges have historically been toll facilities.

Administration and compliance costs for tolling are greater than for motor fuel taxes, although these costs are reduced greatly through electronic toll collection.

Traditionally tolls have been used to finance individual projects. Several States allow tolls from one project to be used to provide front-end financing for other toll roads and thus tolls can be applicable to systems of toll roads or to transit facilities as well. Tolls are applicable at the State and local level, but have not been used at the Federal level.

A few existing toll facilities have been leased to international companies, substituting short-term revenue gains by public agencies for lesser longer-term revenues.

In the past 10 years, 30-40 percent of new limited access highway mileage has been financed at least in part through tolls.

Tolls collected at traditional toll booths are expensive to administer, but electronic tolling is much less costly. Tolls can be set to achieve equity among vehicle classes.

Concerns about the impacts of tolling on equity among income groups continue, but HOT lanes have been supported by all income groups.

Tolls are predominantly facility-based revenue sources used to finance individual projects. Tolls are applicable at the State and local level, but have not been used at the Federal level.

Acts allowing Regional Mobility Authorities (RMA) and a PPP act could expand future possibilities for tolling. Some states do not yet have a PPP act parallel to that of other states, which would enable private parties to initiate proposals to develop new facilities or to add toll lanes to existing facilities.

There currently are restrictions on tolling existing Interstate Highways but that can be done under several pilot programs for either pricing purposes or reconstruction of existing Interstate Highways.

Tolling existing lanes could provide for greater equity than other sources of new revenues, but is widely perceived as inequitable ("paying twice"). This perception is false, however, since funds are needed for the continued maintenance and operation of the facilities.

Tolls are predominantly facility-based revenue sources used to finance individual projects. Tolls are applicable at the State and local level, but have not been used at the Federal level.

Sentiment is against tolling any currently free highway lanes. Likewise, little opportunity exists for tolling existing free bridges.

Fees on VMT could be longer-term options that could supply revenues without being directly tied to fuel consumption. VMT fees could be weighted by fuel economy, weight, emissions, or other factors to support other policy goals.

VMT fees would be more costly to collect and administer than fuel taxes, but long term costs are uncertain.

VMT fees are primarily for program financing rather than project financing – the counterpart at the project level is the toll. VMT fees could be used at the Federal, State, or local levels.

VMT fees or congestion pricing fees require the technology to collect those fees reliably and also the political will to implement a new approach. There are privacy concerns associated with VMT fees but concerns are not substantiated. Transitioning away from fuel tax and to a VMT tax will require substantial coordination and consensus building.

Could be applied as a special kind of VMT fee, with fees varying based on the level of congestion on the road. Pricing can also be implemented on an area-wide basis or a cordon basis. While the primary goal of congestion pricing is demand management rather than revenue generation, pricing can generate substantial revenues as well. Pricing can be either facility-based or area-wide. Oregon is demonstrating the technologies for collecting VMT fees at the fuel pump.

Congestion pricing is more expensive to administer and enforce than motor fuel taxes.

Concerns have been raised about the equity of congestion pricing. Equity is strongly influenced by the availability of good alternatives to driving on the priced highways. Rebate programs have been suggested as one way to reduce adverse impacts on lower income groups.

In the long run, VMT fees and congestion pricing could replace all or a portion of current user fees.

Congestion pricing is applicable at either the project level or an area-wide level, but it generally would not be applicable to financing entire statewide transportation improvement programs.

The ability to apply pricing on the Interstate System is limited by federal law. Good transit alternatives also must be available for those who cannot afford the congestion toll and cannot change their trip destination or time of day.

Have been widely used in many states to support highway and transit investments. Local governments in most states have implemented some type of local option tax, which must be specifically allowed by state enabling legislation.

Local option taxes for transportation investments include motor fuel, vehicle, property, sales, and income taxes.

Collection mechanisms already are in place to levy these taxes at the state or local level.

Most local option taxes are regressive (except for income taxes). However, sales taxes tend to receive stronger support than other local option taxes. People consider that sales taxes are more "fair," since everyone pays, whether they are vehicle or transit users.

Local option taxes may be applicable to a major project, but are more applicable to a program of transportation improvements. By definition these fees are applicable only at the local level.

Commonly, local option taxes require voters' approval. While an expenditure plan that specifies projects and/or programs to be funded with the new local option tax levies is not always required, local option taxes have better chances of success for implementation where expenditures and uses are clearly defined.

Implementation plans that are well designed have resulted in very high success rates for ballot measures to enhance transportation revenues.

Impact fee legislation exists in 26 states (excluding Florida). Impact fees for transportation improvements are widely used in California and Florida.

These charges can be relatively equitable if properly structured. Benefit districts can target the specific beneficiaries.

While impact fees are directly charged to developers, they pass those charges to buyers, increasing the cost of real estate.

TIF allocates a portion of the additional property taxes resulting from the increase in property values.

Communities and local agencies could argue that implementation of TIF would take away revenues that otherwise would be used to meet other public needs.

Beneficiary charges may be applicable to a major project, or to a program of transportation improvements in a local area. These fees are applicable only at the local level.

Impact fees are only applicable to new development. TIF and other property assessments may require the formation of districts, where property tax levies are dedicated for transportation improvement. This may require voters' approval from district residents and business owners.

Beneficiary charges have been the subject of numerous lawsuits in many areas.

Most states have used one or more forms of the IF financing tools. Innovative finance is not a source of new revenues, but rather a method of financing projects or programs of projects. It usually involves borrowing that must be repaid from other sources of funds such as fuel taxes, tolls, or other revenue sources.

Incurring longer-term debt helps advance programs and projects that would otherwise take years to develop if at all. Innovative finance may be more equitable than financing high-cost projects out of current revenues because it spreads the cost to future users who will also benefit from the investment.

Innovative finance is more often used at the project level, but it also is applicable to the program level as well. It is most applicable to the State and local levels of government.

States may require enabling legislation to issue GARVEE bonds. Most innovative finance grant management tools are codified under Title 23 U.S.C. and require no special action from states to be used. To test new grant management tools, states may apply to U.S. DOT under the SEP-15 or TE-045 programs.

Debt mechanisms must be balanced against long-term revenue sources. Many states cap the amount of debt that can be issued.

PPPs are commonly used in Europe to reduce public-sector costs to construct, operate, and maintain highway facilities but are not yet widely used to support similar projects in the United States. PPPs are primarily financing and project delivery mechanisms, but like innovative finance they may help accelerate project delivery. Highway improvements are now eligible for financing with private activity bonds.

PPPs can facilitate access to private capital and bring innovative cost-saving projects delivery methods. Cost-efficiency and equity will be similar to other types of tolls. Since the private sector often handles toll collection and must deal with enforcement, public agency costs for those items are low.

PPPs that involve private sector capital generally are implemented at the project level. Several states are using PPPs to operate and maintain portions of their highway systems, but those do not all involve tolling. PPPs are applicable at either the State or local level.

Specific project proposals need to be evaluated to determine if it will be cost-effective.

May require enabling legislation. More than 20 states have explicit PPP acts that provide means to bring the private sector into funding and management of highways. Virginia's act has fostered a wide range of proposals.

A number of current and emerging trends are driving the exploration of container charges and other direct user fees as a transportation revenue source. These include the rapid growth in international and domestic freight volumes and recognition that new revenue sources will be needed to fund freight-specific transportation improvements.

Container fees offer a way to tie freight system users more directly to the resources and infrastructure they use. These fees are seen by many as a more equitable method to raise revenue that can be dedicated specifically to freight system improvements.

There are limited options to fund or finance non-highway freight improvement projects. Current federal programs may be applicable to small, localized freight system improvements, but are not well suited to larger regional intermodal freight improvements. Container fees could provide substantial revenues for such large-scale projects and would be appropriate for both rail and highway components of intermodal projects. Container fees could be applicable to either State or local projects.

Implementing a container fee that equitably links costs and potential benefits for the mix of freight traffic using any given gateway may be difficult.

The majority of customs duties currently are deposited into the U.S. General Fund, although a portion is used to support costs of Customs and Border Patrol operations.

Fees based on the value of cargo are not as equitable as those on the volume because they do not reflect the transportation requirements as well.

Customs duties would be most appropriately used for improvements to waterside or landside port or airport facilities, to improve the connections between these facilities and the highway and freight rail systems, or to improve freight facilities serving large volumes of international shipments. They would be applicable to the Federal level only.

Some will argue that gateway improvement programs already exist and point to SAFETEA-LU's Coordinated Border Infrastructure Program (Section 1303), but finding from that program currently is inadequate.

Like innovative finance, tax credit bonds are a financing mechanism and not a new source of revenue. Tax credits would represent reductions of income taxes owed by bond holders.

Tax credit bonds would have low administrative and enforcement costs since those costs would be small increments of costs associated with processing Federal income tax returns. Bonds would be relatively progressive with income since bond interest would be paid from general tax revenues.

This financing mechanism would be applicable at the program level and would apply to the Federal Government.

Several tax credit bond proposals for surface transportation have been introduced in recent years (e.g., Build America Bonds, Amtrak, other rail infrastructure), but none has yet been enacted.

Over the years various forms of infrastructure bank have been proposed as mechanisms to provide funds for infrastructure investment. These banks are not necessarily limited to transportation investment. Like other financing mechanisms, funds borrowed from the infrastructure bank would have to be repaid from some other general or project-related revenue source.

Administrative costs generally would depend on the revenue source from which borrowed funds were repaid.

This financing mechanism would be applicable to either the program or project level. Revenues to repay loans would come from the State or local level of government.

As noted, there have been several proposals for infrastructure banks over the years, but it is not believed any have been enacted.