SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 4111 words

COMMITTEE: HOUSE TRANSPORTATION AND INFRASTRUCTURE

SUBCOMMITTEE: HIGHWAYS AND TRANSIT

HEADLINE: FUEL TAXES AND HIGHWAY TRUST FUND

TESTIMONY-BY: LARRY KING, DEPUTY SECRETARY

AFFILIATION: DEPARTMENT OF TRANSPORTATION

BODY:
STATEMENT OF LARRY KING DEPUTY SECRETARY FOR PLANNING PENNSYLVANIA DEPARTMENT OF TRANSPORTATION

The American Association of State Highway and Transportation Officials

THE LONG-TERM OUTLOOK OF THE HIGHWAY TRUST FUND: ARE FUEL TAXES A VIABLE MEASURE

COMMITTEE ON HOUSE TRANSPORTATION AND INFRASTRUCTURE SUBCOMMITTEE ON HIGHWAYS AND TRANSIT

July 16, 2002

District of Columbia and Puerto Rico. Its mission is a transportation system for the nation that balances mobility, economic prosperity, safety and the environment.

Mr. Chairman, my name is Larry King. I am the Deputy Secretary for Planning at the Pennsylvania Department of Transportation. I am speaking today on behalf of the American Association of State Highway and Transportation Officials (AASHTO) in my role as Secretary/Treasurer of AASHTO and Chairman of AASHTO's TEA-21 Reauthorization Work Team with responsibility for Finance Issues

Mr. Chairman, thank you on behalf of the state transportation officials across the country for inviting AASHTO to participate in this hearing to discuss issues related to the near- and long- term future of the Highway Trust Fund. We applaud your leadership in recognizing the need to ensure that our country has a financially sustainable and reliable mechanism for financing the nation's highways, bridges and transit systems. This hearing offers a good first step toward examining the current financing mechanism, and I would like to begin my testimony with a brief statement of our recommendations for consideration by this Committee:

- Over the short-term, AASHTO urges Congress to transfer to the Highway Trust Fund the receipts from the 2.5 cents per gallon tax on gasohol that now go to the General Fund, and to replace the loss of revenues to the Highway Trust Fund resulting from the 5.3 cent tax exemption for gasohol and other ethanol-blended fuels.

- In its reauthorization of TEA-21, AASHTO urges the Congress to establish a blue-ribbon commission, similar to that recently proposed by Senate Finance Chairman Max Baucus, comprised of Federal, State and Local policy officials and experts to fully assess the long-term sustainability of the current petroleum- based highway user revenue stream for the Highway Trust Fund. Such a commission should be charged with conducting a comprehensive assessment of the nature and dimensions of the problem, as well the timing for future erosion of petroleum-based revenues, and identify finance options for future federal highway and transit financing.

- In its reauthorization of TEA-21, AASHTO urges the Congress to consider options to increase current authorizations for highways to $34.1 billion in FY2004, rising to a minimum of $41 billion in FY2009; and $7.5 billion for transit in FY2004, rising to a minimum of $10 billion in FY2009.

The Current State of the Petroleum-Based Highway Trust Fund Mechanism. The federal Highway Trust Fund is the financing mechanism that provides 100 percent of the federal contribution for highway improvements and about 65 percent of the federal funding for transit improvements. The major funding source for the Highway Trust Fund is the Federal tax on motor fuels. In Fiscal Year 2000, federal taxation of motor fuels accounted for 86.6 percent or $30,288 billion of all Highway Trust Fund receipts. Of this amount $4.625 billion was credited to the Mass Transit Account. Taxation of trucks and trailers, heavy vehicle usage, and tires accounted for 9.5 percent, 2.6 percent and 1.3 percent, respectively, of the Highway Trust Fund receipts.

It was almost one year ago when the Office of Management and Budget's mid-session review revised downward earlier estimates of anticipated revenues to the Highway Trust Fund based on lower than expected truck sales and gasoline tax receipts and higher than expected use of gasohol. Those reduced estimates carried through and were reflected in the President's FY 2003 budget released this past February. As we now know, the impact was a devastating $8.6 billion proposed reduction in the obligation levels of federal highway funds to the states. The impact of the revised estimates was exacerbated by the structure of TEA-21's Revenue Aligned Budget Authority (RABA) mechanism, which has the effect of magnifying the impacts of a downward revised revenue estimate because of the look-ahead provisions that increase program obligation levels when revenue growth above that assumed in TEA-21 is estimated.

Through your leadership and the efforts of this Committee, much progress has been made toward restoring a significant portion of the $8.6 billion reduction from the current federal highway funding level. We applaud your efforts and look forward to the resolution of this immediate problem.

The circumstance within which we have found ourselves as a result of the revised Highway Trust Fund revenue estimates has also served as a wake-up call to the longer-term viability of the petroleum-based highway user fee based system for financing the federal-aid highway and, in large measure, the transit system. AASHTO and others in the transportation community have begun to focus on the uncertainties related to potential reductions in revenues from current sources - largely taxes on petroleum-based motor fuels.

For a number of states the revenue issue is gaining more immediate attention. Many states with areas not meeting air quality standards are required to use oxygenated fuels to reduce air emissions, especially during the warmest summer months. The growing use of gasohol has resulted in a direct loss in federal and states highway revenues, and an indirect loss associated with how federal highway funds are apportioned.

Factors Affecting the Long-Term Revenue Picture of the Highway Trust Fund

A number of factors will affect the future revenue productivity of the federal petroleum-based tax structure for federally funded highways, bridges and transit. Changes in the fuel efficiency of the vehicle fleet, subsidies for alternative fuels, greater market penetration by alternative fuel types, population and economic growth rates, shifts in mode choice and travel growth rates are all likely to negatively affect the future revenue yield of federal transportation taxes.

Fuel Efficiency

Corporate average fuel economy (CAFE) requirements, the standards imposed on vehicle manufacturers, are currently 27.5 miles per gallon for automobiles and 20.2 miles per gallon for light trucks and sport utility vehicles. Average fuel economy for all vehicles increased from 12.0 miles per gallon (mpg) in 1970 to 16.9 mpg in 2000, a 29.0% increase. This improved fuel efficiency made it possible to have a 248% increase in vehicle-miles of travel with only a 176% increase in fuel use over the same period. In more recent years, however, average on-road fuel economy is declining because of the increased sales and use of light trucks and sport utility vehicles for personal transportation.

For air quality and energy conservation reasons, future fuel efficiency standards for automobiles, and especially for light duty trucks and sport utility vehicles, is expected to increase. The California Assembly recently enacted legislation that would require the Air Resources Board to adopt regulations that would achieve the "maximum feasible" reductions in greenhouse-gas emissions by passenger cars, light-duty trucks and other noncommercial vehicles. This essentially can be consider a surrogate for increasing the federal CAFE requirements. Because the federal Clean Air Act gives California the unique ability to set its own standards on auto emissions - standards that can then be followed by the rest of the nation - California may lead the way increased fuel efficiency for autos, light trucks and SUVs across the nation.

Revenues to the Highway Trust Fund will be impacted. On average, for every 1 mile-per-gallon increase in fuel efficiency, the impact to the Highway Trust Fund would be a decrease of approximately $3.5 billion. Of that decrease, the Highway Account would lose 87% and the Mass Transit Account, 13%.L2].

Alternatives Fuels

With regard to alternative fuels, on the federal level gasoline, liquefied petroleum gas (LPG), and liquefied natural gas (LNG) sold for on-road use are taxed at 18.3 cents per gallon, and diesel is taxed at 24.3 cents per gallon. Compressed natural gas (CNG) is taxed at 5.8 cents per gasoline equivalent gallon. Ethanol is taxed at 13.1 cents per gallon and of that amount, the revenues from 2.5 cents are deposited in the General Fund. When adjusted for the energy density of the various fuels, however, federal motor fuel taxes are higher on LPG, LNG and diesel than on gasoline, and considerably lower on CNG and ethanol than on gasoline.

In analysis by Marianne Mintz at the Argonne National Laboratory JE of forecasts of alternative fuel use prepared by the Department of Energy's Energy Information Administration, the conclusion is that "...in the future, revenue shortfalls could occur from increased market penetration by vehicles running on ethanol and CNG, which tend to have a more favored tax status, as well as from increased penetration by electric vehicles, which, for the most part, are exempt from motor fuel taxes."

The outlook for a significant increase in ethanol use is almost assured. California's ban on the use methyl tertiary butyl ether (MTBE) in reformulated gasoline, the use of which is required for compliance with the federal Clean Air Act oxygenate requirements, must be implemented by December 31 of this year. Absent a waiver of some sort, which is not anticipated, continued compliance with the Clean Air Act, will require California to turn ethanol - the only alternative for reformulated gasoline. Most recently, a Conference Committee in this Congress is considering provisions in the energy bill that would mandate a tripling of the use of ethanol from approximately 1.7 billion gallons per year to 5 billion gallons per year. With increased use of ethanol, the tax incentive -- first established by Congress in the 1970s to promote ethanol use -- will have a direct and growing impact on revenues to the Highway Account of the Highway Trust Fund. Also note that the Mass Transit Account of the Highway Trust is not affected by ethanol fuel usage because revenues from 2.86 cents of the ethanol tax -just as for revenues from 2.86 cents of the tax on gasoline -- is deposited in the Transit Account.

An analysis F41 prepared last year by the Wisconsin Department of Transportation documents the impact of ethanol on the states in AASHTO's Mississippi Valley region (Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, Ohio and Wisconsin). For these states, the impact of the ethanol fuel tax incentive has been more pronounced than in states of other regions because over 70 percent of the nation's ethanol is consumed by the Mississippi Valley states, the region in which most of it is produced. The "Minimum Guarantee formula shields some of the Mississippi Valley States from being negatively impacted by the ethanol fuel tax incentive, while it leaves other states in the (region) exposed to greater funding loses."

The loss of revenue to the Highway Account of the Highway Trust Fund affects all states regardless of ethanol consumption because less total funding is available for distribution through apportionment formulas, the Minimum Guarantee and RABA. According to the most recent FHWA estimates, in FY 2001, the combination of the reduced tax on ethanol and the diversion of a portion of that tax to the General fund resulted in $1.1 billion dollars less distributed to the Highway Account. All states are impacted, regardless of their ethanol use.

The Minimum Guarantee provisions of TEA-21 also affect the impact of the ethanol tax differential. The Minimum Guarantee apportionment formula is constructed in a way that results in either softening or magnifying the negative impacts to a state whose trust fund contributions are reduced as a result of ethanol usage in the state. The Minimum Guarantee calculation has three components: (1) each state is guaranteed a certain share of the total program based on percentages specified in TEA-21 - the "base share"; (2) each state will receive at least 90.5 percent of its share of contributions to the Highway Account; and (3) each state receives at least $1 million per year in Minimum Guarantee funds. For those states with a guaranteed base share greater than the 90.5 contribution percentage guarantee, the more those state will have returned through the Minimum Guarantee provision and the better protected they are from the impacts of ethanol use, which affects their relative share of total revenue contributions.

With the replacement of ethanol for MTBE to meet the Clean Air Act's requirements for oxygenated fuels, the impact to the Highway Account will only continue to grow. The short-term solution is simple: first, transfer the revenues from the 2.5 cents now going to the General Fund to the Highway Account; and second, replace revenues lost to the Highway Account from the ethanol tax incentive with equivalent general funds.

Market Penetration of Alternatively Fueled Vehicles

The impact of new vehicle technologies with the promise of doubling and tripling current fuel efficiency on transportation revenues will depend on such factors as market penetration, vehicle utilization, and fleet turnover rates. In analysis for the Partnership for a New Generation of Vehicles, MintzJQ examined how quickly new technologies penetrated the market. She concluded "even dramatic increases in fuel economy (would) have little effect on fuel tax revenues in the first 10 years or so. After that, however, consumption flattens and then begins to fall. By 2030, dramatic increases in fuel economy can result in significant revenue losses ... Fuel-cell vehicles and, especially, hybrids are coming, but technological substitution takes a long time. For the next 20 years or so, conventional vehicles will continue to make up the bulk of the vehicle fleet."

While significant market penetration of new, highly fuel- efficient and non-petroleum-based vehicles may not appear to be imminent, further analysis is warranted.

Creation of a Blue Ribbon Commission. We believe that there is clearly a need for further examination of the impact of new vehicle technologies, alternative fuels and increasing fuel efficiency on the future revenue yield of the current federal transportation tax structure. We urge your Committee to create a Blue Ribbon Commission to assess the nature and dimension of the factors that will affect future Highway Trust Fund revenues, to examine and consider the projected timeline for when the impacts from new vehicle technologies and fuels will begin to have a substantive impact on revenues, and to identify and assess alternative revenue sources and finance mechanisms. Finance options should be evaluated for:

- Adequacy and simplicity;

- Effectiveness and equity;

- Economic efficiency; and

- Ease of implementation and acceptability.

Public Private Partnership Approaches to Financing: Transportation Finance Corporation

We can see the future impact of fuels and technology on transportation revenue and finance requires on the future's horizon. The years covered by the next highway and transit reauthorization measure offer us a window of opportunity for careful and comprehensive analysis of the dimensions of the problem and consideration of alternatives. For the immediate future, generating the necessary financial resources to adequately fund our nation's highways, bridges and transit system is a challenge.

With the nation's surface transportation system requiring substantial additional investment, as documented in the DOT's Conditions and Performance Report, it is vitally important that the states be able to access new resources to fund highway and transit projects as well as to secure credit support through loans, loan guarantees and other credit instruments to support other surface transportation modes. AASHTO believes that the traditional pay-as-you-go approach, primarily supported by user fees on fuels, will be inadequate to address the enormous overall needs of the highway and transit systems as well as important intermodal connectors and other modes such as freight rail. The key questions are what mix of funding sources will be needed to keep pace with the needs and when will they need to be in place. We hope that the blue ribbon panel of policy officials and experts will explore these questions and propose solutions for the long term as we move to address these vital transportation needs.

Need to Grow the Program

The AASHTO Board of Directors determined that a top priority is to grow the size of the highway and transit programs in the next reauthorization cycle to a minimum of $41 billion for highways and $10 billion for transit to continue to move toward addressing these needs. AASHTO also recognizes that this must be done in a fiscal environment where the potential for directly increasing federal funds through traditional means is extremely limited.

It is for this reason that the AASHTO Board approved a concept, which would request that Congress create a Transportation Finance Corporation. The AASHTO staff and the Financial Issues Task Force, of which I am chair, are charged with further developing and vetting the concept with a variety of interested parties and report back to the Board in October.

TFC Concept Overview

AASHTO has developed a new and innovative approach that spreads the federal cost of infrastructure investment over the useful life of the assets being funded. The Transportation Finance Corporation would be a federally-chartered, non-profit corporation -- separate from USDOT and the Federal government -- that would provide increased investment resources through a financing mechanism that leverages existing governmental resources to increase investment in critical highway, transit and other surface transportation infrastructure. Note that the largest core of the highway program - 84 percent of the total program -- would continue to be financed through the traditional pay-as-you-go approach, and would provide for a $34 billion highway program level. The additional funding that would come from leveraging - about 16 percent of the total program -- would enable the program to grow to $41 billion.

Capital would be raised through the issuance of long-term tax credit bonds. Tax credit bonds are zero coupon bonds in which bondholders receive annual federal tax credits in lieu of cash interest payments. Thus, the federal government bears the cost of the interest component of tax credit bonds.

The TFC will sell tax credit bonds in the nation's capital markets, and make the net proceeds available to the states through formulas determined by Congress consistent with the current Federal-aid grant apportionments. As with the existing Federal-aid program, the states will be responsible for meeting their respective matching shares of project costs using non- federal funds. The TFC will set aside a portion of the bond proceeds in an escrow account / sinking fund, and invest them in low-risk federal agency (or equivalent) securities to provide for the repayment of principal at maturity. AASHTO estimates that $17 billion will be needed in the escrow account.

AASHTO proposes that the Highway Trust Fund pay the scored cost of the Federal tax credits (the interest component) through an unspecified net new source of revenue from the Highway Trust Fund. Because a portion of the bond proceeds will be invested in a sinking fund to pay the principal, from the perspective of a State, the resources provided by the Transportation Finance Corporation would be indistinguishable from any other Federal Aid Highway and Transit program funds.

Tax Credit Bond Proceeds

The TFC will be authorized to issue tax credit bonds to supplement federal funding for state highway programs and local transit projects. The TFC will issue a total of just under $60 billion in tax credit bonds over the period FY 2004-2009. Of that amount, approximately 28 percent, or $17 billion, will be deposited in a sinking fund that will be invested in federal agency (or equivalent) securities and used to repay the bond principal in 20 years. The remaining $42.6 billion in net bond proceeds will be distributed to the Highway Program Fund ( $34.1 billion) and the Transit Program Fund ($8.5 billion).

The TFC will distribute the net tax credit bond proceeds as follows:

The Highway Program Fund ($34.1 billion). The TFC, if created, will deposit 80 percent of the net bond proceeds, or $34.1 billion, into the Highway Program Fund. Of this amount, $33 billion will be distributed as apportionments to the states by formula. The states will be able to use these formula funds consistent with their Federal-aid program funds. The remaining $1 billion will be used to leverage national discretionary programs.

The Transit Program Fund ($8.5 billion). The TFC will deposit 20 percent of the net bond proceeds, or $8.5 billion, into the Transit Program Fund. This funding will be used to supplement existing federal resources for eligible transit capital projects.

The states and other project sponsors will receive the net bond proceeds as formula apportionments and, consistent with their use of federal funds, match them with state and local funds at the project or program level.

Capital Revolving Fund

In addition to the tax credit bond program for Federal-aid eligible highway and transit projects, the TFC will administer a national-level revolving fund to provide low-interest loans, loan guarantees and standby lines of credit for certain types of infrastructure projects that currently do not have ready access to either the capital markets or governmental grants. These include freight infrastructure, intermodal projects, passenger rail and security infrastructure.

The Capital Revolving Fund ( $5 billion). The TFC Capital Revolving Fund will receive initial capitalization of $5 billion in the form of federal credit to support highway, transit and special infrastructure projects. The fund will make financing available on favorable terms for types of projects that might not be able to receive assistance through the State Infrastructure Bank program. Examples of special infrastructure projects that might receive assistance through the capital revolving fund include: freight rail connectors and other intermodal facilities; high speed passenger rail corridors, facilities, and equipment; transit joint development projects with significant private participation; intercity passenger bus vehicles and facilities; seaport access projects; and security-related infrastructure. (Eligible projects would be required to have at least [20%] of their funding derived from non-federal sources.) The TFC will be authorized to make intermediate and long-term loans to state, local, private or special purpose entities at below-market rates of 2 to 3 percent. The borrowers will pledge user fees, corporate revenues or other dedicated revenue streams for repayment. As loans are repaid, the TFC will be able to recycle the funds into new series of loans to additional borrowers.

Conclusion

We have provided a brief look at some of the factors that will affect the future revenue yield of the current petroleum-based highway and transit financing mechanism and those factors that are having a more immediate impact. We have also described the concept of a Transportation Finance Corporation.

We support immediate action to address the effects on the Highway Account of the Highway Trust Fund of the ethanol tax incentive and the diversion of 2.5 cents to the General Fund and the 5.3 cents not paid on ethanol.

We also support the creation of a blue ribbon panel of experts to address the questions of what mix of funding sources will be needed to keep pace with the needs and when will they need to be in place, and to study the full dimensions of new technologies and alternative fuels on the financial yield and long-term stability of the Highway Trust Fund. AASHTO looks forward to working with Congress, the transportation community and other stakeholders to develop innovative, effective solutions to this dilemma.

Thank you for your time today. I am happy to answer any questions you may have.



LOAD-DATE: July 16, 2002