Bacon's Rebellion

James A. Bacon


 

The Next Transportation Crisis

The federal highway trust fund has blown through its cash balance, and gasoline tax receipts are down. In the years ahead Virginia will be hard pressed to make up the difference.


 

If you thought the transportation "crisis" was over, it's not. It's only in temporary abeyance while the political system digests the new revenue sources bequeathed by lawmakers this year. Panic will resurface as soon as it's obvious that the financial underpinnings of Virginia's transportation program are still deteriorating.

 

Disturbing news from the U.S. Department of Transportation suggests that Virginia and other states may be getting less money in fiscal 2010 than previously anticipated from the federal highway trust fund, a major source of state transportation revenues. And the shortfall in DOT funding is the tip of an iceberg: a dip in federal and state gasoline tax revenues stemming from the fact that people are driving less.

 

The federal Highway Trust Fund sent Virginia about $1,011 million in fiscal 2006 and $1,355 last year to cover construction of new road, rail and other transportation projects such as bicycle trails and pedestrian bridges. In its six-year financial plan, the Virginia Department of Transportation conservatively projected federal contributions in 2010 and beyond: in the $1,000 million to $1,050 million range.

 

What the actual number will be in 2010, however, is anyone's guess. The highway trust fund has nearly spent down its cash cushion, and gasoline tax receipts have fallen below expectations this year. There is reason to believe that gasoline consumption will not revert to its old trend line. Without corrective action by Congress, federal dispensations could fall farther and farther behind projections in the years ahead.

 

That's the story I got from my trip to the U.S. Department of Transportation last week to meet with Tyler D. Duvall, the assistant secretary for transportation policy, and Quintin C. Kendall, DOT's deputy assistant secretary for management and budget. Along with Bacon's Rebellion intern Lyle Solla-Yates, we chatted about transportation policy over lunch in the DOT executive dining room. The Bush administration is pushing some very promising market-oriented approaches to transportation, but the big news to emerge from our conversation was the coming budget crunch.

 

Duvall and Kendall see a short-term problem and a long-term problem. The short-term problem reflects the way Congress has chosen to spend the federal gas tax revenues that flow into the federal highway trust fund. Traditionally, the DOT kept a healthy cash balance in the fund -- $13 billion as recently as 2004. But in the current six-year authorization bill, Congress decided to spend down the cash balance.

 

The good news was, the states get more money during the six years covered by the bill. Here's the bad news: If the feds continue doling out money at the rate they have been, the highway trust fund will face annual deficits of roughly $5 billion annually. Unless a future Congress and U.S. president decide to increase the federal gasoline tax -- a controversial proposition, to say the least -- the Department of Transportation will have no choice but to cut back. The highway trust fund will be able to funnel money to the states only as fast as gas receipts come in. Aggravating the situation, when Uncle Sam has no surplus money in the bank, it won't be able to pay as promptly as it has done in the past, potentially creating cash-flow issues for some states.

 

That brings us to the longer-term problem. The money isn't coming in as fast. Between 1980 and 2005, federal receipts from gasoline taxes had increased at an average rate of 2.7 percent per year. In the early part of 2007, according to a DOT presentation on highway trust fund balances, Americans drove fewer miles than the same period the year before -- for the first time ever. When Americans drive less, they buy less gasoline and pay less in gasoline taxes.

 

There are reasons to believe the gas tax shortfall will get worse. As Duvall and Kendall observe, the major thrust of federal energy and environmental policy in both the Republican Bush administration and the Democratic Congress is to reduce gasoline consumption. The federal government is encouraging the purchase of gallon-pinching hybrid-electric engines, and House Speaker Nancy Pelosi has called for increasing the average-fuel economy standard to 35 miles per gallon by 2020. Meanwhile, the feds are subsidizing research into new technologies such as hydrogen-powered fuel cells, with the goal of creating engines that require no gasoline at all.

 

Recent projections reported by the Transportation Research Board suggest that with current technology, fuel economy improvements of 15 percent to 25 percent are possible within the next two decades. If Americans drive their automobiles fewer miles and get better gas mileage while they do it, the U.S. will face a steady decline in the number of gallons of gasoline sold and taxed. The implications have yet to be factored into federal transportation policy.

 

Barbara Reese, chief financial officer of the Virginia Department of Transportation, insists that VDOT's six-year financial plan is based on conservative financial assumptions. The DOT highway trust fund issues highlighted by Duvall and Kendall have been widely discussed in the transportation community, she says. Indeed, Kendall recently addressed the Virginia Transportation Construction Alliance at the Homestead. "These issues have been talked about," Reese says. "Everyone should have anticipated them."

 

Beyond fiscal 2009, Reese says, VDOT budgeted no increase in revenue from the federal highway trust fund, no special earmarks from Congress and a growth in gasoline tax receipts of a modest one percent annually.

 

Hopefully, VDOT's precautions will spare Virginia from a funding crisis should Duvall's worst fears come true. But disciplined accounting can't make up for declining tax receipts if motorists continue to drive less and get better gas mileage. And there's no sign that Virginia lawmakers are preparing for the day when the gasoline tax fails to deliver.

 

As I've argued before in Bacon's Rebellion, Virginia needs to shift to a "user/beneficiary pays" system for building and maintaining roads. (See "The Oregon Solution," Jan. 8, 2007.) That can be best accomplished through a combination of charging drivers a road-maintenance fee based on the number of miles they drive each year, and charging congestion tolls to allocate scarce roadway capacity.

 

There is no move yet to restructure the gasoline tax into a mileage-based user fee. But the policy wonks in the Department of Transportation are big boosters of congestion tolls. So is the Kaine administration, at least when applied to HOT lanes (see "Coming to an Interstate Near You," July 16, 2007).

 

The combination of a road-maintenance fee and congestion tolls could create a stable, long-term funding sources capable of taking up the slack for the gasoline tax. Unfortunately, the level of political support for tolls, which many politicians regard as just another tax, is thin in Virginia. It may take another transportation funding "crisis" soon after the last one was putatively solved to persuade citizens that the current system isn't working.

 

-- July 16, 2007

 

 

 

 

 

 

 

 

 

 

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Full Disclosure

 

In the interest of full disclosure, I list all paying clients for whom I have worked in the past year. 

 

The Road to Ruin project, Bacon's Rebellion's coverage of transportation and land use issues, is underwritten by the Piedmont Environmental Council, the Prince Charitable Trusts and the Agua Fund. (See details.)

 

Other clients include:

 

AgilQuest: Contract publication of electronic newsletter; writing.

 

Commonwealth Biotechnologies: contract publication of newsletter.

 

Greater Richmond Partnership: Contract publication of four electronic newsletters (Greater Richmond Catalyst, Greater Richmond BioSynthesis, Greater Richmond Logistics, and Working Capital); writing for WORK magazine.

 

CEO Intelligence Services. I am a principal in CEO Intelligence Services, a company that conducts marketplace and political research. (View website.)