The Bell Tolls for User-based Funding

Last month was the first time in a long time that anyone with the ability to act on it has proposed a specific funding source for surface transportation over a multi-year period. Both the House Ways & Means Committee and the Administration proposed an infusion of general funds into the Highway Trust Fund (HTF) in order to stabilize the HTF and provide enough revenue for a multi-year authorization bill. Both called for corporate tax reform as a funding source for this general fund infusion, and though their specifics might differ, the overall theme was the same: user-based funding was not mentioned; general funds are what is being proposed for multi-year surface transportation bills.

While most transportation industry stakeholders might have preferred a proposal for user-based funding, at this point many are happy to see any proposals at all. After almost five years of extensions, short-term bills, and near defaults of the HTF, any certainty that could bring about a four-year transportation bill is likely to be preferable to the status quo. While there is still support for the idea of user-based funding, short of a few lone wolves such as Rep. Earl Blumenauer (D-Ore.), and Sen. Tom Carper (D-Del.), no one in Congress or the Administration has seriously proposed a gas tax increase since the HTF first faced a funding shortfall in 2008.

Neither of these new funding proposals is expected to become law anytime soon, given that neither Congress nor the Administration is showing much of an appetite for actually moving ahead with corporate tax reform. Moreover, even if they did try to move ahead with such a package, the chances are low that it could be passed before August, when the HTF is now projected to run out of available funds to meet its obligations. This means a short-term patch is much more likely than a multi-year bill.

Nonetheless, these funding proposals are indicative of the zeitgeist with respect to transportation funding – the appetite for user-based funding is waning. Particularly disappointing for many transportation advocates has been the fact that this Administration has never proposed a user-based source for transportation. When President Obama was elected, the economy was in free-fall and he had promised not to raise taxes during a recession, so a gas tax increase was off the table. When the recession ended, he couldn’t risk proposing an increase as he campaigned for re-election. When he was re-elected, he had other immediate priorities beyond a gas tax increase. But now those expecting the President to come to the rescue of user-based funding are out of excuses. It is now the official policy of this Administration to use general fund revenues to fund surface transportation in lieu of raising user fees, and this has been Congress’ de facto policy since 2008. In fact, general funds now account for approximately 27 percent of all HTF spending and this number has been increasing. Without Congressional and Administration support for a gas tax increase, this trend is unlikely to reverse course.

This means that at least until 2017 the most likely option for funding a multi-year transportation bill is increased use of general fund revenues. How we raise funding for transportation and how we spend it are deeply intertwined, and thus the prospect of using more general funding means we need to seriously reconsider how we spend the new revenues. The following are three guidelines to consider if we are going to be moving forward with general fund revenues as a substantial source of funding for surface transportation:

  1. Spending from general fund revenues should not be formula driven.

Formula funding can be justified when funds are derived from users, in part because formulas can be an effective and efficient means of distributing the funds that were collected back to those users in a relatively equitable manner. Politically it would be next to impossible to distribute user-based funds purely on the basis of potential returns on investment, because too many users could wind up paying a substantial amount into the system and getting very little in return.

General funds are a different story. It is notable that our largest federal discretionary grant programs – New Starts, Transportation Investments Generating Economic Recovery (TIGER), and High-Speed Rail – are all funded with general funds rather than user fees. The use of general funds implies that the benefits should be widely dispersed to the nation, rather than strictly to users of the system. Continuing to distribute gas tax revenues to users via formula makes sense – though perhaps focused more on system preservation than expansion – but new general revenues should be distributed primarily on the basis of the national benefits their investment can provide.

  1. Spending from general fund revenues should not be modally driven.

Transportation thought-leaders have long decried the modal silos that characterize our transportation investments. People do not stick exclusively to one mode, so it is counterproductive for projects and funding to flow by mode. However, user-based funding makes breaking up these modal silos incredibly challenging. For example, while trucking companies might agree that some federal investment in rail makes sense, this does not mean they wish to pay for such investments out of their own pockets.

It would be a mistake and a huge missed opportunity if we maintained our modal silos while transitioning to the use of more general fund revenues. General funds should be distributed in modally agnostic manner, wherein the funds are given out on the basis of the national benefits a given investment can provide, regardless of mode. Transportation investments supported by general revenues offer an opportunity for the federal government to promote “programs” of transportation investment, which may include multiple modes and innovations across numerous jurisdictions. Supporting such programs with user-based formula funding is very challenging, but doing so with general funds as in the case of the TIGER program is quite doable.

  1. USDOT must be reorganized to accommodate this new structure.

The shift from user-based funding to general funds, if it is a long-term shift, will necessitate a major reorganization at the U.S. Department of Transportation (USDOT). The Department is currently organized in a modally divided manner that primarily enables the distribution of formula funds to states and transit authorities. The Federal Highway Administration (FHWA) is the largest surface transportation agency, reflecting a time when we had a national project to build the Interstate Highway System. No such project exists today in any mode, and a new USDOT should reflect this change.

One possible structure could be to organize USDOT along specific purposes. For example, it may make sense to have an agency devoted to preserving existing infrastructure, and providing remaining user-based funding by formula to states and localities in order to enable them to do so. Another agency could be devoted to determining priorities for new national investments, based on guidelines from Congress, perhaps by rigorously analyzing any competitive proposals from potential grantees. While we might still need agencies devoted to specific modes in order to regulate safety, we would no longer need to have grant-making capacity at the modally specific agencies. Such a shift would enable USDOT to react more effectively to rapidly changing trends in transportation, while also promoting innovation and programmatic investments regardless of mode.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of The Eno Center for Transportation.

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