Transportation Funding — It’s ‘All-of-the-Above’

The Trump administration and Congress are closer than any time in recent history to being able to provide transformative change to help regain U.S. competitiveness in transportation. The United States has traditionally enjoyed an advantage because of the state of transportation infrastructure, but that advantage has eroded.  In 2014-15, the World Economic Forum assessed U.S. infrastructure as 16th in the world. The American Society of Civil Engineers gave our infrastructure a D+ grade, and estimated that at current funding levels we would have a shortfall of $3.6 trillion by 2020. The president has announced that he wants to provide one trillion dollars in new spending on transportation, and members in both parties support that objective. Funding this program, is the problem.

Fundamentally, the potential options for funding can be broken down in three categories — devolution, financing, and public funding, all three options have their own pose problems. Conceptually, proponents of devolution support shifting responsibility for transportation to the state level. However, currently, state and local governments pay close to 75 percent of the total amount spent on transportation infrastructure from revenues paid from transportation or other taxes. Devolution would ultimately, shift an unfunded mandate down to state and local levels causing the states to have to raise an additional $55 billion annually, just to maintain the deteriorating status quo. While giving states greater flexibility from some unneeded federal mandates could be beneficial, devolution policies could seriously jeopardize the underpinning of federal policy that a connected interstate transportation system benefits the competitiveness of U.S. industry and the mobility of U.S. citizens.

Financing as a mechanism for enhanced infrastructure development has a place in future policy, however, it’s impact also has limitations. Financing through the development of infrastructure banks, or the establishment of tax credits, to those who invest in transportation infrastructure, as espoused by President Trump’s transition team, can and would work in certain situations, but would not be a panacea. Harnessing private sector capital and investment only works with the promise of repayment, and in some heavily urban, or business necessary situations where you may be able to attract commitments to repay. However, the U.S. population is accustomed to paying for transportation through public funding generated through taxes. The ground is littered with 3PL investors who had invested in transportation infrastructure that had failed because of access to free publicly financed transportation. Who wants to pay a toll when they do not have to? Politically, private financing does not work well in more rural states that have substantial costs in transportation infrastructure development and do not have the population base to sustain repayment of private sector funding. Over-reliance on private sector funding could jeopardize interstate connectivity.

Public funding, i.e., the federal gas tax and other affiliated taxes that go into the highway trust fund, suffers from political issues, rather than structural finance and geographical-social issues. The federal gas tax and connection of the tax into the highway trust fund was established in 1956 by Republican President Dwight D. Eisenhower as a user fee to fund the development of the Interstate Highway System. The gasoline tax has been raised subsequently by two Republican administrations, and one Democratic administration, the last increase being nearly twenty-five years ago, in 1993. Despite seeming bipartisan support for transportation and business/labor support for a gas tax increase, it is saddled with one major impediment – designation as the dreaded three letter word – “tax”.

Despite the issues related to relying on any one of the three categories of general funding to invest in our nation’s future transportation system, together in an “all-of-the-above” strategy might with a little compromise provide a much stronger program, mitigate some potential opposition, and be achieved in a revenue-neutral fashion. What might such a compromise look like?

First, the existing transportation reauthorization program is set up to run until 2020, so it would be best to keep this program running. However, a reasonable modification would be to include a cost-of-living adjustment to the gas tax. While the federal government has not been able to raise the gas tax, seven states this past year agreed to increases to respond to decreased federal investment, and another twelve are considering proposals for increases this coming year. Simply put, the price of gas is cheap, and this is a very reasonable adjustment to make.

Second, initiate a new program for investment in interstate freight and passenger mobility, and establish a formula for the equitable distribution of funding, based on the implementation of a federal motor fuel wholesalers sales tax. This user fee would be used in entirety for state distribution to implement enhancements to the interstate freight and passenger mobility system, with federal oversight only to ensure that it satisfied the “interstate connectivity requirement.” To further augment user based principles, authorize its use to also help establish transportation infrastructure to facilitate domestic energy production, and to accomplish congestion mitigation. This wholesale motor fuel sales tax approach has been recently implemented by the states of Maryland and Virginia, and could help provide revenue for infrastructure update and modernization, where private sector funding would not work.

Finally, a new program to create a national infrastructure bank for private investment into infrastructure. Sens. Barbara Boxer and Rand Paul introduced legislation to allow the proceeds from a reduced corporate tax from the repatriation of foreign generated income to help stabilize public funding through the trust fund. This mechanism could also be used to set up some sort of federally chartered, privately-operated, infrastructure bank. Additionally, or alternatively, you could establish a tax credit to incentivize private investment in infrastructure.

“My way or the highway” approaches to transportation to highway funding will not work, but with a little melding of interest and compromise, perhaps we could achieve the new administration objective of $1 trillion dollars of investment.

Carl Bentzel is the founder of Bentzel Strategies LLC, a consulting firm established to conduct public policy advocacy. He has represented private industry in the areas of transportation, energy, and other federally regulated areas for more than 10 years. He was previously a senior counsel in the U.S. Senate working on surface and maritime transportation issues.

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