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To toll or not to toll

Jim Trogdon | 18 Jun 2014 | Comments

Investment in infrastructure is reaching a critical point in order to sustain and improve our national economic competitiveness. According to The American Society of Civil Engineers (ASCE), by the year 2020 there will be an estimated funding gap of $846 billion in surface transportation, $84 billion in water/wastewater, and $39 billion in Aviation [1]. They also report that 42% of America’s major urban highways remain congested, costing the economy an estimated $101 billion annually in wasted time and fuel. Current investment is doing little to improve transportation function or condition, and the nation can no longer rely on fuel taxes to generate the revenues to sustain our transportation infrastructure.

Why not just increase motor fuels taxes?

Since the end of World War II, the US has realized sustained economic growth in part due to our investment in public education and infrastructure. Surface transportation has benefited significantly from what was originally a user fee-based revenue derived from national and state motor fuels tax collected at wholesale distribution sites. For decades, the fuel tax was the foundation for transportation infrastructure funding and leverage for transportation bond financing. However, it is now apparent that this once reliable source of funding will soon become a solution of the past.

With the passage of stricter Corporate Average Fuel Economy (CAFÉ) standards by Congress, in 2013, vehicles averaged 24.7 miles per gallon; in 2016, they will average 34.5 miles per gallon; and by 2025, 54.5 miles per gallon. With a fixed-rate fuel tax calculated on a declining base, national and state revenues would be reduced by 21-35% and purchasing power by 50% [2]. Without action, the Highway Trust Fund will be insolvent by late summer 2014 and place 112,000 projects and nearly 700,000 jobs at risk [3].

In order to raise sufficient funds from fuel taxes and account for 2016 CAFÉ standards, Congress would need to raise the current tax of 18.5 cents to approximately 35 cents per gallon. To account for 2025 standards, an additional 21 cents per gallon would be necessary (56 cents per gallon total). As an indication of the current appetite for tax increases, on October 17, 2013, a 10 cents per gallon increase was immediately rejected by Congress—making this an unlikely scenario [4].

Alternatives

Private equity of S&P 500 firms and US Pension fund assets collectively ($19.1 trillion) exceed almost 12 times the estimated infrastructure investment gap. Without substantial public tax increases, leveraging private investment in infrastructure may be the only viable alternative to increase infrastructure investment and promote economic growth. Specifically in surface transportation—where national programs leveraging private investment alone have been inadequate—states must take the lead in developing public-private partnership (P3) programs to deliver these critical needs. However, in order to leverage P3s, states must have a reliable source of new revenue streams, as most national surveys suggest a preference of user fees over tax increases.

The tolling debate

The discussion on increased user fees takes place on a project-by-project basis, primarily as a means for financing and accelerating delivery of individual projects. Opposition generally cites concerns that tolling would negatively impact business and dampen economic development.

In order to address this concern, the North Carolina Department of Transportation attempted to measure the economic impact of tolling the entire 182 miles of I-95 to reconstruct the 1960’s vintage facility and add needed capacity for 2030 travel demand. The conclusion of the economic impact analysis was clear [5]; the worst economic impact to the state was the do-nothing alternative ($78 billion Gross Regional Product loss through 2050). The alternative with the greatest positive economic impact was to build the needed improvements by tolling ($82.6 billion Gross Regional Product growth), followed by a statewide motor fuels tax increase of 13 cents per gallon dedicated to this corridor ($77.7 billion Gross Regional Product growth—but politically impractical). Following those options, the least favorable were a statewide personal income tax increase dedicated to this corridor ($76.4 billion Gross Regional Product growth), and last, a statewide dedicated sales tax increase ($66.3 billion Gross Regional Product growth). In summary, as a user fee to leverage private investment, tolling appears superior to all other options. Degraded trip reliability, congestion, and lost productivity appear more costly than tolls. In short, tolling proved beneficial to those who value their time.

Conclusion: Congress must be flexible

The two most difficult and elusive functions as a strategic leader in government is the search for truth and the search for solutions. Since it is difficult to develop a national “one size fits all” solution to these challenges, particularly on the interstate system where it has historically been restricted, then:

"Congress should grant increased flexibility to interested states, allowing increased tolling to leverage private equity"

In order to serve our clients, our economy, and our nation, we must play a productive and proactive role in advancing a range of solutions that reach consensus and action on a state-by-state basis. We are now at the critical decision point in this debate that has taken place over the last 70 years. To quote Dwight Eisenhower, “neither a wise man nor a brave man lies down on the tracks of history to wait for the train of the future to run over him.”

  1. http://www.infrastructurereportcard.org
  2. http://www.dot.gov/sites/dot.gov/files/docs/Providing%20Critical%20Growth%20for%20Surface%20Transportation.pdf
  3. www.dot.gov/grow-america
  4. http://thehill.com/policy/transportation/329025-lahood-gas-tax-should-be-increased-by-10-cents-per-gallon
  5. http://www.driving95.com/assets/pdfs/_North_Carolina_I-95_Economic_Assessment.pdf (page 3-54, 3-55)