Options For Improving Transportation Finances

Loren Kaye
President of the California Foundation for Commerce and Education

In two recent articles, I have made the case that transportation finance in California is falling far short of our needs, and that the gas tax, for structural and public policy reasons, is an inadequate source of ongoing investment for roads and highways.

After all, a robust travel network is vital for moving Californians between home, school and work, as well as moving goods and supporting tourism. Even after the internet revolution, physical transportation remains the backbone of the state’s economy.

A unique feature of transportation finance is the potentially close connection between potential new revenue sources and the use of the roads and highways. That is, some of these revenue sources are virtual proxies for the use of the transportation infrastructure, which would make them more akin to fees than to taxes.

What are the finance options available to California policy makers to reinvest in the state’s transportation infrastructure?

Increase the fuel excise tax. Motorists pay the gasoline tax every time they fill up at the service station. The rate is 36 cents a gallon (plus local sales taxes and the federal 18 cents-a-gallon excise tax), which makes it the highest fuel tax in the nation. The tax was last increased twenty years ago, but was recently collapsed with the state sales tax on gasoline, which means it is periodically adjusted to reflect the changing gasoline sales base. Because it is an excise tax, the revenues do not rise with inflation – only with growth in volume (which I showed earlier is actually falling). The gas tax would need to be increased by about seven cents a gallon to raise a billion dollars a year – assuming no fall-off in gasoline sales.

Increase the vehicle license fee. Also known as the “car tax,” this tax is closely associated by the public with transportation finance, even though it is actually used for general local government revenues. A recent ballot initiative proposal would have increased the VLF by one percentage point and devoted the funds to highway maintenance and rehabilitation. The tax is collected annually when automobiles must be reregistered, so any new tax would be a big bite. A billion dollar increase would require an increase in the car tax of about 0.4%, or adding another $120 annually for a $30,000 car.

Ease the vote requirements for local sales tax overrides for transportation.
Today some 20 counties with more than 80 percent of the state’s population tax themselves to pay for local transportation services. Ranging from a one-half to a one-and-a-half percent sales tax rate, these counties together raised nearly $4.3 billion in 2012-13 to supplement state and federal transportation funds. Proposition 13 requires that local sales tax overrides receive two-thirds approval of county voters. Some jurisdictions may find this a high hurdle, but for the 20 urban and metropolitan counties the system obviously works. Indeed, some counties – Los Angeles, Santa Clara, San Francisco, Santa Clara, San Mateo and Sonoma – have successfully gone to the voters more than once for a sales tax override.

Expand network of toll roads.
Compared with other states, especially along the Eastern Seaboard, California’s use of toll roads is modest, but growing. In northern California, highway operators have established eight toll bridges spanning San Francisco Bay and Delta channels, along with express lanes on two freeways. In Southern California, two toll bridges have been in use for decades. But dedicated toll roads and, more frequently, dedicated high occupancy toll lanes on busy freeways are becoming a more familiar part of the transportation landscape. Motorists in Los Angeles, San Diego and Orange Counties, can now pay to travel on as many as nine dedicated roads or lanes – presumably more quickly and with less congestion than their parallel “free” ways.

Devise new tax/fee on mileage driven.
The latest and most intriguing approach to financing roads and highways is literally to charge drivers for driving. Known as a fee on vehicle miles traveled (VMT), this approach would marry the act of using roads and highways with a charge for doing so. The major challenges include the novelty of this approach, whether accurate information on an individual’s driving can be obtained, concerns over privacy (if the means for gathering mileage information is a GPS-type device), and sticker shock if the fee is collected annually. A half-cent per mile fee would raise about a billion dollars a year – or about $50 per 10,000 miles driven.

Any new tax or fee for transportation will be a tough slog. On the right, opponents will question the efficiency of the transportation bureaucracy, the overhead from environmental delays and questionable mitigation measures, and high design and construction blunders. They will also question providing new funds for infrastructure while state coffers are brimming. On the left, opponents will question prioritizing new money for public works while other societal needs for the social safety net or children’s services loom large. Others will dispute raising even more money to pour concrete instead of investing in more public transit or making even stronger efforts to reduce automobile use.

These are all important arguments that will take time, intellectual commitment, and political leadership to work through. These objections should not be shortchanged, but neither are they an excuse to not address our looming deficit in transportation finance.

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