Task B1, Appendix A: State Transportation Funding: A Review of Existing Revenue Sources

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1 Task B1, Appendix A: State Transportation Funding: A Review of Existing Revenue Sources This technical memorandum is an appendix to the summary report titled A Context for Evaluating Transportation Funding Options in Maryland. That report is NCSG s submission for Task B.1. of its 2009 work program with the Maryland Department of Transportation. That report contains more information about transportation finance, and all the conclusions. This appendix covers a subset of NCSG s analysis: that part referred to as cross-state comparison of transportation financing techniques. Introduction Maryland is challenged to deal with the inadequate revenues from the Maryland Transportation Trust Fund (TTF), funded in part by motor fuel taxes (23%), vehicle titling and registration taxes (32%), operating revenue (10%), federal funds (23%), and other sources (12%) 1. The MD TTF has fallen short of meeting transportation needs due to the large maintenance needs of aging infrastructure, decreases in federal contributions to states, recent reductions in the amount of driving due to the economic downturn combined with high fuel prices, increased fuel efficiency of modern vehicles, and declines in vehicle purchasing 2. The federal Highway Trust fund (HTF), the primary mechanism for funding federal highway programs, is similarly challenged to meet growing demand and dwindling receipts. To provide adequate funding to maintain current infrastructure and meet the growing demand on the transportation system for the future, Maryland needs to explore alternative structures and/or sources of revenue to fund transportation systems. The need for greater resources to maintain transportation assets is not unique to Maryland. Many states are currently facing a similar financial crisis in providing for their transportation infrastructure and services. For example, Massachusetts 3, Connecticut 4, Georgia 5, Pennsylvania 6, and Washington 7 have recently conducted studies and revealed severe underinvestment in their transportation assets. In the face of declining federal involvement, states must develop solutions or strategies that rely on reconfiguring their own-source revenues to finance transportation projects. The General Accounting Office (GAO) recommends four strategies to deal with 1 Transportation Trust Fund Overview, Presentation to the Commission on Maryland s Fiscal Infrastructure, Department of Legislative Services, Office of Policy Analysis, Sept General Accounting Office, Highway Trust Fund: Options for Improving Sustainability and Mechanisms to Manage Solvency GAO T June 25, 2009, 3 Massachusetts Transportation Finance Commission. Transportation Finance in Massachusetts: An Unsustainable System Connecticut Capitol Region Council of Governments. Building on Progress: Financing Connecticut s Future Transportation System Georgia Joint Study Committee on Transportation Funding. Addressing Georgia s Transportation Funding Alternatives Pennsylvania Transportation Funding and Reform Commission. Investing in Our Future: Addressing the Transportation Funding Crisis Washington State Department of Transportation Key Facts SCHOOL OF ARCHITECTURE, PLANNING, AND PRESERVATION A JAMES CLARK SCHOOL OF ENGINEERING COLLEGE OF AGRICULTU

2 Task B1, Appendix A: State Transportation Funding NCSGRE February 2010 Page 2 insufficient and unsustainable system of financing transportation infrastructure: (1) improving the efficiency of existing facilities, (2) requiring users pay full benefits, (3) finding additional revenue sources, and (4) altering existing ones. 8 While each of these strategies has merit and should likely be pursued in concert, it is this fourth strategy that is the focus of this report: altering existing revenue sources for the state of Maryland. Analysis of existing instruments in place at the state level can provide guidance, albeit absent potential contributions from the other strategies. To understand more about these issues within the current structure of transportation finance, this study examines recent trends in the structure of highway and transit finance across the United States with an emphasis in the alternative structures of the various instruments currently in use. Although new financial instruments, such as mileage-based fees, high occupancy toll lanes, and congestion pricing schemes, are being considered by many states, including Maryland, it is important to consider the shortcomings of the current system of finance when considering potential remedies. Although states rely on a similar set of instruments, they vary widely in their relative reliance on these funding mechanisms. The study considers how Maryland fits into the national landscape and how the financing schemes employed in Maryland compare to the rest of the nation. This data review is structured as follows. The next section reviews current state transportation funding structure and historical trends across the 50 states, and discusses the financial problems state governments are facing. A closer examination of transportation funding trends for highways and transit across the fifty states including Maryland is conducted in Section 3. Overview of state transportation funding State governments play significant roles in funding transportation projects including highways, public transit, airports, and water transportation. To advance a sustainable transportation system, many state governments have established an integrated trust fund as a financing mechanism for transportation service and infrastructure needs. This type of trust fund consolidates and dedicates transportation-related revenues to transportation expenditures, and thus allows great flexibility in funding for operations, constructions, maintenance, and debt service in the area of transportation. Currently, 21 states have transportation trust funds, including Maryland, and 31 have highway trust funds, among which, seven have both. 9 These dedicated transportation funds come from a variety of revenue sources, although the relative importance of each revenue source varies among states. This section provides an overview of state transportation funding structure from 1994 through 2006 with a focus on surface passenger transportation programs highways and public transit and includes an analysis of the revenue diversification and stability. State highway revenue Data on state highway revenue are collected from Federal Highway Administration (FHWA) s annual Highway Statistics ( ). Based on FHWA s classifications, we present these data in nine revenue categories. We first divide the amount of each revenue category by total annual receipts for each state, and then derive the 13-year average percentage that each state has 8 General Accounting Office, Highway Trust Fund: Options for Improving Sustainability and Mechanisms to Manage Solvency GAO T June 25, 2009, 9 Manvel, Evan. Beyond Highways-Only: The Earmarking of State Motor Fuel Taxes for Highways and Recommendations for a Progressive Response. Surface Transportation Policy Project. 7 April 1998.

3 Task B1, Appendix A: State Transportation Funding NCSGRE February 2010 Page 3 received in nine revenue categories from The nine categories used in this study are listed below but emphasis is placed upon the first five: Motor fuel taxes: excise taxes on gasoline, gasohol, diesel, liquefied petroleum gas, liquefied natural gas, and other special fuels; Motor-vehicle and motor-carrier taxes: motor-vehicle registration fees, titling fees, driver-license fees, motor-vehicle sales taxes (if charged at a separate tax rate from that imposed on general sales transactions), oversize-overweight permits, and other miscellaneous vehicle fees and taxes; Highway tolls (or road and crossing tolls ): fees from turnpikes, toll roads, bridges, ferries, and tunnels; and other charges for use of toll facilities; Bond proceeds: long-term note issues with a maturity of at least 3 years; General funds: appropriations from general funds (ultimate revenue source unidentified); Other state taxes and fees (or other state imposts ): other taxes dedicated for highways including general sales and use taxes, gross receipts taxes, ad valorem property taxes, severance taxes, corporate income taxes, etc; Miscellaneous revenues: investment income of highway funds, private donations, insurance recoveries, rentals, fines and penalties, permit fees, etc; Federal aid (or payments from federal funds ): Federal Highway Trust Fund, and funds from other federal agencies; and Local aid (or payments from local governments ): payments from local governments as a matching share of federal-aid projects that are administered by the state government. As shown in Figure 1, during the past 13 years covered in this study, state motor fuel taxes (31%), federal aid (30%), and motor-vehicle and motor-carrier taxes (16%) are the three primary revenue sources for state highway systems. In fact, all 50 states receive highway funding from these three categories. Considering that the majority of federal aid is derived from federal motor fuel taxes, state and federal motor fuel taxes make up the largest share and together account for more than 60% of all revenues used by states for highways. On average, bond proceeds consist of only 9% of total highway revenues for each state. Highway tolls and general fund resources account for a relatively smaller portion of funding - less than 5% on average. When considering motor fuel taxes, motor-vehicle and motor-carrier taxes, and highway tolls together, highwayuser revenues account for more than 50% of state highway revenues over this period.

4 Task B1, Appendix A: State Transportation Funding NCSGRE February 2010 Page 4 Figure 1. Average state highway revenue, Source: Authors Compilation from Highway Statistics, Finance Series, Federal Highway Administration, Table SF-1, Figure 2 shows the amount of the state gasoline tax over the course of this study ( ) has varied. The rate has declined in both Connecticut and New Mexico from 1994 to In 19 states, the rate remained stable over the study period. The remaining 29 had increases to their gasoline tax, from an increase of 0.75 in Montana to 11 in Washington. Reliance on motor-vehicle and carrier taxes and fees has been growing as states are looking to increase the revenues from existing sources. Expansions in this category include taxes on car rentals, first time registrants, and heavy vehicles. In 2006, few states actually collected more in registration and licenses fees than in state motor fuel taxes. 10 In 2007, tolls were collected on facilities in 33 states, mostly on the state highway systems. 11 Tolls were a popular financing mechanism that has remained popular, even though most systems are primarily financed through taxes. Toll projects are more prevalent in fast-growing states, such as Florida and Texas. 12 The federal government now permits tolling on Interstates, High- Occupancy Toll lanes (HOT lanes), and some express bus lanes. According to a 2006 GAO report, about 2,880 miles of the Interstate system, or 6 percent of total mileage, is now tolled. 13 This option is becoming more acceptable to the public and politicians as technology facilitates toll collection and imposes fewer burdens to the facility user. While not addressed in this analysis, congestion pricing or mileage-based fees are given more consideration by policy makers as a means to finance future transportation improvements. 10 Committee for the Study of the Long-Term Viability of Fuel Taxes for Transportation Finance, The Fuel Tax and Alternatives for Transportation Funding, Transportation Research Board Special Report 285, Washington, D.C. (2006) 11 Springer,Darren Issue Brief: State Policy Options for Transportation Funding, National Governor s Association, 12 Weinstein, A; Dill, J; Goldman, T; Hall, J; Holtzman, F; Recker, J; and Goodman; E. Transportation Financing Opportunities for the State of California. Mineta Transportation Institute, MTI Report 06-01, GAO, Highway Finance: States Expanding Use of Tolling Illustrates Diverse Challenges and Strategies, GAO , June 2006.

5 Task B1, Appendix A: State Transportation Funding NCSGRE February 2010 Page 5 Figure 2. Changes in state gasoline taxes, State Gasoline Tax in 1994 and Change from Cents Connecticut New Mexico Alabama Alaska Arizona California Colorado Georgia Hawaii Illinois Louisiana Maryland Massachusetts Minnesota Mississippi New Jersey Oklahoma Oregon South Carolina Texas Virginia Montana Nevada New Hampshire Delaware Iowa Rhode Island Tennessee Nebraska Missouri New York Arkansas Indiana Florida Kentucky Idaho Michigan South Dakota Vermont North Dakota Wyoming Utah Kansas Ohio West Virginia Pennsylvania Wisconsin Maine North Carolina Washington Source: Bureau of Highway Statistics, US Department of Transportation, Federal Highway Administration Bonds have been used since the pre-interstate era to finance transportation projects. Since the Eisenhower Administration, the federal government has preferred a pay-as-you-go system, where fuel and vehicle taxes pay for the system as it is built. Debt financing is being utilized more often by states because fuel taxes have proved to be insufficient to cover transportation needs. Also, paying for projects by issuing bonds can reduce overall project costs and timelines over a pay-as-you-go approaches. States such as Florida and South Carolina have made use of state infrastructure banks (SIBs) to loan money to projects, backed by federal transportation dollars. Similarly, Grant Anticipation Revenue Vehicle (GARVEE) bonds allow states to issue loans for transportation projects, which are backed by future federal gas tax returns to the states. The encouragement by the federal government to engage in creative debt financing structures has opened up private markets for consideration but the debt obligation in these endeavors remains firmly with the states. 14 General fund and other taxes have been used by some states to supplement the revenues collected from state motor fuel taxes. Contributions to transportation investments from local general funds and other taxes are increasing at a faster rate than state user fees for 14 Matt Sundeen and James R. Deer, Surface Transportation Funding: Options for States, National Conference of State Legislatures, (2006)

6 Task B1, Appendix A: State Transportation Funding NCSGRE February 2010 Page 6 transportation. 15 However, these are generally unpopular and support is declining for use of nonuser taxes for transportation purposes. 16 Table 1 shows state revenues used for highways by percentage of total annual receipts from Data are organized by four census regions and show the state average contributions of each source to highway projects. Over this period, bonds and tolling account for a lower proportion of transportation revenues spent on highways, amounting to 9% and 4%, respectively, on average across the US. In general, states in the Northeast appear to rely more heavily on bond financing (18%) and highway tolls (9%) than states in other regions. Bonds constitute over 25% of revenue sources spent on highways in New Jersey (40%), New York (28%), Connecticut (27%), and Massachusetts (26%). Outside the Northeast, bond use is more regionally varied. Delaware (22%), Kansas (16%) New Mexico (15%), Hawaii (15%) and Utah (14%) rank among those making greatest use of bonds. With such heavy reliance on debt financing, these states may face future bond repayment difficulties. Six states including Iowa, Wyoming, Tennessee, South Dakota, North Dakota, and Nebraska use no bond proceeds to build roads. This may be affected by state constitutional or statutory prohibitions on incurring indebtedness. In the highway toll category, 25 states have had nearly no toll income during the past 13 years. On the other hand, nine states collect more than 10% of their highway revenues from tolls, compared with the national average of 4%. Examples of heavy reliance on tolls are Delaware (21%), New Jersey (18%) and New York (15%). Tolls generally contribute less to highway spending, particularly outside the Northeast. States with no toll revenues may consider exploring this revenue source if tolls are feasible and politically acceptable in that state. In Maryland by contrast, bonds only account for 5% of the transportation funding sources and tolls amount to 8% of transportation funding over this period, compared to national averages of 9% and 4% respectively. It is expected that reliance on tolls will increase in the future, as the Inter-County Connector (ICC) and capacity expansions along the I-95 corridor are expected to employ tolling as a finance mechanism. Table 1 shows state motor fuels tax expenditures on highways range from a low of 5% in Alaska to a high of 48% in Nevada. Regional averages of motor fuel taxes are similar to the national average of 31%. Fewer states in the Northeast have high proportions of expenditures covered by fuel taxes, compared to the Midwest and South. At the state level, however, there is quite a bit of variation in reliance with Nevada (48%) and Tennessee (46%) having the largest percentage of state highway spending come from fuel taxes and Alaska (5%) and New Jersey (9%) exhibiting the least. State motor fuel taxes account for over 40% of the revenues spent on highways in seven other states in addition to Nevada and Tennessee and nearly half of all states (24) rely on state fuel taxes for 30% or more of highway spending. States with a greater degree of reliance on gas taxes may face funding difficulties as the purchasing power of the gas taxes continues to erode. 15 Martin Wachs, Improving Efficiency and Equity in Transportation Finance (Washington, D.C.: Brookings Institution, Center for Urban and Metropolitan Policy, 2003). 16 Committee for the Study of the Long-Term Viability of Fuel Taxes for Transportation Finance, The Fuel Tax and Alternatives for Transportation Funding, Transportation Research Board Special Report 285, Washington, D.C. (2006).

7 Task B1, Appendix A: State Transportation Funding NCSGRE February 2010 Page 7 Table 1 Percent of state revenues spent on highways, STATE MOTOR- FUEL TAXES MO TO R- VEHICLE TAXES HIGHWAY TO LLS OTHER STATE FEDERAL AID LO CAL AID BONDS MISC. REVENUES GENERAL FUNDS U.S. TOTAL 31% 16% 4% 3% 30% 1% 9% 3% 4% NORTHEAST 24% 14% 9% 0% 28% 0% 18% 4% 4% Connecticut 24% 11% 0% 1% 27% 0% 27% 6% 2% Maine 32% 11% 11% 0% 28% 0% 9% 1% 7% Massachusetts 17% 8% 7% 3% 22% 0% 26% 5% 14% New Hampshire 29% 18% 14% 0% 28% 2% 6% 4% 0% Rhode Island 24% 9% 3% 0% 44% 0% 17% 2% 1% Vermont 23% 31% 0% 0% 40% 1% 1% 3% 2% New Jersey 9% 8% 18% 0% 17% 0% 40% 5% 2% New York 19% 11% 15% 0% 20% 0% 28% 3% 5% Pennsylvania 36% 16% 11% 0% 23% 0% 7% 4% 2% MIDWEST 34% 17% 2% 6% 29% 2% 6% 2% 2% Illinois 31% 23% 10% 1% 21% 1% 10% 2% 1% Indiana 40% 11% 4% 0% 27% 3% 10% 3% 2% Michigan 33% 26% 1% 0% 23% 1% 5% 3% 6% Ohio 42% 17% 5% 0% 25% 1% 8% 2% 1% Wisconsin 41% 17% 0% 0% 26% 4% 10% 2% 0% Iowa 30% 26% 0% 16% 23% 0% 0% 1% 3% Minnesota 34% 32% 0% 3% 21% 2% 3% 4% 1% Kansas 27% 9% 5% 12% 22% 2% 16% 4% 2% Minnesota 34% 32% 0% 3% 21% 2% 3% 4% 1% Missouri 36% 13% 0% 11% 32% 1% 5% 1% 0% Nebraska 38% 9% 0% 17% 27% 5% 0% 1% 3% North Dakota 27% 14% 0% 1% 48% 4% 0% 0% 4% South Dakota 27% 9% 0% 12% 47% 2% 0% 3% 0% SOUTH 32% 16% 4% 4% 30% 1% 7% 3% 4% Delaware 15% 13% 21% 0% 17% 0% 22% 5% 8% Florida 29% 13% 12% 2% 23% 3% 14% 3% 1% Georgia 21% 9% 1% 11% 38% 0% 10% 4% 6% Maryland 26% 25% 8% 5% 26% 0% 5% 3% 1% North Carolina 40% 13% 0% 12% 27% 0% 2% 3% 2% South Carolina 41% 8% 0% 0% 40% 1% 6% 2% 2% Virginia 26% 21% 3% 14% 18% 2% 10% 3% 4% West Virginia 28% 21% 5% 0% 35% 0% 6% 2% 3% Alabama 42% 13% 0% 1% 38% 1% 1% 0% 2% Kentucky 27% 35% 1% 0% 25% 0% 4% 5% 5% Mississippi 39% 13% 0% 5% 33% 1% 5% 2% 1% Tennessee 46% 14% 0% 3% 30% 2% 0% 2% 3% Arkansas 41% 13% 0% 0% 35% 1% 4% 2% 3% Louisiana 39% 10% 3% 2% 27% 0% 3% 2% 14% Oklahoma 27% 14% 12% 3% 27% 1% 11% 2% 3% Texas 33% 22% 2% 1% 32% 3% 5% 3% 0% WEST 30% 16% 1% 3% 34% 2% 7% 2% 4% Arizona 28% 12% 0% 17% 19% 7% 12% 2% 2% Colorado 34% 21% 0% 5% 22% 2% 9% 3% 5% Idaho 39% 22% 0% 0% 37% 1% 2% 0% 0% Montana 36% 11% 0% 0% 50% 0% 2% 1% 0% Nevada 48% 15% 0% 0% 25% 1% 7% 3% 2% New Mexico 27% 23% 0% 1% 32% 0% 15% 2% 1% Utah 33% 8% 0% 3% 25% 0% 14% 2% 14% Wyoming 19% 11% 0% 5% 61% 1% 0% 2% 2% Alaska 5% 5% 3% 0% 56% 0% 1% 5% 24% California 36% 20% 3% 2% 25% 6% 2% 3% 3% Hawaii 19% 20% 0% 1% 40% 0% 15% 5% 2% Oregon 34% 24% 0% 0% 31% 0% 6% 2% 3% Washington 34% 21% 5% 0% 24% 2% 12% 2% 1% Source: Author's Compilation from Highway Statistics, Finance Series, Federal Highway Administration, Table SF-1,

8 Task B1, Appendix A: State Transportation Funding NCSGRE February 2010 Page 8 Over the study period, Maryland s highway program is financed 26% by motor fuel taxes, slightly below the national average of 31%. The state fuel tax rate is $0.235 per gallon, which did not change from 1994 to Maryland ranks 25 out of the 50 states in its fuel tax rate. Another major revenue source, state motor-vehicle and motor-carrier taxes, vary from 5% in Alaska to 35% in Kentucky. Nationally, motor-vehicle and carrier taxes account for 16% of highway spending and there appears to be little regional variation in that average. About 30 states are below the national average. Besides Kentucky, Vermont and Minnesota also rely on motor-vehicle and motor-carrier taxes for more than 30% of the total receipts for highways. Maryland relies more on Motor-Vehicle and Carrier Taxes compared to other states with 25% of Maryland s highway spending sourced to these taxes compared to a national average of 16%. Nine states including Arizona, Nebraska and Iowa generate more than 10% of highway revenues from other state taxes and fees category, which is about 4-6 times of the national average of 3%. In contrast, 22 states including Pennsylvania, Washington, Michigan and Oregon do not collect such revenues for highway purposes. States in the Northeast do generally not rely on these other state taxes and fees to fund highways. This category of revenue includes a wide variety of sources designated for transportation, such as sales and use taxes, severance taxes, specific ownership taxes, and corporate income taxes. Potential revenue growth in this category could help narrow transportation funding gaps in those states. Maryland s contributions from this category amount to about 5% of highway spending, above the national average. As mentioned earlier, the national average of federal aid to states for highway purposes is approximately 30%, but the funds are not evenly distributed across states, ranging from a low of 17% in Delaware and New Jersey to a high of 61% in Wyoming. Alaska also receives a huge portion (56%) of federal aid for highways. These revenues are returned to states based on federal formulas, based on a variety of factors, including federal gas taxes collected, population, lane miles of roadway and vehicle miles traveled. Federal aid to Maryland accounts for 26% of total highway expenditures, slightly below the national average. Local aid to states only account for 1% of state highway revenues. Twenty-one states do not receive any payments from local governments for highways, including Maryland. Exceptions are Arizona and California, which receive 6-7% of revenues from local governments specifically, demonstrating strong local revenue collection efforts. All states except Idaho, North Dakota and Alabama generate their highway revenues from miscellaneous sources such as interest income, private donations, rental car fees, and sale of surplus property. Connecticut collects about 6%, which doubles the national average. Maryland weighs in at the national average of 3%. Lastly, 43 states also receive appropriations from general funds. Massachusetts, Utah, Louisiana and Alaska count on a larger share of total highway funding from general funds than other states with nearly 25% of general revenue funds going to support highway spending. The national average is 4% and Maryland general fund reliance is 1%. Highway revenue utilization and diversification This data review focuses on altering existing funding sources, including the kinds of instruments and the relative reliance on each. Revenue diversification is argued to provide more stable funding sources for state and local governments, reducing the pressure on any one

9 Task B1, Appendix A: State Transportation Funding NCSGRE February 2010 Page 9 instrument and insulating the impact of fiscal crises. 17, 18 Although most of the diversification literature deals with municipal or state funds more generally, the discussion has application to transportation funding resources as well. The need for expanding the resources available for transportation projects beyond the traditional fuel tax has been discussed for some time. Diversification of revenue sources for transportation would potentially lessen reliance on motorfuel taxes and have the potential to have more robust financial resources for future investments. As illustrated above, states have a varied approach to the type and proportion of funding mechanisms used for highway financing. State governments tend to utilize at least five sources of revenues for highway expenditures and most states use seven or eight categories of revenues. Motor fuel taxes, motor-vehicle and motor-carrier taxes, and federal aid are the most frequently used categories and highway tolls, other state taxes and fees, and local aid among the less common. Six states including: California, Florida, Illinois, Kansas, Oklahoma and Virginia maximize their highway funding from all nine categories of revenues. Idaho and Montana only employ five types of revenues. The utilization of each revenue source by the states is summarized in Table 2. Table 2 Highway revenue utilization by states, 2006 Revenue Category Number of States Share of Total Receipts Motor Fuel Taxes 50 31% Motor-Vehicle and Motor-Carrier Taxes 50 16% Federal Aid 50 30% Miscellaneous Revenues 47 3% Bond Proceeds 44 9% General Funds 43 4% Local Aid 29 1% Other State Taxes and Fees 28 3% Highway Tolls 25 4% Source: Author's Compilation from Highway Statistics, Finance Series, Federal Highway Administration, Table SF-1, To look at this more closely, we examine diversification of state highway revenues across the fifty states using the data from To measure state highway revenue diversification, we use the most a measure of concentration/dispersion commonly used in analysis of revenue structures 19, 20, 21, 22 the Hirschman-Herfindahl Index (HHI). This approach develops a 17 Shannon, John State revenue diversification - The search for balance. In Frederick D. Stocker (Ed.), The quest for balance in state-local revenue structures, Lincoln Institute of Land Policy, Tax Policy Roundtable, Property Tax Papers Series TPR Suyderhoud, Jack P. State-Local Revenue Diversification, Balance, and Fiscal Performance. Public Finance Review 1994; 22; Wagner, Richard E Revenue structure, fiscal illusion and budgetary choice. Public Choice 25: Misiolek, Walter S., and Harold W. Elder Tax structure and the size of government: An empirical analysis of the fiscal illusion and fiscal stress arguments. Public Choice 57 (3): Turnbull, Geoffrey K The overspending and flypaper effects of fiscal illusion: Theory and empirical evidence. Journal of Urban Economics 44: Carlton, Dennis W., and Jeffrey M. Perloff Modern industrial organization. Glenview, IL: Scott, Foresman/Little, Brown Higher Education.

10 Task B1, Appendix A: State Transportation Funding NCSGRE February 2010 Page 10 diversification score ranging from zero to one based on how evenly balanced a government s total revenue is among selected revenue categories. A higher value of the HHI score indicates a greater level of diversification among revenue structures. The HHI measure is based on three assumptions: Each entity or unit of analysis (such as state or municipality) is equivalent in its ability to diversify its revenue structure; Each entity utilizes all of the revenue categories selected for the calculation; and An equal reliance on each revenue category is possible. In the case of state highway revenue, since all 50 states receive funding from motor fuel taxes, motor-vehicle and motor-carrier taxes, federal aid, and one of the other six categories of revenues classified by FHWA, we include these four revenue categories to define highway revenue diversification for this analysis. Thus, state highway revenue diversification is measured as the following: HHI n 1 R i1 1 1 n 2 i Where R i is the fraction of revenue generated by each of the four revenue sources, and n is the number of revenue classifications (n=4 in this analysis). Table 3 shows the relative reliance on each funding sources and the results of the HHI calculations. The average HHI score for the 50 states is Consistent with the discussion in the previous section, states rely on more on average on motor fuel taxes (31%) and federal aid (30%) to fund highway investments and less on motor vehicle and carrier taxes (16%) and other funding (23%). Maryland is the only state that receives a score of 1.00, which represents a perfectly balanced revenue structure. Similarly situated states with relatively balanced sources include Illinois, Iowa, New Hampshire, New Mexico, and Colorado, all with an HHI of On the other end of the scale, 17 states have lower-than-average HHI scores. Table 3 shows that states do not consistently over-rely on any particular source. The most unbalanced revenue structures are in New Jersey, Alaska, Wyoming, and Montana, with HHI scores ranging from 0.70 to New Jersey s revenue sources are skewed toward debt financing, while federal aid contributes the majority of resources to Alaska, Wyoming and Montana.

11 Task B1, Appendix A: State Transportation Funding NCSGRE February 2010 Page 11 Table 3. Highway revenue diversification by states Select State Motor Fuel Taxes Motor- Vehicle Taxes Federal Aid Other HHI Select State Motor Fuel Taxes Motor- Vehicle Taxes Federal Aid Other Maryland 26% 25% 26% 22% 1.00 Ohio 42% 17% 25% 17% 0.94 Illinois 31% 23% 21% 25% 0.99 Indiana 40% 11% 27% 22% 0.94 Iowa 30% 26% 23% 21% 0.99 Nebraska 38% 9% 27% 26% 0.94 New Hampshire 29% 18% 28% 26% 0.99 Louisiana 39% 10% 27% 24% 0.94 New Mexico 27% 23% 32% 19% 0.99 Georgia 21% 9% 38% 32% 0.94 Colorado 34% 21% 22% 23% 0.99 Arizona 28% 12% 19% 41% 0.94 Washington 34% 21% 24% 21% 0.98 Mississippi 39% 13% 33% 14% 0.93 Michigan 33% 26% 23% 18% 0.98 Kansas 27% 9% 22% 42% 0.93 Oklahoma 27% 14% 27% 31% 0.98 Rhode Island 24% 9% 44% 24% 0.92 Virginia 26% 21% 18% 35% 0.98 Vermont 23% 31% 40% 6% 0.92 California 36% 20% 25% 19% 0.97 Arkansas 41% 13% 35% 11% 0.90 West Virginia 28% 21% 35% 16% 0.97 Nevada 48% 15% 25% 12% 0.89 Pennsylvania 36% 16% 23% 25% 0.97 South Dakota 27% 9% 47% 17% 0.89 Kentucky 27% 35% 25% 13% 0.97 Tennessee 46% 14% 30% 10% 0.89 Florida 29% 13% 23% 35% 0.97 Idaho 39% 22% 37% 3% 0.89 Maine 32% 11% 28% 28% 0.97 North Dakota 27% 14% 48% 10% 0.88 Texas 33% 22% 32% 13% 0.96 New York 19% 11% 20% 51% 0.88 Minnesota 34% 32% 21% 13% 0.96 Alabama 42% 13% 38% 6% 0.87 Hawaii 19% 20% 40% 22% 0.96 South Carolina 41% 8% 40% 11% 0.87 Oregon 34% 24% 31% 11% 0.96 Massachusetts 17% 8% 22% 53% 0.84 Connecticut 24% 11% 27% 37% 0.96 Delaware 15% 13% 17% 55% 0.84 Missouri 36% 13% 32% 19% 0.95 Montana 36% 11% 50% 3% 0.81 North Carolina 40% 13% 27% 20% 0.95 Wyoming 19% 11% 61% 9% 0.77 Utah 33% 8% 25% 34% 0.94 Alaska 5% 5% 56% 33% 0.75 Wisconsin 41% 17% 26% 16% 0.94 New Jersey 9% 8% 17% 66% 0.70 Average 31% 16% 30% 23% 93% Source: Author's Compilation from Highway Statistics, Finance Series, Federal Highway Administration, Table SF-1, Public transportation funding The structure of funding for public transportation differs in most states from that for highways. Many states restrict the use of state gas tax funding for highway projects only. Twenty-two states have constitutional restrictions and an additional eight have statutory limits dedicating the motor fuel tax to highway uses only. This rigidity of state revenues then restrict on the use of flexible federal funds, since state revenues are used as match for federal programs. As a result these states have to look to other revenue sources to fund transit projects, leaning largely on local governments. Between 1998 and 2002, very few states spent significant sums of fuel tax revenues on transit. New York, Connecticut, Rhode Island, New Jersey and Maryland, which have statutory provisions for funding transit with fuel taxes, spent more than 15% of total fuel tax receipts on transit and only 11 states spent more than 5%. 23 This section examines the sources that states use to fund transit. Data on state public transportation funding are collected from the 2007 Survey of State Funding for Public HHI 23 Puentes, R and Prince, R. Fueling Transportation Finance: A Primer on the Gas Tax, in Taking the High Road: A Metropolitan Agenda for Transportation Reform (ed. Katz and Puentes), Brookings Institution Press, Washington, DC

12 Task B1, Appendix A: State Transportation Funding NCSGRE February 2010 Page 12 Transportation conducted by the American Association of State Highway and Transportation Officials (AASHTO) in coordination with the U.S. Department of Transportation Bureau of Transportation Statistics (BTS). Table 4 presents funding sources for state transit programs by state. In 2006, all states, except Alabama, Hawaii, and Utah, provide state funds for public transit. Five states including Connecticut, Kentucky, Louisiana, New Mexico, and Texas do not identify their revenue sources for transit in this survey. Among the remaining 42 states, the most utilized sources of state funding for transit are: Gas taxes: used by 19 states; General fund (ultimate source unidentified): used by 11 states; Motor vehicle/rental car sales taxes: used by 10 states; Registration/license/title fees: used by 10 states; Bond proceeds: used by 9 states; General sales taxes: used by 9 states; and Interest income: used by 6 states. In addition to the above seven major revenue sources, 27 states also utilize other types of funding for public transit such as highway funds, trust funds, miscellaneous revenues, fees, taxes, lottery funds, documentary stamps, and other types of assessments. In fact, 5 of these 27 states rely solely on other types of revenue sources. Thirteen states rely on more than three sources ( other revenues considered one category) for public transit. These states are California, Florida, Massachusetts, Michigan, Minnesota, Nebraska, New Jersey, Oregon, Pennsylvania, Rhode Island, Virginia, Wisconsin, and Maryland. In particular, Maryland, Massachusetts and New Jersey appear to have a well diversified transit funding structure. The average reliance for each funding source among those states that have utilized such revenue source is as follows: 52.4% for general fund, 45.2% for gas taxes, 39.9% for motor vehicle/rental car sales taxes, 39.5% for registration/license/title fees, 19.6% for bond proceeds, 71% for general sales taxes, 23.4% for interest income, and 47.4% for aggregated other sources.

13 Task B1, Appendix A: State Transportation Funding NCSGRE February 2010 Page 13 Table 4. State revenues used for public transit in 2006 State General Fund Gas Tax Motor Vehicle/ Rental Car Sales Tax Registration /License/ Title Fees Bond Proceeds General Sales Tax Interest Income Other Alaska 99.4% 0.6% Arizona 0.2% 99.8% Arkansas 89.3% 10.7% California 30.7% 0.1% 62.6% 6.6% Colorado 100.0% Delaware X X X Florida 41.6% 19.1% 39.3% Georgia 100.0% Idaho 100.0% Illinois 100.0% Indiana 100.0% Iowa 100.0% Kansas 100.0% Maine 100.0% Maryland 32.9% 31.2% 22.8% 4.3% 8.8% Massachusetts 4.2% 22.8% 58.4% 14.6% Michigan 39.8% 28.6% 31.3% 0.1% 0.2% Minnesota 32.6% 41.7% 25.8% Mississippi 100.0% Missouri X X X Montana 10.1% 89.9% Nebraska 69.8% 20.6% 9.5% 0.2% Nevada 100.0% New Hampshire 72.3% X New Jersey 32.9% 13.5% 6.6% 35.5% 0.8% 10.7% New York 4.0% X X X North Carolina 90.5% 0.9% X North Dakota 100.0% Ohio 100.0% Oklahoma X X Oregon 8.6% 9.7% 1.5% 2.1% 78.1% Pennsylvania 38.1% 12.4% 18.9% 30.6% Rhode Island 16.4% 82.2% 1.3% 0.1% South Carolina 100.0% South Dakota 100.0% Tennessee 100.0% Vermont 100.0% Virginia 21.0% 28.0% 51.0% Washington X X X X West Virginia 100.0% Wisconsin 33.3% 33.3% 33.3% Wyoming 37.2% 62.8% Average 52.4% 45.2% 39.9% 39.5% 19.6% 71.0% 23.4% 47.4%

14 Task B1, Appendix A: State Transportation Funding NCSGRE February 2010 Page 14 Trend analysis This section looks at the changes in revenue sources for both highway and transit investments. Using the data from the previous section, we look at more closely at the revenue fluctuations across the individual funding sources in the period from 1994 to The argument for revenue diversification is that these fluctuations in individual sources will be offset by incorporation of additional sources that are sensitive to different exogenous factors. 24,25 Although Maryland already has a balanced funding structure for highways, it is important to examine the fluctuations there and elsewhere to understand the potential instabilities in the funding system. Figure 3 shows average yearly state fuel tax revenue rose from $628 million to $645 million, an increase of 2.6% between 1994 and This seemingly moderate increase over the past 13 years, however, was accompanied by great fluctuation between 1996 and The average state fuel tax revenue first jumped $40 million from 1996 to 2000, and then sharply declined by $60 million from , followed by a quick recovery of $30 million from 2003 to Figure 3. U.S. average state fuel tax revenues, California, Texas, Pennsylvania, Florida, and Ohio are the top five states that raised over $1.8 billion, almost three times the national average, in fuel taxes in 2006 and consistently demonstrated strong capacity in collecting fuel taxes over the 13 years. New York, Illinois, North Carolina and Michigan also showed significant reliance on fuel taxes. On the other end of spectrum, not surprisingly, small states such as Alaska, Vermont, Hawaii, Rhode Island, and Wyoming collected less amount of fuel tax revenue during the period of 1994 through Shannon, John State revenue diversification - The search for balance. In Frederick D. Stocker (Ed.), The quest for balance in state-local revenue structures, Lincoln Institute of Land Policy, Tax Policy Roundtable, Property Tax Papers Series TPR Suyderhoud, Jack P. State-Local Revenue Diversification, Balance, and Fiscal Performance. Public Finance Review 1994; 22; Yearly revenue was adjusted for inflation using Consumer Price Index (CPI) with 2006 as the base year as reported by Department of Labor, Bureau of Labor Statistics.

15 Task B1, Appendix A: State Transportation Funding NCSGRE February 2010 Page 15 Taking into account of population growth, the national average of per capita state fuel taxes presents a different trend than the total revenue level shown above. Figure 4 divides the data shown in figure 3 by population to illustrate that over the past 13 years, the average per capita state fuel taxes decreased by $11 or 8.2%, from $133 in 1994 to $122 in Although the per capita revenue trend mirrored the total revenue trend from 1996 to 2003, there was a lag in the per capita revenue between 2003 and 2005 when the total fuel tax revenue started to increase after the significant drop from while the per capita revenue continued to decline. Figure 4. U.S. average state fuel taxes per capita, Source: Author's Compilation from Highway Statistics, Department of Transportation, Federal Highway Administration, 1994 *Note: All dollar amounts are in 2006 dollars adjusted for inflation using CPI reported by Department of Labor, Bureau of Labor Statistics, based on population data from Department of Commerce, Census Bureau, Annual Survey of State Government Finances and Census of Governments ( ). Montana, North Dakota, Nevada, Wyoming, and Nebraska ranked the top five states in terms of per capita state fuel taxes in The per capita state fuel taxes in these states exceeded $175 and the largest amount was $204 in Montana in These states, along with West Virginia and Idaho, have demonstrated a consistently high level of per capita fuel taxes due to their relatively small population size. Interestingly, Georgia, New Jersey and Alaska ranked the bottom three in terms of per capita state fuel taxes in None of the three states collected more than $50 in per capita fuel taxes. In particular, Georgia s fuel tax revenue was only $36 per capita or 30% of the national average, while the number for New Jersey was $41 or 1/3 of the national average. The low levels of per capita fuel taxes in both states are, in a large part, caused by low levels of total fuel tax revenues due to extremely low gas tax rates (7.5 cents per gallon in Georgia and 10.5 cents per gallon in New Jersey compared to the national average of 21.3 cents per gallon in 2006) and moderately large population size. In reference to Table 1, the low level of state fuel taxes in Georgia seems to be offset by heavy reliance on other types of traditional revenue sources such as three percent sales tax on motor fuel used on highways and federal aid, and the shortage in New Jersey is mostly compensated by heavy reliance on certain entrepreneur type of revenues such as highway tolls and bond proceeds. On the other hand, the reason for the low level of per capita fuel taxes in Alaska seems to a combination of low level of fuel tax revenue partially caused by low gas tax rates (8 cents per gallon in 2006) and small size of population.

16 Task B1, Appendix A: State Transportation Funding NCSGRE February 2010 Page 16 The trend in state fuel tax revenue relative to vehicle miles traveled (VMT), as seen in Figure 5, displays a similar pattern with the trend in per capita fuel taxes. Nationwide, the average state fuel taxes per 1,000 VMT has been consistently declining. The revenue dropped by $3 or 21%, from around $14 in 1994 to $11 in Nevada, Pennsylvania, Montana, Washington, and Ohio ranked the top five states that generated the most amount of fuel tax revenue from VMT in 2006, with the highest amount of $21 in Nevada. The first three states, along with West Virginia and Nebraska, have managed to collect more tax revenues relative to VMT since at least On the other hand, Georgia and New Jersey ranked the bottom two states in fuel tax revenue relative to VMT both in 2006 and in the 13-year history. Neither of these two states collected more than $5 in fuel tax revenue per 1,000 VMT in 2006, far behind the national average. Figure 5. U.S. Average State Fuel Taxes per 1,000 VMT, Source: Author's Compilation from Highway Statistics, Department of Transportation, Federal Highway Administration, Figure 6 and Figure 7, Average State Fuel Taxes Per Capita, , provide 50-state comparisons in terms of the thirteen-year averages of state fuel taxes per capita or per 1,000 VMT for the period from 1994 to As shown in Table 6, the national average of state fuel taxes is about $129 per capita over the past 13 years, with 22 states below the national average and 28 states above the average. Per capita state fuel taxes range from $44 in Alaska to $215 in Montana, with most of the states (44 states) falling between $91 and $185 per capita. Compared with other states, per capita state fuel tax revenues in Alaska, New Jersey, Georgia, Hawaii and New York are extremely low none of the five states, on average, collected more than $70 in per capita fuel taxes. The reasons for the low per capita revenues in these states vary: in Alaska and Hawaii, the low per capita revenue seems to be caused by very low collections in total amount of state fuel tax revenues; in New York, it is likely to be caused by the state s super large size of population; and in New Jersey and Georgia, the reason might be a combination of low fuel tax revenues and large population sizes (New York, New Jersey and Georgia are among the top 10 largest states by population in 2000). Maryland has the eight highest fuel taxes per capita in the nation.

17 Task B1, Appendix A: State Transportation Funding NCSGRE February 2010 Page 17 Figure 6. Average State Fuel Taxes Per Capita, * Figure 7. Average State Fuel Taxes Per 1,000 VMT, * Source: Author's Compilation from Highway Statistics, Department of Transportation, Federal Highway Administration, *Note: All dollar amounts are in 2006 dollars adjusted for inflation using CPI reported by Department of Labor, Bureau of Labor Statistics, based on population data from Department of Commerce, Census Bureau, Annual Survey of State Government Finances and Census of Governments ( ). Furthermore, the national average of state fuel taxes, as shown in Figure 6, is about $13 per 1,000 VMT over the past 13 years, with half of the states below or above the national average. State fuel taxes per 1,000 VMT range from $4 in Georgia to $24 in Nevada, with most of the

18 Task B1, Appendix A: State Transportation Funding NCSGRE February 2010 Page 18 states (40 states) falling between $10 and $16 per 1,000 VMT. Georgia, New Jersey and Alaska, again, make the bottom three states in terms of fuel taxes relative to vehicle miles traveled due to the extremely low revenue collection in Alaska and due to the combination of low revenue collection and intensive driving (i.e., high VMT) in Georgia and New Jersey. Maryland ranks twelfth in the country in fuel taxes per VMT. Based on the information provided in Figure 6 and Figure 7 Table 5 shows how states rank when fuel tax revenue is compared to total state population or vehicle miles traveled. A close examination of the table reveals that some states ranked high in terms of both measures, some states ranked low in both measures, some states ranked high in one measure and low in the other measure, and other states ranked moderately in both measures. Table 5 Average State Fuel Taxes and Ranking, State Fuel Taxes Per Capita Rank by Highest Taxes Per Capita Fuel Taxes Per 1,000 VMT Rank by Highest Taxes Per 1,000 VMT State Fuel Taxes Per Capita Rank by Highest Taxes Per Capita Fuel Taxes Per 1,000 VMT Rank by Highest Taxes Per 1,000 VMT Alabama $ $11 34 Montana $215 1 $19 2 Alaska $44 50 $6 48 Nebraska $185 3 $18 4 Arizona $ $13 23 Nevada $183 4 $21 1 Arkansas $165 8 $15 12 New Hampshire $ $12 31 California $95 44 $11 36 New Jersey $47 49 $6 49 Colorado $ $14 18 New Mexico $ $11 37 Connecticut $ $13 21 New York $67 46 $10 41 Delaware $ $13 20 North Carolina $ $14 19 Florida $98 42 $10 42 North Dakota $175 5 $16 9 Georgia $52 48 $4 50 Ohio $ $16 7 Hawaii $61 47 $9 46 Oklahoma $ $9 47 Idaho $168 6 $16 6 Oregon $ $13 22 Illinois $ $13 24 Pennsylvania $ $18 3 Indiana $ $13 26 Rhode Island $91 45 $12 29 Iowa $ $16 8 South Carolina $ $10 40 Kansas $ $15 15 South Dakota $162 9 $15 13 Kentucky $ $11 33 Tennessee $ $12 27 Louisiana $ $15 11 Texas $ $10 43 Maine $ $14 17 Utah $ $15 14 Maryland $97 43 $10 39 Vermont $ $9 45 Massachusetts $ $12 28 Virginia $ $11 35 Michigan $ $11 38 Washington $ $16 10 Minnesota $ $13 25 West Virginia $185 2 $18 5 Mississippi $ $12 30 Wisconsin $ $14 16 Missouri $ $11 32 Wyoming $166 7 $10 44 U.S. Average $129 $13 Source: Author's Compilation from Highway Statistics, Department of Transportation, Federal Highway Administration, All dollar amounts are in 2006 dollars adjusted for inflation using CPI reported by Department of Labor, Bureau of Labor Statistics; per capita revenues are based on population data from Department of Commerce, Census Bureau, Annual Survey of State Government Finances and Census of Governments ( ).

19 Task B1, Appendix A: State Transportation Funding NCSGRE February 2010 Page 19 Table 6 further identifies some typical states in each of the four categories: high in terms of both fuel tax revenue per capita and per 1,000 VMT, low in terms of both measures, high in per capita measure while low in VMT measure, and high in VMT measure while low in per capita measure. The 13 states located in the right-bottom quadrant that is, the states with low fuel tax revenue relative to both population and VMT raise perhaps the most serious concern. These states include California, Florida, Georgia, Maryland, Michigan, New Jersey, New York, Texas, Virginia, etc. Table 6 Ranking of Fuel Taxes for Selected States Ranking by Fuel Taxes Per 1,000 VMT High Low High AR, ID, IA, MT, NE, NV, ND, PA, SD, WV WY, MS, AL, NM Ranking by Fuel Taxes Per Capita Low RI, WA,, MA, IL, LA AK, CA, FL, GA, HI, MD, MI, NJ, NY, OK, TX, VT, VA In general, the total amount of state funds for public transit has continually increased since As shown in Table 7, the total transit funding provided by all state governments is approximately $11 billion in 2006, a growth of 4.87% over the $6 billion in The rate of 4.87% represents the real growth rate which is calculated using the formula: rate = (2006 value/1995 value)^(1/12)-1. All dollar values are converted to constant dollars using CPI with 2006 as the base year. By comparing real growth rates instead of nominal growth rates (i.e., expressed in current dollars), we can have a more accurate look at the change of state transit funding because real growth rates are not distorted by the effects of inflation or deflation. Only seven states have experienced a negative average growth trend in state transit funding. These states include Utah (-100%), Nevada (-14.21%), Ohio (-6.95%), Oregon (-4.05%), Nebraska (-2.47%), Maine (-0.22%), and Pennsylvania (-0.09%). The state of Utah stopped providing funding for public transit since at least Nevada and Ohio have continually decreased their transit funding over the past 12 years. Both states also rely on single source to fund their public transit: Nevada relies on interest income and Ohio relies on general fund solely. Both Oregon and Pennsylvania provide considerable level of funding for public transit, $36 million and $823 million in 2006, respectively, and both states utilize multiple funding sources. However, their transit funding level shows some fluctuation over the years. In addition, 20 states show a positive average growth trend in state transit funding from Among which, New Hampshire and Arizona experienced the fastest growth, 35% and 33%, respectively. Arkansas and Montana also reached an 18% average real growth rate. Maryland s growth rate (4.8%) is about the national average level and its transit funding reached $811 million in 2006.