Study: Raise Fed Gas Tax

WASHINGTON — A congressionally mandated transportation-funding study unveiled yesterday that calls for boosting the federal gas tax by as much as eight cents a year over five years could spur more municipal bond issuance, according to state officials and market participants.

“I think this will generate more bonding because we will have more revenue for [debt] payments,” Missouri Department of Transportation director Pete Rahn said yesterday at a press conference on the report. He added that not only will states leverage the increased federal gas taxes, where feasible, but they will also look to bond other types of revenue, such as sales taxes and tolls.

Pete Rahn
Federal funding for highway and transit construction is derived from the current 18.4-cent per gallon gas tax, which the panel is proposing to increase and eventually index. The revenue is collected and put into the highway trust fund. The trust fund revenue is distributed to states annually based on a formula and is used to help fund road and transit projects.

States sometimes use their portion of trust fund dollars to repay tax-exempt bonds issued to finance projects. Many state and local governments also employ a gas tax to generate transportation funding.

The report comes after 22 months of deliberation by the National Surface Transportation Policy and Revenue Study Commission.

“This is the end of a long journey,” said commission vice chairman Jack Schenendorf, who added that implementing the report’s recommendations “is going to take political leadership.”

In total, the report calls for all levels of government to provide $225 billion over 50 years for transportation infrastructure. The federal government is expected to cover about 40% of the $225 billion, and state and local governments are to cover the rest, which is similar to how transportation funding is currently split. An increase in the gas tax would put pressure on state and local governments to provide more funding.

States and localities will “have to pick it up,” said Rahn, who is also the president of the American Association of State Highway and Transportation Officials. “It can’t be done by just the federal government, and it can’t be done by just the states or locals, so it has to be a collective effort on all our parts.”

Wisconsin secretary of transportation Frank Busalacchi, a member of the finance panel, agreed that an increase in the federal gas tax could trigger more bonding. However, he warned that states will have to be careful not to over-leverage themselves and stressed that the federal government’s commitment is crucial.

“We have to be careful that we don’t incur too much debt,” Busalacchi said. “It is going to be delicate balance.”

Tom Paolicelli, an analyst with Moody’s Investors Service, said he thinks that states and localities will turn more to tolling and leverage some of that revenue to back bonds.

“Historically there has been a reluctance to raise federal and state gas taxes, which right now is the biggest source of funding for surface transportation, so it could be very difficult to achieve the increases that are being proposed,” Paolicelli said. “From where we sit, we think that tolling is going to be an alternative that is going to be pursued more.”

Along with an annual five- to eight-cent boost in the 18.4-cent federal gas tax for five years, the commission called for indexing the tax for inflation after the fifth year.

But it remains to be seen whether the proposal will be passed by Congress and signed into law.

Rep. John Mica, R-Fla., the ranking member of the House Transportation and Infrastructure Committee, said yesterday he believes that the commission “missed the mark in proposing an increase in a tax that is becoming more obsolete with every passing day,” as more alternative fuel vehicles are sold.

“What’s needed is a means of reliably raising revenue as we transition from gasoline to other transportation fuels to power vehicles.” Mica said in a statement.

Sen. Charles E. Grassley, of Iowa, the top Republican on the Senate Finance Committee, which would have to approve any increase in the gas tax, was also critical of the report.

“Raising the gas tax would put us in the fast lane to a recession,” Grassley said in a release. “Businesses and consumers depend on strong transportation infrastructure. A gas tax increase would ramp up transportation costs without ensuring road improvements.”

Transportation Secretary Mary Peters was also critical of the report and dissented from its recommendations, even though she was the panel’s chairman.

But Rep. James L. Oberstar, D-Minn., chairman of the House Transportation and Infrastructure Committee, has long supported a gas tax increase, which has not been raised since 1993, contending the tax has lost its buying power due to inflation. He most recently sought a five-cent increase to pay for bridge repair after the I-35W Bridge in Minneapolis collapsed in August, killing 13 and injuring more than 100. Oberstar has scheduled a hearing on the report for tomorrow.

This final expansive report gives [the committee] numerous ideas to consider as we begin to write the next surface transportation bill,” Oberstar said in a release. “I look forward to a vigorous dialogue with the commissioners on their report.”

For public-private partnerships, the report recommends that Congress prohibit so-called non-compete clauses in P3 deals where states or localities lease a road to a private party for a number of years. Non-compete clauses prevent the government from building or improving roads that would compete with the leased road. Congress should also limit increases in tolls to inflation, require that private entities share revenue beyond a certain level with the public entities, and a limit on the length of concession agreements, the report said.

But Missouri’s Rahn said he believes that states should be allowed to negotiate the P3 deals they think are best.

“I think every P3 project has to be structured to the needs of the project, the region, and its people,” Rahn said. “I trust the states to have the ability to make those decisions correctly” and so the restrictions are not needed.

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