Declining federal gas tax revenues pose a fundamental dilemma for Congress and for policymakers: At the very time that we need to both repair and replace aging transportation infrastructure and make new investments for a growing population, the revenue source on which these investments depend — the 18.4 cent per gallon excise tax on gas — is shrinking as cars become more fuel efficient and per capita VMT (vehicle miles traveled) continues to decline.

The federal gas tax hasn’t been raised since 1993, under President Clinton, when Congress increased it 4.4 cents. The prospect that this Congress will increase it — or even just index it to keep up with inflation — seems dim at best, especially since the 2010 election brought to Washington DC many new members elected on an anti-tax platform.

But it’s hard to accept that we are investing less in transportation infrastructure at a time when other countries, including China and India, are making significant investments, especially in high-speed rail. Some argue we are setting the country on a downhill slide because without an effective transportation system we can’t hope to maintain our standing as the world’s premier economy.

Others make the case that we could change the way the gas tax is structured, basing it not on the amount of fuel consumed but on the vehicle miles traveled (VMT) — using, for example, a VMT fee. There has been considerable pushback on this idea, however, mostly because a VMT fee would require some kind of monitoring device, such as an onboard GPS unit to record the distance traveled, assign it to the appropriate taxing jurisdiction, and calculate the amount owed. This has raised concerns about privacy.

Moreover, there is a tendency to resist any kind of change, especially when it involves a cost as substantial as driving. But perhaps the fatal flaw — as discussed in a recent analysis by the Rand Corporation — is that implementing a VMT fee could run as high as 5-6 percent of the revenue received, which contrasts with the 1 percent cost of implementing the current gas tax.

This suggests that the cost of this fee could outweigh the benefits of collecting it, or to put it another way, in order to implement a mileage-based fee that would generate equivalent revenue for transportation purposes, the federal government would have to set the fee at 5-6 percent more than the current rate. This begs the question: Why not just raise the gas tax?

Questions such as these prompted John Horsley, who late last year retired as director of the American Association of State Highway and Transportation officials (AASHTO), a powerful industry group in Washington DC, to suggest replacing the excise tax on fuel with a national sales tax on fuel.

Horsley pointed out that when the gas tax was set at 18.4 cents in 1993 it represented 17 percent of the price of a gallon of gas. But today, since gas prices have increased dramatically but the gas tax remains fixed at 18.4 cents, the percentage of tax collected has fallen to 5 percent. Meantime the revenues in the Highway Trust Fund have dwindled to the point that it has been kept solvent only through large infusions of revenue from the General Fund — $8 billion in 2008, $7 billion in 2009, and $19.5 billion in 2010.

Horsley proposed that a gas sales tax should be set at a level that would restore solvency to the Highway Trust Fund, though he didn’t say how much. Because a sales tax on gas would not be fixed but rather set as a percentage of the cost, it would provide increasing revenues as the price of gas increases, offsetting most, perhaps all, of the eventual decline in gas consumption.

The criticism usually leveled against this idea is that the revenues from a sales tax on gasoline would be unpredictable because sales tax revenues fluctuate with the economy and would also rise and fall with the price of gas. For this reason, it is argued, a sales tax on gas may not provide the certainty needed to give transportation agencies and their contractors the confidence to move forward with investment programs.

It seems pretty clear, however, that over the long term gas prices are trending up, as evidenced by the fact that gas prices are rising now as they do every spring, but earlier than usual this year, despite the fact that the U.S. is about to overtake Saudi Arabia as the world’s largest oil producer. This is because oil is sold in an international market and prices are a function of both supply and demand — China’s oil consumption is booming and the world economy is growing again, increasing demand even as we are increasing the fuel efficiency of cars.

The absence of a national transportation funding fix — which a national gas sales tax could provide — creates a devil’s bargain for Congress: Should members continue to provide General Fund subsidies, or simply cut back on infrastructure investment — the default choice — or increase the gas tax, a non-starter with this Congress.

In our view cutting back on national infrastructure investment is a prescription for decline unless the federal government takes steps to incentivize increased local investments. That is exactly what the America Fast Forward program that has been championed by LA Mayor Antonio Villaraigosa and LA Metro would do — first with the TIFIA low-interest loan program adopted by Congress last year, and now with the tax-credit bond program being considered by Congress.

Both programs incentivize local voters and local governments to step up and tax themselves to provide a revenue stream for transportation infrastructure that can be bonded against or used to secure a TIFIA loan, thereby increasing local revenues to counteract the decline in federal revenues.

A combination of this shift toward local taxes and an expansion of innovative financing strategies such as the America Fast Forward loan and bond program can yield an increasing aggregate of investment for transportation. Even if the federal government no longer has the revenues required to be a big spender it can help make up the loss by becoming a smart lender!

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