May 9, 2005

May 9, 2005 | WebMemo on Smart Growth

Using the Veto Threat to Impose Reform on the Highway Reauthorization Bill

As the Senate this week considers its version of legislation to reauthorize the federal highway program, Senators will be confronted with a number of opportunities to improve or worsen the traffic congestion that now confronts motorists and truck drivers in many parts of the nation. They will also have an opportunity to honor the commitment that they made at the end of 2004 when they agreed to limit the bill's six-year spending total to $284 billion. On March 10, 2005, the House passed its version (H.R. 3) of the reauthorization bill and kept within the promised spending limit. A week later, the Senate Committee on Environment and Public Works reported out its highway bill (S. 732), which also stayed within the agreed upon cap of $284 billion.

 

Since then, however, several Senators have announced their intention to offer an amendment on the floor to add as much as $10 billion to $15 billion in additional spending to S. 732. To "pay" for the new spending, Senator Charles Grassley (R-IA), chairman of the Senate Finance Committee, has promised that he will produce a series of tax revenue increases to match the higher spending.

 

To his considerable credit, President George W. Bush quickly responded by announcing that any highway bill that spent more than the agreed upon $284 billion would be vetoed. Secretary of Transportation Norman Mineta underscored the President's veto threat by claiming, "if the Congress chooses to irresponsibly add billions to the cost of the bill, it is setting itself up to raise gas taxes or risk bankrupting the Highway Trust Fund in the very near future."

 

Last year, the President won a great victory for spending restraint and tax relief when his credible veto threat forced House Transportation and Infrastructure Committee Chairman Don Young (R-AK) to abandon his proposed gas tax increase and cut $85 billion from his highway bill. A subsequent veto threat against the Senate's 2004 plan encouraged Senator James Inhofe (R-OK) to reduce his highway spending plan from last year's $318 billion to today's $284 billion.

 

Spending Is Not the Only Issue.

While achieving the lower spending level is important for holding the line on wasteful spending and making progress against the deficit, neither one of these bills would do much to alleviate the congestion and the deteriorating road conditions that motorists and truck drivers, who fund the program with their fuel taxes, confront each day. As analysts at The Heritage Foundation and elsewhere[1] have frequently noted, the federal highway program today is more about spending than transportation, and under the proposed plans now before Congress, as much as 40 percent or more of the federal fuel tax revenues is siphoned off to purposes that do not benefit the average motorist or trucker who funds the program.

 

As a detailed reading of either H.R. 3 or S. 732 reveals, the federal highway program has evolved into a grand national spoils system that lets influential constituencies tap into the trust fund to pay for their pet projects and programs. During the current reauthorization process, new programs to divert billions of dollars of transportation money for questionable purposes have been added by the dozens, thereby assuring that little or no progress will be made in mobility and congestion mitigation for the foreseeable future.

 

The President's March 2005 Statement of Administrative Position (SAP) expressed concern over these prospective diversions when it noted:

 

The Administration opposes the proliferation of new categorical programs, set-asides, and so-called "high-priority" projects in H.R. 3. The Administration believes that the vast majority of federal-aid highway funds should be distributed to States via formula as States are far better equipped than the Federal Government to make appropriate decisions about their own transportation systems.

 

Both the House and Senate have ignored this request, and the President should respond by threatening a veto unless the wasteful diversions are cut back.

 

Eliminate Proposed New Diversion and Privileges

H.R. 3 creates an estimated 39 new categorical programs including the anti-obesity Safe Routes to Schools, Transit in the Parks, and the Bicycle Clearinghouse. Many of these have been added to the Senate bill, and others will be offered on the floor as amendments.

 

One provision added by Senator John Warner (R-VA) mandates that 2 percent of each state's apportionment under the surface transportation program must be devoted to storm water management (estimated at $865 million over five years). One Senator wants the Federal Highway Administration (FHWA) to continue to purchase traffic sensors made by a company in his state. Also introduced is an amendment to provide $45 million to California University of Pennsylvania for a fanciful Mag Lev demonstration project. H.R. 3 includes language to require FHWA to contract with a national organization representing architects to conduct a study on the relationship between transportation and economic development, and an amendment to that effect may be offered in the Senate.

 

Earmarks

The so-called high-priority projects have been increased from the 1,800 enacted seven years ago in TEA-21 to 3,800 in H.R.3, and more will be added by the Senate during the conference. To further facilitate wasteful spending, a new earmark category has been created: "Projects of National and Regional Significance." If both earmark programs are included in whatever bill is ultimately enacted, pork-barrel spending will rise from their current 4.4 percent to at least 8 percent of total federal highway spending in the House bill alone. Once the Senate adds its thousand or more earmarks in conference, their share of trust fund spending could exceed more than 10 percent of the total.

 

In addition to the above legislative threats to waste money and further impair the quality of transportation services, a number of other important issues should be addressed in the reauthorization bill now before the Senate, and ultimately by the President if the bill Congress finally produces is deficient in these areas.

 

Allow Greater Opportunities for Responsible Tolling

With future trust fund revenues (and spending) limited to whatever the unchanged federal fuel tax will yield, many in Congress, the U.S. Department of Transportation, and the states have become more focused on tolls as a way to pay for needed improvements and/or new road capacity. But the growing interest in tolls is accompanied by concern that the tolls imposed may become just another government tax and that the revenues so raised might be devoted to spending on programs that are of no benefit to the toll-paying motorist. As a result of such concerns, legislation has been introduced to limit the application of tolls that are levied on roads in existing interstate right-of-ways to the funding of new capacity only.

 

The current Senate bill (S. 732) now includes such limits in its tolling provision, whereas the President's original bill (SAFETEA) did not. The Senate bill also continues the existing provision that allows up to three tolling pilot projects for rehabilitation of segments of the interstate system and requires that one of the projects be limited to Virginia (which has a plan to toll the existing I-81 highway and apply the revenues to repair and capacity enhancement). However, several Senators intend to offer an amendment to eliminate these pilot programs.

 

The House bill (H.R.3) includes a more expansive approach to the types of projects to which tolls can be applied but also limits their number: It will allow up to three interstate rehabilitation projects and three interstate capacity enhancement projects.

 

Reaching a compromise between the contending and shifting views on tolls has been a challenge. As a result, current federal tolling policy on existing federally funded roads-which effectively prohibits their use-remains in place, and tolls will seldom be used. But as financing pressures mount and as future trust fund revenues remain constrained, a solution to the disagreements must be reached to give states the needed flexibility to use tolls while protecting motorists from another form of taxes and revenue diversion.

 

One possible compromise that would address the potential tax increase/leakage/diversion problem would be the requirement that all newly tolled facilities be legally structured as independent not-for-profit corporations or as chartered for-profit corporations. Each such entity would be limited to one highway in order to prevent intra-state revenue shifts, could issue tax-exempt bonds to finance expansions and improvements, would have an independent board of directors, and would operate under a legal charter mandating that all toll revenues raised on that highway stay on that highway or service the debt that financed its construction. Examples of such existing arrangements include the "63-20" (so named after the section of the tax code that allows them) not-for-profit corporation organized by the public-private partnership that built the Pocahontas Parkway in the Richmond, Virginia, area and the wholly private corporation that owns and operates the Dulles Greenway, a new toll road serving the Virginia suburbs of Washington, D.C.

 

Private Activity Bonds

In its original SAFETEA reauthorization proposal, the Administration proposed that Congress extend the privilege to issue up to $15 billion of tax-exempt, private-activity bonds to a limited number of highway projects that involved partnerships with the private sector.[2] If enacted, this proposal would allow private investors to use these bonds to raise the funds to invest in private or public-private partnerships to build new toll roads or toll express lanes. In effect, roads could be built with borrowed funds at low interest rates, and the tolls collected would be used to service the debt and maintain the roads. By using debt whose interest payments are exempt from federal income taxes, the private sector could more readily participate in highway investments and partnerships, and could compete more effectively with the public sector by eliminating the 30 percent borrowing cost disadvantage.

 

Last year's Senate bill included a provision for private-activity bonds similar to the President's, but the House bill did not. This year, neither bill includes it, but there is the expectation that the proposal could be offered as an amendment or part of an amendment that includes related financing provisions. If so, the White House should encourage Senators to support the applicability of the private-activity bond privilege to privately funded and operated highways. Its priority status also merits mention in any subsequent SAP targeted at the Senate or the conferees.

 

In mid-May 2005, the Texas Transportation Institute issued its annual urban mobility report, which found once again that traffic congestion in many major metropolitan areas worsened significantly over the past two decades, largely as a consequence of the increase in the number of drivers and cars outpacing new road capacity. Over the same period, vehicle miles driven increased by 74 percent, while road capacity increased by 6 per cent.

 

As currently written, neither the House nor the Senate version of the reauthorization bill will make any improvement in this sorry state of affairs. Unless the President can encourage significant changes in the pending legislation, congestion is certain to worsen.

 

Ronald D. Utt, Ph.D., is Herbert and Joyce Morgan Senior Research Fellow in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

 



[1]Ronald D. Utt, "Congress Gets Another Chance to Improve America's Transportation: Should It Be Its Last?" Heritage Foundation WebMemo, March 7, 2005.

[2]See Ronald D. Utt, "Closing the Spending Gap Between Contending Transportation Reauthorization Proposals," Heritage Foundation Backgrounder No. 1688, September 1, 2003.

About the Author

Ronald D. Utt, Ph.D. Herbert and Joyce Morgan Senior Research Fellow

Related Issues: Smart Growth