Federal Funding Uncertainty in State, Local, and Regional Departments of Transportation: Impacts, Responses, and Adaptations (2022)

Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

14 C H A P T E R   2 2.1 The 20th-Century Federal-Aid Highway Program, Funding, and Structure The establishment of the Federal-Aid Highway Program in the second half of the 20th century reflected a national consensus on the need to respond to an evolving economy, regional growth, transportation-dependent industries, and the concern for defense logistics. Together these needs supported the imperative of creating a core national network of interstate highways—and later major metropolitan transit investments—backed by an assured, significant, sustainable, and predictable flow of funds generated by federal fuel taxes in an era of ever-growing demand for mobility. Key characteristics of the Federal-Aid Highway Program have shifted over time in response to economic, political, and social forces. While the history of the program is full of events that appear to represent major uncertainties in the future flow/availability of funds, over time the Federal-Aid Program has developed a series of features to blunt the impacts of these uncertainties. 2.2 The Interstate Era and the Highway Trust Fund: 1956–1985 Federal support for major capital investments was essential before embarking on the con- struction of the Interstate Highway System. Prior to the Federal-Aid Highway Act of 1956 and the establishment of the Highway Trust Fund, roads were financed directly from the General Fund of the United States Department of the Treasury. From a policy perspective, using general funds to fund the Interstate Highway System was not desirable because the revenue flowing into the fund was not related to highway needs or use. Therefore, the 1956 act directed the revenue generated by a new federal motor fuel tax to contribute to the Highway Trust Fund, to provide a stable source of funding exclusively for the construction and maintenance of the Interstate Highway System and ensure the program could be carried out in the long term. During this period, the maximum federal participation rate for federally funded interstate highway capital expenditures was 90%, reflecting a common national interest in interstate trans- portation. The allocation of federal funds was relatively straightforward and was based on a national network map with common design standards for which the “cost to complete” could be determined. The focus of the Federal-Aid Highway Program was the efficient completion of the national interstate highway network, using uniform standards determined by technical studies. The timely and efficient completion of this long-term system investment was recognized as being dependent on a significant and stable source of funding, with motor fuel taxes ultimately selected as the most reliable and resilient revenue source. The History of Federal Transportation Funding Uncertainty

The History of Federal Transportation Funding Uncertainty 15   2.2.1 Formula Programs In addition to the interstate program, three other programs existed with funding to be distributed according to formulas dating back as far as 1916: • Primary System: funds apportioned using three formula factors—a state’s share of the national land area, population, and rural post road mileage, each weighted equally. • Secondary System: funds apportioned based on each state’s share of national land area, rural population, and rural postal route mileage. • Urban System: funds apportioned based on each state’s share of the national population living in urban areas of 5,000 or more residents. 2.2.2 Program Stability and Predictability At the dawn of the interstate era in 1956, a set of congressional authorization funding pro- cesses was adopted to financially support the program in the long term. This differed from the normal appropriation processes in that congressional authorizations for the Federal-Aid Highway Program constituted legally binding funding commitments to states in the form of contract authority. Federal-Aid funding was provided to states on a pay-as-you-go basis, supported primarily by fuel tax revenue deposited in the Highway Trust Fund. The trust fund was required to maintain a positive balance year over year. To regulate the flow of Federal-Aid funding, the Eisenhower administration imposed quarterly limits on the aggregate amount of contract authority states could obligate. A change in budget law in 1974 abolished these quar- terly obligation controls, so Congress began enacting annual obligation ceilings in appropria- tions bills. From time to time, Congress increased the rate of federal fuel taxes to maintain trust fund solvency. The relative stability of these core features provided need-based funding levels with a consis- tent and reliable framework so states and local governments could predict the level and timing of federal resource availability, which allowed them to plan, time, fund, construct, and maintain their high-priority capital highway and transit projects. Major projects could be planned with the assurance of funding in out years. Risks of interruption or delay in funding were minimal. Clear eligibility rules also reduced the vulnerability of funding uncertainty for lower-priority state projects using Federal-Aid funding. At the same time, expanding federal motor fuel tax revenue limited state incentives to raise their own fuel taxes or use other funding tools. From the state program funding perspective, this approach provided a high degree of predict- ability in terms of funding levels and sustainability. Its key features included: • Long-term assurance: interstate construction funding was provided and guaranteed through 1995 to ensure the completion of the Interstate Highway System. • Funding dedicated to transportation and shielded from legislative incursions. • Annual appropriations providing USDOT budget authority to incur obligations and make payments from the US Treasury to reimburse states for specified expenses. • Modest earmarking of funds to support congressional interests, which encouraged rapid legislative consensus. • A dominant focus on major capital facilities arguably of national and regional interest, with federal versus state/local shares reflecting “national” interest. • Known federal match rates, providing states clear revenue-raising targets. • Apportionments to states and programs reflecting some notion of need and fiscal capacity. • Annual allocations through federal budget obligations, reflecting the level of commitments made in a fiscal year and levels of contract authority consistent with formulas in the autho- rizing statute.

16 Federal Funding Uncertainty in State, Local, and Regional Departments of Transportation: Impacts, Responses, and Adaptations 2.2.3 Funding Levels and Stability/Predictability During the interstate era, the real-dollar value of Federal-Aid increased continuously based on fuel tax increases, growing vehicle miles traveled (VMT) nationwide, and modest improve- ments in fuel efficiency (EIA 2012). As Table 2-1 shows, from 1955 to 1985 the level of appor- tionments increased and real-dollar values also rose, providing a high level of transportation funding. Funding during this period began with the 3-cent federal gasoline tax flowing to the Highway Trust Fund in 1956. Taxes increased in 1959 by 1¢, and in 1982 by 5¢, with 1¢ dedicated to mass transit. 2.3 The Pre-ISTEA Transition: 1985–1991 As the interstate system approached completion, Congress began creating new funding cate- gories for specific program initiatives to respond to differing state priorities, accommodate constituent needs, and maintain and justify the dedicated fund-based Federal-Aid program. New programs, each with their own apportionment formulas, included the National Highway Traffic Safety Administration of 1970, the Highway Bridge Replacement and Rehabilitation Program of 1978, and the Interstate 4R (resurfacing, restoring, rehabilitating, and reconstruc- tion) Program of 1981. After the mid-1980s, real-dollar federal transportation funding failed to keep pace with growing needs. Although demand for federal transportation dollars and the VMT tax base were increasing, the federal motor fuel tax—the financial backbone of the interstate highway program—was not sufficiently increased. In 1990, as part of the ongoing discussion of federal budget reconciliation issues, the gas tax was increased from 9¢ to 14¢—with 2.5¢ of the increase going to the Highway Fund and the other 2.5¢ going toward deficit reduction. However, these increases were not indexed to offset inflation, nor were apportionments adjusted to reflect new state-by-state differences. In addition, dramatic increases in fuel efficiency began to erode the revenue potential of the motor fuel tax. Between 1985 and 2001, the average fuel efficiency for all vehicles increased from 14.6 to 16.9 miles per gallon (EIA 2012). Table 2-2 summarizes funding trends during this period. Passage of the Surface Transportation and Uniform Relocation Assistance Act of 1987, over presidential veto, indicated the continuing deterioration of national consensus on the impor- tance of the highway program. Revenue additions since then have been associated with deficit reduction rather than increased highway funding. Modest increases were made in 1993 and 1998 via transfer of other tax sources to the Highway Trust Fund, such as general funds offset by the US Department of Veterans Affairs Tobacco Settlement. Thus, Congress was broadening how Federal-Aid highway dollars could be used without a commensurate increase in funding. This dynamic was compounded by the fact that the ISTEA of 1991 declared the Interstate Highway System would be completed in 1995. Without the focus that completion of the interstate system provided, the consensus on how federal highway funding should be used diminished. The years just prior to ISTEA saw not only the completion of the Interstate Highway System but an important transition from an era characterized by a largely stable and single-purpose preoccupation with basic infrastructure network completion (and corresponding major urban rail transit projects) to a new context for public infrastructure and services characterized by the following concepts: • A broader set of transportation-related interests, values, and perspectives relating to urban and rural needs • A focus on urban, rural, and interurban transportation

Apportionments (nominal $) Population Apportionment per Capita (nominal $) CPI PC CPI Apportionments (1950 $) PC Apportionments Apportionments per Capita (1950 $) Apportionments (2018 $) Apportionment per Capita (2018 $) 1950 $473,500,000 - 1955 $807,080,224 70% 1960 $2,183,908,618 171% 1965 $2,901,448,730 33% 1970 $3,394,453,943 17% 1975 $3,059,164,409 -10% 1980 $2,504,468,490 -18% 1985 $473,500,000 $897,500,000 $2,682,311,000 $3,792,350,000 $5,464,930,000 $6,829,172,000 $8,562,996,000 $13,548,072,000 152,271,417 165,931,202 180,671,158 194,302,963 205,052,174 215,973,199 227,224,681 237,923,795 $3.11 $5.41 $14.85 $19.52 $26.65 $31.62 $37.69 $56.94 24.1 26.8 29.6 31.5 38.8 53.8 82.4 107.6 - 11% 10% 6% 23% 39% 53% 31% $3,034,465,941 21% $3.11 $4.86 $12.09 $14.93 $16.55 $14.16 $11.02 $12.75 $4,933,575,290 $8,409,273,601 $22,754,968,523 $30,231,289,887 $35,368,097,359 $31,874,589,097 $26,095,002,871 $31,617,246,428 $32.40 $50.68 $125.95 $155.59 $172.48 $147.59 $114.84 $132.89 Source: FHWA 2019. Note: PC refers to percent change. Table 2-1. Federal-Aid Highway Apportionments 1955–1985 (in nominal and constant dollars). Source: FHWA 2019. Note: PC refers to percent change. Apportionments (nominal $) Population Apportionment per Capita (nominal $) CPI PCCPI Apportionments (1950 $) PC Apportionments Apportionments per Capita (1950 $) Apportionments (2018 $) Apportionment per Capita (2018 $) 1985 107.6 $3,034,465,941 - $12.75 $31,617,246,428 1990 130.7 $2,288,754,873 -25% $9.17 $23,847,401,240 1995 152.4 $2,499,057,091 9% $9.39 $26,038,619,454 2000 172.2 $4,041,447,681 62% $14.32 $42,109,369,408 2005 195.3 $3,853,688,967 -5% $13.04 $40,153,040,472 2010 218.056 $4,239,785,007 10% $13.71 $44,175,920,898 2015 237.017 $3,843,318,412 -9% $11.98 $40,044,985,744 2018 $13,548,072,000 $12,412,459,000 $15,803,166,000 $28,877,066,000 $31,229,272,000 $38,361,434,000 $37,798,000,000 $41,420,520,075 237,923,795 249,622,800 266,278,400 282,171,936 295,560,549 309,346,863 320,742,673 327,167,434 $56.94 $49.72 $59.35 $102.34 $105.66 $124.01 $117.85 $126.60 251.107 - 21% 17% 13% 13% 12% 9% 6% $3,975,335,350 3% $12.15 $41,420,520,075 $132.89 $95.53 $97.79 $149.23 $135.85 $142.80 $124.85 $126.60 Table 2-2. Federal-Aid Highway Apportionments 1985–2018 (in nominal and constant dollars).

18 Federal Funding Uncertainty in State, Local, and Regional Departments of Transportation: Impacts, Responses, and Adaptations • Recognition of the growing burden of preservation, maintenance, reconstruction, and operations • Consideration of the negative environmental and community externalities of transportation facilities development and operations • Heightened recognition of mobility and service availability inequities, and an increased sen- sitivity to cross-subsidies among economic, social, and geographic interests The consequent changes in the context for Federal-Aid transportation programs included increasingly obvious and competing differences among states and metropolitan regions regarding their transportation improvement priorities and fiscal capacity to support them (highway, transit, freight). These contextual changes were reflected in more complicated and fragmented surface transportation programs with an increasing number of modal and program categories, match rates, and levels of flexibility. At the same time, at the root of these complexities was the lack of a sustainable level of Federal-Aid transportation funding that could keep up with growing highway needs as defined by highway agencies and stakeholders. 2.4 ISTEA: Program Reform, 1991–1998 ISTEA reflected a consensus among stakeholders on the need to simplify the Federal-Aid Highway Program and, at the same time, introduce new programs that recognized increasing public policy interest in achieving multiple goals. These goals included highway and transit capital expansions, improved safety conditions, environmental outcomes, and funding equity. ISTEA attempted to introduce a new set of balances by providing a smaller set of formula categorical programs (i.e., the new Surface Transportation Program) accompanied by increased program flexibility. This compromise generated support for an increase in Federal-Aid and other funding. As drafted by the House Committee on Transportation and Infrastructure, ISTEA contained a 5-cent motor fuel tax increase. However, political backlash led the Speaker of the House to pull the tax increase before the full House could consider the bill. No further fuel tax increases have been considered by Congress since that time as part of any surface transportation reauthorization act. ISTEA rationalized the program, but did not rationalize apportionments and avoided dis- cussion of need-related funding. Rather, it simply proportioned state funding according to the share of the previous reauthorization, substantially undercutting the rationale of state-by-state allocations. Finally, in 1998, the Transportation Equity Act for the 21st Century (TEA-21) estab- lished new apportionment formulas for the individual Federal-Aid programs. The center of the new “national” focus in TEA-21 was the National Highway System Program. This network—unlike the Interstate Highway System—was not based on cost to complete a fixed set of routes, but on an apportionment formula basis. TEA-21 also increased the flexibility for states to transfer funding between programs. Equity adjustments—specific allocations begun in ISTEA to guarantee that funds received by a state would at least equal that state’s contribution to the trust fund—increased to almost 20% of total funding. 2.5 Post-ISTEA: An Era of Uncertainty, 1998–2007 The temporary political resolution and balance of alternative stakeholder interests provided by ISTEA has been eroding since the early 1990s. From ISTEA on, each successive reauthorization has been characterized by differing points of view: • Political disagreements about surface transportation priorities in both the House and the Senate • Aversion to dedicated fuel tax increases and growing reliance on general funds for real-dollar increases in federal funding

The History of Federal Transportation Funding Uncertainty 19   • Political delays and uncertain time frames—at several levels—for authorization, appropriation, budgeting, and obligation • Project development and approval delays and uncertainties due to new laws and regulations and overlapping departmental jurisdictions • Waves of consolidation and fragmentation regarding specific program funding categories • Addition of transit programs to the eligible recipients of the Highway Trust Fund Together, these developments have led to a fragmentation in the national consensus on surface transportation among various interest groups regarding the appropriate focus of Federal-Aid among systems, modes, jurisdictions, and geographies. At the same time, com- peting federal priorities in health, education, defense, and social support have stressed the national budget dialogue. The increasing competition for federal funding has fragmented the long-standing political consensus on providing sustainable funding for a national trans- portation program. At the same time, since the passage of ISTEA, a succession of non-highway federal legislation has varied the levels of the federal fuel taxes: • The Omnibus Budget Reconciliation Act of 1993 increased the federal gas tax by 4.3¢ per gallon but directed the entire amount of the increase to the General Fund. • The Taxpayer Relief Act of 1997 redirected the 4.3¢ per gallon levied under the 1993 Budget Reconciliation Act from the General Fund to the Highway Trust Fund. Subsequent acts have adjusted the taxation on gasohol. Nonetheless, total transportation funding levels increased, both in nominal and real-dollar terms, between 1956 and 2008. While these increases were not guaranteed, in the sense that they depended on congressional action, they took place from one reauthorization cycle to the next, such that recipients presumed it would work out in the end, despite delays in legislative action and uncertainty in funding levels. This stance was supported both by ongoing congressional actions to reinforce the importance of the Federal-Aid Highway Program and by the continuing support of the Highway Trust Fund owing to positive fuel tax revenue levels. Fuel tax revenue continued to grow without a tax increase because of the growth in VMT year over year and limited gains in fuel efficiency through the mid-1980s. 2.5.1 Decoupling Highway Spending from Predictable Trust Fund Revenue The risk to state DOTs of counting on reliable Federal-Aid revenue is well-illustrated by the attempts to cope with declining Highway Trust Fund balances between the passage of TEA-21 in 1998 and today. These risks have been exacerbated by the uneven treatment of control measures such as the revenue aligned budget authority (RABA), the importance of powerful industry con- gressional interests, and the uncertainties surrounding budgetary maneuvers used as temporary trust fund bailouts. The concept of RABA was introduced in TEA-21 and was designed to tie actual highway spending to estimated trust fund revenues. However, allowing highway spending to increase based on estimated future tax receipt levels rather than actual tax receipts created uncertainty about the level and timing of Federal-Aid funds. During this period, political pressure resulted in reduced program levels. Furthermore, the Safe, Accountable, Flexible, Efficient Transporta- tion Equity Act: A Legacy for Users (SAFETEA-LU) authorization act of 2005 actually increased the transportation program to a level that was not supportable from projected trust fund revenues, despite warnings from the Congressional Budget Office. This in effect nullified the negative RABA projection and set spending levels back close to those of TEA-21. In addition, this funding measure

20 Federal Funding Uncertainty in State, Local, and Regional Departments of Transportation: Impacts, Responses, and Adaptations was tied to non-transportation emergency legislation associated with the war in Afghanistan, which was another break with the traditional predictable approach provided by stand-alone trans- portation authorization acts. At the same time, authorization acts and appropriations measures were tied up in complex congressional politics that delayed actual appropriations and required a series of continuing resolutions to continue the reliable flow of federal transportation funding. In addition, Congress provided up to 20% of federal transportation funding for dedicated projects, continuing the earmarking trend that had been growing for a decade. 2.5.2 Extent of Uncertainties As Figure 2-1 shows, funding uncertainties were significant between the passage of ISTEA in 1991 and the enactment of the Fixing America’s Surface Transportation (FAST) Act in 2015. During that time, there were 76 months—more than 6 years—without an active transportation authorization act. In addition, Congress has relied on General Fund transfers and annual appro- priations to keep the Highway Trust Fund solvent, which has introduced political uncertainty and increased exposure to competing non-transportation political priorities. Congressional efforts to develop a 6-year program that included a 2-cent indexed increase to the gas tax following the expiration of TEA-21 garnered little support. Instead, Congress resorted to a variety of arcane accounting mechanisms to direct other funds to the Highway Trust Fund and migrate certain programs from highway to general funding. At the same time, legislation was introduced that effectively neutered the so-called “Byrd test” that required auto- matic reductions in annual apportionments if they exceeded the latest Treasury projections of trust fund receipts. Despite an initial administration position citing what it called an “unsustainable level of highway funding” that would break dramatically with the traditional linkage of highway spend- ing and trust fund revenues, Congress ultimately passed SAFETEA-LU in 2005 after a succes- sion of 12 continuing orders extending over 23 months, providing $286 billion in transportation funding over 6 years. However, this funding was unsustainable based on the revenues flow- ing into the Highway Trust Fund. The legislation was based largely on the hope that the next administration would ultimately support an increase in the motor fuel tax. However, the actual SAFETEA-LU revenue versus spending imbalance indicated insolvency by 2008. Figure 2-1. Gaps between federal transportation authorization cycles.

The History of Federal Transportation Funding Uncertainty 21   2.5.3 Impact of Uncertainty on State Programs With each delay and change in funding structure, industry associations and lobbyists encour- aged state DOTs to provide arguments that could be used to keep pressure on Congress to act and bridge the funding gap. However, it appears not all DOTs felt seriously threatened. Never- theless, a litany of state DOT funding crisis discussions appeared in congressional testimony and in statehouses around the country from 2008 onward. In addition to the fact that Congress always came through with extensions and reauthoriza- tion measures, certain program features blunted the impacts and inconveniences of delays: • Carryover contract authority (apportionments) from previous years often mitigated the impact of any specific year obligation/contract authority limitations. • Categorical program flexibility permitted states to allocate funds between program catego- ries to meet their specific project-type priorities (e.g., bridge, interstate maintenance, and NHS needs). • Federal-Aid program features allowed “advance funding” of major capital projects through advance construction using state funds, as well as loans and loan guarantee programs, such as the Transportation Infrastructure Finance and Innovation Act (TIFIA) program and State Infrastructure Banks, and special funds such as the Economic Stimulus program enacted in 2009. • Guaranteed minimum apportionments addressed donor state contributions from states that paid more into the Highway Trust Fund than they received in apportionments. These features provided flexibility that limited the impacts of funding constraints in most states. States also adopted programs to supplement Federal-Aid funding. Major capital-intensive projects were so disruptive to regular budget cycles that additional resources were needed to minimize disruptions on the rest of the state transportation program. In addition, a growing backlog of maintenance and reconstruction needs began to crowd new construction projects. Some high-growth states with rapidly increasing transportation needs found it politically fea- sible to develop alternative sources of revenue to offset the modest increases in Federal-Aid, enabling them to advance major projects. States pursued several strategies: • Toll road development with Federal-Aid direct and indirect support • Local option sales and other taxes dedicated entirely or in part to transportation • Bond financing • P3s, including toll concessions and private activity bonds 2.6 The Trust Fund Crisis: 2007–Present By 2007, it became clear that the trust fund could not support transportation obligations through the end of the SAFETEA-LU authorization period. The congressional response was to propose a “bailout” from the General Fund, but this proposal ultimately failed. After the lapse of SAFETEA-LU, the House tried to attach an $8 billion trust fund bailout to a short-term exten- sion of funding for the Federal Aviation Administration in 2008. Following initial resistance, this measure ultimately gained the support of the Bush administration, which was facing the need for a substantial reduction in federal transportation disbursements because of reduced proceeds flowing into the Highway Trust Fund. Concerns about similar rescissions in federal transportation funding led to an additional $7 billion bailout from the General Fund in late 2009, and another $19.5 billion bailout in 2010. Despite the recommendations of two SAFETEA-LU blue-ribbon panels, the administration was not willing to consider an increase in the federal motor fuel tax, especially as the deficit grew

22 Federal Funding Uncertainty in State, Local, and Regional Departments of Transportation: Impacts, Responses, and Adaptations larger. As the recession continued, the 2-year Moving Ahead for Progress in the 21st Century (MAP-21) authorization act passed in 2012, following a gap of 33 months and a total of 10 con- tinuing orders. MAP-21 was funded by more General Fund transfers rather than increases in motor fuel taxes. Since 2008, federal transportation funding levels have been maintained by $140 billion in injections from other sources. This began with transfers from general funds and then from access- ing ever more obscure funding sources with no logical relationship to transportation, several of which were clearly one-time opportunities. For example, one funding augmentation involved the use of economic development funds imposing a 2-year time frame for project commitments that required state DOTs to readjust their capital programs and resort to off-the-shelf projects to capture the state share. This Band-Aid approach coincided with substantial earmarks by key Congress members, as well as the perpetual hope of state and local transportation service pro- viders and transportation professionals at large that the next Congress and/or new administra- tion would implement a tax increase. To the present day, no permanent solution has been adopted to bridge the significant deficit in the Highway Trust Fund. The Congressional Budget Office projects growing shortfalls that would require ongoing program reductions to align with future Highway Trust Fund revenue. Figure 2-2 shows that, without a solution to this crisis, AASHTO estimated states would see a drop of roughly 40% in federal highway funding following the expiration of the FAST Act, from $42.6 billion in 2020 to $27.7 billion in 2021. Although the one-time transfer of funds included in the FAST Act extension prevented that outcome, the current political climate in Congress, together with the challenge of gaining support for tax increases, has not yet led to a long-term solution. As the continuing nature of this uncertainty has become abundantly clear, those states and regions with the means and determination to do so have compensated for limited federal fund- ing by tapping into new funding sources at the state and local levels and, in some cases, by reducing programs. The need for new state revenues has been recognized by 33 states that have enacted increases in motor fuel tax rates between 2014 and 2019. Source: AASHTO 2018 p. 23, Exhibit 3. Figure 2-2. Estimated federal Highway Trust Fund obligations.

The History of Federal Transportation Funding Uncertainty 23   The current extent of the federal deficit and the broad range of looming social and environ- mental program costs suggests few opportunities to resort to general funding transfers to keep the Highway Trust Fund from defaulting. The resolution of these issues is uncertain. 2.7 Additional Challenges Facing States Moving Forward In addition to the trust fund crisis, states will need to manage a new type of risk moving forward: the accelerating impact of decreased fuel consumption on fuel tax revenue. The effects of flat per-gallon tax rates and cost escalation will be exacerbated by increasing vehicle fuel efficiency and modest growth in VMT. This increasing delinking of VMT from fuel tax revenue means federal and state fuel tax revenues will decline due to several forces working in concert (Maugouber and Doherty 2019): • Mandated Corporate Average Fuel Economy standards on passenger cars • Improved vehicle aerodynamics and other operational efficiencies • Hybrid and electric vehicles will eventually displace a substantial portion of internal combus- tion engine vehicles. • Potential lower private automobile ownership (via growth of automated vehicles and shared mobility services) Shortfalls in trust fund revenues compared to authorized expenditure levels have been “solved” over the last three authorizations by diverting general funds or accessing other one-time resources. This strategy may not be viable for another reauthorization cycle because of increasing competition for constrained general funds and a lack of other viable funding sources. Moreover, delinking authorization acts from fuel tax revenues coming into the Highway Trust Fund intro- duces an entirely new scale of funding gap that is unlikely to be bridged through traditional fixes at the federal and state levels. As Figure 2-3 shows, total revenue from 2019 (around $37 billion) will drop to between $32 and $35 billion by 2030, even after full travel recovery from the pandemic. Federal revenue in The Highway Trust Fund’s structural deficit can lead to uncertainty even on the cusp of the passage of a transportation act providing historic levels of new fund- ing. On August 26, 2021, as Congress was considering the Bipartisan Infrastructure Law (BIL), which would provide an infusion of general funds into the Highway Trust Fund, the FHWA held a briefing for state DOTs regarding its contingency plans for an impending Highway Trust Fund cash flow shortfall. The Highway Trust Fund has been running a continuous and structural cash flow deficit since 2008, which has been exacerbated by unusual receipt and outlay patterns during the COVID-19 pandemic. According to the FHWA, the Highway Trust Fund was estimated to run out of cash in early November 2021 if no “cash management procedures” were implemented and if no additional funding were provided by Congress. The FHWA would implement cash management procedures approxi- mately 1 month before the Highway Trust Fund cash balance is projected to fall below $1 billion, which would slow state reimbursements. The combination of pending legislation and a potential slowdown in reimbursement created a window of increased uncertainty for state DOTs. With the passage of the BIL, the Highway Trust Fund’s insolvency has been postponed to 2027 with a $118 billion transfer from the General Fund.

24 Federal Funding Uncertainty in State, Local, and Regional Departments of Transportation: Impacts, Responses, and Adaptations 2030 is expected to be almost $8 billion lower, or nearly 20% less, exclusively because of changes in fuel eciency and the early stages of electric vehicle penetration. A reduction of almost 39% is expected by 2040, and most likely 50% by 2050 (Regan 2021). Moreover, this gap does not account for increases in program investment levels, such as doubling investment in the interstate system, recommended in Committee for a Study of the Future Interstate Highway System (2019). States may need to manage federal revenue reductions if the motor fuel tax rate remains unchanged, particularly if coupled with parallel revenue reductions from state fuel taxes. Although the erosion of fuel tax revenues will be gradual, it will still be substantial, increasing by approxi- mately $10 billion per decade. Continued reliance on fuel taxes suggests the need to double or triple current tax rates. Managing this risk may require funding options that have previously been considered for the medium to long term in many states, such as vehicle sales taxes, extensive tolling, and mileage- based user charges. Although these funding options have been studied in concept, they face signicant political and practical challenges to implementation. Figure 2-3. Estimated annual national average total fuel tax rates. Source: Regan 2021. Note: 2021 dollars; assumes current tax rates.