Abstract
Fuel taxes have historically been the key revenue source for a great deal of transportation infrastructure, especially roads. For many reasons, such as reduced fuel tax receipts, governments at all levels have begun to explore additional financing options. This chapter explores an option that local governments have available to them in many states: local sales taxes earmarked for transportation projects. This chapter briefly discusses the literature on local sales taxes, the diversity of the laws regarding local sales taxes earmarked for transportation, potential consequences of increased reliance on local sales taxes earmarked for transportation, and briefly discusses a similar revenue source—the local fuel tax. This research is important to understanding the changing patterns of how public transportation is being financed in many states, and if the spread of non-earmarked local sales taxes are any indicator, how it is likely to be financed in many others moving forward.
TopIntroduction
Transportation financing has been evolving in the United States for many decades. The federal government has devolved a great deal of responsibility for the maintenance of roads and highways to states and local governments, and states have devolved responsibility increasingly to local governments. These same local governments are often responsible for other areas of transportation expenditures such as public transit and airports. In addition to the changing roles that different levels of government are playing, the way in which transportation is financed has been changing dramatically. This is in part due to the declining revenue capacity of what has historically been the primary source of revenue for transportation, the fuel tax. The revenue raising capacity of the fuel tax plateaued in the 1990s and has been steadily declining since then. While many states have increased their rates, it has not been sufficient to keep up with inflation and this reliance is not sustainable (Puentes and Prince 2003; Yusuf and O’Connell 2013; Bartle and Chen 2014; Zhao, Guo, and Coyle 2015). This chapter examines a revenue source that has been growing in importance over this same period that is available to many local governments, local sales taxes earmarked for transportation. As responsibility to fund transportation projects devolve to local governments it is critical to understand the ramifications of the ways in which local governments fund it and too little attention has been given to earmarked sales taxes. Local sales taxes earmarked for transportation are a revenue instrument available in many states and are an option to not only increase revenues but to link transportation expenditures to a sustainable revenue source. Other chapters in this book discuss financing concerns and opportunities from the perspective of user fees, tolls, public private partnerships, and this chapter expands upon those by adding local option taxes with an emphasis on sales taxes, but includes a brief discussion of local fuel taxes as well.
What is the state affairs in transportation finance? According to a report published by the National Conference of State Legislatures on transportation finance (Rall et al. 2011) transportation finance is not on a sustainable path. Federal funding, such as federal-aid highway and transit programs and congressional earmarks, make up approximately 20 percent of highway and transit spending. Two-thirds of federal revenue is generated by the fuel tax followed by general fund expenditures and the vehicle tax. States have taken on a more substantial role than what they have had historically. States are responsible for almost half of surface transportation funding and approximately 20 percent of transit funding. Approximately a third of state revenue for transportation comes from the state motor vehicle fuel tax, with a fifth being generated from the vehicle tax, another fifth from other forms of taxation, and the remaining coming from debt, tolls, and general funds. The laws governing how these funds can be used varies tremendously. Twenty-six states have either constitutional or statutory provisions that earmarks1 state fuel taxes for highways and roads, for example. Local governments, which are the focus of this chapter, are responsible for approximately 30 percent of surface transportation funding and are responsible (or own) more than three-quarters of the nation’s roadway miles. Local governments rely heavily on general funds, which make up almost half of the money spent on transportation projects, property and other taxes, debt, with very little revenue being generated by tolls and vehicle taxes (less than ten percent combined) (Rall et al. 2011, Oliff 2015). The current emphasis on fuel taxes is largely recognized as unsustainable due to the prevalence of lower fuel consumption vehicles and the lack of rate adjustment to incorporate inflation (Yusuf and O’Connell; O’Connell and Yusuf 2013; Zhao, Guo, and Coyle 2015). This snapshot of transportation finance suggests the need to better understand the specific revenue instruments being used by local government, for both roads and highways and transit for which they are responsible for approximately 60 percent of the expenditures. Furthermore, politics and citizen perceptions are also critical factors. The political acceptability of a local sales tax earmarked for transportation has made them a popular choice (Wachs 2003a, Afonso 2015a) and a lack of understanding of the nature of fuel taxes have made them less popular and feasible (Yusuf et al. 2011; O’Connell and Yusuf 2013).
Key Terms in this Chapter
Tax Earmarks: Tax instruments where the revenue generated must be used on specific areas of expenditure.
Ability to Pay Principle: An equity principle that states that fairness should be assessed by vertical and horizontal equity. Where vertical equity dictates that taxpayers with different abilities-to-pay should have different tax burdens (i.e., the idea of progressive versus regressive taxation). Whereas, horizontal equity dictates that taxpayers with the same ability-to-pay be subject to the same tax burden.
Jurisdictional Eligibility: The criteria that establishes which governments are permitted to levy the revenue instrument. Developed with regard to local sales taxes by Afonso.
Discretional Authority: The criteria that determines the level of autonomy that governments have over the levying and use of revenue of tax instruments. Developed with regard to local sales taxes by Afonso.
Leviathan Model of Expenditures: A model that suggests earmarked revenue will be dedicated to popular programs and will simply replace existing revenue streams and due to the fungible nature of money, the ultimate outcome may be that the recipient program does not have any additional monies allocated once the earmarked revenue is introduced.
Flypaper Hypothesis: A hypothesis that suggests that earmarked revenue, often intergovernmental transfers, tends to “stick” to the program that it is earmarked for. The outcome, if the flypaper hypothesis is accurate, is that overall expenditures will increase when new earmarked revenue streams are introduced.
Benefit Principle: An equity principle that suggests that those who use the service or program should bear the burden of its cost, and that use and burden should be proportional.
Rational Model of Expenditures: A model that suggests earmarked revenue that only partially funds the recipient program will simply be treated as an increase in general fund revenues. Thus, the likely outcome is that the recipient program will only receive an increase in allocation that is a fraction of the earmarked revenue due to the fungible nature of money.