Eight Alternative Ways to Pay for Highways in Tennessee

Increasing the tax on gasoline from 21 cents per gallon to 28 cents per gallon, as Gov. Bill Haslam has proposed, is not the only way to pay for new highways in Tennessee.

The 2015 Comptroller’s Report, for instance, lists these eight additional ways:

(1) Variable Rate and Indexed Fuel Tax Rates

(2) Vehicle Registration Fees

(3) Tolls

(4) Debt Financing

(5) Fees or Taxes on Alternative Fuel Vehicles

(6) Local Funding Options

(7) Vehicle Miles Traveled (VMT) Tax

(8) Public-Private Partnerships

Here’s how that report breaks those eight additional ways down:

(1) Variable Rate and Indexed Fuel Tax Rates 

Since 1989, when Tennessee last increased its gas tax rate, general inflation as measured by the Consumer Price Index (CPI) has increased 85 percent. The Federal Highway Administration’s measure of highway-related construction costs increased 56 percent, with greater fluctuations above and below the CPI. o Several states (18) have implemented variable rate taxes on fuels to allow fuel taxes to better adjust to changes in purchasing power over time. Measures used to adjust the rates include the CPI and/or the wholesale or retail price of fuel. Most states have placed limits on the variable rate to control for the potential volatility in fuel taxes. Some states collect sales taxes on fuel or dedicate a percentage of general sales taxes to highways. No states tie fuel tax rates to construction price indices. o Using the CPI, to account for general inflation between 1989 and 2012, Tennessee’s gas tax rate would need to increase 18 cents per gallon, for an estimated yield of $556.2 million in 2012. The diesel tax would need to increase 13 cents to account for inflation for an estimated yield of $124.8 million in 2012. o Motor fuel purchases are exempt from Tennessee’s sales tax. Applying current sales tax rates (7 percent state, 2.5 percent local) to gas and diesel fuel sales would yield an estimated $1 billion in state revenue and $368 million in local revenue. o A 1 percent motor fuel sales tax would yield an estimated $147 million. o A revenue-neutral motor fuel sales tax rate to replace the current per gallon taxes would be an estimated 6.2 percent for gasoline and 4.9 percent for diesel fuel, assuming fuel prices of $3.453 and $3.77, respectively.’
(2) Vehicle Registration Fees

A $1 increase in vehicle registration fees in Tennessee would yield approximately $6.8 million annually. o Other states’ registration fees vary from a flat fee to variable fees based on vehicle value, weight, age, horsepower, and number of cylinders. o Vehicle registration fees do not account for differences in the miles a motorist drives.
Weight-Distance Tax o A weight-distance tax is calculated based on two variables: vehicle weight and distance traveled. Weight-distance taxes are designed to collect higher user fees from heavier vehicles, which cause more pavement damage.

Four states – Kentucky, New Mexico, New York, and Oregon – levy weight-distance taxes on commercial freight vehicles. The tax is structured differently in each state. o Tennessee levies vehicle registration fees on commercial freight vehicles according to vehicle weight, with heavier vehicles paying higher fees, but does not impose a weightdistance tax.
(3) Tolls

Tolling is used by some states to generate revenue to leverage and repay the capital costs associated with a particular project, such as a bridge, and fund maintenance costs. o Tolls are direct payments for use of roads, bridges, and tunnels. o In 2013, about 5,695 miles of toll roads, bridges, and tunnels were operating in 33 states. o New electronic toll collection (ETC) tags allow drivers to pay tolls without stopping at toll booths. o Tennessee does not currently charge tolls to use any highways or bridges. Tolling within specific criteria was authorized in Tennessee in 2007, but no projects studied by TDOT have met all the criteria. o Tolls are seen as a means to better manage urban congestion. At least 10 states by 2012 had created high-occupancy toll (HOT) lanes, which permit drivers of lowoccupancy vehicles to access high-occupancy vehicle (HOV) lanes in exchange for paying a toll.
General Funds o In 2012, 33 states allocated general fund revenues to fund transportation costs; Tennessee did not. Since 2008, the federal government has increased its use of general fund monies to fund the federal transportation program. In 2010, general fund appropriations were 22 percent of highway revenues for all levels of government in the U.S. and 36 percent of local highway revenues in Tennessee. o Transfers of general fund revenues to highways, without increasing the underlying tax rates, requires reducing funding to other state priorities. o Reliance on annual appropriations of general fund revenue may affect the stability of funding and may affect multi-year transportation projects.

(4) Debt Financing

Tennessee has not used general obligation bonds or other debt instruments to finance transportation projects since 1977, and is currently one of only four states not to do so. Local governments in Tennessee use loans or bonds to finance some transportation projects.

o Debt finance is not a direct source of transportation revenue; states must repay bonds from highway user taxes or fees, or other revenue.

o Debt finance can be cost efficient if interest costs are less than rising construction costs and sufficient future revenues are available to cover bond repayments. o Debt finance can be used to leverage other private and public revenue sources.
(5) Alternative Fuel Vehicles 

Growth in the number of alternative fuel vehicles (AFVs) is expected to continue in the coming decades, but AFVs are not expected to comprise a large share of the motor vehicle market. o Owners of AFVs pay less in gas taxes than drivers of conventional motor vehicles. o Some states collect an annual fee from owners of electric and hybrid-gas/electric vehicles, who pay less in gas taxes because of their vehicles’ fuel efficiency.
(6) Local Funding Options 

Local governments are responsible for the majority of the roads in the state, though these carry less traffic. Local roads comprise 85 percent of the road miles in Tennessee, but account for 27 percent of the vehicle miles traveled. o Federal funds made up 3 percent of local highway revenues in 2011. o Options to increase or provide a more sustainable source of state highway user fee revenue would also provide additional revenue to local governments to maintain locallycontrolled roads if current distribution formulas are maintained.

(7) Vehicle Miles Traveled (VMT) Tax

Recent studies from a variety of groups have concluded that road-user charges based on miles driven, known as a VMT fee system, could provide a viable alternative to fuel taxes. VMT taxes would not decline with increased fuel efficiency or the use of alternative fuels. o VMT fees can either be fixed, with users paying a certain number of cents per mile for all travel, or variable, based on one option or a combination of options (e.g., time of travel, miles driven in different jurisdictions, congestion levels, type of road traveled on, type and weight of vehicle, vehicle emissions). o Administering a VMT fee system has become more feasible with the advent of new electronics and communication technologies, although the cost of administering a VMT system is likely to be higher than collecting fuel taxes. o The tracking technology often used in VMT programs has led to concerns about protection of privacy. o Accounting for non-resident driving presents a challenge, particularly when surrounding states are not using a VMT system. o Oregon’s Department of Transportation (ODOT) is scheduled to implement a mileage collection system for 5,000 volunteer motorists beginning July 1, 2015. ODOT is authorized to charge 1.5 cents per mile for up to 5,000 volunteer cars and light commercial vehicles and issue a gas tax refund to those participants. The program is expected to expand in coming years.
(8) Public-Private Partnerships 

Some states allow broader authority than Tennessee to use Public-Private Partnerships (P3s) to finance, operate, and/or maintain transportation projects. In some cases, P3s may be used as a debt finance option to supplement fuel tax revenues and public bonding authority funds by attracting private sector capital or leveraging federal credit assistance programs. o Additional up-front capital can accelerate project delivery as well as share or shift financial risk from the public sector. o P3s do not provide new money for highway projects. P3s require either a commitment of existing or new user fees or tolls to cover costs and a return on investment to the private partner. o Other potential concerns include the loss of public control over a highway or bridge for the length of the contract and the risk of bankruptcy or default by a private partner.

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