Transportation Policy Academy 2013 – DC – Part 9: Panel Discussion on Virginia and Maryland Transportation Funding Plans

Day three of the CSG Transportation Policy Academy in Washington, DC began with a panel discussion on the transportation funding packages approved this year in Virginia and Maryland. On the panel were Virginia Speaker of the House William Howell, Virginia Assistant Secretary of Transportation Matt Strader, Maryland House Majority Leader Kumar Barve and Maryland Assistant Secretary for Transportation Policy and Freight Bruce Gartner.

Virginia’s Road to the Future

Howell began by talking about how Virginia has funded transportation projects in recent years.

“Virginia has a triple A bond rating,” the Speaker noted. “We borrowed $4 billion for transportation projects that were pretty much needed but that wasn’t the long-term answer. We’ve been great utilizers of public-private partnerships. Virginia … is the second largest user of public-private partnerships. We have more activity going on in Virginia now than any other country in the world except for the United Kingdom. I think we have more public-private partnerships going on in Virginia than all the rest of the states combined. And it’s a great tool for us. … We’ve taken some money from the General Fund, which we get big battles with the other side about because my contention has always been that transportation is a core responsibility of state government and to put all its funding off in a separate silo to me isn’t necessarily the best way to approach it. We’ve been successful in getting some money out of the General Fund particularly when we have revenue surpluses, a portion of that surplus goes to transportation. … But all of these things weren’t enough.”

Enter House Bill 2313, known as Virginia’s Road to the Future. The Speaker said bipartisan compromise was necessary to get it across the finish line in 2013.

“I get in trouble with some of my conservative friends when I talk about the fact this was a compromise. This was a true compromise and it was a true bipartisan effort. In the Virginia House we have 68 Republicans and 32 Democrats. You could say we don’t need (the Democrats) but we do because a lot of my Republicans didn’t want to vote for the plan. So I worked with the Minority Leader and the bill would not have gotten out of the Finance Committee had it not been for a couple of Democrat votes. The bill would not have passed the first time on the floor when it went over to the Senate were it not for a couple of Democrat votes. And then the final vote, when the compromise had been done, out of my caucus the 38 had 33 that voted against it so it wouldn’t have passed without a good solid Democratic vote. It was a true bipartisan effort. In the Senate, I think there were more Democrats that voted for it than Republicans and I like to tell people now that this is how Washington should work. … We do have the ability to reach across party lines and reach across the aisle. We do have the ability to come up with compromises. There’s part of the bill that I don’t like but there’s parts that I embrace. It’s a true way to get something done.”

Howell noted that regional transportation funding is a key part of the legislation.

“We’ve ended up with a bill that’s going to generate about $1.2 billion a year once it’s fully up to speed that we desperately need. It’s unique in the sense that our transportation problems are primarily up here in Northern Virginia and in Hampton Roads, down around Norfolk-Virginia Beach-Tidewater. … They’re going to pay more of a sales tax … and more of some other types of taxes but they get to keep 100 percent of that locally generated money. But that’s where the need is. It’s not right maybe for the people in southwest Virginia who don’t have transportation problems to have to pay to fix Northern Virginia and Hampton Roads.”

Assistant Secretary of Transportation Matt Strader further outlined why the legislation was necessary.

“The principal problem we were facing in Virginia is that we have a special fund for transportation,” Strader said. “We draw very little money from the General Fund—a little bit of sales tax, surplus. But the vast majority of our funding comes from taxes and fees that are specifically dedicated to transportation. The largest source of that revenue from the state level is obviously the gas tax. Having not been raised since 1986, the value of that gas tax purchasing power dropped down to about eight cents per gallon. And with the increase in CAFÉ standards—something that we’re all going to continue to see over the coming years—we were actually seeing that despite having more vehicles driving more miles on our roads each year, our gas tax revenues either remained relatively flat or actually declined each year. So you kind of had that growing gap and the gas tax being the principal source of maintenance funding and vehicles and vehicle miles traveled being indicators of greater maintenance need, your gap just continues to grow each year.”

Virginia Gov. Bob McDonnell had some specific ideas about what he wanted in the legislation, Strader recalled.

“From the governor’s standpoint, he really wanted to find a mechanism to replace the gas tax in its entirety,” said Strader. “He did not believe that just indexing the gas tax would be a long-term solution. Theoretically we could have done it. I don’t know about politically whether gas tax indexing would have really worked. But it wouldn’t have been a long-term solution and given that it took 27 years to get something done the last time, we really wanted to … do something that we won’t have to deal with this issue for a really long time to come. So the governor initially proposed eliminating the gas tax in its entirety and increasing our General Fund sales tax by 0.8 percent but dedicating all of that 0.8 to transportation. We coupled that with a few other fee increases, some tax reform. That legislation passed the House almost in the exact form that the governor (proposed it).”

“It went over to the Senate. The Senate typically has a little bit different theology than the House to say the least and they turned it into a massive gas tax increase. And then the bill went to conference. The governor, myself, my boss the Secretary (of Transportation), the Speaker and several other members of the House and the Senate got together and hashed out a compromise. As the Speaker said there are parts that he doesn’t like, there are parts that the Governor doesn’t like, there are parts that Democrats in the House and the Senate don’t like but there’s something for everybody to like and a little bit for everybody to dislike and that’s really the only way you’re going to get something done.”

Strader took legislators through what ended up in the final legislation and why certain policy decisions were made.

“Ultimately what the bill did is that it eliminated our 17.5 cents-per-gallon excise tax on gasoline. It replaced that with a 3.5 percent tax on gas and 6 percent tax on diesel at the wholesale level. So that amounts to a little more than a six cents-per-gallon reduction in taxes on gasoline. So your everyday consumers are paying less in gas tax. It’s about the same for trucks once you add in all the various taxes that existed on diesel fuel. We decided to leave that rate higher because obviously the heavier the vehicle, the more damage it causes the roadway. To offset the reduction in the gas tax, the legislation included a 0.3 percent increase in our sales tax. Those two changes combined are essentially revenue neutral in year one. But when you look at having a sales tax on gas—and let’s be honest, I don’t think we’re ever going to see prices on a sustained basis below $3 a gallon—and the sales tax being tied to economic activity grows at a much higher rate. Last year for example, sales tax revenues grew at about 3.5 percent while motor fuels tax revenues were actually negative 1 percent. So making those changes in the long term without substantially increasing the rate of taxation you’re going to generate more revenue because it grows at a higher rate.”

“The conference report included a $100 alternative fuel vehicle fee. The purpose behind that is obviously hybrids pay less in gas tax, certain alternative fuels pay no gas tax. We ended up through the governor’s amendments reducing that down to $64.”

“The sales tax prior to this year in Virginia had been 5 percent since Gov. Warner but the sales tax on motor vehicles had been only 3 percent so there was a 2 percent exemption. So we eliminated part of that exemption in the conference report with 1.3 bringing the rate to 4.3. The governor knocked that down by 0.15 so you have a 1.15 percent elimination of that exemption on the titling tax and sales tax on motor vehicles.”

“We increased the amount of general fund sales tax dedicated to transportation. The governor like the speaker believes that transportation is a core function of government and ought to receive a little bit of General Fund revenue each year. … All of that stuff is statewide.”

“The last part of the statewide piece is the Marketplace Fairness Act. … In Virginia, like every other state we can’t collect sales taxes on online purchases. It’s actually in the code. There’s no mechanism to do it with all the differences between each state’s sales tax. The governor has been a big proponent of supporting that legislation in Congress. He believes that’s revenue we should already be collecting and he would dedicate the vast majority of any future revenues derived from the Marketplace Fairness Act to transportation. Through the conference process, a portion of that was also dedicated to K-12 education. If that provision does not pass Congress, the conference report included a trigger that would increase the sales tax on gasoline to 5.1 percent. That is still lower than 17.5 cents-per-gallon when you do the equivalent rate calculations but not by much.”

“One of the big challenges in Virginia is many folks in southwest Virginia don’t feel that transportation infrastructure is really a big challenge. There was a lot of reluctance among some of the rural members of the General Assembly to support a transportation bill that they did not feel held any real benefit for them. There was also some reluctance especially on the Democrat side but also some of the Republicans who wanted to see mechanisms in place for Northern Virginia and Hampton Roads to raise additional revenue on top of what we were doing on a statewide basis. So the conference report included several additional increases in taxes or fees in Northern Virginia and Hampton Roads. In both jurisdictions, there’s an additional 0.7 percent increase in the general sales tax. In Northern Virginia, there is a 15-cents-per-$100 grantor’s fee, essentially a fee on real estate transactions and that type of stuff. And then there’s an additional 2 percent transient occupancy tax, a tax on hotels. Then in Hampton Roads, there’s an additional 2.1 percent sales tax on gasoline. That sales tax has existed in Northern Virginia for a long time now to help fund some of the light rail transit projects up in Northern Virginia.”

“All said and done when you look at our six-year improvement program, which is essentially everything but maintenance, it’s about a $6.2 billion increase over the six-year period. That’s a 38 percent increase over the prior year for just VDOT and DRPT, our rail and transit department. It’s $2.5 billion in new construction funding. It’s a little over half-a-billion dollars in additional funding for transit and rail. Through this legislation over the six-year period, we’re essentially doubling our budget for transit. And then Hampton Roads through their additional taxes will generate an additional $1.3 billion and then Northern Virginia will generate another $1.9 billion.”

It was the elimination of the gas tax in favor of sales tax revenues that attracted the most attention in policy circles—and the most criticism. To some, relying on a general sales tax for a portion of transportation revenues signified a step away from the concept of a user fee. Howell said he was unmoved by those concerns.

“There was some objection in the Senate particularly about the fact that the sales tax was not a user fee,” he said. “I really don’t see the magic in that. Our job is to raise money and do it in the most efficient, most effective way and I think that’s what this plan does. There was also talk about the sales tax being regressive. I can’t think of a more regressive tax than the gasoline tax. If I’m some worker and I’ve got to get in my car and drive 30 miles to the site each day, that 17.5 cents-a-gallon is a lot more regressive than three-tenths of one percent on the sales tax. … Again, there’s parts of this plan that some people don’t care for.”

Strader said the Virginia plan isn’t as much of a divorce from the user fee concept as it would first seem.

“We see a direct nexus between the sales tax and transportation,” he said. “There is not a single thing you can pay a sales tax on that has not moved through at least one if not multiple facets of our transportation infrastructure be it the port, be it Dulles International Airport, be it any one of our rail lines, intermodal facilities, I-81, I-95. Anything you purchase has somewhat of an impact on our transportation infrastructure. It’s causing damage or leading to congestion or whatnot. So we didn’t see it as completely cutting ties between revenue and the infrastructure.”

“Part of this legislation is also looking at other user fees. You have the alternative fuel vehicle fee, which is not very popular among some folks. You have the titling tax. … We have a very robust truck permitting program, which (Del. Joe May) has been a major driver of reform to that generates revenue. So there’s not a complete cutting of ties to user fees.”

Maryland’s Transportation Infrastructure Investment Act

“We took a different approach from Virginia,” Maryland House Majority Leader Kumar Barve told policy academy attendees. “Let me say that like Virginia, we have a triple A bond rating and like Virginia we’ve been hurt by what’s happened in the federal government over the last several years.”

“The initial proposal that Speaker Mike Busch on our House side had and some of the initial proposals were very similar to the Virginia plan and we found that with the exception of the gas station owners who liked it, nobody seemed to like it much and we were going to be criticized for raising taxes anyway so we decided, y’know what, if we’re going to be criticized, let’s get some real money and do projects. So here’s what we did. We are phasing this in between July 1 of 2013 and July 1 of 2016. We are in step increments phasing in a 3 percent sales tax on gasoline at the wholesale level. Number two, we are indexing the existing 23.5 cents gasoline tax at the retail level, indexing that to the rate of inflation. Number three, we are also indexing starting in 2015 transit rider, bus fees, light rail fees because we really feel everybody needs to participate in this. We have a minor vehicle registration fee increase of $3.50 and that’s going to be dedicated to our statewide medevac system.”

“Basically the plan is very heavily based on the gas tax. The last time we raised the gas tax was 1992 and since then the only other time we’ve increased revenue for our transportation trust fund was when our Republican Governor, Bob Ehrlich, was in office. He’s a Republican and he’s more conservative and he has more of a representation base in the rural parts of the state of Maryland. They didn’t want a gas tax increase obviously because they have to drive further so instead he proposed—and I voted for it—doubling of what you have to pay to renew your licenses in the state of Maryland, which means my Mom, who at the time drove to and from the Safeway, ended up paying the same amount of increased tax as I do and I drive 25,000 miles a year. We approached this from the perspective of the people who drive the most should pay the most.”

“We didn’t think it made a lot of difference with respect to how we got the money. To us we really wanted to be able to over five years raise $3.2 billion. It’s our hope we’ll be able to do that. Look, it would be great if we’re all driving Nissan Leafs and Teslas. We don’t think that’s going to happen in the next 10 to 15 years and if it does, then we may have to make a revenue neutral change to this plan so that we get the same amount of money but we become less dependent (on the gas tax). We have always taken the attitude in Maryland that revenue neutral changes are relatively easy to do.”

“On the Senate side, some Republicans voted for this. On the House side, I don’t think any Republicans voted for it. We have overwhelming Democratic majorities in both of our chambers in Maryland so we were able to do this.”

“Another thing we did is we introduced an amendment to the Maryland constitution creating a lockbox. The money is going into the transportation trust fund and if the voters approve this at the ballot (box), diverting money from transportation to other functions of state government will require basically the assent of the governor and 3/5ths of both chambers of the legislation, which our Republican friends pointed out ‘you’ve got more than 3/5ths of the votes so that’s not a restraint on you’ but life isn’t going to be like that all the time and simply being able to get 3/5ths of the vote in a chamber is a substantial amount. … I like to tell my friends in the minority party that if you think getting votes is so easy, try having my job. Trust me. We may make it look easy but it’s not easy getting votes for difficult things. I expect that by the way to pass.”

“There was a lot of hesitancy from a policy perspective on doing the lockbox and I have to confess that I was one of those people who (was hesitant). One of the reasons Maryland has a triple A bond rating is we don’t pigeonhole money. We have a lot of flexibility in our budget. … I think there are two models of how you can budget. There’s the California model, where they pigeonhole a lot of things. They really dedicate stuff to specific funds. And Maryland, up until this lockbox here, was very flexible with respect to where the money goes. And I have to say I would rather err on the side of flexibility but there was a very strong feeling among the members—moderate Democrats to conservative Democrats—who wanted to vote for a tax increase but needed to have this kind of assurance to their constituents that the money was really going to go to transportation. Many of our friends in the minority party pointed out that we had raided the Transportation Trust Fund. Well, governors from both political parties did that because we’ve been through bad budgetary times and you gotta do what you gotta do to balance the budget. This law I believe has language that says the money has to be paid back even if that diversion is enacted with the 3/5ths vote.”

“The politics obviously are different in our two states but that argument from the rural parts of Maryland that ‘you’re perpetrating a war on the shore,’ which I don’t think is true but I love that slogan because it rhymes. … I reminded my friends from the rural areas that in the state of Maryland we try to take a one Maryland approach and we have an education formula, which we think is responsible for us having the best public school system in America but it’s one where the people of Montgomery County, Maryland pay taxes and those tax dollars go to rural Maryland for schools on the Eastern Shore and Western Maryland and Southern Maryland. So if it’s good enough for me to pay for your schools, it should be good enough for you to pay for my transit and roads. They didn’t like the argument but I liked it and that’s why I made it.”

“I suspect that the experience of Virginia is probably more relevant to most of the states in the union. Very few states have overwhelming Democratic majorities as we do in the state of Maryland.”

“Another objection that came up was that ‘you guys in Montgomery and Baltimore and Prince George’s counties, you’re going to put it all into transit.’ And we do put a lot of emphasis on transit … but the fact of the matter is if you want to go from Gaithersburg to most places in Montgomery County, driving is the way to do it. But if you live in Montgomery County and you work in D.C., basically you’ve got to use the Metro. You’ve got to do it.”

“We also by the way have a highway user formula. We give some of our transportation money to our 24 jurisdictions. We have 23 counties and the City of Baltimore. They get some money for local transportation out of this but the vast bulk of this is going to go for big projects. … We are hopefully going to have a transit-way that’s going to link the high-tech corridor of Montgomery County to the Shady Grove Metro. We’re going to try and build the Purple Line, which kind of runs parallel to the Beltway. The (Metro) Red Line is kind of a U shape and we want to link it so that if you’re in Shady Grove and you want to go to Glenmont, you don’t have to go all the way into the city to do that. There’s also a major transit project in the city of Baltimore that we want to finance as well. But we feel that this (package) is going to be rich enough that it will allow us to do intersection upgrades, to fix roads that need to be fixed. We have the same needs that Virginia has. Montgomery County (MD), Fairfax County (VA), Prince George’s County (MD), Loudoun (County) (VA)—these are growth jurisdictions and we need to move people from point A to point B as quickly as possible.”

“We also have a trigger to increase the gas tax even more if there’s no internet sales tax. I personally don’t think the U.S. federal government is going to allow sales taxation of internet sales.”

Maryland Assistant Secretary for Transportation Policy Bruce Gartner recalled the last time Maryland’s gas tax was raised in 1992.  

“At the time, you anticipated the gas tax increasing every five years,” he said. “The tradition in Maryland in the ‘80s was because it didn’t keep pace with inflation, you would adjust it and you would get to vote on projects. (In 1992) there was talk about indexing, particularly in the Senate Budget and Tax side. Those members aren’t around in the legislature anymore but they wanted us to come back and show the projects every five years. We have a six-year program. And basically over the course of years, in a good economy, we kept continuing to add projects with growth in the corporate income tax that we share, vehicle titling tax that we get into the Transportation Trust Fund to fund transit, highways, everything. We had been doing well on that front and had been able to ride it out but those times were ending.”

“We weathered the storm through a lot of other fiscal issues in Maryland and the transportation side of things really had to wait. I mean we’ve been trying to go at this at the department and looking at ways to do it and be prepared for the governor and the (House) speaker and the (Senate) president to say ‘this is the year.’ Well this was the year. We tried last year and we basically found that the general fund side of the house was pretty much in good shape and facing a transportation revenue increase was not as daunting for elected officials as going back … to the public and saying ‘we still can’t fund any transportation projects.’ Going to the polls and saying ‘we still don’t have anything for you’ particularly in Prince George’s County and Montgomery County in Maryland and it’s (those counties) and Baltimore City that really get a vote on a revenue increase in the state of Maryland.”

“We have over $12 billion in need for just the number one projects in every one of the 24 jurisdictions in the state of Maryland. We only passed a revenue package of $4.4 billion over six years so obviously we’re still not doing everything that every jurisdiction wants but what we were able to do within the department is really think about what level of revenue that we could expect to get, what was politically realistic in terms of an increment. We had a blue ribbon commission back in 2011 that set out this target of about $800 million per year. At the end of this package we’re getting pretty close to that because it is phased in so we kind of met that. But how do you match that up with what you’re going to do? … We were basically able to go to each delegation and say ‘look, this is what we think we can do of your high priority projects.’ A combination of highway and transit needs. And they basically said with very few arguments back ‘yes, you’re right, those are our needs.’”

“What really brought us together was just stopping the discussion about what is the best little thing to do and saying ‘we need to do this.’ … The beginning of February we basically said ‘okay, president, speaker and the governor, here is what we’re going to support.’ That changed in minor forms throughout the process but basically the bill that passed the House passed the Senate two weeks later with no changes. … Very much worked out in advance so you could see what was going on. There had been years of hearings so it’s not like there were backroom deals. … People have had their chance to say what they support, what they don’t support.”

“We have been announcing throughout the state the increases in funding for different projects. On September 3rd, we basically put out our full six-year plan that includes all the projects that could be funded with the revenue increase.”

“The gas tax isn’t going to be there forever but for this six-year period, we definitely needed to do something. If we need to adjust it (later), we’ll look at that then.”

“Having a Republican governor in your neighboring state, which is very much an economic competitor particularly for the Washington suburbs, do something first, whether it’s a reduction in the gas tax or an increase, when you’re faced in the Washington region with the worst congestion in the country. Having that state go first, it woke everybody up. It really did.”

“In our bill we did … two provisions in there to basically say ‘look at innovative financing and come back to us with a report for the next session about what you can do to address either local needs through innovative financing or what you’re doing to leverage the dollars that they just took a vote on to increase taxes.’ … Then there’s a task force that has been meeting this fall to talk about two different things … one is local option revenue. To say to each one of the 24 jurisdictions what can we allow you to do that will allow you to raise transportation revenues because the state basically owns the revenues of the gas tax and the registration fees and everything else. Do we give local authority to anything like that? … We will be studying whether or not there should be revenue sources that the locals can raise so that they can increase some of the local road maintenance dollars and we’re also going to have that concept of the regional tax that might be for transit. Whether or not the Washington area counties can kind of join together to figure out what they need to do to fund even more transit needs in the Washington, D.C. region and in the Baltimore MPO also, what they could do there, what options could they look at because … in Maryland we are very much a state-funded transportation system. The Baltimore system and 100 percent of the capital and operating costs subsidy for the (Washington Metropolitan Area Transit Authority) system are paid for out of those transportation revenues. So we don’t even have the base of local transportation support, with the exception of one county. … In Montgomery County, they fund a very significant local bus system. So they do more than any other (county in the) state and they’ve done more even without the state they’ve advanced constructive road highway projects for design so that they can get farther up in the chain for when we’re ready. Some of their projects were ready for construction because they had already funded the design and engineering as opposed to other jurisdictions that were not ready and we were funding design. So there are those elements that are not formula-based but addressing regional or local needs in the future.”

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