ACKNOWLEDGMENTS

The authors would like to acknowledge and thank the following people for their important contributions to this project:

Phil Trounstine and the entire team at the SJSU Survey and Policy Research Institute (SPRI), for their work on developing and administering the two surveys conducted as part of the project

MTI staff, especially Executive Director Rod Diridon, Research Director Trixie Johnson, Research and Publications Assistant Sonya Carter, Webmaster Barney Murray, and Graphic Artist Shun Nelson

Four anonymous peer reviewers, for their thoughtful suggestions

The advisory panel members and interviewees (listed in Appendices E and F), for their insightful comments

Nancy Hannaford, for her excellent editing and organizational skills

John Du and Allen Cheng, for their research and other assistance

Additional editorial and publication services were provided by Project Solutions Network, Inc.

Revenue Projections for Seven Options (2005 dollars) 112

Voter Preferences for Government Investment in Transportation 128

Process for Developing Revenue Forecasts 162

Projected Revenues for Mileage Fee and Motor Fuel Tax 166

Transportation Revenue Proposals in the California Legislature from
1999 to 2005 175

Trends in US and California Gas Tax Rates 184

Trends in California Gas Tax Rates, Population, and VMT 186

Introduction

Significant investments will be required to maintain, operate, upgrade, and expand California's transportation infrastructure if the state is to retain its economic position in the global economy while accommodating a 20% increase in its population by 2040. At the same time, available funding for transportation will decline significantly over the next 15 years if the current transportation finance system remains unchanged. The real value of state and federal fuel taxes, which underpin the state's transportation finance system, could fall by more than a third between now and 2020 if the rates are not increased. This report assesses the most promising strategies for resolving California's dilemma of growing needs and shrinking revenues. In particular, the report identifies a set of revenue and finance options that could provide California with a stable and sufficient core stream of transportation revenues through 2020.

California, like most states, depends heavily on state and federal motor vehicle fuel excise taxes to fund its transportation system. These revenue sources performed well for much of the twentieth century, but have been losing their effectiveness in recent decades. Fuel taxes are assessed at a flat per-gallon rate, and because the legislature has not raised them in over ten years, these taxes are losing their value to inflation. In addition, over the past decades vehicles have become more fuel efficient, reducing the amount motorists pay per mile traveled. Current efforts to introduce new, more efficient engine technologies will erode fuel tax receipts further as some motorists use less or no petroleum-based fuel. Finally, should world events or other factors cause fuel prices to rise substantially higher, drivers may respond by driving less.

A projection of revenues from the major existing taxes and fees shows that the total amount of revenue from these sources will continue to decline over the next 15 years, under both low- and high-growth scenarios (See Aggregate Projections for Major Revenue Sources, Low-Growth Scenario and See Aggregate Projections for Major Revenue Sources, High-Growth Scenario). Even in an optimistic scenario, in which the state adds 8.2 million new residents and experiences only 2.5% annual inflation over the next 15 years, the state will have less available funding for transportation in 2020 than it does today, assuming no changes are made to increase revenues.

 

Aggregate Projections for Major Revenue Sources, Low-Growth Scenario

Source: Authors' analysis. See See for an explanation of methodology.

 

Aggregate Projections for Major Revenue Sources, High-Growth Scenario

Source: Authors' analysis. See See for an explanation of methodology.

To return California's transportation finance system to a stable footing, the state's leaders must choose among a broad array of potential transportation revenue sources, as well as finance options. The state could raise or modify some of its existing taxes and fees, for example, by linking state fuel taxes to inflation or using tolls more widely to finance new facilities. California might also consider the dozens of other options some states have used or considered. To name a few, these include vehicle mileage taxes, rental car taxes, real estate transfer taxes, local income taxes, local benefit assessment districts, and selling highway naming rights (see See for a longer list of options). As for finance options, one is for the state to borrow money to spend immediately, though the bonds must ultimately be repaid by future generations. Another option is to allow the private sector to invest in public infrastructure in exchange for the right to collect tolls or other charges, a strategy that reduces the need for public investment.

Wise and careful choices made now will bring long-term benefits to California. First, history shows that California, like most states, has changed its transportation finance system only rarely. Decisions made today are likely to remain in place for decades to come. In addition, different revenue and finance options will impact the state's residents, environment, and economy in very different ways--some options will help the state to further policy goals such as environmental protections and social equity, while others will undermine them.

Methodology

This study was conducted in three phases. The first phase involved review of published literature, government reports, and newspaper databases to identify a large set of potential revenue and finance measures for analysis. In the second phase, five evaluation criteria were applied to each option in order to narrow these to a set of more promising options for further review. In the third phase, a full assessment of the most viable set of revenue options was developed. The following research methods were used throughout the study:

Review of literature on state-level approaches to raising transportation revenue

Analysis and forecasting of California revenue trends

Opinion polls of California residents

Analysis of California legislative activity

California stakeholder interviews

Analysis of state fuel tax rates and trends in the U.S.

Analysis of recent statewide ballot measures in the U.S.

The revenue options evaluated in more depth include facility-based sources, where tolls and other revenue generated from the use of the facility pay for its construction and maintenance, as well as the more traditional government taxes and fees. The four facility-based sources considered were toll roads and lanes, truck-only toll lanes, privatized rest areas, and public-private partnerships (PPPs). The taxes and fees evaluated were increasing fuel taxes by a fixed amount, indexing fuel taxes to inflation, mileage-based fees, vehicle registration fees, vehicle license fees, weight-mile taxes for trucks, a statewide sales tax, and state general-fund revenues allocated either for current expenditures or to pay off bonds that raised money for transportation expenditures.

Evaluation of Options

Each of the revenue and finance options was evaluated according to five criteria:

Revenue generation

Ease of implementation

Transportation system performance

Equity

Revenue Generation

There are many technically promising and politically feasible options to develop facility-based revenue sources in California, from truck-only toll roads in corridors with heavy freight traffic, to high-occupancy toll (HOT) lane or express lane systems (freeways with adjacent free and tolled lanes) in congested corridors where some drivers will be willing to pay a toll in exchange for a faster trip. Fully tolled highways are likely to be less popular, but the fiscal viability of several new toll roads in Orange County shows that even fully tolled roads have a future in California. Finally, privatizing rest areas has promise for improving the quality of services available to long-distance travelers.

Toll facilities can complement the statewide taxes and fees that generate a core revenue stream for transportation by providing the funding to build some high-profile projects in some heavily trafficked regions of California, where sufficient travel demand will allow the facilities to pay for themselves. This can be achieved through the creation of new public authorities, or through public-private partnerships (PPPs), in which the firms build and/or operate transportation facilities over a fixed period in exchange for the right to collect user payments. PPPs are often able to secure fixed, long-term schedules for increasing toll rates, which allows them to make larger up-front investments in infrastructure than might otherwise be possible. In terms of potential revenue generation, facility-based finance tools are by themselves unlikely to generate enough of a surplus that they can fill the gap left by falling fuel tax revenues.

Of the state tax and fee options examined in this report, three have the greatest long-term potential to generate revenue: increasing the vehicle license fee from 0.65% to 1.0% of vehicle value, a new statewide 1/4¢ sales tax, and indexing the fuel tax rate to inflation (see See Comparison of Revenue Potential in 2020 of New or Increased Statewide Taxes and Fees). These sources will retain their revenue production over time because they do not lose value due to inflation. A fourth option, converting the existing state motor fuel tax into a 1¢ mileage fee, will provide an additional revenue stream that will grow over time, but not enough to counteract the effects of inflation. Traditional revenue options (including fixed or incremental increases in the fuel tax or motor vehicle registration fees) can generate substantial revenues in the near term, but will decline in real terms, due to inflation.

Ease of Implementation

Except for the mileage fees and truck weight-mile fees, the tax and fee options would all be easy to implement because they merely modify existing administrative processes, rather than require new processes. Developing new toll facilities can have significant administrative costs, especially if new public or private organizations must be established to administer them. Most tolled roads and lanes would use electronic toll collection (ETC); some facilities would also need toll booths. Both systems are currently in use on many facilities in California and would not be difficult to implement on new facilities. The costs to collect the tolls and enforce the tolled facilities would reduce revenue. The use of PPPs involves additional public costs, as agencies would require new expertise to negotiate, implement, and manage the agreements.

Transportation System Performance

Tolled facilities offer opportunities to improve transportation system performance by making it possible to implement variable pricing as a traffic management technique. Variably priced tolls can permanently eliminate recurring congestion on a facility. Even without variable pricing, flat tolls will somewhat reduce traffic on those lanes, compared to what would occur if the lanes were free. At the same time, new toll roads have the potential to increase overall levels of traffic and thus increase congestion elsewhere on the network. Removing truck traffic from mixed-flow lanes on highways through truck-only toll lanes could generate several important improvements in system performance that would benefit the trucking industry and other highway travelers alike. Using PPPs to implement tolled facilities could have both positive and negative impacts on the performance of the system, depending upon how the agreements are written.

Most of the different tax and fee revenue options examined in this report would not directly affect the performance of the transportation system, at least noticeably. One exception is mileage fees. Mileage fees that vary by time of day, level of congestion, or axle weight have been shown to be particularly effective in reducing traffic delays, air pollution, and roadway damage, respectively. Weight-distance fees for trucks can help rationalize the movement of freight by embedding the costs of pavement damage in the cost of moving goods.

Equity

This study examined three basic concepts of equity: proportionality to user benefits, proportionality to user impacts, and ability to pay. From the perspective of user benefits, all of the vehicle, fuel, and mileage-based fees, tolls, and taxes are at least somewhat equitable, in that users pay in some proportion to their use of the system and to the costs they impose on the system. To the extent that these fees can be structured to vary according to the levels of congestion, or the environmental impacts caused by individual vehicles, these fees can be said to be equitable with regard to the costs that users impose on the system.

Nearly all of the fees and taxes examined in this study tend to be regressive with respect to income. Sales taxes, motor fuel taxes, vehicle registration fees, and vehicle license fees are all highly regressive with respect to income. Tolls may or may not be regressive, depending on the user profile of an individual facility. Property taxes are somewhat less regressive. General obligation bonds and annual appropriations, on the other hand, are progressive to the extent that they are paid from income tax revenues. Overall, the sales tax is perhaps the least equitable of these tax and fee options, because it is regressive, yet it is also paid by all residents regardless of their use of the transportation system.

Political Feasibility

New taxes and fees are generally not popular politically. The survey of California residents confirmed this (see See Comparison of Likely Voter Support for Increased Revenue Options). However, two measures showed promise of potentially gaining majority support: increasing the fuel tax by 10¢ over ten years (43% of likely voters supported, 54% opposed), and increasing registration fees and varying them by fuel economy or emissions (45% supported and 51% opposed). Given the recent success of a 9.5¢ per-gallon fuel tax increase in Washington, these options are worth exploring in California. While increasing the vehicle license fee (VLF) was supported by 42% of likely voters (with 53% opposed), the high-profile debates over the future of this tax during the 2003 gubernatorial recall election make it a less politically attractive option in the near-term than other taxes or fees. Finally, less than one-third of likely voters supported the use of general obligation bonds when they were told that paying off the bonds over 30 years would use money that otherwise might be spent for other state programs and services.

Tolled roads do not have a strong presence in California, which increases the challenge of raising support for them. A survey conducted for this report showed that converting underused carpools lanes to HOT lanes had clear majority support. Fully tolled roads have less clear political support among both the public and stakeholders. Less than half (44%) of the likely voters surveyed supported building new, fully tolled roads. However, support for tolled facilities may be different when people are asked about a particular project in a corridor they often travel. Truck-only toll (TOT) lanes were popular with likely voters, but face opposition from the trucking industry.

Conclusions and Recommendations

Transportation agencies in California have long relied on a package of different state, federal, and local revenue sources to fund the surface transportation system. Within this broad picture, state funds have played two important functions which should continue.

First, state revenues are a cornerstone of available revenues, especially for the state highway system. Unless the state grants local governments much greater flexibility in their taxing powers, locals are unlikely to be able to make up the gap created by shrinking state funds. In addition, rural counties have large road systems but small populations and tax bases, a situation that makes it especially hard for them to raise money independently. Thus, there remains an important role for the state to provide a substantial portion of the money needed to maintain, operate, and expand California's transportation infrastructure.

Second, the state has historically played a key role in setting guidelines and priorities for how funds are spent, helping to manage the transportation network so that it functions effectively as a statewide system. The state has a continuing interest in ensuring that scarce transportation dollars are spent in ways that support its key policy priorities. In the coming years, California will face a number of policy challenges that are truly statewide in scope: accommodating a surging population, meeting the needs of rural areas that are struggling economically, protecting critical habitats and valuable farmland for future generations, improving long-distance intercity travel, ensuring that residents enjoy healthful air quality, and confronting the challenge of global climate change. One of the most effective ways for the state to ensure that its policy goals are addressed in transportation decision making is to maintain its historical commitment to funding its share of the transportation system.

To address current and future funding shortfalls, so that the state can continue to fulfill these two functions, California needs a multiphased approach that considers near-, medium-, and long-term options. In the long term, fuel taxes will lose much of their power as high efficiency or alternative-fuel vehicles become more common. And even in the short term, the state barely has sufficient revenues to maintain and operate the current system, leaving little money available for improvements. In crafting a comprehensive strategy for each time frame, a sensible approach would be to pursue a variety of strategies simultaneously, given the substantial amount of funds needed and the political reluctance to pursue large increases in any single revenue source.

In the near term, state leaders could look to options with relatively strong political appeal that require no new administrative apparatus to implement, and that fare well under the equity and transportation system efficiency criteria. Of the tax and fee options evaluated, voters were most supportive of raising annual vehicle registration fees if the rate varied according to the vehicle's emissions or fuel economy. Also, despite general antitax sentiments, 43% of voters supported increasing the gas tax by 1¢-per-year over ten years (54% would oppose this). General obligation bonds could be a source of funds in the near term, though they do not generate net revenues for the state, and they reduce the level of funds available for transportation or other state programs during the years the bonds are being repaid.

In both the near and medium term, PPPs and tolled facilities have strong potential to help fund new infrastructure in certain locations. Tolls can be used to build, improve, and maintain some new facilities, although toll facilities by themselves are not a long-term solution to the state's transportation needs. As for PPPs, these reduce the need for government investment (and thus revenues) by leveraging private capital to help finance new infrastructure. Likely voters in the study's second survey were open to the idea of private companies building and operating toll facilities, particularly with state oversight. Also, privatizing rest stops has potential to finance improvements to the quality of the travel experience in the state's long-distance highway corridors. Voters support the concept strongly, though this option would generate very little extra revenue for the state and faces some administrative and regulatory hurdles.

Several of the tax and fee options may be viable in the medium or long term. For example, despite the recent, highly publicized rollback of the VLF in 2003, 42% of voters surveyed supported increasing the annual VLF from 0.65% to 1.0% of a vehicle's value (53% opposed this). As economic conditions, transportation technologies, and political realities change with time, the outlook for measures that look unacceptable today may change as well. Long-term solutions that address fundamental changes in the transportation system and vehicle fleet will likely require significant shifts in attitudes and approaches. One alternative attracting growing interest among transportation experts is replacing fuel taxes with a mileage-based fee. An advantage of a mileage-fee approach is that it charges road users in rough proportion to the benefits they receive from driving and the cost of providing them with road infrastructure, while also capturing revenue from the growing number of alternative fuel vehicles that pay little or no fuel taxes. For these reasons, mileage fees are worth exploring further, despite the low levels of public support at the moment and concerns regarding the implementation of such a system. Three pilot projects are currently underway in the U.S. to test the technical feasibility of mileage-based taxation systems.

Finally, this research suggests three ways to gain popular support for new transportation revenues by designing approaches that mesh with the interests of voters:

Voters are interested in variable fees and taxes that are higher for vehicles that have more negative environmental and energy consumption impacts. A full 64% of voters indicated support for varying registration fees based on a vehicle's pollution level, while only 33% opposed this.

Voters are more likely to support tax or fee increases that designate the new revenues to programs that voters support. Although linking revenues to specific projects limits the state's ability to react flexibly as new needs arise, designating revenues for program categories may satisfy voters without limiting decision makers' ability to plan and spend revenues according to need. The survey showed that reducing traffic congestion on freeways and highways and maintaining local streets were a high priority for more voters than was expanding freeways. Transit was also a high priority for many voters when asked whether the government should prioritize transit or streets and highways.

Regional solutions may be a feasible complement to state revenue sources. In a few cases, the survey found that a majority of voters in a region supported a new tax or fee, even though a minority supported it statewide. Because many transportation problems and solutions are local or regional in scope, increasing the options for raising funds at a local or regional level is a sensible option to fill some funding gaps.

State leaders face a daunting task to secure sufficient revenues to support California's transportation infrastructure over the next decades. They will need to sift through dozens of revenue and financing options to identify the ones that have strong revenue potential, promote state objectives such as reducing congestion and improving environmental quality, and also are acceptable to political stakeholders and the public. Despite the challenges, there are several promising solutions. This study identifies a set of options that can meet those criteria and allow California to maintain a high-quality transportation infrastructure that will support its citizens and businesses into the twenty-first century.

Future Transportation Revenues: Tough Choices Ahead

California has long been faced with revenue shortfalls that have led to the slow deterioration of its transportation system. The California Transportation Commission estimated in a 1999 report that for the ten-year time period from 2000 to 2010 there will be over $117 billion in unmet needs for California's transportation system (California Transportation Commission, 1999), and others have echoed this estimate (Bustamante, 2000).

The public also wants the government to improve the transportation system. Various opinion polls over the last decade have found that people rate the quality of the transportation system to be a problem (among the most recent are Baldassare, 2005; Bay Area Council, 2006). In a poll conducted for this report, 56% of respondents considered the quality of the transportation system as either a big problem or somewhat of a problem for them personally; a slightly larger majority of 59% thought that state and local governments should spend more on transportation (see See for additional survey results).

If state leaders do not make changes, funding for transportation will decline significantly over the next 20 years. California, like most states, depends heavily on state and federal motor fuel excise taxes (fuel taxes) to fund its transportation system. These revenue sources performed well for much of the twentieth century, but have been losing their effectiveness in recent decades. Fuel taxes are assessed at a flat per-gallon rate, and because the legislature has not raised them recently, these taxes are losing their value to inflation. In addition, over the past decades vehicles have become more fuel efficient, reducing the amount motorists pay per mile traveled. Current efforts to introduce new, more efficient engine technologies will erode fuel tax receipts further as some motorists use less or no petroleum-based fuel. Finally, should world events or other factors cause fuel prices to rise substantially higher, drivers may respond by driving less.

Over the past two decades, regional and county-level governments have developed strategies to raise new streams of transportation revenue that help compensate for the loss in state and federal fuel tax transportation revenues. County-level transportation sales taxes are now one of the largest sources of revenue for new highway construction projects and the third largest source of transit operating revenues (California State Controller's Office, 2006b, xi). In recent years, several counties have tried to pass local vehicle registration surcharges and have investigated the possibility of regional gas taxes or new tolled highways.

These local efforts have supplemented state and federal transportation monies and helped to alleviate demands for statewide gasoline tax increases over the past decade. However, local governments may have reached the limits of their own revenue potential. Now, if the state wishes to ensure a resilient supply for transportation funds, the legislature needs to restore the state's contribution to transportation investment or else give local governments new tools for generating revenue on their own. This report was written to help the state's leaders and residents assess their options for raising new transportation revenues and to select those options that will more effectively and fairly generate a core stream of monies to support the transportation needs of residents and businesses.

Choosing the Best Options: Five Evaluation Criteria

California faces a bewildering array of potential transportation revenue sources. The state could raise or modify some of its existing taxes and fees, for example by linking state fuel taxes to inflation or using tolls more widely to finance new facilities. California might also consider the dozens of other options some states have used or considered. To name a few, these include vehicle mileage taxes, rental car taxes, real estate transfer taxes, local income taxes, local benefit assessment districts, and selling highway naming rights (see See for a longer list of options).

To compare the many alternatives systematically for this report, each was assessed using five criteria: revenue potential, administrative and technical feasibility, transportation system performance, equity, and political feasibility. Taken collectively, these criteria test whether an option can feasibly succeed in raising substantial revenues, as well as how it will impact the state's travelers, economy, and environment.

Revenue generation: The first criterion, revenue generation, assesses whether the option will generate sufficient revenue to have a meaningful impact on statewide needs. In addition to assessing the near-term revenues generated, it is also important to look at the potential for the revenue option to provide stable and predictable revenues over the long term. Effective transportation planning and capital asset management require knowing five, ten, and even twenty years into the future what resources will be available to maintain existing infrastructure and services, as well as to fund major capital projects constructed over many years.

Ease of implementation: This second criterion assesses whether or not the state can collect the revenues easily. One key consideration is whether the state already has in place the administrative structure to do so, as setting up new structures can be costly, time-consuming, politically unpopular, and subject to other unforeseen problems. If new technologies are required, such as for some new revenue options that have not yet been implemented, there may be uncertainty about how well the new systems will perform. Another factor to consider is the cost of collecting the tax or fee. Some revenue options cost very little to collect (perhaps less than 1% of revenues), while others, such as tolls, can consume up to 20% of revenues in collection costs. Fraud and evasion of payment are other concerns for some options, especially those that are relatively untested, like mileage fees. Finally, this criterion also assesses whether state or federal laws and regulations would need to be changed to make the option legal.

Transportation system performance: One of the most important--yet often overlooked--criteria is transportation system performance. All taxes and fees influence economic behavior. To the extent that they affect individuals' and businesses' decisions and behavior within the transportation system, they can influence the overall efficiency and performance of the system. For example, fuel taxes raise the price of gasoline, providing some incentive for people to purchase more fuel-efficient vehicles or drive less, thus potentially reducing fossil fuel consumption and greenhouse gas emissions. If some roads are tolled and others are not, drivers may shift to the nontolled routes, increasing congestion on the free roads and decreasing it on the tolled ones. Because the behavioral shifts triggered by transportation revenue mechanisms can have substantial effects on traffic flow and the environment, it is critical to try to predict these shifts and their consequences.

Equity: Fairness, or equity, is a paramount policy concern. Equity is complex to measure, and its meaning varies greatly from person to person. This study relies on three of the many definitions used in transportation policy analysis: proportionality to user benefits, proportionality to user impacts, and ability to pay. The benefit definition states that a revenue measure is equitable if users of the transportation system pay in proportion to the benefits they receive. According to this definition, a person who does not directly use the highway or transit system should not pay taxes to support it. According to the cost definition, equitable revenue measures are ones that charge users according to the costs they impose on the transportation system. For example, the cost definition suggests that heavy trucks should pay higher fees than passenger cars for using the roadways, because heavier vehicles create more pavement damage than lighter vehicles. Finally, many policy makers are concerned with ensuring that government taxes people according to their ability to pay, and that it does not disproportionately burden the poor. The common terms used to describe these methods are regressive and progressive taxes. The income tax is a classic progressive tax, as higher income people pay a larger proportion of their income. Tolls, on the other hand, are regressive, since everyone pays the same amount regardless of income, and the toll will represent a larger share of a poorer person's income.

Political feasibility: Even a revenue option that performs well under the first four criteria is unlikely to be implemented if the public and elected officials do not support it. Many factors influence political feasibility. Revenue options that have been used in the past have greater likelihood of gaining support--both voters and elected officials tend to be more supportive of modifying existing measures than adopting entirely new ones. In addition, politically feasible measures tend to have at least a few strong champions, and relatively diffuse (or poorly organized) opponents. Finally, California's history shows that transportation revenue measures usually succeed only if they have support from both the northern and southern regions of the state.

By assessing the options according to these criteria, a well-rounded picture emerges of the strengths and weaknesses of each. No option fares consistently high across all criteria; policy makers must balance the advantages against the disadvantages of a revenue measure in order to select the one that best fits with California's goals and needs.

Study Methods

This study was conducted in three phases. The first phase entailed review of published literature, government reports, and newspaper databases to identify a large set of potential revenue and finance measures for analysis. In the second phase, the five evaluation criteria were applied to each option in order to narrow these to a set of more promising options for further review. In the third phase, a full assessment of the final set of revenue options was developed.

The following research methods were used throughout the second and third phases:

Review of literature on state-level approaches to transportation finance: There already is extensive literature on transportation finance in California (Brown et al., 1999; Dill et al., 1999; Adams et al., 2001; Taylor et al., 2001; Crabbe et al., 2002). The literature review conducted for this study built on the previous writings by identifying additional reports and articles by government agencies, nonprofits, and academic researchers across the United States that assess different transportation revenue and finance options.

Analysis and forecasting of California revenue trends: For each of the major revenue measures examined in this study, the research team developed forecasts for future growth under several different economic scenarios, taking into account past growth trends and variability (see See for details).

Opinion polls of California residents: The Survey and Policy Research Institute at San José State University conducted two public opinion polls of California residents to assess their preferences regarding different revenue and finance options. The first, a survey of over 2,700 residents, focused on people's views about the need to raise transportation revenues and their preferences for different options to raise transportation revenues through new or augmented statewide taxes and fees. The second poll asked over 800 residents their views on raising revenues by charging user fees on specific facilities such as tolled highways, and on incorporating public-private partnerships into these plans (see See for a discussion of the results and See and See for the survey instruments).

Analysis of California legislative activity: The research team identified and examined all 128 bills introduced into the California legislature from 1999 to 2005 that aimed to increase or decrease transportation revenues. From these, the team identified trends and indicators of success (see See for details).

California stakeholder interviews: The research team interviewed seventeen experts involved in transportation finance issues in California. The interviewees were chosen to reflect a diversity of perspectives. Respondents were asked their views on the value of pursuing a wide range of different revenue options. These interviews provided critical feedback during the design stage of the survey instruments for the public opinion polls. In addition, interviewees were asked how they thought the public felt about several broader thematic questions related to choosing transportation revenue options. These interviews helped identify the selection of options to analyze in this report, the content of the public opinion polls, and the final evaluation of options (see See for details).

Analysis of state fuel tax rates and trends in the U.S.: The research team collected state gas tax rate information for all 50 states and the District of Columbia, for the period 1970 to 2005. The data set was analyzed for general trends in rate changes in the context of inflationary impacts, increasing vehicles miles traveled, and increased vehicle fuel efficiency with respect to gas tax revenues (see See for details).

Analysis of recent statewide ballot measures in the U.S.: The team identifies thirty transportation-related ballot measures on state ballots across the country between the years 2001 and 2005. A review of the successes and failures of these recent ballot measures provided insight into the initiative process (see See for details).

Report Overview

The next sections of the report discuss the results of the analysis. The second section explains the current sources of transportation revenue in California and projects likely revenue yields through year 2020 for the major sources. The third and fourth sections analyze different revenue and finance options using the evaluation criteria described above. The third section evaluates two types of facility-based revenue sources, tolls and commercialized rest areas, as well as the potential to incorporate private financing in transportation infrastructure projects. The fourth section assesses various options for statewide taxes and fees: fuel taxes, mileage fees, vehicle registration fees, vehicle license fees, weight-mile fees for heavy vehicles, a statewide sales tax, and money from the state's general revenue fund. The concluding section presents a set of findings to guide decision makers as they choose from among the many options.

Introduction

California, like most states, generates revenue for transportation from a complex system of taxes and fees collected by federal, state, and local governments. This section presents an overview of all the primary transportation revenue sources used in the state.

For fiscal year 2003-04, transportation revenues in California totaled nearly $21.7 billion. See Estimated California Transportation Revenues, Fiscal Year 2003-2004 shows the major transportation revenue sources in California grouped into three categories based on how closely payment is linked to use of the transportation system:2

User charges: User charges are those taxes and fees that are most closely linked to the use of the transportation system. Generally, user charges have independent tax rates for the purpose of generating transportation revenues. User charges include fuel taxes, tolls and transit fares, severance taxes, and other state and federal fees that are assessed only from users of the transportation system.

Property access charges: Property access charges are similar to user charges in that the payments are linked to the benefits landowners receive from the transportation system. However, property access charges differ from user charges in that they represent annual or one-time fees that are collected from developers or property owners in exchange for providing infrastructure or transportation services that allow people and goods to access the property. Revenue sources from property access charges include property taxes, development fees, and benefit assessment districts.

Subsidies: Subsidies are those taxes and fees whose collection bears no connection to the use of the transportation system but whose revenues are dedicated for transportation purposes. Subsidies are collected at both the state and local level and include sales tax revenues from retail purchases other than motor fuel, as well as general fund revenues that are used for transportation purposes.

This section describes the characteristics of each funding source, how much revenue each generated for fiscal year 2003-04, and any statutory and programmatic limitations that restrict the use of funds for highways, transit, local streets and roads, or other specific purposes. The section also presents revenue projections to the year 2020 for the major transportation revenue sources, using three alternative growth scenarios. It concludes with a summary of the current state of California's transportation revenue system and projects the overall revenue picture to 2020 in the absence of any transportation finance policy changes.