William D. Fay

President and CEO

Mr. Chairman and members of the subcommittee, I am Bill Fay, president and CEO of the American Highway Users Alliance. Thank you for inviting us to testify at this very important and timely hearing on highway funding for 2003 and future years.

The Highway Users is one of the most broad-based and diverse advocacy groups in the nation. We are like a consumers’ group for motorists and businesses who pay the taxes that support the federal highway program. Our vast membership includes the most visible user groups — AAA and the nation’s truckers, buses, and recreational vehicles — but also those who ensure their safety — 3M, insurance companies and the traffic service industry. It includes businesses that rely on efficient roads to ease the flow of raw materials, supplies, and finished products — such as farmers, auto and auto parts makers and dealers. And our members include those who build roads and mine, drill, and refine the products essential to highway travel — petroleum, asphalt, cement, and aggregates producers, and many others. Our 45 million members have a strong interest in how much the government collects from motorists and how that money is invested after it gets to Washington.

The subject of today’s hearing includes both short- and longer-term issues: the Administration’s FY 2003 budget proposal and the major funding issues pertaining to next year’s reauthorization legislation. Putting first things first, I will begin with the 2003 budget and then discuss funding for reauthorization.

FY 2003 Highway Funding

Transportation Secretary Mineta foretold the drop in guaranteed highway funding when he testified before this committee nearly three weeks ago. Last week, the President’s FY 2003 budget confirmed that the guaranteed obligation limitation for next year will be approximately $8.6 billion less than the $31.799 billion provided in 2002. That’s more than a quarter of the program (a 27 percent cut) in one year.

According to the Administration, the cut is a straight-forward calculation based on a substantial reduction in FY 2001 tax receipts relative to previous estimates combined with revised, lower estimates of FY 2003 tax receipts. Questions, of course, remain regarding the accuracy of the Treasury Department’s accounting of those receipts, and I understand the General Accounting Office (GAO) is reviewing Treasury’s calculations for a report due in May. Apparently, one error was found after the principal budget documents were sent to the printer but in time for the more accurate figures to be reflected in the Department of Transportation’s own budget documents. Correcting that error resulted in a $600 million increase in trust fund tax receipts and a corresponding increase in the FY 2003 guaranteed highway funding.

The possibility of further errors in the calculation of trust fund receipts is important, and we look forward to reading GAO’s final report. Assuming, however, that the current figures are generally correct, we have a simple point to make about the FY 2003 budget: a 27 percent cut in one year in the nation’s largest infrastructure program is too much. It would have serious economic repercussions just at a time when the country is struggling to get out of a recession, and it would be a devastating blow to our national transportation system.

Mr. Chairman, a week ago, when initial expectations were for a $9.1 billion cut in guaranteed funding for highways (rather than $8.6 billion), we obtained a Federal Highway Administration chart showing the potential impact on each state’s obligation limitation. The losses spread across the states are nothing short of calamitous. Nevada, for example, would lose over $53 million of the $200 million it received this year. Similarly, Oklahoma would lose $118 million out of its $428 million in 2002 receipts. While the $600 million downward revision in lost funding will mitigate those reductions slightly, the cuts, as a percentage of the states’ total federal funds, are still dramatic.

The Cost of Losing One’s Job to Families and Society

As you have heard from others, funding cuts of this magnitude will result in lost jobs, perhaps hundreds of thousands of jobs over time. Far too many of those jobs will be lost before the fiscal year even begins as contractors begin laying off workers in anticipation of the project delays that will inevitably follow. These are high-paying jobs that induce many other jobs. Such dramatic changes in employment would increase the call of federal unemployment compensation funds and other social programs, as well as cut the flow of tax dollars from those affected families and individuals. Attached to my testimony is a 1984 study released by the Joint Economic Committee on the social effects of losing one’s job. It paints a dire picture of personal financial hardships, loss of health insurance, and rising mortality, divorce, criminal activity, and suicide. Quoting from that study, “The longer [joblessness] endures, the more likely it becomes that frustrations will be vented on the family — or on the rest of society.” While I wish the study were more recent, it is unlikely the torment of losing one’s job today is any less consequential than it was in 1984.

The Life-Saving, Time-Saving, Fuel-Saving, Economic and

Environmental Benefits of Road Investments

Equally important from the perspective of motorists, a 27 percent reduction in funds will delay the important benefits of roadway improvements — the safety benefits of reducing crashes, injuries, and fatalities; the air quality, time-saving, and fuel-saving benefits of relieving traffic congestion; the economic and productivity benefits of speedier deliveries. These are the primary reasons that fuel taxes are the taxes that Americans pay most willingly. They realize the benefits of a safe, uncongested, and accessible highway system to themselves, their families, and their businesses. But those benefits are only realized if their tax dollars are used as intended.

In 1999, The Highway Users published a study identifying the worst traffic bottlenecks in the country and the benefits that could be realized by improving traffic flow at those sites. Unclogging America’s Arteries: Prescriptions for Healthier Highways showed that very modest traffic flow improvements at each of our 167 worst bottlenecks would result in 287,000 fewer crashes over 20 years, including 1,150 fewer fatalities and 141,000 fewer injuries; they would reduce carbon monoxide emissions by 45 percent and volatile organic compound emissions by 44 percent, while carbon dioxide emissions would fall by 71 percent at those sites; they would slash fuel consumption by nearly 20 billion gallons; and of course, they would reduce travel time by an average of 19 minutes per trip. With polls showing that time management is one of the greatest challenges facing American families today — 38 minutes less for a commuter driving to and from work represents more time for family, work, errands, and recreation.

That’s an example of the “big bang for the buck” that this program has the potential to deliver, but too little funding will delay these large, critically important projects for years. That’s why this debate over 2003 funding is so important to us.

We Must Preserve The Fundamental Premise of RABA and TEA21’s Firewalls:

Highway Taxes Received Equals Highway Investments Made

Let me be clear about our view of the funding predicament we face in 2003. We do not believe there is anything fundamentally wrong with either the RABA provisions or the budgetary firewall provisions of TEA-21. It is clear that Treasury’s models did not foresee the recession (resulting in a large “look back” adjustment) and that those same models will likely understate the economic recovery that most economists predict to begin in upcoming months. As such, some minor adjustments to the method of calculating tax receipts and guaranteed funding levels may help eliminate dramatic changes in funding from one year to another, but the link established in TEA-21 between tax receipts and guaranteed funding for the program has been critical. It is, in fact, the reason that TEA21 was so warmly embraced by America’s highway users — it restored the “trust” in the Highway Trust Fund. The chart appended to my testimony illustrates the impact that RABA and the firewalls have had on funding for highways during the TEA-21 years compared to the previous six years.

The fact that revenues have fallen short of previous estimates simply puts all of us back in the annual budget and appropriations game that we used to play every year before TEA-21 tied highway funding to trust fund receipts. The Highway Users looks forward to being back in the game this year and working with all of you, your House counterparts, and members of the Appropriations committees to see that this vital infrastructure program is not cut by 27 percent in one year.

We commend the members of this committee for your recent introduction of “The Highway Funding Restoration Act,” legislation to raise the FY 2003 obligation limitation to $27.7 billion, the amount anticipated when TEA-21 was enacted. By adding $4.4 billion to the amount guaranteed for 2003, your legislation will soften the blow of negative RABA in these difficult economic times. The Highway Users strongly supports this legislation, and we are already working hard, through our grassroots contacts, to build political support and enlist additional cosponsors for the bill. We have a similar campaign underway to support the identical legislation introduced by your counterparts on the House Transportation and Infrastructure Committee.

$18 Billion in Motorist Taxes Just Sitting in Washington

Although funding will be tight because of the war on terrorism and renewed deficit spending, I believe America’s highway users have a strong case to make for additional highway funding above the guaranteed amount. In addition to describing the very serious impact of this cut on state highway funding, jobs, safety, congestion, and the environment, we can also cite a key distinction between our cause and the argument members of Congress will hear from other interest groups: the money for highways has been collected in advance.

Before TEA21, interest was accrued on surpluses in the Highway Trust Fund. This interest was ridiculed by some members of Congress as “funny money” that wasn’t really owed to highway users. As a condition for establishing a link between revenues and investments, TEA21’s framers agreed to eliminate all but $8 billion of the previously existing cash balance in the Highway Account and to stop any further interest payments to the account. As a result, since TEA21’s enactment, not one penny of that $8 billion or subsequent additions to the trust fund surplus is attributable to interest payment transfers from the General Fund.

According to the Administration’s budget, the Highway Account of the Highway Trust Fund will have a cash balance of more than $18 billion at the end of this fiscal year. All of today’s cash balance — every dime — is money previously paid by motorists and intended for improvements to our nation’s roads and bridges.

If Congress were to increase the 2003 obligation limitation by a full $8.6 billion to bring us up to this year’s level, the cash balance in the Highway Account would only be reduced by approximately $2.3 billion in FY 2003. That would leave more than $15 billion in the account as you consider funding levels and other issues in the reauthorization legislation.

Funding Issues in Highway Reauthorization

That leads me to the longer-term highway funding issues that you asked us to address in connection with next year’s reauthorization legislation. Let me begin again with the basic facts.

Tax receipts to the Highway Account of the Highway Trust Fund will be just over $28 billion next year, according to the President’s budget documents. The Administration projects conservatively that those receipts will grow by almost $1 billion a year through 2007. The truth is, we collected more than $30 billion in both 1999 and 2000, so if the economy picks up, we can expect trust fund receipts to rise significantly above the Administration’s projections. Still, the need for additional highway investment is substantially greater than those Highway Account tax receipts can support, according to the FHWA biennial report on road and bridge conditions and performance To us, that suggests several clear funding priorities. The first priority, and by far the most important, is to continue the direct link between annual highway funding and the taxes paid by motorists. Whether that link is accomplished through RABA and the budgetary firewalls, a modified version of them, or some other mechanism entirely, the point is to provide as much assurance as possible that highway funding will not be less than the taxes paid by motorists and deposited in the Highway Account.

Second, the reauthorization legislation should ensure that all taxes paid by highway users are used for their intended purpose. Here, there are several opportunities to improve upon current law.

Support S. 1306, Which Will Shift Ethanol Tax Receipts into the Highway Trust Fund

Last year, Senator Baucus introduced S. 1306, a bill to transfer into the Highway Trust Fund that portion of the tax on ethanol-blended fuels that currently is diverted to the General Fund. We strongly support the Baucus legislation, and we appreciate the fact that four other members of this subcommittee, including you, Mr. Chairman, are cosponsors of it. If enacted, the bill would increase annual trust fund deposits by more than $400 million, and it would ensure that the trust fund receives virtually all taxes currently imposed on motor fuels.

End Fuel Tax Evasion

Another step toward ensuring the integrity of highway use taxes would be to close the remaining loopholes in the tax collection system that allow unscrupulous individuals to evade the federal taxes they should be paying. Former Federal Highway Administrator Ray Barnhart originally brought this issue to Congress’ attention years ago. His efforts resulted in a change in the tax collection system for motor fuels, closing the books on tax evasion schemes that robbed the Highway Trust Fund of hundreds of millions of dollars in revenue. Administrator Barnhart believes, however, that other substantial tax evasion schemes still exist, and I urge the subcommittee to review the report on this subject, prepared by kpmg Consulting Inc., which is appended to my testimony.

We understand that efforts are underway to draft legislation closing these loopholes. We expect to support this legislation, and we will report back to the committee once a bill is introduced.

Reduce the Highway Trust Fund Surplus Over Time

Our final recommendation for ensuring the integrity of highway use taxes is to spend down the Highway Account balance over time. As I indicated previously, the cash balance in the account will be $18 billion at the end of FY 2002, slightly less than that by the end of 2003, depending on how much funding is ultimately appropriated for next year.

All of that money has been paid by motorists. All of it was intended to be used for road and bridge improvements. It ought to be used for its intended purpose.

After protecting the integrity of highway use taxes, we ought to guard against proposals that will reduce the revenue available for the highway program.

Don’t Triple Ethanol Mandate

For instance, the renewable fuels mandate proposed in S. 1766, the “Energy Policy Act of 2002,” would require that large amounts of renewable fuels, primarily ethanol, be sold in the U.S. If enacted, that provision would nearly triple the current demand for ethanol, which, because of the tax subsidy for ethanol-blended fuels, would have a severe impact on revenues to the Highway Trust Fund. The trust fund currently loses more than $1 billion per year because of the tax treatment of gasohol. When fully implemented, the ethanol mandate of S. 1766 would result in an annual revenue loss greater than the obligation limitation distributed this year to the states of Nevada, Oklahoma, Montana, Virginia, Connecticut, Oregon, and Rhode Island combined.

We strongly urge you to oppose the expansion of the ethanol mandate in S. 1766 or, if you support mandated ethanol use, to bring equity to ethanol taxation . . . in other words, levy the same tax on ethanol that you do on gasoline.

Stem Diversions of Highway Funding

We also urge the committee to oppose any new diversions of highway funding away from road and bridge improvements. In particular, I know that you, Mr. Chairman, and other members of the full committee have previously indicated your strong interest in finding additional funds to support passenger rail development in the U.S. While Congress considers whether and to what extent public financial support for passenger rail service makes sense, we urge the subcommittee to resist attempts to divert Highway Trust Fund dollars to rail. The needs are simply too great on our primary transportation system — highways — to justify the expenditure of limited financial resources to build or operate a passenger rail system.

Finally, Mr. Chairman, some have also suggested a fuel tax increase as a means to increase highway funding. Given the current state of the economy and the President’s general opposition to tax increases, I suspect there is little possibility that Congress will approve a tax increase as part of the reauthorization bill. In any case, I expect taxpaying motorists are unlikely to support a rate increase unless it is clear that the funding guarantees of TEA-21 will be continued, that the enormous existing balance in the Highway Account will be spent down, and that highway users are not subsidizing other federal programs that have little or no direct benefit to motorists.

I also have one final observation about the President’s budget. Rather than spending down the balance in the Highway Trust Fund, the Administration projects a dramatically growing balance beginning in FY 2004, the first year of a reauthorized highway program. Over four years, the balance is projected to grow by a whopping $17.4 billion despite using very conservative estimates of annual tax receipts.

Urge President Bush to Support Continuation of TEA21’s Funding Guarantees

We are told by Administration sources that those projections are simply based on the extraordinarily low 2003 spending as a baseline adjusted for inflation in future years. Unfortunately, however, it also indicates at the very least that the Administration has not yet made the policy decision to support continued budgetary firewalls and a RABA-like mechanism tying highway funding to tax receipts. There is still time for the President to make that policy decision before submitting his reauthorization proposal to the Congress, but I believe the recent budget documents are an ominous warning that members of this subcommittee, state and local public officials, and we in the private sector need to work very hard to convince top Administration officials that the TEA-21 funding guarantees must be continued in the next bill.

Former Transportation Secretary Rodney Slater used to say that highways are about more than concrete, asphalt, and steel; they’re about new opportunities and quality of life. We at The Highway Users understand the value of a good transportation system, centered on our road network. It isn’t an end in itself; it’s a tool to move us, our families, our customers and employees, and our products where they need to go as safely and with as little delay as possible.

As Federal Highway Administrator Mary Peters is quick to point out, however, it takes a lot of concrete, asphalt, and steel to realize those benefits. That’s the central point of this hearing and much of the coming debate on 2003 funding and the reauthorization bill: we need a well-funded federal highway program to improve safety, reduce congestion, enhance air quality, and keep our manufacturers and producers competitive in the marketplace.

We look forward to working with all of you to see that your colleagues, journalists, and the general public understand the unique and vital role that our highway system plays in our overall economy and our quality of life.