Prepared by Porter and Associates for the Puget Sound Regional Council
April 20, 2000
Initiative 695, approved by the State's voters in November, 1999, eliminated the state motor vehicle excise tax (MVET), beginning in January, 2000. MVET is a significant source of transportation funds. In 1999, MVET revenues totaled about $260 million in the four-county region. This was about 13% of all sources of regional transportation revenues for public transit, state highways, state ferries, county roads, and city streets.
The Puget Sound Regional Council (PSRC) requested Porter & Associates, Inc. to update the regional transportation revenue forecast through 2020, taking into account the loss of MVET revenues. The forecast is used to determine if the region has sufficient funds to implement the projects included in the metropolitan transportation plan (MTP). A fiscally-balanced MTP, that achieves regional air quality standards, is one of the factors considered by the USDOT in certifying the region for federal highway and transit funds.
P&A found the direct revenue loss from I-695 to be $6.8 billion through 2020. This is measured in constant, 1998 dollars as was the prior forecast. An estimate of similar magnitude had been prepared by PSRC staff in October, 1999.
One important surprise from this analysis, however, is the potential loss faced by the region if current laws affecting transportation revenue prevail. The term "current law" means no changes in tax rates, taxes, or the system of allocating tax revenues to various uses. P&A found that the region would export another $2.2 billion in highway revenues. This would occur because, in a current-law scenario, other regions of the State cannot produce enough revenue to pay for their basic needs - maintenance, preservation, and operations. Other urban areas of the state (Clark and Spokane counties) would probably share this same fate. Like the Puget Sound region, these growing urban areas have historically exported transportation funds, and the loss of MVET revenues would accelerate exports from these areas as well.
In all, the new 2020 revenue forecast is $9 billion less than the 1998 forecast. The effects by program are shown in the chart on the following page. Since the MTP already included a $16 billion deficit, this brings the total deficit to $25 billion through 2020. Apart from the obvious effect on regional mobility this deficit would produce from the deferral of critical projects, it also puts the MTP at risk for Federal certification.
The Puget Sound region will lose $9 billion in transportation revenue through 2020, from direct loss of MVET ($6.8 billion) and transfers of funds to other regions ($2.2 billion) to pay for basic highway needs statewide
The remainder of this paper presents these findings in more detail, and describes the methods and data sources on which the findings are based.
I-695 WILL DIRECTLY ELIMINATE $6.8 BILLION IN REGIONAL MVET REVENUE
In the 1998 MTP update, then-current law revenues were forecast to be $50.03 billion for the period 1998-2020. This forecast was a composite of many revenue sources, each based on projected growth in the underlying tax base. Revenues allocated to the Puget Sound region by the Legislature or by WSDOT were assumed to follow historical trends with respect to the percentage of revenue returned. The method and assumptions were described in the June, 1998 progress report on the MTP.
State MVET revenues forecasted to be available to the Puget Sound region totaled $7.25 billion, or about 14.5% of the total. This percentage is slightly higher than noted earlier for 1999 because the MVET was one of two revenue sources - the other being sales tax - that grows apace with population and inflation. Most other sources of transportation revenue grow more slowly.
To update the forecast pursuant to I-695, P&A zeroed out MVET collections starting in 2000, but included MVET distributions that will be made in 2000 from taxes collected in 1999.
We found that the region would lose about $6.8 billion (constant 1998 dollars) in MVET revenues through 2020. Public transit would lose the most revenue ($3.6 billion), followed by state highways and state ferries, at $1.6 billion apiece. County roads and city streets would not be affected, except when general fund revenues are diverted from transportation purposes to make up for MVET losses elsewhere (e.g., public health, police and fire, criminal justice). Non-transit allocations of MVET in the Puget Sound region would be about $1.5 billion through 2020. P&A did not evaluate how much of this revenue loss might draw from general funds otherwise made available to city streets and county roads.
MVET revenue would continue to be collected for Sound Transit, since that tax is independent of the State MVET. The table below presents the dollar loss by program, and the percent of current law revenues, prior to I-695, that the loss represents.
DIRECT MVET LOSS BY PROGRAM PURSUANT TO I-695
| Program | Direct MVET Loss ('98 $) | Total Revenue, '98 Forecast | MVET % |
| Public Transit | $3.6 bil | $22.9 bil | 16%1 |
| State Ferries | 1.6 bil | 3.9 bil | 42% |
| State Highways | 1.6 bil | 7.3 bil | 22% |
| County Roads | - | 6.6 bil | 0% |
| City Streets | - | 9.3 bil | 0% |
| total | $6.8 bil | $50.0 bil | 14% |
Current law revenue forecasts by program, before and after I-695, are included in Appendices A and B to this report.
I-695 ACCELERATES THE EXPORTING OF TRANSPORTATION REVENUES
P&A also found that the region would lose another $2.2 billion in State highway revenues, if current law prevails through 2020. Thus, the revised revenue forecast is $41 billion; $9 billion less than the 1998 forecast.
This outcome is exacerbated by I-695, but would occur in any future scenario in which statewide highway funds are insufficient to support new highway construction. As described below, funds for new highway construction are spent primarily in the Puget Sound region, while funds for basic needs (i.e., maintenance, preservation, operations) are spent primarily in the rest of the State. This reflects the distribution of capacity-deficient lane miles, and total lane miles, respectively. Since basic needs are the first priority, any scenario in which no funds are available for new projects translates into a more pronounced export of funds from the Puget Sound region, and from urban areas generally.
The Puget Sound region normally receives 92 cents for every state and federal transportation dollar it generates.
Most state and Federal transportation funds are allocated to the Puget Sound region based on legislative formulas, actions of the Legislature, and programmatic priorities. Collectively, this structure results in an export of funds from the Puget Sound region to other areas in the State, even though the ferry system is a net importer.
During the thirteen year period 1985-1997, the four-county region generated $10.2 billion, and received $9.4 billion in State and Federal transportation funds. This is a return of 92¢ on the dollar. A summary of funds for this period is presented in Appendix C. The chart below shows the revenue returned by year.
The four-county Puget Sound region exported State and Federal transportation funds for twelve of the thirteen years between 1985 and 1997
The 92¢ return is similar to the 90% "minimum guaranteed return" included in recent Federal transportation funding legislation (ISTEA and TEA21). The Puget Sound can be viewed much like the so-called "donor states" for Federal highway funds. It is often argued that this region is the economic engine of the State, and should be responsible for a disproportionate share of funding statewide infrastructure needs. History has shown that this return ratio has not been sufficiently negative to encourage legislative action to the contrary.
Interestingly, the Puget Sound region is not alone in this regard - other urban areas are net exporters of transportation funds as well. Between 1985 and 1997, Clark and Spokane counties had a return of just 68¢ on the dollar (see chart below). Other areas of the state, in contrast, received $1.25 for every dollar of revenue they produced. Clearly, the state's urban areas carry most of the burden for statewide transportation funding.
The Puget Sound region is not alone in exporting transportation funds - other urban areas have received an even lower return
In 1997, expenditure of State & Federal funds in the Puget Sound was $0.95 billion, compared to revenues of $1.04 billion, or a return of $.91 on the dollar
THE RATE OF RETURN BY PROGRAM IS INSTRUCTIVE IN UNDERSTANDING THE EFFECT OF REDUCED FUNDING LEVELS FOR HIGHWAY CONSTRUCTION
The rate of return by program is instructive in understanding the effect of reduced funding levels for highway construction. The chart above shows the rate of return by program for 1997. The factors underlying these results are as follows:
These exports for the surface system are partially offset by funds imported for the ferry system. The region imports state ferry funds because ferries rely primarily on tax revenue, and serve only a few portions of the State. The region's imports of ferry funds, however, are smaller than its share of the overall system. Although the four-county Puget Sound region accounts for about 67% of ferry expenditures, it accounts for only about 30% of net transfers to the ferry system. This is due to the higher fare recovery (i.e., fare revenue as a percent of expenditures) of routes serving the four-county region.
IF CURRENT LAW PREVAILS, THE REGION'S RETURN ON HIGHWAY REVENUES WILL FALL TO 50¢ ON THE DOLLAR
Absent new transportation revenues, we found that other regions of the State cannot produce enough revenue to pay for their basic needs - maintenance, preservation, and operations. Because these programs are the first priority for highway funds, any revenue surplus over basic needs that is produced by the Puget Sound would be allocated to other regions in the State until these statewide basic needs are satisfied. This will reduce the Puget Sound region's historical revenue return for highways - about 89¢ on the dollar - to just 50¢ on the dollar through 2020.
The chart on the following page compares highway needs, as stated in the State Highway System Plan (1998), to current law revenues. Statewide needs total about $18 billion for the next twenty years. According to Transportation Commission policy, funds would be expended in the following order: (i) maintenance, preservation, and operations; (ii) safety, environmental retrofits, and economic initiatives; and (iii) mobility (i.e., the WSDOT improvement program, category I). The highway system plan considered a more optimistic forecast than would be produced by current law revenues. As noted on the chart, current law revenues are projected to be about $9 billion, or about half the statewide needs. This level of funding would be sufficient for all the first priority programs, but would fund only about a third of the second priority programs, and none of the mobility program.
If current law prevails - no tax increases and no new taxes - the PSRC region's net contribution to the rest of the State will grow considerably, reducing revenue returned to the region to just $.50 on the dollar
(based on the State Highway System Plan and WSDOT revenue projections; see Appendix D for details)The combined effect of less statewide funding and the distribution of priorities would translate into a substantially lower return for the Puget Sound region. As noted on the chart, other areas of the State account for a large share (72%) of the first two program priorities. Most of the planned expenditures for the Puget Sound region, however, are in the Mobility program, which is the last priority. Although the Puget Sound would generate enough revenue to pay for its basic needs and even some of the mobility program, shortfalls in revenues in the rest of the State would intervene. In this twenty-year outlook, the Puget Sound region would generate $5.1 billion in revenues, but $2.5 billion would be transferred to other regions to pay for basic needs. Converting this transfer to 98$ ($2.58 bil) and accounting for the transfers already assumed in the 1998 MTP revenue forecast ($0.4 bil) yields an additional $2.2 billion shortfall.
We did not examine this issue on an annual basis, and the near-term effects may not be as negative as the long-term effect described above. In 2000, for example, the loss of MVET revenues and the corresponding reduction in expenditures would reduce the region's overall return to about 88¢ from 91¢ reported for 1997. Nonetheless, the analysis points out a basic structural issue in the allocation of State highway funds - the Puget Sound's needs, and those of the state's urban areas generally, are substantial and are not the top priority. A constrained funding outlook means that the Puget Sound region, as well as other urban areas, will suffer disproportionately.
Appendix A: 1998 Forecast - Regional Revenue Summary
Appendix B: Post I-695 - Regional Revenue Summary
Appendix C-1: 1985-1997 Revenues Generated
Appendix C-2: 1985-1997 Revenues Received
Appendix D-1: State Highway System Plan
Appendix D-2: Revenue Transfers Implicit in the State Highway System PlanAll appendices are PDF files, which can be viewed with the free Adobe Acrobat Reader.
For a printed copy of this report, contact the Regional Council Information Center, infoctr@psrc.org, (206) 464-7532.