Question of the Month | December 2021 | State funding of transportation

In addition to motor fuel taxes, how are states raising funds for transportation-related projects?

December 22, 2021

All states use a mix of state money – with a motor fuel tax and borrowing being two common features — along with federal highway funds to pay for road and highway projects. Over the past several years, that mix has changed in some Midwestern states as the result of new laws and the use of new financing options.

Illinois, for example, launched its six-year, $45 billion Rebuild Illinois infrastructure plan in 2019 with the passage of four different bills. Many types of capital projects are being funded (schools, state facilities, water infrastructure, etc.), but more than $25 billion is going to roads and bridges. Along with raising the state’s gas tax and sales tax on motor fuels, legislators tapped other revenue sources — higher motor vehicle registration and title fees, an increase in the cigarette tax, and some dedicated revenue from an expansion of legalized gambling.

As part of Illinois’ legislative package, too, an annual $100 vehicle registration “surcharge” for electric vehicles was put in place.

Legislatures across the Midwest have implemented EV surcharges, typically a flat rate established in state statute. One exception is Michigan. There, the EV charge is tied to changes in the state’s fuel tax; and increases by $5 for every cent of increase in the fuel tax above 19 cents per gallon. Michigan’s EV fee also varies depending on a vehicle’s weight (currently $135 or $235). It was enacted as part of a much larger, $1.2 billion transportation-funding measure signed into law in 2015. This seven-bill legislative package raised Michigan’s vehicle registration fees and motor fuel taxes while designating $600 million in state general funds annually for road and bridge projects.

Nebraska is halfway through a 20-year period during which one-quarter of 1 percent of its state sales tax is being used to help fund road and highway projects (LB 84 of 2011). In 2006, Indiana signed a 75-year, $3.8 billion lease of the Indiana Toll Road to fund a 10-year road and highway improvement plan. Under the agreement, a private consortium of Australian and Spanish companies was allowed to maintain the road and collect tolls. (The consortium filed for bankruptcy in 2014, citing lower than expected toll revenue, and was sold the next year to an Australian firm.)

Another financing option for states: a federal bond program known as GARVEE (Grant Anticipation Revenue Vehicles), which pledges future federal highway funding to pay upfront for projects. According to the Federal Highway Administration, Ohio and North Dakota are among the 26 states that have tapped GARVEE bonds. (Enabling legislation by states is required.)

North Dakota issued $51.5 million worth of GARVEE bonds in August 2005 for highway and bridge projects; they were backed by the state’s highway fund and came due last year. Shannon L. Sauer, chief financial officer for the North Dakota Department of Transportation, says the state’s strong credit rating allowed the GARVEE bonds to be sold at a reasonable interest rate. “As it turned out, the bonds were a hit with the market and, in fact, the bonds were sold at a premium,” she says.

Question of the Month highlights an inquiry sent to the CSG Midwest Information Help Line, an information-request service for legislators and other state and provincial officials from the region.