American Road and Transportation Builders Association

First Vice Chairman

Richard E. Wagman

Testimony before the

Subcommittee on Clean Air, Climate Change and Nuclear Safety of the Senate Committee on Environment and Public Works

Legislative Proposals Amending the Clean Air Act Regarding Fuel Additives and Renewable Fuels

March 20, 2003

Introduction

Good morning, Mr. Chairman and members of the Committee.  I am Richard Wagman, President of G.A. & F.C. Wagman, a highway contractor based in York, Pennsylvania, and First Vice Chairman of the American Road and Transportation Builders Association.

ARTBA, which celebrated its 100^th anniversary in 2002, has over 5,000 member firms and member public agencies from across the nation.  They belong to ARTBA because they support strong federal investment in transportation improvement programs to meet the needs and demands of the American public and business community.  The industry we represent generates more than $200 billion annually in U.S. economic activity and sustains 2.5 million American jobs.

At the outset, I would like to thank you for giving our industry an opportunity to testify at this important hearing.  Your understanding of, and long support for, transportation improvement programs and investment is deeply appreciated by the transportation and construction communities.

This morning I want to focus on how federal policies to promote the use of alternative fuels impact the nation’s surface transportation programs, the potential impact of a proposed renewable fuels standard on Highway Trust Fund revenues, and the ability of the federal highway program to help meet the nation’s highway investment needs.  At the outset of this discussion, I want to make it abundantly clear that ARTBA strongly supports the use of renewable fuels.  Our goal in this debate, however, is to ensure that federal policies to promote alternative fuel use not be undertaken at the expense of another national priority—a safe and efficient transportation network.

ARTBA has a long history of involvement in this critical issue.  We presented testimony to this subcommittee in June 2000 on the impact of ethanol’s tax treatment on Highway Trust Fund revenues.  We also delivered similar messages in appearances before the House Ways and Means Committee and Senate Finance Committee.

Last year, when the Senate was debating a renewable fuels standard as part of comprehensive energy legislation, Chairman Inhofe and others pursued amendments that would have rectified the impact of current renewable fuel tax incentives on Highway Trust Fund revenue.  A coalition of Senate leaders and interest groups supporting the renewable fuels standard made the case that the energy bill was not the right vehicle for this issue and pointed to the 2003 reauthorization of TEA-21 as the appropriate legislative vehicle for that action.

Mr. Chairman, Congress is in the throe of reauthorizing TEA-21 as we speak.  Now is the time to resolve the zero sum game that exists between promoting ethanol and other alternative fuels on the one hand, and the ability to meet the nation’s highway and transit needs on the other. 

As context for my remarks, you should know that ARTBA believes the U.S. highway program must emphasize five key principles:

1.     Highway capital improvements should be financed primarily through the collection of highway user fees.  And these fees, which should be levied and collected by government, must be adjusted as warranted to provide a source of funding that is consistent with the investment requirements necessary to meet the conditions and performance needs of the nation’s highway, bridge and mass transit network.

2.     Safety must be a paramount concern in the design, construction, maintenance and traffic operations of the nation’s highway system. 

3.     Critically deficient bridges should be repaired or replaced.

4.     Improved rideability and pavement durability should be program goals; and

5.     The capacity and efficiency of the highway system should be improved as necessary to meet public demand and the needs of the economy.

In line with our support for the user-fee concept of financing surface transportation improvements, we also believe all energy sources powering motor vehicles that use the nation’s highway and bridge system should be taxed to pay for system improvements through the federal Highway Trust Fund.  The current investment needs of our highway system dictates that the excise on each motor vehicle powering source, from an energy content basis, should be at least equivalent to that currently levied on gasoline.

These views are supported by virtually all state and national organizations representing highway transportation and construction concerns.

The Tax Nexus Between Federal Transportation, Energy, Environmental Policies

My primary purpose today is to bring to your attention the unique nexus between federal transportation, energy and environmental policies.  Policy in all three areas have a common thread—the use of federal tax law involving motor fuels to advance national objectives.

Unfortunately, these tax policies are often debated and decided separately and thus in a vacuum—during a transportation bill… an energy bill… or an environmental bill.  As a result, positive impacts for one policy area sometimes contradict—or even undermine—goals and objectives in another policy area.

The federal government first levied a highway user fee on the sale of motor fuels in 1956, when it established the federal Highway Trust Fund.  The original congressional intent in establishing the user fee—an excise on gasoline and diesel fuel—is clear: to ensure that America would have a “pay-as-you-go” system for funding needed highway and bridge improvements. 

The principle was—and remains today—that the more you drive, or use the roads, the more you pay to build and maintain them.

This user fee principle was reaffirmed by the Congress in 1998 with the enactment of the Transportation Equity Act for the 21^st Century, or TEA-21. 

Unfortunately, current public investment in road, bridge and mass transit improvements financed by highway user fees levied at all levels of government is grossly insufficient to maintain the physical conditions of the system, much less improve its overall performance for the American public and business community.  The essentially status quo investment that would be provided by the FY 2004 budget resolution proposals demonstrate that existing Highway Trust Fund revenues are falling further and further behind the growing needs of the nation’s highway and transit network.

Status of the Nation’s Highway Network

Under the landmark TEA-21, federal highway investment will have averaged just under $29 billion per year by the time the program expires at the end of Fiscal Year 2003.  This represents a substantial increase over the funding provided under the Intermodal Transportation Efficiency Act of 1991 (ISTEA).

Under TEA-21, however, investment by government at all levels has barely been enough to maintain the physical condition of the nation’s highways and bridges, according to the U.S. Department of Transportation’s (U.S. DOT) 2002 biennial report on the condition and performance of the nation’s highways, bridges and transit systems.  Worse, investment has fallen far short of the amount needed to maintain travel times and prevent traffic congestion from increasing—concerns which are of equal, if not greater, importance to highway users.

While the nation’s roadway and bridge network has benefited from increased federal investment under TEA-21, the system still has enormous, unmet capital needs.  Based on data published in the 2002 U.S. DOT report, adjusted to reflect OMB’s estimate for future inflation and a traditional 43 percent federal share of highway capital outlays, a federal highway program close to $50 billion per year is necessary just to maintain the system conditions and performance levels over the period 2004-2009, which is the expected duration of the next federal surface transportation authorization bill.

Current forecasts of revenues into the Highway Account of the Highway Trust Fund would only support a federal highway program of approximately $33 billion by FY 2009, or less than two-thirds the amount needed just to maintain current conditions.

Promoting Alternative Fuels and the Highway Trust Fund

Clearly the intent of Congress in enacting TEA-21was to make surface transportation investment a federal priority.  But as Congress discusses and debates TEA-21 reauthorization legislation in the months ahead, this Committee should be aware that some current federal energy and tax policies work against the goals of TEA-21.

Consider the impact of the current federal tax treatment of ethanol-gasoline motor fuel blend sales.  And again, I must make clear ARTBA has no brief against the promotion and use of ethanol as a motor fuel beyond the way it impacts the Highway Trust Fund.

Current Federal Tax Treatment of Alternative Fuels

A motorist purchasing gasoline contributes 18.3 cents per gallon to the Highway Trust Fund through the federal user fee—15.44 cents per gallon to the trust fund’s Highway Account and 2.86 cents per gallon to the fund’s Mass Transit Account.  (An additional 0.1 cents per gallon is contributed to the Leaking Underground Storage Tank Trust Fund.) 

Under current federal law, a motorist purchasing gasohol (with 10 percent ethanol), however, pays a 13.1 cents per gallon excise, or 5.2 cents per gallon less than those who purchase straight gasoline.  A slightly higher excise is applied to gasohol sales with less ethanol.  Of the 13.1 cents per gallon federal excise paid on a gallon of 10 percent gasohol, a user fee of 10.6 cents per gallon goes into the Highway Trust Fund—7.74 cents per gallon to the trust fund’s Highway Account and 2.86 cents per gallon to the fund’s Mass Transit Account.  Two-and-a-half cents is deposited in the federal General Fund for deficit reduction purposes.  (There is also a 0.1 cents per gallon contribution to the Leaking Underground Storage Tank Trust Fund.)

The combination of the 5.2 cent per gallon tax incentive for 10 percent gasohol and the 2.5 cent per gallon contribution to the general fund reduces deposits in the Highway Trust Fund Highway Account by 7.7 cents per gallon sold.  (It is also worth pointing out that the Mass Transit Account of the Highway Trust Fund receives the same contribution from either the purchase of gasoline or gasohol.  This means the cost of federal policies to promote the use of ethanol fuels comes exclusively at the expense of the Highway Account.) 

As a result of TEA-21’s provisions that directly link incoming Highway Account revenues to annual federal highway and bridge investment, the ethanol tax incentive has a direct consequence of making less revenue available for investment in needed highway and bridge improvements.

Impact of Alternative Fuel Incentives on Federal Highway Investment

To put this number in perspective, $1.3 billion would resurface over 13,000 lane miles of interstate highway or replace almost 1,400 outdated unsafe two-lane bridges.

Federal tax treatment of ethanol-based motor fuels impacts individual states differently.  TEA-21’s highway funding distribution formula requires the apportionment of Interstate Maintenance and Surface Transportation Program funds to be based, in large part, on a states contribution to the federal Highway Trust Fund’s Highway Account.  States that sell ethanol-based motor fuels are, therefore, at a relative disadvantage to states that don’t.  States that sell more ethanol than other states are also at a competitive disadvantage.

Ohio is one of those states.  As Governor Robert Taft testified last year before the House Transportation and Infrastructure Committee, “In Ohio ethanol comprises 40 percent of our fuel use. That means that Ohio’s contribution to the federal Highway Trust Fund is reduced about $166 million annually…. We estimate that Ohio’s federal highway apportionment is reduced by $150 million annually as a result of our substantial use of ethanol…. The contradiction is obvious. If an Ohio or a California use these domestically produced, clean burning fuels they then face a loss of federal funds. I call this the ethanol penalty. We are penalized for responding to the explicit federal policy which encourages us—and which creates market forces which compel us—to use alternative fuels…. I urge Congress to recognize that current federal formulas penalize states for using this domestically produced, clean-burning fuel.”

Increased Alternative Fuel Use Impact on Highway Trust Fund

Mr. Chairman, what I have just described is a historical review of how the current tax treatment of ethanol fuels has impacted the Highway Trust Fund.  Table 2 below demonstrates how this situation could be exacerbated in the future, based on the U.S. Department of Energy’s projections for increased ethanol usage, if the tax treatment of ethanol fuels is not modified to protect the Highway Trust Fund. To make a bad situation even worse, Table 2 also demonstrates how Highway Trust Fund revenues would be reduced even further if proposals to establish a renewable fuels standard are enacted without resolving the Highway Trust Fund issue.

The proposed renewable fuels standard would require refiners to incorporate a target amount of ethanol into motor fuels, beginning with 2.3 billion gallons of ethanol in 2004 and growing to 5.0 billion gallons by 2012.  While I am not qualified to comment on the merits of ethanol, I can assure you that requiring an increase in the use of gasohol would also increase the amount of lost revenues to the Highway Account and, therefore, further diminish the nation’s ability to meet its highway infrastructure needs.

If Congress continues to provide a tax incentive from the Highway Trust Fund for gasohol of just over 5 cents per gallon and continues to deposit 2.5 cents per gallon of the gasohol excise tax into the General Fund rather than the Highway Trust Fund, the proposed renewable fuels standard would reduce Highway Trust Fund revenues by approximately $25.7 billion during the nine fiscal years FY 2004 - FY 2012 that are covered by the proposed legislation, or about $2.9 billion annually.

Before discussing this table, I think it is important to note that the use of gasohol as a motor fuel is projected to grow significantly in the future with or without a renewable fuels standard.  In 2001, the nation used almost 1.6 billion gallons of ethanol in motor fuels. The Energy Department predicts that this will jump to 2.7 billion gallons by 2004, largely because of the continued oxygenation requirement under the Clean Air Act and the phase-out of MTBE.

Between 2004 and 2012, ethanol use in motor fuel is expected to grow another 600 million gallons to 3.3 billion gallons under current market forecasts, even without a renewable fuels standard.

As the first set of columns in Table 2 shows, the projected market growth of ethanol in motor fuels will cost the Highway Trust Fund almost $21.5 billion in foregone revenues between 2004 and 2012.  Of this total, $7.6 billion would result from the current practice of depositing 2.5 cents per gallon of the excise tax on gasohol into the General Fund for deficit reduction.  The remaining $13.8 billion of the projected loss would be due to the ethanol tax incentive, which works out to 5.2 cents per gallon (5.1 cents per gallon starting in 2005) for gasohol that is 10 percent ethanol and 3.93 cents per gallon for gasohol that is 7.7 percent ethanol.

The proposed renewable fuel standard would increase the revenue loss to the Highway Trust Fund.  For 2004 and 2005, the cost of the proposed standard would be negligible because the market demand for gasohol is expected to exceed the proposed minimum.  But starting in 2006, the required use of ethanol in motor fuels would begin to exceed the projected market demand.

The second set of four columns in Table 2 shows the total projected cost of the renewable fuels standard to the Highway Trust Fund.  As explained above, much of this cost would occur anyway because of the projected growth of demand for ethanol in motor fuels.

The incremental cost of the renewable fuels standard is shown in the final set of four columns in Table 2.  There should be no incremental cost in 2004 and 2005 because market demand those two years is projected to exceed the minimum standard.  Between 2006 and 2012, however, the proposed standard would have an incremental cost, which the table shows is projected to total $4.7 billion.  This includes a projected $1.7 billion loss to the Highway Trust Fund from the 2.5 cents per gallon of gasohol deposited into the General Fund and $3.0 billion from the ethanol tax incentive.  Chart 1 clarifies these overlapping impacts on the Highway Trust Fund revenues.

Let me put these figures into perspective.

The $21.5 billion total revenue loss from the projected market growth of ethanol in motor fuels would be sufficient to repave every rural Interstate Highway in the United States at least once in the next nine years.  It would completely cover the construction costs, including rail lines and stations, for a 90-mile urban subway system or approximately a system like Washington, DC’s Metro.

The $4.7 billion extra cost of the renewable fuels standard over current gasohol projections would repave two-thirds of all of the urban Interstate Highway miles or build a 120-mile light rail mass transit system.

Conclusion

With the reauthorization of TEA-21 and debate over comprehensive national energy policy scheduled for this year, Congress has a unique opportunity to formally acknowledge the nexus among transportation, energy and environmental policies. 

The nation is at a critical juncture.

It is clear America needs to reduce its dependence on foreign energy sources that power our U.S. transportation fleet.

It is clear that meeting federal air and water quality standards without compromising American mobility and the economy will require even cleaner transportation vehicles and motor fuels.

It is also clear that America has a growing transportation infrastructure capacity crisis—not just in its road network, but also in our airport, water port, rail and mass transit systems.  If we do not meet our transportation network challenges, we will also compromise American mobility, air and water quality goals, and the U.S. economy.

Mr. Chairman and members of the Committee, as you develop legislation to reauthorize TEA-21 and other relevant measures, we urge you to ensure that federal funding for much needed transportation improvements is not shortchanged in the pursuit of promoting use of alternative motor fuels.

And we will support you in any legislative effort that seeks to address the concerns we have raised.  Among the suggested proposals to resolve this issue are either eliminating the ethanol fuel tax incentive directly or providing a Federal General Fund reimbursement for Highway Trust Fund revenues foregone due to ethanol’s tax treatment.  We also understand Senators Grassley and Baucus are developing a proposal to provide ethanol refiners a General Fund tax credit in lieu of an excise tax incentive. 

It should also be recognized that the FY 2004 budget proposals from the Bush Administration and the House and Senate Budget Committees all propose redirecting the 2.5 cents per gallon of the ethanol fuels excise from the General Fund to the Highway Trust Fund.  This is an excellent first step and we urge Congress to build on these recommendations to ensure the Highway Trust Fund is fully compensated for the use of all alternative fuels.

We commend all members of Congress, the Administration and those in the transportation and renewable fuels communities that are working to find a solution to this issue.   From our perspective, the primary objective must be that this issue is fully resolved once and for all so that our nation’s transportation and energy priorities are in sync, rather than at odds.

Mr. Chairman, that concludes my testimony.  Again, thank you for the opportunity to present our views to this Subcommittee.  I will try to answer any questions you or other Committee members might have.