SECTION 1. FLEXIBILITY INCENTIVE GRANT PILOT PROGRAM.

    (a) In General.--Chapter 53 of title 49, United States Code, is 
amended by adding at the end the following:
``Sec. 5339. Flexibility Incentive Grant Pilot Program
    ``(a) Purpose.--The purpose of this section is to provide 
incentives to encourage States to establish new sources of revenue for 
transit projects and services and to reward States for creating more 
flexibility in the use of their existing transportation funds.
    ``(b) Establishment of Program.--The Secretary of Transportation 
shall establish a flexibility incentive grant pilot program in 
accordance with this section.
    ``(c) Selection Process and Criteria.--Not later than 90 days after 
the date of enactment of this section, the Secretary shall establish a 
process and criteria for selecting States to participate in the pilot 
program. Any State may apply under the process to participate in the 
pilot program.
    ``(d) Selection of Participating States.--The Secretary shall 
select States to participate in the pilot program under the selection 
process, and based on the selection criteria, established by the 
Secretary.
    ``(e) Determinations by the Secretary.--Not later than September 1 
of each of calendar years 2004 through 2009, the Secretary shall 
determine which of the States selected to participate in the pilot 
program increased the aggregate amount of State funds (excluding funds 
from Federal sources) that the State expended on transit projects and 
services from the State's second fiscal year preceding such September 1 
to the State's first fiscal year preceding such September 1, the amount 
of such increase, and the percentage of such increase over the State's 
second preceding fiscal year.
    ``(f) Grants for Increased Transit Funding.--
            ``(1) States with an increase of 10 percent or more.--
        Subject to paragraph (2) and subsection (h)--
                    ``(A) the Secretary shall make a grant for each of 
                fiscal years 2006 through 2010 to each State selected 
                to participate in the pilot program whose percentage 
                increase in expenditures for transit projects and 
                services over the preceding fiscal year of the State 
                was 10 percent or more, as determined by the Secretary 
                under subsection (e); and
                    ``(B) the amount of the grant shall be equal to the 
                increase in the aggregate amount of State funds 
                (excluding funds from Federal sources) that the State 
                expended on transit projects and services from the 
                second preceding fiscal year of the State to the first 
                preceding fiscal year of the State, as determined by 
                the Secretary under subsection (e); except that 
the amount of the grant may not exceed $5,000,000.
            ``(2) Large states with an increase of 1 percent or more.--
        Subject to subsection (h), for each of fiscal years 2006 
        through 2010, the Secretary shall make a grant of $10,000,000 
        to each State selected to participate in the pilot program 
        whose percentage increase in expenditures for transit projects 
        and services over the preceding fiscal year of the State was 1 
        percent or more, and whose aggregate expenditures for such 
        projects and services in the State's preceding fiscal year was 
        more than $1,000,000,000, as determined by the Secretary under 
        subsection (e).
    ``(g) States Creating Flexible Transportation Funds.--
            ``(1) New dedicated source of revenue.--
                    ``(A) In general.--Subject to subsection (h), for 
                each of fiscal years 2004 through 2010, the Secretary 
                shall make a grant of $10,000,000 to each State that 
                implemented in the first preceding fiscal year of the 
                State a dedicated source of revenue for carrying out 
                only transit projects and services that the Secretary--
                            ``(i) determines was not in effect in the 
                        second preceding fiscal year of the State; and
                            ``(ii) projects will result in an increase 
                        of 10 percent in State funds available for 
                        expenditure on such projects and services 
                        within 2 years after the date of such 
                        implementation.
                    ``(B) Dedicated source of revenues defined.--For 
                purposes of this paragraph, the term `dedicated source 
                of revenue' may include the dedication of a State motor 
                fuels tax or sales tax, interest on existing highway 
                funds, motor vehicle excise tax, tolls, loans to be 
                made out of highway funds, and such other sources of 
                revenue as the Secretary determines.
            ``(2) Unrestricted use of highway funds.--Subject to 
        subsection (h), for each of fiscal years 2004 through 2010, the 
        Secretary shall make a grant of $10,000,000 to each State that 
        in the preceding fiscal year of the State amended State law or 
        the State constitution to allow funds that were restricted for 
        highway purposes only to be used for transit projects and 
        services as well as highway purposes.
    ``(h) Limitation for States Eligibility for Multiple Grants.--If 
the Secretary determines that a State is eligible for a grant under 
more than one of subsections (f)(1), (f)(2), (g)(1), and (g)(2) for a 
fiscal year, the Secretary may only make the grant to the State that is 
for the greatest amount the State is eligible for under such 
subsections.
    ``(i) Use of Grants.--A State may obligate funds granted to it 
under this section for any project or activity eligible for assistance 
under title 23 or chapter 53.
    ``(j) Grant Requirements.--Except as otherwise provided in this 
section--
            ``(1) a grant under this section being used for a transit 
        project or activity shall be subject to all of the terms and 
        conditions to which a grant made under section 5307 is subject; 
        and
            ``(2) a grant under this section being used for a highway 
        project or activity shall be subject to all of the terms and 
        conditions that would be applicable to such project or activity 
        if such project or activity were being carried out under title 
        23, United States Code.
    ``(k) Federal Share.--The Federal share of the cost of a project or 
activity funded under this section shall be 100 percent.
    ``(l) Authorizations of Appropriations.--There are authorized to be 
appropriated to carry out this section for each of fiscal years 2004 
through 2010 $80,000,000. Such sums shall remain available until 
expended.
    ``(m) Program Evaluation.--Not later than 5 years after the date of 
enactment of this section, the Secretary shall--
            ``(1) conduct a study to evaluate the pilot program 
        authorized by this section; and
            ``(2) submit to the Committee on Transportation and 
        Infrastructure of the House of Representatives and the 
        Committee on Banking, Housing and Urban Affairs of the Senate a 
        report describing the results of the study.''.
    (b) Conforming Amendment.--The analysis for such chapter is amended 
by adding at the end the following:

``5539. Flexibility incentive grant pilot program.''.
Directs the Secretary of Transportation to establish a flexibility incentive grant pilot program to encourage States to establish new sources of revenue for transit projects and services. Directs the Secretary to make grants to States that: (1) increase their expenditures for transit projects and other services; or (2) dedicate State revenues specifically for transit projects and services.
To amend title 49, United States Code, to provide for the establishment of a flexibility incentive grant program.