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58–297—PDF 2008

S. HRG. 110–1078

TAX AND FINANCING ASPECTS OF HIGHWAY

PUBLIC-PRIVATE PARTNERSHIPS

HEARING

BEFORE THE

SUBCOMMITTEE ON ENERGY, NATURAL RESOURCES,

AND INFRASTRUCTURE

OF THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

JULY 24, 2008

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

DEBBIE STABENOW, Michigan

MARIA CANTWELL, Washington

KEN SALAZAR, Colorado

CHUCK GRASSLEY, Iowa

ORRIN G. HATCH, Utah

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

PAT ROBERTS, Kansas

JOHN ENSIGN, Nevada

JOHN E. SUNUNU, New Hampshire

RUSSELL SULLIVAN, Staff Director

KOLAN DAVIS, Republican Staff Director and Chief Counsel

SUBCOMMITTEE ON ENERGY, NATURAL RESOURCES, AND INFRASTRUCTURE

JEFF BINGAMAN, New Mexico, Chairman

KENT CONRAD, North Dakota

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

MARIA CANTWELL, Washington

KEN SALAZAR, Colorado

JIM BUNNING, Kentucky

GORDON SMITH, Oregon

ORRIN G. HATCH, Utah

MIKE CRAPO, Idaho

JOHN ENSIGN, Nevada

JOHN E. SUNUNU, New Hampshire

(II)

C O N T E N T S

OPENING STATEMENTS

Page

Bingaman, Hon. Jeff, a U.S. Senator from New Mexico, chairman, Subcommittee on Energy, Natural Resources, and Infrastructure, Committee

on Finance ............................................................................................................ 1

Bunning, Hon. Jim, a U.S. Senator from Kentucky ............................................. 3

WITNESSES

Kleinbard, Edward D., Chief of Staff, Joint Committee on Taxation, Washington, DC ............................................................................................................. 4

Hecker, JayEtta Z., Director, Physical Infrastructure Issues, Government Accountability Office, Washington, DC .................................................................. 6

Choate, Pat, economist and director, Manufacturing Policy Project, Washington, VA ............................................................................................................. 8

Carlisle, Linda E., partner, White and Case LLP, Washington, DC ................... 9

Enright, Dennis, principal, NW Financial, Jersey City, NJ ................................ 11

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Bingaman, Hon. Jeff:

Opening statement ........................................................................................... 1

Prepared statement .......................................................................................... 21

Bunning, Hon. Jim:

Opening statement ........................................................................................... 3

Carlisle, Linda E.:

Testimony .......................................................................................................... 9

Prepared statement .......................................................................................... 23

Choate, Pat:

Testimony .......................................................................................................... 8

Prepared statement .......................................................................................... 33

Enright, Dennis:

Testimony .......................................................................................................... 11

Prepared statement .......................................................................................... 41

Responses to questions from subcommittee members ................................... 47

Hecker, JayEtta Z.:

Testimony .......................................................................................................... 6

Prepared statement .......................................................................................... 48

Responses to questions from subcommittee members ................................... 63

Kleinbard, Edward D.:

Testimony .......................................................................................................... 4

Prepared statement .......................................................................................... 65

COMMUNICATION

Johnson, Hon. Sam .................................................................................................. 85

(III)

(1)

TAX AND FINANCING ASPECTS OF HIGHWAY

PUBLIC-PRIVATE PARTNERSHIPS

THURSDAY, JULY 24, 2008

U.S. SENATE,

SUBCOMMITTEE ON ENERGY, NATURAL

RESOURCES, AND INFRASTRUCTURE,

COMMITTEE ON FINANCE,

Washington, DC.

The hearing was convened, pursuant to notice, at 2:15 p.m., in

room SD–215, Dirksen Senate Office Building, Hon. Jeff Bingaman

(chairman of the subcommittee) presiding.

Present: Senators Salazar and Bunning.

Also present: Derek Dorn, Staff Director; and Payson Peabody,

Tax Counsel.

OPENING STATEMENT OF HON. JEFF BINGAMAN, A U.S. SENATOR FROM NEW MEXICO, CHAIRMAN, SUBCOMMITTEE ON

ENERGY, NATURAL RESOURCES, AND INFRASTRUCTURE,

COMMITTEE ON FINANCE

Senator BINGAMAN. Let me welcome all of our witnesses and indicate just at the very beginning of things here that we are going

to have to recess at 3:25 to comply with a Senate remembrance

that is scheduled on the Senate floor for Capitol Police officers

Jacob Chestnut and John Gibson, who were killed in the line of

duty 10 years ago on this date. So we will see where we are in the

hearing at that time, but we may have to take a short recess at

that time if we are still going.

This hearing today is a hearing of the Subcommittee on Energy,

Natural Resources, and Infrastructure tax issues. The topic is ‘‘Tax

and Financing Aspects of Highway Public-Private Partnerships.’’ At

a July 10 full committee hearing, CBO Director Peter Orszag told

us that spending from the Highway Trust Fund has vastly outstripped increases in revenues at a time when critical surface

transportation needs require billions of dollars in additional spending.

That hearing’s other witness, GAO’s JayEtta Hecker, argued that

Congress should clarify national goals and considered the appropriateness of our current funding structure alongside the roles of

States and the private sector.

So heeding GAO’s advice, I called this hearing today to consider

more closely one financing option that has received considerable attention, that is, the sale of concession rights to existing tolled highways. These so-called public-private partnerships have been billed

2

by advocates as a silver bullet to our surface transportation problems.

The National Surface Transportation Policy and Review Study

Commission’s January report concluded that public-private partnerships should play an important role in financing and managing

our surface transportation program, and the Department of Transportation has provided States with a how-to guide that includes

model State legislation.

Already there are two public-private partnership deals that have

closed. One was in 2004. The city of Chicago sold Macquarie of

Australia concession rights to the Chicago Skyway for 99 years in

exchange for $1.8 billion. In 2006, Indiana sold concession rights to

the Indiana toll road to a partnership between Cintra of Spain and

Macquarie for 75 years, and received $3.8 billion for that.

Investors are also lining up to invest in another project. Governor Rendell has announced a $12.8 billion deal for a 75-year sale

of concession rights to the Pennsylvania Turnpike, which, if ratified, would represent the largest privatization of highway infrastructure in our history.

There is no denying the seriousness of our surface transportation

funding challenges, but the question is whether our Federal response should be to encourage States to essentially sell off vital

components of the interstate highway system.

I personally am open to the role of the private sector, but I have

real concerns about this rush into public-private partnerships and

its adequacy to replace or supplement a strong and vibrant Federal

infrastructure program.

Before we move away from our long-term Federal-State highway

partnership, we must better understand the consequences of doing

so. To date, there has been virtually no consideration given to the

tax and financing aspects of these transactions, yet tax benefits are

key to making them economically attractive to private companies.

This afternoon our witnesses will assist us in understanding the

tax and financing aspects, an understanding that I think will prove

essential if Congress is to consider its role in this new phenomenon.

Before turning to our testimony, let me just say how troubled I

am that a desire to derive generous Federal tax benefits is driving

exceedingly long lease lengths. As our tax attorney witnesses will

explain, in order to take advantage of the tax code’s 15-year cost

recovery period, a lessor must have constructive ownership of the

road.

Constructive ownership is generally attained by having a lease

that exceeds at least 45 years, which is the Bureau of Economic Affairs’ determination of what is its useful life. So parties will not

enter these deals unless they are at least 45 years in length, often

longer, and they take that position to follow tax advisors’ guidance.

What we have, in my view, is the tax tail wagging the dog, exceptionally long leases in order to recover capital outlays on an accelerated schedule. In essence, today’s tax code provides a taxpayer

subsidy for these companies that far exceeds what economic reality

would dictate.

3

Let me put the remainder of this statement in the record, and

go ahead and defer to Senator Bunning, who is the ranking member on this subcommittee.

Senator Bunning?

[The prepared statement of Senator Bingaman appears in the appendix.]

OPENING STATEMENT OF HON. JIM BUNNING,

A U.S. SENATOR FROM KENTUCKY

Senator BUNNING. Thank you, Mr. Chairman.

I welcome the opportunity to hear from these distinguished visitors on our panel today about public partnerships with private

firms to build and maintain certain highways. We all know how

important a healthy and functioning transportation system is to

the United States. Perhaps no one knew this better than President

Eisenhower, who led the effort to create the modern interstate system over 50 years ago.

President Eisenhower’s goal was to link the continental United

States together for the age of the automobile. Under his administration, the Highway Trust Fund was created. There are many different models and modes of transportation used by Americans

today, such as transit, rail, and aviation, but our highway system

and its funding are the reason that we are here today.

Today we are focusing on partnerships to maintain existing State

highways that were not built with Federal money, such as the Indiana toll road that was mentioned and the road in Chicago. As the

Government Accountability Office stated in written testimony,

‘‘Public-private partnerships show promise as a viable alternative

to help meet the growing and costly transportation demands. We

should not dismiss this private sector alternative out of hand, but

we should make sure that our tax laws are neutral across investment types.’’

The principal of neutrality is a bedrock of our tax laws, and

rightly so. Tax laws that are unduly restrictive will starve the

transportation sector of capital for new investment and will mean

higher costs for government, higher taxes, and deteriorating infrastructure.

As we look at the tax attributes of these transactions, we should

be careful to consider the tax benefits available to investors for

similar capital-intensive investments such as investments in manufacturing facilities or aircraft. We must put our tax laws in context

before we conclude that they are too generous when we focus on

one particular type of transaction.

I thank the chairman for holding today’s hearing, and I look forward to the testimony and the discussion that follows it. Thank

you.

Senator BINGAMAN. Thank you very much.

Let me just introduce our five witnesses, and then ask each of

them to give us their views. Starting on the left-hand side of the

table—our left, at least—Edward Kleinbard is Chief of Staff for the

Joint Committee on Taxation. Thank you for being here. JayEtta

Hecker is Director of Physical Infrastructure Issues at the Government Accountability Office. Thank you for being here. Pat Choate

is an economist who is director of the Manufacturing Policy Project.

4

Thank you, Pat, for coming. Linda Carlisle is a tax partner with

White and Case. Dennis Enright is principal of the public finance

investment banking firm of NW Financial Group. Thank you very

much for being here.

Why don’t each of you take 5 or 6 minutes and give us the main

points we need to understand. We will include all of your statements in the record as if read, but give us the main points and

then we will have some questions.

Mr. Kleinbard, why don’t you go ahead?

STATEMENT OF EDWARD D. KLEINBARD, CHIEF OF STAFF,

JOINT COMMITTEE ON TAXATION, WASHINGTON, DC

Mr. KLEINBARD. Thank you, Mr. Chairman, Ranking Member

Bunning. I am pleased to appear before you today to discuss the

Federal income tax issues raised by the use of public-private partnerships for brownfield highway projects. These, as you know, involve very long-term leases of existing infrastructure from a State

or other public owner to private parties. In my testimony, I have

used the structures of two well-publicized transactions as a template, but my remarks should be understood as generic in nature.

The term ‘‘public-private partnership’’ has no tax significance. Indeed, many such partnerships are not partnerships at all in the tax

sense. As a result, the tax consequences of these transactions depend on their particular facts and contractual terms. For tax purposes, the archetypal transaction that we are considering today can

be seen to comprise three operating relationships: first, a purchase

by the private firm of the existing infrastructure, that is, a highway itself and the related improvements; second, a grant by the

public owner to the private firm of a right of way, that is, a longterm lease on the public lands that underlie that infrastructure;

and, third, a grant of a franchise from the public entity that permits the private party to collect tolls from the highway.

Mr. Chairman, as you have pointed out, these deals are structured as very long-term arrangements, 75 or 99 years, for example.

Tax considerations are important drivers of the long-term nature of

the arrangements. By leasing the infrastructure assets for a period

that clearly exceeds their expected economic life, the firms can

treat themselves as the tax owners of the infrastructure. As owners, they are then eligible to claim tax deductions for the depreciation on their investments, just as other asset owners do.

Turning to the tax policy implications, public-private partnership

transactions raise, in my mind, two important sets of tax policy

questions: first, are the parties to the arrangement engaged in a

bona fide commercial transaction, or instead are they primarily

trading on the public entity’s tax-exempt status to transfer favorable tax attributes from the public sector to the private firm?

I think, here, the answer is that the public-private partnership

arrangements of the sort that have been consummated to date appear to be genuine commercial transactions. In particular, they do

not appear to present the issues raised by lease-in/lease-out, socalled LILO, or sale-in/lease-out, SILO, transactions which are

abusive arrangements that have been curtailed by Federal tax legislation.

5

The second policy question is, are the tax consequences to the

private party similar to the tax results achieved in other economically comparable transactions that take place entirely in the private sphere? Considerations of economic efficiency and consistency

would dictate that the tax law should be neutral as between making this type of investment or another type of investment. Or, instead, does the tax law, through tax expenditures, indirectly subsidize this activity? If so, is that subsidy intentional, for example,

as an instrument of Federal transportation policy?

I think, here, the answer is that the code’s depreciation system

can be described as comprehensively non-neutral. The rules arguably grant Federal subsidies in the form of accelerated depreciation

deductions for investing in property, plant, or equipment, but in

turn, those subsidies are not uniform across different asset classes.

So the practical question here is whether a private investor in a

brownfield public-private partnership receives depreciation benefits

that in some manner are disproportionate to those available in

capital-intensive transactions that take place wholly within the private sphere.

A private investor in a brownfield highway project generally can

expect to depreciate its investment in the highway itself and any

bridges that it acquires over 15 years using accelerated depreciation methods. Its costs for any intangible assets, like its franchise

to collect tolls, also are amortizable over 15 years, but on a

straight-line schedule.

It can be argued that the 15-year accelerated depreciation is not

the appropriate schedule for highways or bridges. The current rule

does not, however, appear on its face to be greatly different from

the depreciation benefits afforded other transportation assets. For

example, railroad beds are depreciated over 50 years, but rail track

over 7, using an accelerated method, and commercial aircraft also

are depreciated on an accelerated 7-year method.

Similarly, it could be argued that 15-year amortization of the upfront payment for the franchise is too generous in the context of a

toll road where the overall agreement lasts for 75 or 99 years, but

the code, today, permits the amortization of a purchased permanent franchise or purchased goodwill over the same 15 years. It,

therefore, is not obvious that the code inappropriately favors longterm toll road deals that we are discussing when compared to competing investments.

Finally, a quick note on the financing opportunities available. As

you know, qualified private activity bonds are tax-exempt bonds

used to benefit a private owner or user, but that advance some

public policy by virtue of the nature of the asset being financed.

In 2005, Congress added a new category of qualified private activity bonds, bonds for qualified highway facilities. Qualified highway facility bonds may be used to finance improvements in publicprivate brownfield highway arrangements, but doing so comes at a

price. To the extent that assets are acquired with the proceeds of

these bonds, depreciation is calculated using a straight-line method

over longer recovery periods than otherwise would be the case.

Interestingly, however, intangible assets available for the 15-year

amortization rule that I described are not affected by any slowdown if acquired with tax-exempt financing.

6

I would be pleased to answer any questions that you might have.

[The prepared statement of Mr. Kleinbard appears in the appendix.]

Senator BINGAMAN. Ms. Hecker, why don’t you go right ahead?

STATEMENT OF JAYETTA Z. HECKER, DIRECTOR, PHYSICAL

INFRASTRUCTURE ISSUES, GOVERNMENT ACCOUNTABILITY

OFFICE, WASHINGTON, DC

Ms. HECKER. Thank you very much, Mr. Chairman, Senator

Bunning. It is an honor to be here.

What I will be doing is summarizing a recent report that we

have done looking both domestically and internationally at the use

of public-private partnerships in the highway sector.

The three points that I will cover are: first, what are the benefits, costs, and trade-offs of these deals, both domestically and

internationally? The second question is, how have public officials

acted to protect the public interest, what kind of process do they

go through, what kind of analysis do they do? And, finally, what

has the Federal role been? What kind of review do they have, what

kind of hook do they have on these deals?

The issue of the benefits is one that we could talk about for a

long time, but I will very briefly say the major benefit is on the

sharing or the transfer of risk. There is a lot of risk in building

highways, construction risks, traffic risks, and a lot of uncertainty.

Part of the benefit of these deals is that the private sector is very

good and, in some places, potentially better than the public sector

at quantifying and pricing those risks. There are also increased efficiencies. You get a life cycle management. The public sector traditionally has not taken a life cycle approach to roads. These are

long-term assets. But they build them and then, as they can, they

figure out when it is time to replace or when it is time to repair

or renovate. These deals basically have the built-in long-term responsibility; it is taken care of for the life of the concession, the full

life cycle management of that asset.

Another benefit is the private sector profit motive. You potentially get a lot more innovation, customer service, use of information technology, and more efficient methods of tolling. Public toll

authorities have traditionally not had well-defined tolls and efficiently managed tolling programs, and private entities do a really

good job of better recognizing what the full costs of operating that

road are, the benefits received by the users, and pricing the road

more efficiently.

The foreign benefit, where these have been used extremely widely, are most of their major highway systems were built with these

partnerships. So this is not just kind of at the margin, the way we

are seeing it starting to develop here. In some countries—Australia, Spain—the whole network was built through these deals.

From the public perspective, the benefit is that it is off the public

books. They recognize that it has costs, but basically these countries did this, in Europe, for example, to be able to join the European Union. You had to have a very, very tightly managed fiscal

policy, and there was just no view whatsoever that they could build

the roads without turning to the private sector.

7

There are, however, potential costs and trade-offs. It is a concern

that there are views that this is somehow ‘‘free’’ money. You cash

out, particularly on these brownfield or existing assets. You just

cash it out and there is this windfall. The reality is, these techniques are probably going to result in higher tolls to the users because of the way they have been managed relative to a publicly

owned toll road. There are lots of other costs and issues which I

discuss in my written statement.

As to the tax issues, I can say that our work has been confirmed

by all the parties in Indiana and Chicago. The length of the deals,

as you said, Mr. Chairman, was largely dictated by eligibility for

demonstrating effective ownership for tax purposes, and those benefits were seen as substantial and definitely increased the amount

that the State was able to cash out or monetize from the asset. So,

it played a big role.

The second issue: what kind of strategies do States or other

countries use to protect the public interest? In the deals that we

looked at domestically where this process is just beginning, a lot

of the focus is on the contract terms. While these protections are

important, overseas they have much more rigorous, up-front analyses, very multiple-staged reviews of public interest, multiple dimensions. They have public sector comparators, how it compares to

what the public sector could do, and those are very, very distinct,

very well developed, and really represent an opportunity for a lesson learned in the U.S., and that was one of our main recommendations.

The final question, which of course is important to the Congress,

is what is the Federal role? The Federal involvement in these

projects was very limited because the Federal hook on these deals

is related to the amount of Federal funds involved in them.

As you said, correctly, many of these facilities were built with

State funds. Federal funds, for the most part, were limited. The

concern that we have is that there really is no focus at the Department on what the national interest may be in these deals and what

the review process might be. There is some ambiguity in current

law about rate of return, which is potentially a very important factor.

To wrap up, though I hope we can get into many of these in more

detail, there are really some important promises and benefits of

these deals, and they do bring money to the table.

It is borrowed money, but we are out of money, and these bring

rigor and structure to some environments and have promise. They

need to be adopted in rigorous, up-front ways where all of the risks

are understood and mitigated and we do not have some unintended

consequences of perhaps putting more burden on the users of that

toll road than is appropriate.

Thank you, Mr. Chairman. That completes my statement.

Senator BINGAMAN. Thank you very much.

[The prepared statement of Ms. Hecker appears in the appendix.]

Senator BINGAMAN. Mr. Choate, go right ahead.

8

STATEMENT OF PAT CHOATE, ECONOMIST AND DIRECTOR,

MANUFACTURING POLICY PROJECT, WASHINGTON, VA

Mr. CHOATE. Thank you, Mr. Chairman, Mr. Bunning.

I have been invited to provide an overview. What we are talking

about on highways is being experienced nationwide. What we are

seeing is massive under-investment across the board. I prepared a

table to show you, today, an estimate of just what this meant from

the period 1960 through 2006. What we have seen during that period in terms of real investment is a decline of 44 percent, and at

the same time we have seen a 66-percent increase in our population inside this country.

For highway investments, the primary problem has been that the

gas taxes have not been indexed for inflation, and they have not

kept pace over time. The last change was in 1993. The gas tax at

this point is about 18.3 percent. If it were indexed for inflation, it

would be nine points more. To put that into context, what you

could buy for $1,000 in 1993, you can only get $700 worth of today.

That is the primary problem that we face on the financing of these

roads.

These PPP arrangements are a substitute for the absence of public monies. The system that we have long used, going back into

really the Roosevelt administration, was officially put into place by

President Eisenhower, and the financing system that we have, the

pay-as-you-go, was designed by Senator Prescott Bush of Connecticut, when he was a Senator, the President’s grandfather. That

system has worked well, as long as we kept it indexed for inflation.

As we take a look at these projects, the first ones, there are some

real questions on policy, I would think, for the public sector. In the

Chicago deal, on the $1.8 billion, most of the money was used for

things other than transportation, including making up the $200

million deficit for the city of Chicago. On the $3.8-billion deal for

Indiana—a toll road that was built, incidentally, with the promise

that when it was paid off it would be made a public road, but was

not—that money has been used to give to counties in the surrounding area, fund other roads, and various purposes of general

government.

For the Texas roads that are being put into place, there are several different models in use there. But the key points on those

roads are, they are being used not just to simply provide transportation at the best cost, they are being used to also finance State

government. In other words, a transport tax is being imposed

through those roads. Up-front monies are being collected to take

what are existing public roads and convert them to tolls. At the

present point, of the highway monies collected in taxes, more than

25 percent are diverted to other functions to fund the general fund

of the State government.

The Governor of Texas has submitted a proposal to Congress,

asking that the U.S. sell back to the State of Texas its interstate

highways at the prices that were originally paid in the 1950s and

1960s to construct those roads, and those roads would be converted

to toll roads.

Taking a look to the future, when one takes a look at doing the

analysis, the first thing that one sees at the national level is that

the principal problem is that the national government does not

9

have a national capital budget. Every State government has a capital budget, every corporation has a capital budget. The Federal

Government does not have a capital budget that determines priorities and looks at the things that Ms. Hecker called for. That is a

major fiscal omission.

The second thing, when one takes a look at the PPP substitute

for public financing, is the projects that will draw attention are the

ones where you have massive congestion. I submitted as part of my

testimony a map that had been put together by the Federal Highway Administration, and it identified where the congestion would

be in the year 2020. That is about 20 percent of the roads in the

country. Those roads will be attractive for high tolls. The rest of

the country, the question is, how will the Federal Government and

how will the States finance those, where you have the long runs

in States such as New Mexico and such as in Kentucky, and the

balance of the West?

I have other questions that I raise in my paper that deal with

the question of, with these long profits to private firms, if we must

use tolling instead of public authorities that will turn the roads

back to the public, what is the incidence of tax, what is the equity

of the tax, and particularly, what are the consequences when you

have projects such as are being built on I–95 here, when the Federal Government is putting up $1 billion of the $1.7 billion or $1.8

billion that is being financed? It is not simply a tax question, it is

a question of the Federal Government putting up money. The Department of Transportation reports that there are, at present, some

$75 billion of applications for those particular monies. I think those

are also significant.

I look forward to your questions.

Senator BINGAMAN. Thank you very much.

[The prepared statement of Mr. Choate appears in the appendix.]

Senator BINGAMAN. Ms. Carlisle?

STATEMENT OF LINDA E. CARLISLE, PARTNER,

WHITE AND CASE, LLP, WASHINGTON, DC

Ms. CARLISLE. Mr. Chairman and members of the committee,

thank you so much for inviting me to speak. My name is Linda

Carlisle. I am a partner with White and Case in Washington.

I have provided advice regarding the Federal income tax treatment of transactions involving private investments in public toll

roads in the United States to U.S. and foreign investors. With increasing frequency in the past few years, State and local governments have sought to obtain funds for infrastructure development

and maintenance from private investors rather than from tax revenues or from issues of tax-exempt bonds.

These privatization transactions result from a competitive bidding process through which the most qualified and the most wellfunded private investors are awarded the right to enter into the

privatization transactions. Authorization for the State or local government to enter into the transactions typically requires the approval of the legislative body of the government.

Investments in public toll roads are attractive to private investors because toll roads are, or may, produce predictable cash flows

and growth potential, they provide returns on investments that

10

have a low correlation to other asset classes, and they provide predictable returns over relatively long periods.

Private investments may be made with respect to existing toll

roads or may be made with respect to new toll roads. My oral testimony will focus on brownfield projects, which we have been discussing today: existing toll roads.

Private investment in an existing toll road typically takes the

form of a concession and lease agreement for the lease of the toll

road and the grant of the right to toll the road over the term of

the agreement. The concessionaire, an entity typically treated for

tax purposes as a partnership, is required to make an up-front payment to the State or local government. This is typically funded

with equity and debt from third-party lenders.

The concessionaire also may be required to make payments back

to the local government during the term of the agreement if specified windfall toll revenues occur or if there are specified refinancing

gains during the term of the agreement.

The term, as earlier panel members have discussed, gives the

concessionaire possession and use of the toll for a period that exceeds the estimated remaining economic life of the road, normally

between 75 and 99 years.

The concessionaire agrees to pay all costs and bears all risks relating to the operation of the toll road, including any casualty

losses. The State or local government will typically retire or legally

defease any outstanding tax-exempt bonds that are secured by the

toll road or by revenues from the toll road.

Through such brownfield projects, State and local governments

are able to monetize the fair market value of a toll road in order

to use the proceeds to fund other capital needs and shift the burden of the toll road during the term of the agreement to the private

investors. The U.S. Federal income tax treatment of private infrastructure transactions in brownfields mirrors the tax treatment of

other investments in property in the United States.

Since the concessionaire is a flow-through entity, the entity itself

is not subject to Federal tax, but U.S. and foreign individuals and

corporations that are partners are subject to U.S. Federal tax on

their distributive share of the income of the partnership, regardless

of whether it is distributed to them. Dividend distributions by corporations that are partners in the concessionaire are subject to 30-

percent withholding tax if they are paid to non-residents.

In addition, non-U.S. shareholders of U.S. corporate partners or

members of the concessionaire may be subject to U.S. Federal tax

on gains from the disposition of their shares in the U.S. corporate

partner if such U.S. corporate partner is deemed to be a U.S. real

property holding corporation.

In a typical agreement, the concessionaire acquires ownership for

tax purposes of the real property improvements. The concessionaire

also acquires a lease of the land on which the toll road is located,

ownership of any tangible property conveyed as part of the road—

signage—any goodwill or going concern with respect to the road,

and the right to charge and collect tolls. Government licenses, permits, and franchises that are not interest and land are section 197

intangibles, which, under current law, are amortizable on a

straight-line basis over 15 years. In many States, private persons

11

are prohibited from operating toll roads or charging tolls without

the express permission from the State.

In such States, the license or franchise to toll a toll road should

not be treated as an interest in land because it is not a right that

is part of the ownership or lease of the land. Accordingly, in such

rights the right to charge and collect tolls for the use of public land

should be considered to be a 197 intangible, amortizable over 15

years.

The concessionaire should be able to depreciate the real property

improvements acquired, and other tangible property under

‘‘MACRS,’’ the Modified Accelerated Cost Recovery System. But in

brownfield projects, the original construction of the road may very

well have been through tax-exempt bond financing at the local or

State level. MACRS depreciation is not allowed for tax-exempt

bond-financed property. It is unclear whether property that is acquired from a local government in all cases would be able to be depreciated under MACRS.

If a U.S. corporate member of a concessionaire is a U.S. real

property holding company, gain on the sale of the stock would be

subject to the FIRPTA, or Foreign Investment and Real Property

Tax Act, withholding tax. Again, that may or may not depend upon

whether the right to charge tolls is an interest in land.

In conclusion, the up-front payment made to a State or local government in a brownfield is in exchange for the transfer of the ownership of the real property improvements, lease of the land, government franchise, and any goodwill. The cost of such assets may be

depreciated for tax purposes.

A U.S. or non-U.S. investor is engaged in a business in the

United States and pays tax on income earned from the project.

These are the same results that would apply in any acquisition of

a U.S. business. Accordingly, there are no unique rules that enhance the tax benefits of brownfield transactions. To the contrary,

because most brownfield projects may have been financed with taxexempt bonds, private investors in a brownfield may receive less

tax benefits.

In summary, private-public infrastructure investments provide

needed infrastructure for State or local governments with no extraordinary tax benefits to the private party.

I would be pleased to respond to any questions.

Senator BINGAMAN. Thank you very much.

[The prepared statement of Ms. Carlisle appears in the appendix.]

Senator BINGAMAN. Mr. Enright?

STATEMENT OF DENNIS ENRIGHT, PRINCIPAL,

NW FINANCIAL, JERSEY CITY, NJ

Mr. ENRIGHT. Thank you, Mr. Chairman, members. I appreciate

being here today.

We have undertaken analyses and written reports on both Chicago and Indiana, as well as other toll roads. We are here to talk

about the relationship of those projects to the issues at hand in infrastructure finance.

Over the last 2 years, ever since the Chicago Skyway publicprivate partnership transaction, the 99-year lease, there has been

12

much discussion and debate on the need and/or value of having private operators take over long-term ownership financing and operating obligations of U.S. infrastructure assets which to date have

been the responsibility of public bodies.

Most of the focus on utilizing the private sector has been to tout

two advantages: (1) the availability of investment capital in the billions; (2) infrastructure management that is more focused on profitability. In my view, these two alleged advantages have been promoted without a thorough review of the impact upon the general

public that utilizes infrastructure assets, and in the end must pay

for them through some form of user fees. Additionally, it is important to note there is no shortage of investment capital available to

fund public sector-owned and -operated infrastructure.

Second, with rare exception, most publicly owned and operated

infrastructure is run just as efficiently as any private operator

would. Any cases of higher operating costs are almost always directly related to the higher cost of fringe benefits in the public sector for health care insurance and pensions rather than any lack of

operating talent.

An often misused measure of both private investment interests

in infrastructure investment and public sector lack of efficiency is

EBITDA, Earnings Before Interest, Taxes, Depreciation, and Amortization, or pure cash flow from operations is really what it reflects.

Publicly owned and operated infrastructure has little positive

cash flow because the public mission is to provide affordable services to its customer base. As a result, when infrastructure has been

sold to private interests, these sales have been hailed as successful

because they were purchased at very high multiples to EBITDA,

multiples to cash flow perhaps 20 to 30 times EBITDA when typical private-to-private sales would be at 10 to 15 times EBITDA,

thus giving the impression that the private sector can run the assets more efficiently and, therefore, is willing to pay a higher price.

In reality, the price is not established in relationship to historical

EBITDA, but is based upon projected future EBITDA, which is

largely driven by the massive increase in rates allowed in the

P–3 model. As an example, if the toll rates granted to the private

buyers of the Chicago Skyway were applied retroactively to the

Holland Tunnel from its opening in 1929, the toll at the Holland

Tunnel today could be $185 rather than the $8 that is collected.

Another misconception is created by promoters of privatization,

creating new metrics that support their case. The presentations of

these new measures often sound compelling, but upon review they

are often revealed as voodoo economics.

Recently in the battle over the leasing of the Pennsylvania Turnpike, one advocate for privatization used the metric of operating expenses as a percentage of revenues as a measure to prove alleged

inefficiency of operations. In reality, this is a bogus measure, since

the lowest toll rate’s possible goal of a public authority drives a de

facto result that their debt and operating expenses consume almost

all of their revenue.

In fact, the Pennsylvania Turnpike maintains one of the three

lowest toll rates per mile in the country, at about 5 cents, and

therefore its expense will reflect the higher percentage of revenues.

This would not be true in the hands of a private operator who must

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increase tolls to squeeze out a profit margin. The true measure of

efficiency is the operating cost per mile of toll road, and the Pennsylvania Turnpike would score well for efficiency using this metric.

Private infrastructure in the United States. The utilization of the

private sector to provide infrastructure in the U.S. has deep roots

that go back to the 18th century when private tolls were common.

Today, although there is still much private infrastructure, it is

largely focused on areas where the private sector has taken technology and market acceptance risk.

The infrastructure involved can be divided into two distinct classes of assets: regulated utilities and risk transfer assets. Regulated

utilities include electric, water, sewer, telephone, cable, etc. Risk

transfer assets include solid waste technology and health care collections.

In both categories, the public sector and the end users were protected either through pricing regulation or through elimination of

risk. The history of private ownership was largely due to an undeveloped public ownership model, and also the need to install the infrastructure across multi-jurisdictional boundaries at a time when

regional entities were not a commonplace solution.

In the case of some of the oldest forms of private infrastructure,

like electricity and telephone, there was also uncertainty as to how

successful these ‘‘new’’ technologies would be since the public needed to pay for them, much like many of us said years ago, we would

never pay for TV since we could get it free over the airwaves.

These types of technology and businesses are appropriate for the

private sector to lead; however, the public sector has always looked

to pricing and open access regulation as a method to protect the

public. One only need look at the deregulation of the electric markets in California in the past decade for an example of why utility

regulation is appropriate.

The risk history of private enterprise providing infrastructure assets to serve the public continues today largely because that is how

it was first established and because it is working in a price and

quality controlled manner that is overseen by public officials whose

interests are to protect the consumer.

Infrastructure finance is not very different from real estate finance. Most people understand that to some degree. And, in real

estate finance, an income-producing property becomes the collateral

for a loan, and the rents that are charged are set at a level sufficient to repay the loan and return a profit. The higher the interest

rate on the loan, the higher the return on equity to the owner, then

the higher the rents.

Infrastructure is not different. The cost of installing and operating a water plant, sewer lines, or roads will need to be recovered

from the rates, charges, and tolls that users of the infrastructure

will pay. Once again, the higher the cost of capital, the higher the

user charges will be.

Equity investment is often looked at as a cheap form of capital

by the public sector. In reality, it is the most expensive form of capital. It requires returns of 10 to 20 percent. Certainly equity investors do not require instant returns on their capital and can wait

to achieve that return, but that accrued return will ultimately be

built into the rates that the users will pay.

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In the Chicago and Indiana transactions, and others such as

Pennsylvania, which is pending, the role of leverage becomes important because, at 10 or 20 percent, the valuation of an asset

would be extremely low. So the investment teams were incentivized

to create what is called a weighted average cost of capital by using

leverage, meaning borrowing in combination with equity investment.

In the case of Chicago and Indiana, this borrowing was typically

80 percent debt, 20 percent equity. In the case of Pennsylvania,

with the crisis in the credit markets, it has changed to 60 percent

debt, 40 percent equity. The lower leverage—meaning less debt,

which is a cheaper form of capital—has increased the cost of capital to over 9 percent in the Pennsylvania case, from an expected

range of 7 to 8 percent. This resulted in lower than expected bids

from the private sector.

It is important to note that a public authority could access the

capital markets at rates near 5 percent for the same transaction.

The lower the cost of capital, the higher the valuation of the asset

up for sale. Our past analyses have shown that a public sector

funding model will produce a value at least 30 percent greater than

a private ownership model, or could produce the same valuation

with 30 percent lower user charges.

Thank you.

[The prepared statement of Mr. Enright appears in the appendix.]

Senator BINGAMAN. Thank you all very much for your testimony.

Why don’t we do 5-minute rounds here? Let me start.

One thing I am not real clear on, Mr. Kleinbard, and any of the

rest of you, maybe Ms. Carlisle, you explained in your testimony

that the long length of these deals is driven by a desire to attain

depreciation benefits that are more generous than economic reality

would dictate. That was what I understood you to say.

Ms. CARLISLE. That is what Mr. Kleinbard said.

Senator BINGAMAN. Mr. Kleinbard said that. All right.

In particular, concessionaires seek to depreciate highways on a

15-year schedule. If, after the 15-year period, the firm sells the

lease to another concessionaire and there are still 45 years left on

the lease, what would be the tax consequences? Is the successor

company then able to write off its costs over 15 years, too?

Mr. KLEINBARD. Yes. If the first concessionaire were to transfer

the lease, effectively it would be selling the property to the second

concessionaire. As a result, the second concessionaire—assuming

they are unrelated parties—would obtain a new cost in the property and would be able to depreciate it, again, over 15 years.

However, the first concessionaire would pay tax on its gain. If

you sum the two of those up, the government actually comes out

the winner because we collect the tax up front from the seller, and

the value to the buyer of the refreshed depreciation takes place

over 15 years. So, net, actually the government is the winner in

that case.

Senator BINGAMAN. All right.

Let me ask Pat Choate, my understanding is that part of these

deals—at least I think the one in Indiana, maybe others, too—is

that they have a non-compete clause in there.

15

Mr. CHOATE. Yes.

Senator BINGAMAN. How does that work? I mean, I guess I have

real trouble seeing how the government, by contract, commits itself

not to build roads if congestion or whatever dictates that additional

highways are needed. I think it would be hard for a Congress to

say, well, we cannot do anything, or hard for a State legislature to

say we cannot do anything, because 40 years ago the State agreed

not to build any roads in this part of the State. Is that what a noncompete clause provides? How do these things work?

Mr. CHOATE. In these first ones, they were called ‘‘non-compete

clauses.’’ In the Virginia contract they are called ‘‘compensation

events.’’ But the non-compete clause—for example, in the Indiana

deal—is 10 miles on either side of that highway. If the State makes

improvements in roads that adversely affect the traffic on the Indiana highway, then the State is obligated to compensate the concessionaire for the money that is lost.

On the deal that is going into place in Virginia, the arrangement

is, on these HOT tolls that, if you get the traffic over, I think it

is 24 percent over some level, I think it is 3,200 or 3,500 cars per

time period, then the State is obligated to pay the concessionaire

70 percent of what the toll would be. These are open-ended deals.

I think the Virginia deal goes for 40 years.

The Texas deal had the 20-mile, 10 on each side, provision on the

trans-Texas corridor arrangement. This has caused a great deal of

concern for the people in Texas, saying, for example, if you do a

greenfield, which that deal was originally proposed to do, and it

runs along the side of I–35, and the State decides to really improve

I–35, then there would have to be some sort of arbitration on how

much traffic was diverted off of the trans-Texas corridor, and the

State, again, would be obligated to pay. The alternative is, as the

tolls go up and the State does not improve, then what you see is

a deterioration of side roads as people seek out a free road to drive.

That is what has happened in Mexico, for example, on their toll

roads.

Senator BINGAMAN. Senator Bunning?

Senator BUNNING. Thank you.

Mr. Choate, I understand you are opposed to politicians who

promise not to raise taxes by signing a ‘‘No Tax’’ pledge.

Mr. CHOATE. As a general——

Senator BUNNING. Well, wait. Let me get my question out before

I get a response, if that is all right with you.

Mr. CHOATE. All right.

Senator BUNNING. You prefer those who would want to raise

taxes on middle-class taxpayers—who are paying today Federal,

State, and local taxes, including gas tax, sales tax, telecommunications tax, tolls on roads, property tax, and other indirect taxes.

Perhaps you would also want a carbon tax. When you add it all up,

the burden is well over 50 percent. But you obviously think that

is not enough. Why not 60 or 70? With the new Medicare law that

we just passed, it probably will be, in 2011, well in excess of 60

percent. If you think you can impress voters by promising to raise

taxes, I encourage you to give that a try in the 7th congressional

district in Virginia, where your Manufacturing Project is based. Do

you have any plans to run for office, Mr. Choate?

16

Mr. CHOATE. In 1996, I was at a party with Senator Bingaman,

and he very wisely advised me. He said, ‘‘Choate,’’ having run for

vice president with Ross Perot, ‘‘whenever you lose by 32 million

votes, I think you can take that as a mandate from the American

people to stay in the private life.’’ So, I am taking that advice, definitely. [Laughter.]

Senator BUNNING. Thank you very much. And by the way, in

Kentucky——

Senator BINGAMAN. I do not remember saying that, just for the

record.

Senator BUNNING. That is all right. [Laughter.]

Mr. CHOATE. But it was wise advice.

Senator BUNNING. I have a couple more questions. In Kentucky,

all parkways, east, west, north, south, were built by Kentucky

State dollars, roads that spanned Kentucky. The only time we got

to the interstate system was when Dwight David Eisenhower became president, and now we have two interstate highways in Kentucky, one north/south, one east/west.

The rest of our main roads are all parkways: the Bluegrass Parkway; the Western Kentucky Parkway; the Daniel Boone or, as it is

now called, the Hal Rogers Parkway; the Louie Nunn Parkway; the

Martha Layne Collins Parkway; the Ned Breathitt Parkway. Those

were all built by Kentucky taxpayers, and we are not selling any

of them, at least presently. With the situation we have in Kentucky

there may be a plan to do just that, because we are hurting financially, both in the road fund and in the general fund.

Ms. Carlisle and Mr. Kleinbard, some have said that publicprivate partnerships for highway maintenance or new construction

have features in common with tax shelters. Can you comment on

why the comparison is being made, and why do you believe this is

not an area that the Finance Committee should be concerned about

from a tax shelter perspective?

Mr. KLEINBARD. Does Ms. Carlisle want to go first?

Senator BUNNING. Either/or.

Mr. KLEINBARD. Go ahead.

Ms. CARLISLE. As I said in my testimony a few moments ago, the

tax benefits that are afforded to the investors in a private-public

infrastructure partnership are exactly the same as they would be

in any business operation in the United States. In a SILO or a

LILO, as Mr. Kleinbard referenced earlier, tax benefits were

bought—and I will use that word—in transactions with no true

business purpose. That is one side of the spectrum.

These transactions that we are referencing are just like any

other acquisition of a business. Indeed, we are taking toll revenues

which would be not subject to tax because they would inure to the

government, and we are making that taxable income to the private

sector. Yes, there are depreciation benefits allowed because it is the

acquisition of a trade or business, but as those benefits may not

mirror economic depreciation, that is a tax policy choice that the

Federal Government has made. It is not a unique structure for infrastructure deals. I cannot answer the first part of your question,

which is why people are viewing these as like SILOs and LILOs.

Senator BUNNING. Maybe Mr. Kleinbard has an idea why, or

maybe not. Go ahead.

17

Mr. KLEINBARD. Well, I have three thoughts. First, the word ‘‘tax

shelter’’ means whatever you choose it to mean. But it does not, by

itself, have a lot of content. I think the reason for the confusion is

that these transactions involve the public sector and the private

firm and a lease, and that sounds sort of like the SILO and LILO

transactions.

But the difference is that in those cases the lease went the other

way. The critical lease went from the private nominal owner back

to the public sector, so it was the public sector that continued to

have all the economic risks and rewards of operating the facility,

and it was the public sector as lessee that had the obligation to

maintain the facility. And it was the public sector that had, in effect, an obligation even to reacquire the facility at the end of the

lease term. None of that is present here. Nonetheless, what Ms.

Carlisle says, of course, is correct in the sense that the depreciation

and other benefits given here are not unique.

But there is a way of looking at these transactions that was identified either by Mr. Choate or Mr. Enright that is worth keeping

in mind, and I think, as Ms. Carlisle also said, these are long-term

transactions with very predictable income streams. When you have

a long-term asset with predictable income streams, you have a

highly bankable asset, one that you can finance in the private markets easily.

The result of that is very similar to a high-quality office tower,

for example, with net leases where the owner can borrow a good

deal of money, secured by the building. So, too, here, the owner of

the facility has, long-term, the ability to leverage the facility to an

extent that would not be true, for example, of any other——

Senator BUNNING. I am sorry. My time has expired. Thank you.

Senator BINGAMAN. You can go ahead, if you would like.

Senator BUNNING. No, that is fine.

Ms. CARLISLE. Mr. Bunning, could I possibly add something to

Mr. Kleinbard’s comment?

Senator BUNNING. Well, we are already past, 3 minutes past. So,

the chairman is——

Senator BINGAMAN. Go right ahead. I am not in any great hurry

to ask my next question, so go ahead.

Ms. CARLISLE. Thank you, Mr. Chairman.

I always agree with Mr. Kleinbard, or generally agree. The one

distinction I would make is, particularly with respect to toll roads,

they are not like a net lease of an office building. These are businesses that require drivers. There have been, with respect to Indiana toll roads, Chicago’s Skyway, and the recent deals that have

been done, a marked decrease in what traffic expectations were in

pricing the deal.

I said it is a predictable cash flow generally. My clients would

argue that they have to maintain the toll road to make sure that

it is predictable. This would go to Ms. Hecker’s point about the

technology that goes into operating a toll road, and they have to

hope that people continue to drive. So I just would argue with Mr.

Kleinbard that it is not quite as predictable a cash flow as a longterm bond.

Senator BUNNING. Thank you.

Ms. CARLISLE. Thank you.

18

Senator BINGAMAN. Mr. Enright, maybe I am reading too much

into your testimony, but my impression is that it is your conclusion

that the public sector can finance road infrastructure more cheaply

than the private sector can, and therefore these so-called publicprivate partnerships wind up costing people more in the long run

than if the government just went ahead and maintained the roads.

Mr. ENRIGHT. You are correct. The public sector is in the position

to deliver a much lower cost of capital, and therefore keep the user

charges as low as possible. The private sector is incentivized to

make a profit. That is their job. We did separate analyses on both

Chicago and Indiana, very extensive, and concluded that in both

cases the public sector could have done just as well and held onto

the asset and charged people lower tolls and raised the same

amount of money. The problem in infrastructure in the country is

not capital. The problem is a willingness to charge people for the

infrastructure that they want to use.

Senator BINGAMAN. Right.

Now, Ms. Hecker, you were suggesting that in Europe, for example, and in other industrial countries they do a much better or

more rigorous analysis before entering into these kinds of projects

than was done in the case of Chicago or Indiana. At least, I

thought I heard you say that.

Ms. HECKER. Precisely.

Senator BINGAMAN. And I guess what I am hearing from Mr.

Enright is, had such an analysis been done in those cases, the decision would have been made not to enter into the transaction. Do

you have any views on that?

Ms. HECKER. I do not think it is necessarily that they would not

go ahead with the transaction. I think there are opportunities to

gain benefits and efficiencies. I do not think the full costs were

very transparent. I do not think they were detailed. I do not think

potential impacts of transfers from the interstate commerce that

would fund this, transferring that to lower State roads was really

evaluated.

I think there were a host of issues that were not fully evaluated.

I have to agree that the cost of the borrowing part of this is more

expensive, even with the PAB. So there is no doubt that this is a

premium way to go about building or maintaining a road but, if

you give effective transfer of risk, if you get some assurance of certain public benefits——

Senator BINGAMAN. When you say a premium way, you mean an

expensive way.

Ms. HECKER. It is more expensive for the private sector to borrow

or to use equity than it is for the public sector to use municipal

debt.

Senator BINGAMAN. Right.

Ms. HECKER. But it is whether you get enough benefits in exchange. There are no deals in Europe or anywhere where they

monetize the asset the same way we have seen here. We never saw

that anywhere.

Senator BINGAMAN. Explain that a little more.

Ms. HECKER. The focus in both Chicago and Indiana and in many

of the other deals now is, to the advisors: get me a deal that maximizes the cash that I can take out of this asset.

19

Senator BINGAMAN. Right.

Ms. HECKER. And they take pride that their whole bidding was

a piece of paper with a single number on it.

Senator BINGAMAN. Right.

Ms. HECKER. Their whole focus. In Australia, in Europe, in other

places, there is competition and the bid is for the lowest toll.

Senator BINGAMAN. So the competition in these other countries

is who can keep the tolls the lowest?

Ms. HECKER. In some of the cases, that is the way the bid takes

place.

Senator BINGAMAN. Rather than who can give the government

the biggest up-front payment.

Ms. HECKER. Right. So it is not that the analysis would say it

will never show that it is a good deal. You would get a better idea

of how you can assure that you generate the benefits and that they

justify the higher costs.

Senator BINGAMAN. Mr. Kleinbard, did you have a comment?

Mr. KLEINBARD. I did, sir. I wanted to add a footnote to Mr.

Enright’s and Ms. Hecker’s comments about the cost of capital. It

is true that public debt is cheaper than private debt, but the reason

is, to a limited extent, credit rating, but more directly it is because

of a Federal subsidy in the form of tax-exempt interest. So we

spend $30 billion a year, the Federal Government does—$30 billion

a year—in subsidizing tax-exempt financing at the State level.

So, when you talk about the cost of capital to a State, what you

are really talking about is how large a Federal subsidy is going to

be given in the form of the tax-exempt interest as opposed to the

Federal subsidy in the form of accelerated depreciation in the private sector, for example. That makes the comparison fairer, but it

also makes it more complicated.

Senator BINGAMAN. Your comment, Pat, I think in reference to

what is going on in Texas, you were talking about a transport tax

being imposed through the use or establishment of these roads. Is

it fair to say that what we are doing here, in order to avoid raising

a gas tax, in order to improve highways, you have this device of

establishing or selling off roads for toll roads as a way of essentially transferring that over to a transport tax?

Mr. CHOATE. Yes. And it is not just simply financing roads, it is

financing—in Texas, 25 percent of that money goes to fund education and other functions of State government. So, basically what

we have is, transport is being taxed to finance other activities. The

political responsibility and risk of raising those taxes, tolls, is being

contracted out to, in effect, the concessionaire.

What is troubling to me about the way this is being done, particularly listening to Mr. Enright’s conclusion, if we could do it as

a public deal for 30 percent less, that seems to be very attractive,

on limited public resources. The pattern in the past has been, on

many tolls roads, when they are completed and they are paid off,

they are made freeways again.

The philosophy, at least for the past 60, 70 years of the United

States on our transportation policy, is to provide the very best service at the very lowest cost because of the externalities that are involved with our economy, of locating business, moving people to

deal with an urban land design that has moved more and more toVerDate 11-MAY-2000 14:22 Sep 24, 2010 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 58297.000 TIMD PsN: TIMD
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ward commuters. This reverses that policy. This is an historic shift

in policy.

This is, as Mrs. Hecker says, to maximize the revenues that are

coming off of those roads. In many ways, that can be maximized

by just plotting a curve and just saying, all right, what is the maximum rate we can get, and that may involve fewer cars. You may

raise it where you can substitute fewer cars for the maximum rate.

So this is an historic shift in national policy that we are going

through.

Senator BINGAMAN. Well, I think all of this has been very useful.

As I indicated before, I need to adjourn the hearing because of this

ceremony on the Senate floor. But I think we have gotten most of

the points out that people wanted to make, and I appreciate the

full testimony everyone has provided. We will follow up with you

and perhaps have another hearing down the road.

Thank you very much.

[Whereupon, at 3:24 p.m., the hearing was concluded.]

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