Mass Transit: Issues Related to Providing Dedicated Funding for the Washington Metropolitan Area Transit Authority
Published: 2006-05-15T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: A regional panel estimated that the Washington Metropolitan Area Transit Authority (WMATA)--Washington, D.C.'s, transit system--will have total budgetary shortfalls of $2.4 billion over 10 years. The panel and others have noted that WMATA's lack of a significant dedicated revenue source may affect its ability to keep the system in good working order. Proposed federal legislation would make $1.5 billion available to WMATA if the local governments established dedicated funding. This report addresses (1) the characteristics of dedicated funding and its effects on transit agencies and governments; (2) how potential revenue sources compare in terms of stability, adequacy, and other factors; (3) major actions needed to establish dedicated funding for WMATA and the progress made to date; and (4) issues that dedicated funding poses for the region and WMATA. To address these issues, GAO reviewed financial data for the nation's 25 largest transit agencies, interviewed officials from 6 transit agencies and from the state and local governments that support WMATA, and reviewed literature on the financing of mass transit. GAO provided a draft of this report to WMATA and the Department of Transportation for review. Officials from these agencies provided technical clarifications that were incorporated in the report, as appropriate.
section_title: What GAO Found
paragraphs: Dedicated funding, an important source of revenue for many transit agencies, is described by the Federal Transit Administration (FTA) as a specific revenue source--such as a sales or gas tax--that is designated to be used for transit and is not subject to appropriations. According to data transit agencies report to FTA, 23 of the 25 largest transit agencies have dedicated funding, although the transit agencies GAO spoke with vary in the extent to which their dedicated funding corresponds to FTA's description. Most transit agencies with dedicated funding receive such funding from multiple sources and use it on both operations and capital expenses. Generally, dedicated funding is subject to the same oversight as other expenditures and is viewed by transit agencies as having a positive effect on their financial health, particularly with regard to long-range planning. However, dedicated funding has potential drawbacks: For example, it is vulnerable to economic cycles, and it limits the budgetary flexibility of state and local governments. Selecting a dedicated funding source for WMATA involves consideration of the funding source's year-to-year stability and its longer-run adequacy. For state and local governments, another consideration is the political feasibility of the tax or fee rate required to collect a specified amount of revenue from a particular funding source. Revenue sources that GAO analyzed--the sales tax, payroll or income tax, motor vehicle fuels tax, property tax, access fees, and vehicle registration fees--have different characteristics when assessed using these considerations. If governments increase their overall tax and fee revenues to provide additional funding for WMATA, there may be equity, efficiency, and administrative cost issues for their tax systems. To establish dedicated funding and conform to the requirements of the proposed federal legislation, WMATA's supporting jurisdictions would need to enact separate legislation to direct a specific revenue source to WMATA and to amend the WMATA Compact. As of April 2006, legislation to dedicate a portion of sales tax revenues to WMATA had been enacted in the District of Columbia, but neither Maryland nor Virginia had enacted comparable legislation. The only jurisdiction to introduce a bill to amend the Compact has been Maryland, and this legislation was later withdrawn. The District of Columbia and Virginia have not begun steps to amend the Compact. The federal government and the jurisdictions that support WMATA will need to resolve several issues should they choose to provide WMATA with dedicated funding, including (1) the proportion of the jurisdictions' payments to WMATA that come from dedicated funding and how to mitigate its risks; (2) whether dedicated funding will result in a net increase in payments to WMATA and how the size of each jurisdiction's payment will be determined; (3) whether dedicated funding should be used for operations, capital expenditures, or both; and (4) whether increased oversight of WMATA is needed to ensure dedicated funds are properly accounted for.

section_title: Letter
paragraphs: In recent years, the Washington Metropolitan Area Transit Authority  (WMATA) has faced serious financial and budgetary problems as well as  continuing challenges related to the safety and reliability of its transit  services. At the same time, ridership is at an all-time high, and WMATA  continues to provide critical services and considerable benefits to the  Washington, D.C., region’s economic well-being and to the federal  government. Over the years, the federal government has provided WMATA  with about 60 percent of the funds used to construct the Metrorail subway  system, and Congress has a continued interest in the viability of WMATA  due to the system’s importance to the functioning of the federal  government and the orderly movement of people during major events and  times of regional or national emergencies.
The Metro Funding Panel—a regional panel cosponsored by the  Metropolitan Washington Council of Governments, the Greater  Washington Board of Trade, and the Federal City Council—reported in  2005 that WMATA, under its current revenue structure, will have  budgetary shortfalls of $2.4 billion over 10 years, in spite of an agreement  in 2003 from the WMATA Compact (Compact) jurisdictions to provide an  additional $1.5 billion for the agency’s critical capital needs. This panel  and others have noted that WMATA’s lack of any significant dedicated  source of revenue may affect WMATA’s ability to carry out essential  equipment and infrastructure projects needed to keep the system in good  working order. Past efforts to provide stable and reliable sources of  funding for WMATA were difficult due to the agency’s complex  governance structure and the political nature of decisions related to how  much each of the local governments should pay.
Legislation introduced in Congress and approved by your committee  would make $1.5 billion in federal funding available to WMATA if, among  other things, the local governments established dedicated sources of  revenue. This legislative proposal has motivated the region to renew its  efforts on this front. You asked us to provide you with information on  issues related to establishing dedicated funding for WMATA, including (1)  the characteristics of dedicated funding and how it affects transit agencies  and state and local governments, (2) how potential revenue sources that  could be used for dedicated funding or for addressing WMATA’s projected  budgetary shortfall compare in terms of key considerations, (3) major  actions that would be needed to establish dedicated funding for WMATA  and the progress that has been made to date in carrying out those actions,  and (4) issues that dedicated funding poses for the region and WMATA.
To determine the characteristics of dedicated funding and how it affects  transit agencies and state and local governments, we analyzed the  financial data that the 25 largest transit agencies reported to the Federal  Transit Administration’s (FTA) National Transit Database. We reviewed  the reliability of these data and concluded that they were sufficiently  reliable for our purposes. We also conducted semistructured interviews  with officials at six transit agencies, which we selected based on their  similarity to WMATA and their use of a range of dedicated revenue  sources. We reviewed the legislation establishing dedicated funding at  some of these agencies, and interviewed state and local government  officials in the Washington, D.C., region and experts on transportation  finance. To assess how potential revenue sources that could be used for  dedicated funding or for addressing WMATA’s projected budgetary  shortfall compare in terms of key considerations, we reviewed and  synthesized economics literature on mass transit funding, and interviewed  experts in transportation planning and finance. To determine the actions  required to establish dedicated funding for WMATA and the progress made  in carrying out those actions, and to identify issues that dedicated funding  poses for the region and WMATA, we reviewed and analyzed the proposed  federal legislation that would make additional funding available to  WMATA (H.R. 3496) and the related legislation proposed in the District of  Columbia, Maryland, and Virginia. We also interviewed officials from all of  the state and local jurisdictions supporting WMATA, members of the  general assemblies of Virginia and Maryland and the District of Columbia  City Council, and representatives from the Northern Virginia  Transportation Commission and the WMATA Board of Directors. We  conducted our work from August 2005 through May 2006 in accordance  with generally accepted government auditing standards. Details of our  scope and methodology are provided in appendix I.
subsections: section_title: Background
subsections: section_title: WMATA Is a Large, Multijurisdictional Transit Agency with an Unusual Organizational Structure
paragraphs: WMATA was created in 1967 by an interstate compact that resulted from  the enactment of identical legislation by Virginia, Maryland, and the  District of Columbia, with the consent of Congress. The Compact also  created the Washington Metropolitan Area Transit Zone, shown in figure 1,  where WMATA provides its transit services, including the District of  Columbia; the cities of Alexandria, Falls Church and Fairfax; the Virginia  counties of Arlington, Fairfax and Loudoun; and the Maryland counties of  Montgomery and Prince George’s.
WMATA is unusual among transit agencies in that it was created by an  interstate compact; moreover, it has unique demands placed on it because  it serves the national capital area and the federal government, as we  discussed in a July 2005 testimony. WMATA provides transportation to  and from work for a substantial portion of the federal workforce, and  federal employees’ use of WMATA’s services is encouraged by General  Services Administration guidelines that instruct federal agencies to locate  their facilities near mass transit stops whenever possible. WMATA also  accommodates increased passenger loads and extends its operating hours  during events related to the federal government’s presence in Washington,  D.C., such as presidential inaugurations and funerals, and celebrations and  demonstrations on the National Mall. WMATA’s Metro Transit Police  assists federal law enforcement agencies such as the Secret Service by  making available its officers who have expertise in areas such as  explosives detection and civil disturbance management. WMATA also  provides Metrobuses to be used as a security perimeter on the grounds of  the U.S. Capitol and other public places for events such as inaugurations  and State of the Union addresses.
WMATA began building the Metrorail system in 1969, acquired four  regional bus systems in 1973, and began the first phase of Metrorail  operations in 1976. In January 2001, WMATA completed the originally  planned 103-mile Metrorail system, which included 83 rail stations on five  rail lines. As of March 2006, the transit system encompasses (1) the  Metrorail subway system, which now has 86 Metrorail stations on five rail  lines and a fleet of about 948 railcars; (2) the Metrobus system, which has  a fleet of about 1,451 buses serving 340 routes; and (3) the MetroAccess  ADA complementary paratransit system, which provides specialized  transportation services, as required by law, to persons with disabilities  who are certified as being unable to access WMATA’s fixed-route transit  system.
section_title: WMATA Funds Its Operations and Capital Activities through a Variety of Directly Generated Revenues and through Other Local, State, and Federal Sources
paragraphs: WMATA funds its operations through a combination of revenues from  passenger fares, nonfare revenues such as parking and advertising fees,  and payments from state and local governments. It funds its capital  program primarily through grants from the federal government and  contributions from state and local governments, and by borrowing from  the private sector through the issuance of bonds. WMATA’s funding  sources for operations and capital are shown in figure 2.
The operating costs for bus, rail, and paratransit that are allocated to the  Compact jurisdictions are determined by a set of formulas that take into  consideration factors such as population, ridership, number of Metrorail  stations, and miles of bus routes. The formulas for determining capital  cost allocation—other than for extension projects, which are paid for by  the sponsoring jurisdiction—are based on the amount that the  jurisdictions pay for operating costs. Under these formulas, jurisdictions  with higher populations and service levels (indicated by factors such as  the number of Metrorail stations and miles of bus routes) generally pay  more than jurisdictions with smaller populations and lower service levels.  The operating subsidy and capital program payments for 2006 as  determined by the formulas are shown in figure 3.
The Compact jurisdictions of the District of Columbia, Maryland, and  Virginia vary in the sources they use for payments to WMATA:    District of Columbia. Payments to WMATA are provided by the District’s  Department of Transportation every quarter. Operating costs are paid for  from the District of Columbia’s general fund and capital costs are funded  by general obligation bonds.
Maryland. Payments to WMATA for Montgomery and Prince George’s  counties are made from the Maryland Transportation Trust Fund. The  trust fund’s revenue sources include a gas tax, vehicle title tax, and other  motor vehicle taxes and fees, along with other sources such as federal aid.  Trust fund revenues are also used for operating and capital expenses for  various modes of transportation in the state including transit, ports, and  aviation, as well as for local road construction. Maryland is required by  state law to make payments for the share of WMATA’s operating expenses,  capital equipment replacement, and debt service for which Montgomery  and Prince George’s Counties are responsible.
Virginia. The individual cities and counties are responsible for making  payments to WMATA. A portion of these localities’ payments are made  through the Northern Virginia Transportation Commission (NVTC).  NVTC holds, in trust, funds from a variety of sources that are used to pay  for its members’ public transit systems—including WMATA and local bus  systems such as the Fairfax Connector and Alexandria’s DASH bus.  Sources include a 2 percent Northern Virginia retail motor vehicle fuel tax  and state sources such as transit assistance grants and state bonds issued  for WMATA. NVTC sources accounted for about two-thirds of payments  to WMATA from Northern Virginia counties and cities in fiscal year 2006.  The portion of the localities’ obligation to WMATA that is not covered by  NVTC sources is usually paid directly by the localities from their general  funds.
section_title: History of Efforts to Provide Stable and Reliable Funding for WMATA
paragraphs: In 1980, federal legislation required that for WMATA to receive additional  funding for construction of the Metrorail system, the WMATA Compact  jurisdictions had to demonstrate that they had “stable and reliable”  sources of revenue sufficient to pay for the principal and interest on bonds  and the local share of the operating and maintenance costs of the transit  system. The District of Columbia, Maryland, and Virginia took the  following actions to comply with the requirement:    District of Columbia. The city adopted a law in 1982 to earmark funds for  WMATA by establishing a Metrorail/Metrobus account within its general  fund. The account was supported by earmarking existing revenues that  came from sources receiving direct or indirect benefits from mass transit,  including sales taxes on hotels, meals, and gasoline, as well as vehicle  registration fees and parking meter fees. The earmarked revenues were  sufficient to cover the District of Columbia’s share of WMATA’s operating,  debt service, and capital expenses. This account is no longer the source of  WMATA payments. As described above, the District of Columbia now  provides payments to WMATA from its general revenue fund and general  obligation bonds.
Maryland. The state enacted legislation in 1980 to require the Maryland  Transportation Trust Fund to assume a portion of the costs WMATA  allocated to Montgomery and Prince George’s Counties. The legislation  also provided the trust fund with new sources of revenue, including motor  vehicle fuel taxes, a portion of the corporate income tax, and all revenues  of the state motor vehicle administration. The trust fund was used to pay  all of Montgomery and Prince George’s Counties’ share of WMATA’s  capital costs, and 75 percent of the counties’ share of operating costs and  debt service. Montgomery County provided for the balance of its  obligation to WMATA through a property tax earmarked for mass transit,  and Prince George’s County met the remainder of its obligation by  establishing the Mass Transit Special Revenue Fund and earmarking  revenues from the state real property tax grant program in the event that  county appropriations to the fund fell short. State legislation in 1992 and  1998 made the state’s transportation trust fund the source of all payments  to WMATA.
Virginia. In 1980, the state enacted a 2 percent sales tax on the retail price  of gasoline within the Northern Virginia counties and cities in the WMATA  service area and dedicated the proceeds of the new tax to WMATA,  effective in July 1982. The state also increased its biennial appropriation to  NVTC, increasing the amount of state money available for payment to  WMATA. At the same time, the Northern Virginia counties and cities  enacted local ordinances stating their intention to fund WMATA’s debt  service and operating assistance on an annual basis and designating their  general fund revenues as the source of funding for what the gasoline tax  and state aid did not cover.
In 2005, the Metro Funding Panel estimated that under its current revenue  structure, WMATA would have a total budgetary shortfall of $2.4 billion  during fiscal years 2006 through 2015 if it went forward with the projects  remaining in its 10-year capital improvement plan, not including those that  involved expanding the current system. The panel’s report noted that  WMATA—unlike almost all other large transit systems—does not have a  substantial dedicated source of revenue, such as a local sales tax, whose  receipts are directed to the transit authority. As a result, the panel  concluded that the Washington, D.C., region needs to develop a dedicated  source of funding for WMATA, and recommended specifically that a  regionwide sales tax be implemented. In the course of its work, the panel  analyzed a number of revenue options for dedicated funding for WMATA,  including estimating the tax or fee rate that would be required to raise  sufficient revenue to address the projected shortfall.
In our July 2005 testimony before the House Committee on Government  Reform, we stated that the actual projected shortfall could, in fact, be  much greater because the Metro Funding Panel did not include in its  estimate costs associated with providing paratransit service, which is  required by the Americans with Disabilities Act. These costs are  significant; in fact, the panel estimated that these services could result in  an additional shortfall for WMATA of about $1.1 billion over the 10-year  period.
The Brookings Institution in June 2004 issued a report that similarly  concluded that WMATA’s lack of dedicated revenues makes its core  funding uniquely vulnerable and at risk as WMATA’s member jurisdictions  struggle with their own fiscal difficulties. The Brookings report also  concluded that the Washington, D.C., region needs to develop a dedicated  source of revenue.
section_title: Proposed Legislation in Congress Would Authorize Additional Federal Funding for WMATA If the Compact Jurisdictions Provide Dedicated Funding
paragraphs: In July 2005, Representative Tom Davis, Chairman of the House  Committee on Government Reform, introduced the National Capital  Transportation Amendments Act of 2005 (H.R. 3496), which would  authorize $1.5 billion to WMATA over 10 years for financing the capital  and preventive maintenance projects included in WMATA’s Capital  Improvement Program. The bill states that WMATA is essential for the  effective functioning of the federal government and for the orderly  movement of people during major events and times of regional or national  emergency, and that additional funding is necessary to ensure the transit  system’s continued functionality. H.R. 3496 does not appropriate funds.  For WMATA to receive the funding authorized in H.R. 3496, Congress must  pass additional legislation appropriating funds. H.R. 3496, as amended by  the House Committee on Government Reform, states that to be eligible for  the additional funding, WMATA must amend the WMATA Compact to  require that    all payments to WMATA from the Compact jurisdictions be derived from    an Office of Inspector General be established at WMATA, and  the WMATA Board of Directors be expanded to include four additional  members appointed by the federal government, two of whom are voting  and two of whom are nonvoting.
section_title: Dedicated Funding Is an Important Part of Transit Agencies’ Overall Funding and Commonly Includes a Basket of Revenue Sources Used for Both Operations and Capital Expenditures
subsections: section_title: Definition of Dedicated Funding Has Some Common Characteristics, but There Is Variation in How It Is Structured
paragraphs: Using the definition in FTA’s National Transit Database (NTD), we  identified the following characteristics of dedicated funding: (1) specific  revenue sources are designated, (2) the revenue is designated to be  provided to the transit agency, and (3) the revenue is not subject to  appropriations. Similarly, H.R. 3496 states that dedicated funding is any  source of funding that is earmarked and required under state or local law  to be used for payments to WMATA.
In the Washington, D.C., region, legislators in the District of Columbia,  Maryland, and Virginia proposed bills to provide dedicated funding to  WMATA—described in detail later in this report—that demonstrate some  of these characteristics, as follows:     Legislation in the District of Columbia, which was enacted in April 2006,  would set aside a portion of the sales tax revenue to be dedicated solely  for WMATA. Under this legislation, which must be approved by Congress  before taking effect, the provision of dedicated funds to WMATA would be  subject to annual appropriations by Congress, but not by the District of  Columbia.
Legislation introduced in the Maryland General Assembly, which was not  enacted during the 2006 legislative session, would have set aside a  percentage of the sales tax revenue, but the tax proceeds would have been  dedicated to WMATA and other transit programs and expenses in the  state, and also would have been subject to appropriations.
Legislation proposed in the Virginia General Assembly would set aside a  portion of a regional sales tax to be dedicated to WMATA, and these funds  would not be subject to appropriations. As of April 2006, this legislation  had not been enacted.
Although the Maryland General Assembly considered bills in its 2006  session to provide dedicated funding to WMATA, the position of  Maryland’s Department of Transportation is that the state’s current system  for funding WMATA already constitutes dedicated funding. Under this  system, payments are made from the state’s transportation trust fund,  which has several dedicated sources, although expenditures from the fund  are subject to an annual appropriations process. Maryland officials also  note that state law requires them to provide funding to WMATA. On the  other hand, an official with Maryland’s Office of Attorney General stated in  a legal opinion dated February 17, 2006, that the transportation trust fund  does not constitute dedicated funding.
The six transit agencies we spoke with varied in the extent to which the  dedicated revenue sources they reported to the NTD have the three  characteristics we identified. Three of the transit agencies reported  dedicated funding sources with all three characteristics, while the other  three agencies reported dedicated funding sources that were subject to  appropriations or were allocated among other transit or transportation  programs.
Three agencies—San Francisco’s Bay Area Rapid Transit (BART),  Boston’s Massachusetts Bay Transportation Authority (MBTA), and Dallas  Area Rapid Transit (DART)—have dedicated funding sources with all  three characteristics. BART receives the proceeds from a regional  dedicated sales tax, as established by state law. The tax is collected by  the state and the proceeds are provided directly to BART by the state  treasury. At MBTA, state law directs that the proceeds of a statewide  dedicated sales tax are deposited into a state MBTA fund from which the  state treasurer will provide funds to MBTA upon request, without an  appropriation. At DART, the state comptroller collects the proceeds of a  regionally dedicated sales tax and provides those proceeds directly to  DART.
New York’s Metropolitan Transportation Authority (MTA) receives a  number of revenue streams that it considers to be dedicated, even though  they are subject to appropriations by the state legislature or by local  governments and they do not always consist of a specific tax or fee that is  dedicated to the agency. They include: (1) local matching payments for  state aid, which in addition to being appropriated may come from general  revenues as opposed to a specific revenue source; (2) payments from two  state funds for MTA, which are composed of the receipts of several taxes  statutorily required to be deposited in these trust funds and which are  subject to appropriations by the state legislature; and (3) local payments— which are appropriated—for the operation and maintenance of commuter  rail stations, the amount of which is designated in statute.
St. Louis Metro receives a portion of local sales taxes that are dedicated to  both highway and transit purposes and that must be annually  appropriated. The allocation between highways and transit is determined  through the annual budgeting process and is not statutorily designated.
Philadelphia’s Southeastern Pennsylvania Transportation Authority  (SEPTA) receives dedicated funding from the state of Pennsylvania, which  dedicates a portion of its statewide sale tax, as well as several motor  vehicle-related fees, to two state trust funds to be used for aid to transit  agencies statewide, not only SEPTA. Statutory formulas are used to  determine how much each agency receives, and the funds are provided to  transit agencies directly from the state treasury.
section_title: Almost All Large Transit Agencies Have Dedicated Funding
paragraphs: Of the 25 largest transit agencies, all except 2—the Maryland Transit  Administration, which operates Baltimore’s transit and commuter rail  systems, and the Port Authority Trans-Hudson Corporation, which  operates rail lines and ferryboats between New York and New Jersey— reported to the NTD that they received dedicated sources of revenue in  2003. Although the NTD provides a description of dedicated funding, the  revenue that transit agencies report as dedicated may or may not have the  characteristics described by the NTD. In addition to dedicated funding,  other revenue sources transit agencies reported receiving were a  combination of state and local appropriations and other funding, fares and  other operating revenue, and federal grants. Of the total revenues those  23 largest transit agencies received in 2003 from state and local sources— including dedicated funding, general revenue appropriations, and other  funding sources—the proportion that came from dedicated sources  averaged 70 percent. For 12 of these agencies, between 90 percent and 100  percent of state and local funds they received in 2003 came from dedicated  sources. Figure 4 shows the percentages of transit agencies’ state and local  funding that came from dedicated funds, general revenue, and other  funding in 2003.
section_title: Most Large Transit Agencies Rely on Multiple Dedicated Funding Sources, Often Including Sales Taxes, to Mitigate Volatility
paragraphs: Most transit agencies reported receiving multiple dedicated revenue  sources from state and local governments, as well as, in some cases,  dedicated revenue that was directly generated. For example, GAO’s  analysis of NTD data for the 23 largest agencies that have dedicated  funding shows that 18 of these agencies received dedicated funds from at  least two sources in 2003, with the sales tax being the source most  commonly dedicated to transit (15 of the 23 transit agencies received  dedicated funds from sales taxes). Sales tax also ranked at the top in  revenue generation among dedicated sources; in 2003, approximately $4.5  billion or 43 percent of the approximately $10.3 billion in total dedicated  revenues received by the 23 transit agencies came from sales taxes.  According to the NTD data and to the transit agencies we spoke with, sales  taxes dedicated to transit are levied at the state or local level and are  sometimes enacted by ballot measures. All of the transit agencies we  spoke with have dedicated funding that includes sales taxes, as follows:    St. Louis Metro receives two separate sales taxes—one at one-half of 1  percent and one at one-quarter of 1 percent—that are levied in the  localities that Metro serves. The revenues are collected by the state and  remitted to the local governments to be appropriated to Metro.
San Francisco’s BART receives 75 percent of a one-half of 1 percent sales  tax that is levied in the counties in the BART transit district. The sales tax  was first enacted in 1969 to fund the completion of the rail system, but the  revenues are now used for operations.
Dallas’s DART receives the proceeds of a 1 percent sales tax from the 13  cities that are served by the transit agency. This tax is part of the statewide  8.25 percent sales tax; part of it can be set aside for localities for economic  development purposes, such as schools, parks, and transit.
Boston’s MBTA receives 20 percent of the statewide sales tax revenues.
State law designates a “base revenue amount,” which increases each year  with inflation, for the amount of revenue MBTA is to receive from this tax  each year. If the portion of the tax receipts designated for MBTA does not  meet the base amount, the state makes up the difference.
Philadelphia’s SEPTA receives a portion of the statewide sales tax.
Approximately 2 percent of the revenue from this tax is deposited in state  public transportation accounts and is allocated to the state’s transit  agencies, including SEPTA, based on statutory formulas.
New York’s MTA receives the proceeds of a three-eighths of 1 percent  regional sales tax, which is used for operating costs of the commuter rail  and transit systems.
Local option sales taxes—in which the sales tax rate of a city or town can  be raised above the rate of the state sales tax and which are enacted by  ballot measures—have become more prevalent in financing a variety of  transportation projects, including transit. Many ballot measures for local  option sales taxes target a mix of transportation programs, including  highways and transit. A transportation economist we spoke with noted a  recent trend in ballot measures for sales taxes for capital projects and said  that an advantage of these taxes is that they bring about fiscal discipline  because the agencies have to deliver results (such as a completed capital  project) within a specified time. According to this economist, in 2002,  there were 43 such ballot measures, and in 2004, there were 44; in both  years, roughly half of them passed. Denver, Salt Lake City, and 23 counties  in California are some of the localities that have local option sales taxes  that are either dedicated to transit or can be used for any mix of  transportation purposes.
The second most common source of dedicated funding for transit,  according to our analysis of NTD data, was the gasoline tax. In 2003, 7 of  the 23 agencies with dedicated funding reported receiving revenues from  this source. In that year, the gasoline tax generated about $304 million or  2.9 percent of about $10.3 billion in total dedicated revenues received by  those 23 agencies. Of the 6 transit agencies we spoke with, 2—New York’s  MTA and San Francisco’s BART—had revenue from a dedicated gasoline  tax.
Some of the transit agencies we spoke with also use other sources of  dedicated revenue, such as mortgage recording taxes, city and town  assessments, and motor vehicle-related fees. Following are some  examples:    New York’s MTA receives funds from a mortgage-based tax. New York  City and the seven other counties within MTA’s service area collect a tax  based on a percentage of the debt secured by real estate mortgages and  provide the receipts to MTA.
Boston’s MBTA receives funds from assessments it makes on the 175 cities  and towns in the MBTA district. The assessments are based on a weighted  population formula.
New York’s MTA and Philadelphia’s SEPTA receive funds from various  motor vehicle fees (e.g., MTA receives funds from registration and other  fees and SEPTA receives funds from car leasing and car rental fees.)  Transportation experts we spoke with said that using a basket of revenue  options lowers transit agencies’ economic risk because different revenue  sources are affected to different degrees by fluctuations in economic  activity and other factors, and that a diversity of revenue sources helps to  ensure a steady revenue stream. Additionally, these experts said that  specific revenue sources are selected based on the conditions of the local  economy, with the goal of having less volatility.
section_title: Most Transit Agencies Use Dedicated Funds for Both Operating and Capital Expenditures
paragraphs: In 2003, 24 of the 25 largest transit agencies in our analysis reported  spending dedicated funds for operating expenditures, capital  expenditures, or a combination of both, according to our analysis of NTD  data. Of those 24 agencies, 20 spent dedicated funds for a combination of  operating and capital expenditures. Having the flexibility to spend  dedicated revenues on operations or capital has advantages for transit  agencies, according to agencies and transportation experts we spoke with.  One transportation expert we spoke with noted that agencies that have  flexibility to spend dedicated funding on operations or capital are better  off because the agency can adjust to cost changes. Transit agencies noted  the following reasons why this flexibility is advantageous:    Spending on capital projects fluctuates. For example, capital projects  might need up-front funding in one year but not in the next.
The construction of capital projects, such as extending a rail line, typically  creates a need for operating expenditures, so dedicated funds used to   build a capital project might later be used for operating expenses once the  project is implemented.
Regional and agency priorities may change, which may require a shift in  how funds are used.
Transit agencies we spoke with did not cite any disadvantages of having  the ability to spend dedicated revenues on both types of expenditures.  Some agencies are subject to restrictions on how they spend dedicated  revenues, as illustrated in the following examples:    Philadelphia’s SEPTA must use the dedicated revenue it receives from the  state for capital projects, debt service, and asset maintenance.
San Francisco’s BART uses revenues from the dedicated local sales tax  and property assessments for operating expenditures. These are the only  local sources of operating support the agency receives.
Dallas’s DART is subject to an operating expenditures cap, which was  enacted by its Board of Directors. Growth in operating expenses must not  exceed 90 percent of the inflation rate.
section_title: Expenditures from Dedicated Sources Are Generally Subject to the Same Oversight as Expenditures from Other Sources
paragraphs: Expenditures from dedicated sources are subject to the same type of  oversight as expenditures from other sources, which at transit agencies  includes a board of directors involved in capital planning and periodic  audits by federal and state auditors. FTA does periodic reviews of all  transit agencies that receive funding from FTA, including procurement  system reviews, financial management oversight reviews, and drug and  alcohol oversight reviews. Some of the transit agencies whose officials we  interviewed are subject to oversight and review as follows:    DART’s expenditures are subject to review by its internal auditor (which  reports directly to the Board of Directors), a state auditor, and the Texas  Department of Transportation. DART’s Board of Directors and the cities in  the Dallas region that are served by DART review DART’s budget annually.
MBTA has an internal audit department that reports to the general  manager. A state auditor also reviews certain programs and areas of MBTA  on an annual basis, and a state inspector general’s office reviews MBTA.  The state auditor has a suboffice in MBTA’s office building with dedicated  officials reviewing transportation programs. Internal and state audits focus  more on program reviews than on financial audits. The state legislature  sometimes has hearings on MBTA, generally for capital projects. Finally,  the MBTA Advisory Board, which is made up of representatives from each  city and town within the MBTA district, approves MBTA’s mass  transportation program and its annual budget.
MTA is required to file reports each year with state legislators and other  officials certifying the proper use of the dedicated funds, and the state  comptroller is authorized to audit MTA’s financial records. MTA also has  an office of inspector general, which does programmatic reviews and  investigations.
While spending safeguards do not generally vary based on the source of  revenue, safeguards can vary depending on whether funds are used for  operations or capital. Major capital projects funded by FTA are monitored  to ensure they are progressing on time, within budget, and according to  approved plans, and agencies that issue debt to finance capital projects  must make debt repayments within specified time frames. Also, agencies’  capital projects require the review and approval of the board of directors,  whose review sometimes includes a public approval process. MTA’s 5-year  capital program, for example, is subject to an extensive public approval  process that is coordinated through the board of directors. MBTA also has  an open capital planning process that is subject to a lengthy public review  process. On the operations side, one agency we spoke with—DART—as  noted earlier, has a cap on expenditures for operations that was enacted  by its Board of Directors, which dictates that growth in operating  expenses must not exceed 90 percent of the inflation rate.
Although dedicated funds are generally subject to the same type of  oversight as funds from other sources, the implementation of dedicated  funding at transit agencies sometimes has been accompanied by enhanced  oversight:    When state legislation established dedicated funding for SEPTA, it also  required the Board of Directors to be expanded to include four additional  members appointed by the state. According to a SEPTA official, the state  said that since it was going to be shouldering a greater percentage of  SEPTA’s costs, it should have more of a voice in how SEPTA was run.
State legislation establishing dedicated funding sources for MTA in the  1980s also established oversight mechanisms, including a capital planning  board, an inspector general, and a committee on the Board of Directors for  capital program oversight.
section_title: Dedicated Funding Can Improve Transit Agencies’ Planning for Future Expenditures and Access to Bond Markets, but It Also Has Disadvantages
paragraphs: Dedicated funding is an important revenue source for transit agencies  because it enhances their planning of future expenditures and increases  their access to bond markets due to better predictability of revenue. With  regard to planning, according to five of the six agencies we interviewed,  dedicated funding makes revenue more predictable, thereby enabling  more effective multiyear planning. With regard to raising revenue through  the issuance of bonds, all of the agencies we spoke with have used  dedicated funds to issue bonds for capital programs and projects. In  addition, four of the six agencies we interviewed said that dedicated  funding either allowed them to issue bonds or improved their credit rating.  An improved credit rating generally allows agencies to issue bonds at a  lower rate, thereby decreasing the cost of borrowing for capital projects.  For example, SEPTA used the funds from a 1992 dedicated funding  package to support the issuance of bonds for capital needs. SEPTA  inherited most of the commuter rail service formerly provided by Conrail,  which required major repairs to stations, bridges, tracks, and overhead  power.
The officials we spoke with representing local governments and  transportation departments in the District of Columbia, Maryland, and  Virginia, and NVTC, also cited a number of advantages of dedicated  funding for WMATA. Officials from five of these entities stated that a  consistent and known source of revenue would enable WMATA to plan  more efficiently for future expenditures. Another local official said that  dedicated funding would also allow WMATA to provide a consistent level  of quality. That WMATA stands to receive $1.5 billion in additional federal  contributions if dedicated funding is established is an advantage cited by  officials from one local jurisdiction, as well as NVTC.
An analyst with one of the major credit rating agencies told us that  dedicated funding is one factor that can strengthen transit agencies’ bond  ratings. According to this analyst, who has expertise in transit, dedicated  funding can provide better access to the capital markets, but any effect on  the cost of borrowing will depend on how the dedicated funding is  structured. For example, a dedicated revenue stream is more stable if the  legislation creating it is difficult to reverse. Additionally, requiring that  revenues be spent first on debt servicing is looked upon favorably by bond  rating agencies. This analyst also noted that the credit-rating history of  transit agencies—including WMATA—is based partly on that of the local  or state jurisdictions that provide the agency with subsidy payments.  WMATA has a good, steady credit-rating history in part because of the high  credit ratings of its member jurisdictions. The key downside to WMATA’s  current funding arrangement is the appropriations risk—that local  jurisdictions might not make their payments or might be late. However,  the analyst noted that the jurisdictions supporting WMATA had a long  history of making payments on time, which, to a certain degree, offsets the  risk of appropriations. Furthermore, although dedicated funding could  also offset the appropriations risk—if the dedicated revenue source were  structured so that it was not subject to appropriations—it could increase  the risk associated with the revenue source, such as economic  fluctuations.
Despite the advantages of dedicated funding, there are risks of revenue  volatility and a loss of budgetary flexibility for governments supporting  transit agencies. Although the transit agencies we spoke with cited the  predictability of revenue as an advantage of dedicated funding, they also  acknowledged that a risk of dedicated funding is that it may be too volatile  or not meet funding expectations. For example, BART is largely dependent  on local sales tax revenues for operating expenses; when the local  economy began declining in 2000, revenues were no longer sufficient,  leading BART to cut operating costs and raise fares.
According to three transit agency officials we spoke with, it can be  difficult or impossible to obtain additional money from state and local  governments that have already provided the agencies with dedicated  funds. For example, although SEPTA officials told us that their dedicated  revenues were too small a proportion of their overall funding to enhance  the agency’s long-term planning ability, they said that they had been  unsuccessful in obtaining additional dedicated funding. Moreover, not all  transit agencies have the authority to raise tax rates or fees themselves. In  addition, local option taxes for capital projects are a potentially  problematic means of providing dedicated funding in that, although they  do provide agencies with additional funds, they often expire after a certain  number of years, requiring agencies to have another ballot measure or to  find other ways to increase revenue.
However, some transit agencies benefit from laws that mitigate the risk of  revenue fluctuations associated with dedicated funding sources. MBTA,  for example, is protected by legislation designating that 20 percent of the  statewide sales tax revenues go to the agency; this legislation specifies a  base revenue level that changes each year with the inflation rate. If  revenues do not meet the base level, the state makes up the difference.  MTA also has access to additional funding if the local matching shares for  state operating assistance are insufficient. If localities are unable to  provide the matching funds to MTA, the state takes out the shortfall from  the amount the locality would have received in state aid, and provides it  directly to MTA. Additionally, some agencies have reserve funds they can  draw on if revenues are not sufficient.
Officials in the Washington, D.C., region identified similar concerns when  discussing what they believe the effects of dedicated funding for WMATA  might be. An official from one local jurisdiction stated that a dedicated  funding system is only as reliable as its funding source; another local  official said that revenues dedicated to WMATA from a specific source  may fluctuate from year to year with changing economic conditions.
Regarding the loss of budgetary flexibility, we have previously reported  that setting government funds aside for a specific use—such as with  federal trust funds—may affect the funding available for other spending  priorities. We also reported that constituencies may create pressure to  spend revenues that are set aside for a specific purpose, regardless of the  need for the spending at the moment or the priority that would otherwise  be given such spending. Some of the officials in the Washington, D.C.,  region we interviewed also cited disadvantages related to state and local  budgeting. Maryland officials from the state Department of Transportation  and a local jurisdiction noted that funding dedicated strictly for WMATA  may reduce funds available for other transportation programs. Officials  from another local jurisdiction also noted that revenue dedicated from an  existing tax—rather than from a new source of revenue—reduces that  locality’s general fund and decreases spending flexibility.
section_title: Revenue Sources That Could Be Dedicated to WMATA Vary in Their Stability, Revenue Adequacy, and Required Tax or Fee Rate
paragraphs: In light of the proposed federal legislation to provide additional funding to  WMATA (H.R. 3496), state and local officials are faced with two main  issues, should they choose to enact dedicated funding for WMATA: (1)  which revenue source or sources to dedicate to WMATA and (2) whether  and how to address a WMATA budgetary shortfall. The two issues are not  necessarily linked since implementing a dedicated revenue source does  not automatically require a change in revenue sources or in the amount of  revenue collected. Important considerations in selecting a revenue source  or sources to be dedicated to WMATA are the stability and long-run  adequacy of the revenue source, as well as the political feasibility of the  size of the tax or fee rate necessary to provide sufficient revenue to  WMATA. In evaluating revenue sources to provide additional funding to  WMATA, equity, efficiency, and administrative cost are potentially  important considerations.
subsections: section_title: Year-to-Year Revenue Stability, Longer-Run Revenue Adequacy, and Required Tax or Fee Rate Are Key Considerations for a Revenue Source to Be Dedicated to WMATA
paragraphs: One key budgeting consideration identified in the economics literature  that is relevant for establishing a dedicated revenue source, from the  perspective of the transit agency, is year-to-year revenue stability. Year-to- year revenue stability refers to the degree to which both short-term  fluctuations in economic activity (the business cycle) and other factors not  directly linked to the business cycle influence dedicated tax revenues. The  revenue stability of different taxes and fees with respect to economic  fluctuations is often compared by estimating the percentage change in  year-to-year revenues that results from a 1 percent change in year-to-year  income levels. The variability in these estimates is then used to evaluate  the relative magnitude of fluctuations not related to the business cycle. A  greater degree of variability in the estimate of economic response  indicates a higher degree of instability from noncycle variations.
Year-to-year revenue stability is an important consideration because it  influences the ability of a government or agency to carry out effective  planning and budgeting. A stable revenue source is not subject to  substantial year-to-year fluctuations, making it easily predictable. Greater  predictability leads to more accurate revenue forecasts and allows for  better budgeting and planning as it reduces the probability of a significant  funding shortfall (or surplus) in any given year.
In the longer run, an important consideration for WMATA’s financial  health is that the revenues yielded by a dedicated source adequately keep  pace with increases over time in transit expenditure demands. Although  many economists used to believe that there was a trade-off between year- to-year stability and long-run revenue growth, current research suggests  that a revenue source can exhibit relatively high long-run growth and be  relatively stable. Long-run revenue adequacy is measured by how revenues  are expected to grow over time as income grows. The relationship  between income levels and the revenue generated by a tax or fee is a  convenient benchmark for comparing different revenue sources. However,  to assess the adequacy of a revenue source for transit spending, one would  need to know how transit demand (and, consequently, spending) is related  to income. There is considerable uncertainty, however, about the  relationship between income growth and growth in demand for transit  services. As a result, it is uncertain what relationship between revenue  growth and income growth over the longer run is necessary to ensure that  revenues will adequately keep pace with transit expenditure demands.
Estimates of long-run revenue growth rates for a given revenue source  often differ at the state or county level, creating further potentially  important budgetary and political implications for dedicated funding for  WMATA, which has a service area that encompasses multiple jurisdictions.  From a budgeting perspective, these jurisdictional differences should be  taken into account to arrive at accurate forecasts of transit revenues.  Political concerns might arise because of different revenue growth rates in  the Compact area, which could mean that the allocation of payments  among jurisdictions could change over time unless tax or fee rates are  adjusted or floors and ceilings are placed on contribution levels.
Another key consideration in choosing a revenue source to be dedicated to  WMATA is the tax or fee rate required to dedicate a specified amount of  revenue from that source—that is, the rate required may influence the  choices of state and local officials among various revenue sources. In  general, the rate required will be smaller when the tax or fee is applied to a  larger base.
As part of its analysis of WMATA’s funding issues, the Metro Funding  Panel estimated the tax or fee rate required to generate specified amounts  of dedicated revenue from six potential revenue sources. The specified  amounts were based on different categories of WMATA’s spending that  could be covered by dedicated local revenues. For example, the panel  estimated the tax or fee rate required to dedicate $148 million in 2010. That  amount represents 50 percent of what the panel estimated would be  needed for capital spending to renew aging components of the WMATA  system and add system capacity to meet growing demands, plus operating  spending related to this capital investment. In addition to its estimates of  the level of dedicated revenue needed to fund different specified levels of  spending, the panel made several critical assumptions in developing its  estimates of the tax or fee rate required. The accuracy of these  assumptions will affect the accuracy of the panel’s estimates.
section_title: Potential Revenue Sources Have Different Characteristics When Assessed Using the Key Considerations of Year-to- Year Stability, Long-Term Adequacy, and Required Tax or Fee Rate
paragraphs: Figure 5 provides a summary—based on our analysis of the economic  literature and the Metro Funding Panel report—of how these six revenue  sources (sales tax, payroll/income tax, motor vehicle fuel tax, property  tax, access fees, and vehicle registration fees) compare according to  stability, long-run adequacy, and tax or fee rate required. Additional  analysis of each of the taxes and fees, and how they compare with respect  to the key considerations, is presented in appendix II.
section_title: Tax and Fee Changes Used to Provide Additional Funding for WMATA Can Affect the Equity, Efficiency, and Administrative Cost of the State and Local Tax Systems, but the Effects May Be Small
paragraphs: Experts and state and local officials commonly identified the economic  considerations of equity, efficiency, and administrative cost as potential  key considerations in evaluating revenue sources. However, these  considerations are only relevant if the amount of revenue or the methods  for its collection are altered. In the context of dedicated funding for  WMATA, these considerations come into play primarily when addressing a  shortfall. State and local governments could establish a dedicated funding  source for WMATA without increasing their revenue collections. However,  if they want to provide WMATA with enhanced funding to address the  revenue shortfall identified by the Metro Funding Panel, they would have  to take some offsetting fiscal action, such as increasing their revenues,  reducing their spending on other functions, or taking money from  available surplus revenues, if any.
In the case of raising additional funding for WMATA, administrative costs  are likely to be a more important decision factor than equity or efficiency,  particularly if the state and local jurisdictions choose to implement at the  state or local level a tax or fee that is not currently being administered at  that level of government (even though the tax or fee might be collected by  another level of government). Conversely, administrative costs are likely  to be small if the tax or fee is already being collected at the desired level of  government. Equity and efficiency effects are likely to be small given that  the additional amount of revenue collected for WMATA would be small in  relation to the overall state and local government operations. Possible  exceptions are the vehicle fuel tax and vehicle registration fees, which  might require larger rate increases because of their relatively small bases.
Possible administrative, equity, and efficiency effects are discussed in  appendix III.
section_title: Although All Jurisdictions Proposed Legislation in 2006 Directing a Revenue Source to WMATA, Actions to Provide WMATA with Dedicated Funding Are Not Complete
subsections: section_title: To Conform to the Current Requirements of H.R. 3496, the Enactment of State or Local Legislation Directing Specific Revenue Sources to WMATA Would Be Needed
paragraphs: To establish dedicated funding as defined in H.R 3496 (i.e., a revenue  source that is legislatively directed solely to WMATA), each Compact  jurisdiction would need to enact legislation directing a specific revenue  source or sources to WMATA. The legislative process for enacting such  legislation in the District of Columbia, Maryland, and Virginia is as follows:    Legislation in the District of Columbia would be taken up first by the  District of Columbia City Council. If passed by the council and signed by  the District of Columbia mayor, the WMATA legislation would require  approval by Congress.
In Maryland, if it is determined that the state’s current system for funding  WMATA does not constitute dedicated funding, the General Assembly  could pass legislation—signed by the governor—to order a tax rate  change, shift the use of an existing tax, impose a new fee or surcharge, or  enable localities to enact a tax rate change. Dedicated funding legislation  could have a local or statewide scope. If the scope were local—which  would be a departure from the current funding structure—local input  would be considered and a consensus would be reached by a local  delegation; the legislation would then go to the state legislature for final  approval. If the scope of the legislation were statewide, the legislation  would not require initial approval by the local delegation and would go  directly to the state legislature. Legislation in Maryland to enact dedicated  funding for WMATA may also have to address the issue of parity in transit  spending across the state, particularly between the Baltimore and  Washington, D.C., regions. If additional funds are raised for or dedicated  to WMATA, there may need to be additional funds provided for other state  transit programs.
In Virginia, the General Assembly could pass a law—signed by the  governor—ordering a tax rate change or redirecting existing taxes  statewide to establish dedicated funding. According to local officials in the  state, to change the existing tax structure, Northern Virginia jurisdictions  would have to be given the authority to raise or dedicate a tax by the  General Assembly, unless that tax is currently under local control. State  legislation can require local approval through a voter referendum or a vote  by the local governing bodies. Legislation concerning a dedicated funding  system for WMATA may or may not need the approval of the local  jurisdictions it would encompass. The state also determines whether a tax  shall be statewide in scope or limited to certain localities.
section_title: Legislative Bodies in the District of Columbia, Maryland, and Virginia Have Considered Dedicated Funding Legislation
paragraphs: Bills were introduced in 2006 in the District of Columbia, Maryland, and  Virginia that would dedicate a portion of sales tax revenues to WMATA.  These bills differ from one other in a number of aspects, and they also  differ from the approach recommended by the Metro Funding Panel,  which included dedicating a sales tax increase of one-quarter of 1 percent  across the WMATA Compact area to be used for capital maintenance and  system enhancement. The panel also recommended that the proceeds of  the regional sales tax be in addition to the jurisdictions’ current payments  for operations and capital. Table 1 provides details on the legislative  proposals and the panel’s recommendation.
As of April 2006, dedicated funding legislation in the District of Columbia  had been enacted by the city but had not yet received congressional  approval. Additionally, this legislation will not take effect until H.R. 3496  and dedicated funding laws in Maryland and Virginia are passed. In  Maryland, two of the bills—one in the House and one in the Senate—that  were originally introduced to provide dedicated funding, were amended to  remove the dedicated funding provisions and to add language requiring  that the Maryland Department of Transportation (MDOT) undertake a  study on the state’s transit costs and funding strategies, as noted earlier.  The amended bills do not provide any funding for transit. The other  dedicated funding bills in Maryland did not proceed beyond the committee  level. In Virginia, dedicated funding legislation was approved by the Senate  but not by the House. However, the Virginia proposal to dedicate a one- quarter of 1 percent sales tax levied in Northern Virginia to WMATA is  included in the Senate’s budget proposal, so, as of April 2006, it was still  possible that dedicated funding could be enacted through this vehicle.
As discussed earlier in this report, although legislators in the Maryland  General Assembly have introduced dedicated funding bills, MDOT’s  position is that the state’s current system for funding WMATA already  constitutes dedicated funding. On the other hand, an official with the  state’s Office of Attorney General said in a legal opinion dated February  17, 2006, that the fund does not constitute dedicated funds for WMATA. An  MDOT official we spoke with said that Maryland would consider making  adjustments to the trust fund to meet the goal of dedicated funding.
section_title: Amendments to the WMATA Compact Would Require State Legislation and Congressional Consent, but There Has Been Little Movement in the Region to Pursue Amendments
paragraphs: As currently written, H.R. 3496 requires the WMATA Compact to be  amended, a process that entails state legislation and congressional  consent. H.R. 3496, as amended, requires the WMATA Compact to be  amended to require that (1) all payments from the Compact jurisdictions  come from a dedicated source, (2) WMATA establish an inspector general,  and (3) four federal representatives be added to the WMATA Board of  Directors, one of whom must be a regular Metrobus or Metrorail rider. To  amend the WMATA Compact, identical legislation—which would be  separate from legislation establishing dedicated revenue sources—must be  enacted by the states of Maryland and Virginia, and the District of  Columbia, and must be consented to by Congress. No amendment can be  enacted until this process is complete.
According to our legal analysis of the WMATA Compact and H.R. 3496,  amending the Compact would not be necessary for the WMATA Compact  jurisdictions to establish dedicated funding or to create an inspector  general for the agency, but would be necessary for changing the structure  of WMATA’s Board of Directors:  It is unnecessary to amend the WMATA Compact for jurisdictions to  provide payment to WMATA from dedicated sources of funding. However,  if the Compact were amended to require dedicated funding, then the  jurisdictions would be bound to this requirement as long as it remains in  the Compact. The Compact does not specify what the source of the  jurisdictions’ payments to WMATA shall be nor how WMATA’s costs are to  be allocated among the jurisdictions.
WMATA could establish an office of inspector general without amending  the Compact; however, some provisions in H.R. 3496 about the inspector  general’s office conflict with the Compact. For example, H.R. 3496 would  require a unanimous vote of all board members to remove the inspector  general. Under the Compact, most actions by the board do not require a  unanimous vote; rather, they require a majority vote and the majority must  include at least one board member from each of the three jurisdictions.  Conflicts such as this between H.R. 3496 and the Compact could be  resolved through an amendment to either one. The WMATA Board of  Directors voted in April 2006 to create an office of inspector general.  WMATA’s policy outlining the structure and functions of this office is  similar to the provisions in H.R. 3496, although WMATA officials told us  that they wrote this policy to avoid any conflicts with the WMATA  Compact.
Adding federal representatives to the Board of Directors would require a  Compact amendment because the Compact specifically sets forth the  composition of the board, which is composed of six members, two each  from the District of Columbia, Maryland, and Virginia.
Legislation that would amend the WMATA Compact as required by H.R.  3496 has not been proposed in the District of Columbia or Virginia,  according to a WMATA official. Such legislation was introduced in the  Maryland General Assembly in February 2006, but was later withdrawn.  Currently, the jurisdictions are more focused on enacting legislation to  establish dedicated funding. Additionally, officials with the transportation  departments of the District of Columbia, Maryland, and Virginia noted that  even if H.R. 3496 is enacted, there is no guarantee that federal funding for  WMATA would be appropriated. Also, officials in Northern Virginia  questioned whether Compact amendments are necessary to implement the  requirements of H.R. 3496 to establish an inspector general and to provide  dedicated funding to WMATA.
section_title: Timeline for Implementing Dedicated Funding Is Uncertain
paragraphs: There is no clear consensus among Compact jurisdictions about which  legislation—amending the Compact or revenue legislation—should be  dealt with first. Although Maryland officials stated that it makes more  sense to amend the Compact to establish oversight first, the officials we  spoke with in the District of Columbia and Virginia stated that enacting  revenue legislation should be the first priority before trying to amend the  Compact.
The schedules for considering legislation in the District of Columbia,  Maryland, and Virginia are different in each jurisdiction. In the District of  Columbia, council members can file legislation to be introduced at any  time during normal business hours, unless the council is at recess. The  council generally meets to vote on legislation on the first Tuesday of every  month. The legislative sessions of the Maryland and Virginia general  assemblies both begin annually in January. In Maryland, the session  adjourns after 90 days; bills may be filed throughout the 90-day session,  but bills introduced after the 21st day of the Senate’s session and the 31st  day of the House’s session need special approval before they are returned  to the floor. In Virginia, the adjournment date varies based on the  legislative year and whether the General Assembly chooses to extend the  session, and the deadline for filing legislation is in January, the same  month the session begins. The short legislative sessions and large volume  of bills leave a limited window for considering and passing dedicated  funding legislation for WMATA.
section_title: WMATA Funding Partners Have Yet to Resolve Several Issues Related to Dedicated Funding
paragraphs: WMATA’s funding partners face a number of issues that will need to be  resolved should they choose to provide WMATA with dedicated funding.  As discussed previously, the Compact jurisdictions have differing views on  what constitutes dedicated funding, with Maryland officials having  different opinions on whether their current system for supporting WMATA  is dedicated, and the District of Columbia and Virginia viewing dedicated  funding as a specific source statutorily dedicated to WMATA. In addition  to addressing this fundamental issue, the jurisdictions must also resolve  the following issues:     what proportion of the jurisdictions’ payments to WMATA would come  from dedicated sources and how to mitigate the risk associated with  dependence on these sources;    whether dedicated funding would result in a net increase in the amount  WMATA receives from the Compact jurisdictions and what portion of the  total amount dedicated to WMATA each jurisdiction would pay;    whether dedicated funding should be used exclusively for WMATA’s  capital or operating needs, or both; and    whether increased oversight of WMATA is needed to ensure adequate  accountability for dedicated funds.
subsections: section_title: Stakeholders Would Have to Determine the Proportion of the Compact Jurisdictions’ Contributions to WMATA That Should Come from Dedicated Funding and How to Mitigate Risk Associated with Dependence on Dedicated Revenue
paragraphs: There is currently no agreement among WMATA’s stakeholders—at the  local, state, and federal levels—as to what proportion of the Compact  jurisdictions’ total payments to WMATA should come from dedicated  funding. Although as currently written, H.R. 3496 would require that all  state and local contributions come from dedicated funding, no jurisdiction  has offered a proposal that would meet this requirement and none of the  state and local officials we spoke with indicated that measures to fulfill  this requirement are likely. As noted earlier, among the 23 largest transit  agencies with dedicated funding, an average of 70 percent of their state  and local contributions came from dedicated sources in 2003. Among the  District of Columbia and the cities and counties in Maryland and Virginia,  officials from two jurisdictions expressed support for providing all  payments to WMATA from dedicated sources, although officials from one  of these jurisdictions also recognized that such an approach was not likely  to have regional support. As a result, WMATA’s stakeholders will need to  determine a dedicated funding level that is acceptable to all parties.
If a large proportion of WMATA’s state and local contributions were to  come from dedicated funding, stakeholders would also need to determine  how the risk of revenue volatility would be balanced between the  jurisdictions and WMATA. The revenue sources chosen for dedicated  funding for WMATA may fluctuate from year to year, requiring the transit  agency to work within the constraints of the available revenue or  necessitating additional appropriations from the state and local  jurisdictions supporting WMATA. Legislation establishing dedicated  funding for other transit agencies sometimes provided safeguards for  revenue streams, such as specifying an annual revenue floor. These  safeguards can better protect the transit agencies from revenue  fluctuations, but the state or local government bears the burden of  ensuring adequate revenue to the transit agency each year. WMATA’s  funding partners will need to determine the extent to which they or  WMATA should take on this risk.
section_title: Compact Jurisdictions Would Have to Determine Whether Dedicated Funding Would Result in a Net Increase in Payments to WMATA and How the Amount of Payments to WMATA Would Be Allocated among the Jurisdictions
paragraphs: Officials we interviewed from each of the localities in Maryland and  Virginia said that dedicated funding should result in a net increase in  payments to WMATA. Officials from two Virginia jurisdictions elaborated,  saying that dedicated funds could be used both to replace part of the  current subsidy payments jurisdictions currently make from their general  funds, and to provide additional funding to WMATA, to result in an overall  increase. An official from another Virginia jurisdiction said that dedicated  funding should only result in a net increase in the jurisdictions’ payments  to WMATA if the federal government participates in supporting WMATA.  Officials from the District of Columbia did not offer an opinion on this  topic.
Although the officials we interviewed generally said that dedicated funding  should be used to increase their financial support of WMATA, the  dedicated funding proposals introduced in the region are not all clear  about whether dedicated revenues are to be in addition to the  jurisdictions’ current payments. The legislative proposals introduced in  Maryland and Virginia state that the dedicated revenues are not meant to  reduce or replace other funding sources. However, because these  proposals do not explicitly state that dedicated revenues will be used to  provide WMATA with additional funding—above the jurisdictions’ current  level of payments—it remains unclear if these proposals would result in a  net increase in the payments to WMATA. The District of Columbia’s  legislation does, however, state that its purpose is to provide additional  payments to WMATA.
Regardless of whether dedicated funding results in a net increase in the  amount of payments to WMATA, the region would need to determine what  portion of the total amount dedicated to WMATA each jurisdiction would  pay—that is, whether the amount of payment from dedicated sources  would be based on current allocation formulas or would be determined  using another means. None of the legislative proposals explicitly states  how the amount of payments to WMATA from dedicated revenues would  be determined, but local officials we interviewed did express views on this  matter. The District of Columbia officials we spoke with said that the  amount of payments to WMATA from dedicated revenue sources should  not be determined using the current allocation formulas. These officials  said they believe the burden of providing financial support for WMATA  should be more evenly distributed across the three major jurisdictions.  This view is reflected in the District of Columbia’s legislative proposal,  which includes a provision that would require Maryland and Virginia to  dedicate an amount of revenue at least equal to that dedicated by the  District of Columbia, although it does not specify how that amount would  be determined. Officials from two of the Northern Virginia Compact  jurisdictions and from the Virginia Department of Transportation stated  that they believed the current allocation formulas should also be applied  to dedicated revenues provided to WMATA. Neither the Virginia legislation  nor the Maryland legislation explicitly states how the relative size of  payments to WMATA would be determined. State and local officials from  Maryland, along with other Virginia officials we met with, did not express  strong views about whether the current allocation formulas would be  applied to additional funding provided to WMATA.
Whether additional funds provided to WMATA from dedicated sources are  distributed to WMATA based on the existing allocation formulas or using  another means could have an effect on the distribution of payments among  the jurisdictions. For example, using the approach recommended by the  Metro Funding Panel—in which all local Compact jurisdictions would  provide the entire proceeds of a one-quarter percent or one-half percent  sales tax to WMATA—the amount of funds that each jurisdiction would  provide to fund WMATA’s estimated capital shortfall would be based on  the jurisdiction’s tax receipts, rather than on the allocation formulas. As a  result, the payments would be shifted away from the District of Columbia  and Maryland and toward Virginia. Table 2 compares the current  distribution among the jurisdictions of payments for WMATA’s operating  subsidy and capital improvement program to the distribution of additional  payments for the estimated capital shortfall using a dedicated regional  sales tax.
section_title: Stakeholders Would Have to Determine Whether Dedicated Funding Would Be Used for Operations, Capital Needs, or Both
paragraphs: Whether funds are used for operations, capital projects, or both has  implications for key issues, such as the purpose of the dedicated funding  and the appropriate amount of that funding. The Metro Funding Panel  proposed that dedicated funding be used to cover WMATA’s budgetary  shortfall, which the panel projected would occur largely due to planned  capital expenditures. Dedicated funding legislation introduced in Maryland  and Virginia states that funds are to be used for operations and capital,  while the District of Columbia’s legislation states only that funds are to be  used for “maintaining and improving the transportation system [of  WMATA].” Officials we spoke with from local jurisdictions also had varied  views on this topic:    Representatives from three of the eight local jurisdictions stated that  dedicated funding should go toward funding WMATA’s capital needs,  citing the following advantages: (1) Capital planning benefits from the  predictability of dedicated funding because such planning tends to involve  multiple years; (2) WMATA’s unfunded needs are mostly capital needs  related to system rehabilitation and capacity, a conclusion reached by the  Metro Funding Panel report; and (3) an annual subsidy is already in place  to fund operations.
Representatives from two other local jurisdictions stated that dedicated  funding should be used for both operations and capital needs. They noted  that: (1) operations and capital programs can both benefit from the  stability provided by dedicated funding, (2) transit agencies can be more  efficient when given the flexibility to use funds for either purpose, and (3)  making operating payments to WMATA from dedicated funding, rather  than from the jurisdictions’ general funds, can make budgeting easier for  both WMATA and the jurisdictions.
Representatives from three of the eight local jurisdictions had no opinion  on whether dedicated funding should be used for operations or capital  needs.
section_title: Stakeholders Would Have to Determine Whether Increased Oversight of WMATA Would Be Needed to Ensure Dedicated Funds Were Adequately Accounted For
paragraphs: In earlier testimony on WMATA, we highlighted the importance of having  reasonable assurances that if WMATA were to receive additional funds, it  would spend these funds effectively. H.R. 3496 would make additional  federal funding contingent upon WMATA’s establishing an office of  inspector general, and, in April 2006, the WMATA Board of Directors  approved a resolution that would establish such an office. The issue of  appropriate oversight was also discussed by regional stakeholders during  a summit on dedicated funding for WMATA in October 2005. Summit  participants—who included state and local officials from the Compact  jurisdictions—agreed that steps should be taken to improve oversight of  WMATA. Additionally, U.S. Representative Albert Wynn, whose district  includes parts of Prince George’s and Montgomery Counties, sent a letter  to WMATA urging the Board of directors to create an “independent  investigative authority” to study WMATA’s budgets, plans, purchases, and  employee relations with the goal of improving operations and alerting the  public to problems. Officials in six out of eight local jurisdictions, as well  as an official with a state department of transportation, told us either they  were concerned that a loss of governance could occur with dedicated  funding or that it is important to have accountability mechanisms in place  with dedicated funding. For example, one official said that additional  oversight of WMATA is necessary and particularly important if WMATA is  given greater control over its revenue stream through dedicated funding.  An official from a state transportation department said it was important to  improve oversight of WMATA through such steps as increasing access to  WMATA’s financial and operating data if WMATA were to receive  additional funds.
section_title: Agency Comments
paragraphs: We provided copies of a draft of this report to WMATA and the U.S.  Department of Transportation for their review and comment. We received  comments, consisting of technical clarifications, from officials from the  Department of Transportation’s Office of Budget and Policy and from  WMATA’s Interim General Manager, Auditor General, and Director of  Intergovernmental Relations, which we incorporated in the report, as  appropriate. We also provided officials from the District of Columbia,  Maryland, and Virginia with an opportunity to comment on segments of  the report pertaining to their legislative processes and the dedicated  funding bills introduced in their legislative bodies. These officials also  provided technical clarifications, which we incorporated in the report, as  appropriate.
As agreed with your office, unless you publicly announce its contents  earlier, we plan no further distribution of this report until 30 days from the  report date. At that time, we will send copies to the appropriate  congressional committees and to the Secretary of Transportation, the  Interim General Manager of WMATA, and officials in the state and local  jurisdictions with whom we spoke. We will also make copies available to  others upon request. In addition, this report will be available at no charge  on the GAO Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (202) 512-2834 or siggerudk@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made key contributions to this report are  listed in appendix IV.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: To determine the characteristics of dedicated funding, and how it affects  transit agencies and state and local governments, we reviewed the  literature on transit agencies’ use of dedicated funding and interviewed  representatives of a major credit rating agency and the Government  Finance Officers Association. We performed semistructured interviews  with six transit agencies—Bay Area Rapid Transit, Dallas Area Rapid  Transit, Massachusetts Bay Transportation Authority, New York’s  Metropolitan Transportation Authority, Southeastern Pennsylvania Transit  Authority, and St. Louis Metro—which we selected to include a cross  section of characteristics that are similar to the Washington Metropolitan  Area Transit Authority (WMATA), including size of total budget, modes  operated, age of rail system, and service area. Additionally, we selected  agencies that had a diversity of dedicated revenue sources. We also  reviewed the legislation establishing dedicated funding and budget and  financial documents from some of these agencies. We analyzed financial  data for the 25 largest transit agencies using information in the Federal  Transit Administration’s (FTA) National Transit Database (NTD). The NTD  contains financial data reported to FTA by transit agencies. We used 2003  data, the most recent year for which data were available at the time of our  analysis. We selected the top 25 agencies based on the size of their  combined operating and capital budgets. To assess the reliability of the  NTD, we interviewed an FTA official knowledgeable about the database  and reviewed pertinent documentation. FTA has several processes in  place to assure the reliability of the NTD data, including the following:    The data that agencies report have to be reconciled against the agencies’  own audit reports. The data are then certified by the chief executive  officer of the agency.
FTA uses an automated program that checks transit agencies’ current year  entries against the previous year’s data. If an inconsistency is identified,  the general manager of the agency is contacted to verify the information.
The NTD system is backed up every hour to ensure that in the event of a  power loss or other disruption to the system, the data would not be lost.
We also compared the NTD data with the information we received from  our interviews with the six transit agencies, as well as with some agencies’  budget and financial documentation. Generally, the information we  received from transit agencies supported the information in the NTD.  However, there was one instance in which we recategorized a revenue  source reported by an agency. MBTA reported the revenue from local  assessments as general revenues; these assessments, according to MBTA  officials and financial documents, are dedicated. Because our analysis of  NTD data included determining the proportion of state and local  contributions that come from dedicated sources, we placed the revenue  from local assessments into the dedicated category. Based on our  assessment, we determined that the NTD data were sufficiently reliable for  our purposes.
To compare potential revenue sources that could be used as dedicated  funding for WMATA, we reviewed literature on the economics of state and  local public finance and mass transit funding and the Metro Funding Panel  report, and met with experts in state and local public finance and the  financing of transportation and with staff from the Metro Funding Panel.  Based on that review and those discussions, we  identified year-to-year revenue stability, longer-run revenue adequacy, and  the tax or fee rate necessary to yield a specified amount of revenue as key  considerations for choosing a revenue source to dedicate to WMATA; identified equity, efficiency, and administrative cost as additional  considerations that could be affected if there are tax and fee increases to  provide additional funding to WMATA; identified the sales tax, the payroll or income tax, the motor vehicle fuel  tax, the property tax, access fees, and vehicle registration fees as revenue  sources that we would compare; and   assessed these revenue sources based on the considerations identified.
To determine the major actions required to establish dedicated funding for  WMATA, what progress on these actions has been made so far, and what  issues related to dedicated funding have emerged, we interviewed the  following state, local, and regional officials, including the chief administrative officers or other appropriate official from each of  the eight local Compact jurisdictions or their representatives; the Director of Transportation from the District of Columbia and the  Secretaries of Transportation from Maryland and Virginia;   members of the Maryland General Assembly, the Virginia General  Assembly, and the City Council of the District of Columbia—we selected  officials who sit on committees that would be involved in dedicated  funding legislation;    officials from the Offices of the Parliamentarian at the U.S. House of  Representatives and the U.S. Senate; representatives from the Northern Virginia Transportation Commission;  and   WMATA officials, including representatives from the Board of Directors,  the Office of Policy and Intergovernmental Relations, and the Office of  General Counsel.
We also reviewed dedicated funding legislation that was proposed in the  District of Columbia, Maryland, and Virginia, and Maryland statutes  pertaining to the payment of WMATA. We performed a legal analysis of  how the requirements of H.R. 3496 compare with the provisions in the  WMATA Compact. We also attended public meetings relating to dedicated  funding for WMATA, including an October 2005 regional summit and  hearings of the District of Columbia City Council and the Maryland  General Assembly.
section_title: Appendix II: Revenue Sources Compared on the Basis of Revenue Stability and Adequacy, and Required Tax or Fee Rate
paragraphs: The following paragraphs provide a summary—based on our analysis of  the economic literature and the Metro Funding Panel report—of how six  revenue sources (the sales tax, the payroll/income tax, the motor vehicle  fuel tax, the property tax, access fees, and vehicle registration fees)  compare according to stability, long-run adequacy, and tax or fee rate  required.
subsections: section_title: Sales Tax
paragraphs: Previous studies suggest that revenues from the sales tax are more  susceptible to economic fluctuations than property or fuel tax revenues.  Sales tax revenues are susceptible to economic fluctuations because they  are dependent on consumer purchases, and these purchases vary with  changes in income. Studies estimate that the economic fluctuations of  retail sales tax revenues are about the same as those for income tax  revenues, but that the sales tax is less prone to random variations.  Economic estimates suggest that sales tax revenues are more stable if the  tax base includes items for which purchases remain relatively constant.  These items are commonly referred to as necessities, including food,  clothing, and prescription drugs. However, caution is needed when  applying these results because there can be significant variations at the  state level. For instance, the results of two studies suggest that Maryland  sales tax revenues are more responsive to economic fluctuations than are  sales tax revenues in Virginia.
In terms of long-run revenue growth, there is a general consensus in the  economics literature that sales tax revenues do not keep pace with overall  economic expansion. This slower growth, compared with income, occurs  because retail sales usually take up a declining share of income as income  rises. Two studies produced very similar state-specific estimates for  Maryland and Virginia consistent with this finding; a 10 percent increase in  total personal income is associated with a roughly 8 percent increase in  sales tax revenues. Economic estimates also suggest that tax bases that  include food have lower levels of long-run growth than those that exclude  food, although bases including food tend to be more stable. In addition,  other results suggest that sales tax revenues grow faster as income rises  when the sales tax base includes more services because spending on the  service sector has been rapidly increasing.
Collecting a specified amount of dedicated revenue from a general sales  tax usually requires a relatively small tax rate because the base to which  that rate would be applied is relatively large. When retail purchases of  many services, as well as goods, are taxed, the base is particularly large  and a smaller tax rate would be needed than if the tax applied only to  retail purchases of goods. When retail purchases of major categories of  goods, such as food purchases from grocery stores, are excluded, then the  base is smaller and a higher tax rate would be needed.
The Metro Funding Panel estimated that a sales tax rate of 25 cents per  $100 of taxed retail sales throughout the WMATA Compact region would  be required to collect $148 million in 2010. Compared with some of its  estimates for other revenue sources, the panel’s estimate for the sales tax  was relatively straightforward and based on publicly available data.  However, for several reasons, the retail sales tax base might increase at a  rate different from the historical average growth rate that the panel  assumed in developing its estimate. These reasons include future  population or income growth that differs from such growth in the past;  increased retail sales through the Internet; and decisions by state and local  governments to apply the sales tax to some previously untaxed purchases,  or to stop applying it to some currently taxed purchases.
section_title: Payroll or Personal Income Tax
paragraphs: Previous studies suggest that income tax revenues are more susceptible to  economic fluctuations than property or fuel tax revenues because income  varies more over the course of the business cycle than do property values  or fuel purchases. The variability in income tax revenue is about the same  as for sales tax revenue, but random variations are larger. Unlike the sales  tax discussed above, which is more stable with a broader base, tax  revenues from personal income are more stable under the payroll tax, or  when the tax base is limited to wage income. Economic studies indicate  that there are some large differences in the fluctuation of income tax  revenues due to changes in economic conditions at the state level. Two  studies provide conflicting estimates of the relative volatility of income tax  revenues in Virginia and Maryland, with one study suggesting more  volatility in Virginia and the other suggesting more volatility in Maryland.  These differences at the state level indicate the need for caution in  generalizing from state or national studies because smaller jurisdictions,  such as cities or counties, might also differ substantially in measures of  revenue stability.
In terms of long-run revenue growth, previous studies have consistently  indicated that income or payroll tax revenues more than keep pace with  overall economic growth. Income tax revenues grow faster than income  levels because of the progressive nature of most income taxes: People  with higher incomes typically pay a larger percentage of their income in  taxes than those with lower incomes. This progressivity occurs because of  graduated tax rates that get higher as incomes grow and deductions and  credits that are often phased out at higher income levels. Payroll tax  revenues may not increase as much as income tax revenues due to  economic growth because a payroll tax might not have graduated tax  rates. A study of individual states found that evidence from Maryland and  Virginia is consistent with the broader observation that income tax  revenues generally rise faster than income levels, with the long-run growth  rate in tax revenues for an equal growth rate in income larger in Virginia.
Collecting a specified amount of dedicated revenue from an income or  payroll tax generally requires a relatively small tax rate because the base  to which that rate would be applied is relatively large. A lower tax rate  would be needed for an income tax because the tax base would include  both nonwage and wage income, while the payroll tax base would include  only wage income. Exempting some income from tax—such as by putting  a cap on the amount of wage income subject to a payroll tax, as is done for  Social Security, or allowing some form of deduction for income up to  some level—would raise the tax rate required on the remaining income  because the base would be smaller.
The Metro Funding Panel estimated that a payroll tax rate of 16 cents per  $100 of wages earned by residents of the WMATA Compact region, with  wages below $15,000 per year and above $100,000 per year exempt, would  be required to collect $148 million in 2010. According to a panel staff  member who participated in developing these estimates, the payroll tax  estimate was the most complex to develop. Because the panel derived this  estimated tax rate from an estimate of the tax base that itself was derived  from Census Bureau data on income that included nonwage income, the  tax rate may be lower than the rate that would be needed to raise the same  amount of revenue from a tax that applied only to wage income. On the  other hand, the estimated tax base did not include any income earned by  nonresidents of the Compact region. If such income could be taxed, then  the tax base could be higher, which would allow the same amount of  revenue to be collected with a lower tax rate.
section_title: Motor Vehicle Fuel Tax
paragraphs: Previous studies indicate that motor fuels tax revenues exhibit the highest  degree of stability in the presence of economic fluctuations compared  with property, income, and sales taxes. The revenues are more stable  because in the short run fuel purchases do not change much in response to  changing economic conditions. However, the literature indicates that fuel  tax revenues have the most severe random fluctuations, such as those due  to natural disasters or other events that disrupt the supply of oil.
In terms of long-run growth, studies have found that motor vehicle fuel  revenues have historically grown more slowly than general measures of  economic growth, but not as slowly as sales tax revenues. Future long-run  adequacy concerns remain because of potential fuel efficiency  improvements and increased transit use resulting from rising fuel prices  and congestion. This concern is exacerbated because motor fuel taxes are  generally applied on a per-gallon basis, not as a percentage of the total sale  price. Under this structure, revenues are proportional to fuel consumption,  not total fuel expenditures, which may require that the motor fuels tax rate  be increased over time if revenues are to keep pace with the demand for  transit expenditures in periods of high inflation.
Collecting a specified amount of dedicated revenue from a tax on retail  purchases of motor vehicle fuel requires a relatively large tax rate because  the base to which that rate would be applied is relatively small compared  with, for example, the base for a general sales tax on retail purchases. If  for various policy reasons some fuel purchases are exempt from the tax,  then the required tax rate on the remaining fuel purchases would be even  higher.
The Metro Funding Panel estimated that a motor vehicle fuel tax rate of  11.1 cents per gallon of motor vehicle fuel purchases within the WMATA  Compact region would be required to collect $148 million in 2010.  However, uncertainty about some of the assumptions underlying this  estimate may make it less reliable than the panel’s more straightforward  estimates for some of the other revenue sources. For example, this  estimate is based on an assumption that average fuel efficiency does not  change throughout the period analyzed—until 2015. However, if fuel  efficiency improves in response to high fuel prices, then the number of  gallons purchased will be less than the panel estimated and the tax rate  required would be higher than the panel estimated. In addition, the panel’s  estimate of the number of gallons of fuel purchased in the Compact region  in the baseline period is based on an estimate from the Metropolitan  Washington Council of Governments on the number of vehicle miles  traveled within the Compact region. Using vehicle miles traveled  introduces uncertainty in an estimate of fuel purchases because some  driving in the Compact region is done by vehicles that were filled up with  fuel outside the region, while some fuel purchased within the Compact  region was used in cars driven outside the Compact region, and these two  influences might not be completely offsetting.
section_title: Property Tax
paragraphs: Previous studies suggest that property tax revenues are moderately  susceptible to economic fluctuations, but generally less so than sales and  income/payroll taxes, because assessed property values tend to vary less  over the course of the business cycle than do retail sales or incomes.  Fluctuations in property tax revenues due to changes in economic  conditions are generally more predictable than those of other revenue  sources because there is often a lag between changes in economic  conditions and their effects on property tax revenues. This lag occurs  because it often takes a while for changes in property values to be  reflected in property assessments. However, this advantage in  predictability is only captured using more sophisticated forecasting  techniques that take into account economic indicators from the recent  past. In addition, random fluctuations in property tax revenues are  relatively small.
The evidence from previous studies on the long-run revenue growth of  property tax revenues is inconclusive. Studies indicate that revenues  exhibit widely variant long-run growth patterns at the county level,  sometimes increasing faster than income and sometimes more slowly.  Researchers have provided evidence suggesting that these large local  disparities are generated by differing local economic conditions and  implementation structures.
Collecting a specified amount of dedicated revenue from a property tax  generally requires a relatively small tax rate because the base to which  that rate would be applied is relatively large. The Metro Funding Panel  estimated that a property tax rate of 3.44 cents per 100 dollars of assessed  value in the WMATA Compact region would be required to collect $148  million in 2010. Compared with some of its estimates for other revenue  sources, the panel’s estimate for the property tax was relatively  straightforward and based on publicly available data, as was the sales tax  estimate. However, long-run property value growth might differ from the  growth rate in the past, which could cause the required tax rate to differ  from the panel’s estimate.
section_title: Access Fees
paragraphs: Access fees are not as widely used as the previously discussed revenue  sources, and the economic literature on the characteristics of access fees  is sparse. Intuition suggests that revenues would likely be stable in the  face of economic fluctuations if the fee rate were set on a per-square-foot  basis, unless the property around a Metrorail station was relatively  undeveloped and significant building was taking place or expected to  occur. In this instance, rapid short-run growth in revenues would be  expected until the development was completed.
Although access fee revenues would likely be relatively stable, long-run  revenue growth would be limited if the fee rate were applied per square  foot and remained the same over time. Revenue growth would only occur  to the extent that taxable space increased and would likely be minimal, or  even negative, in real dollars if the rate is not indexed for inflation.  However, to the extent that revenue growth is due to increased  development near stations, there might be a link between revenue growth  and the increased demand for transit expenditures.
Collecting a specified amount of dedicated revenue from an access fee  generally requires a fee rate that, especially compared with a property tax,  is large relative to the assessed value of the property, because the base is  much narrower than that of a general property tax. Many details could  determine the required fee rate, such as the radius of the area around a rail  station within which properties would be subject to an access fee.
The Metro Funding Panel estimated that an annual transit access fee rate  of 30 cents per square foot of federal and commercial property within 0.5  miles of designated Metrorail stations would be required to collect $148  million in 2010. The panel derived this estimate from data on the square  footage of federal property and all commercial and hotel space within 0.5  miles of 63 Metrorail stations. If an access fee were in place, it might apply  to additional categories of property not included in the estimated tax base,  which would lower the required fee rate. However, if federal properties  were not subject to the access fee, the required fee rate would be higher.
section_title: Vehicle Registration Fees
paragraphs: Revenues from vehicle registration fees are also likely to be relatively  stable from year to year. In addition, their response to economic  fluctuations is likely to lag because car ownership rates are not likely to  vary much over the course of the business cycle, and any variation that  might occur is likely to occur after a downturn, rather than during it.
Long-run growth in vehicle registration fee revenues is unlikely to keep  pace with economic growth. Car ownership rates are already so high that  higher household income is unlikely to lead to a proportionate increase in  the number of cars owned per household (for example, a doubling of  average income levels is unlikely to lead to double the number of cars per  household). However, longer-term increases are possible in areas with  high sustained levels of population growth and, therefore, vehicle  ownership growth. This revenue source might provide less long-run  adequacy for funding transit than those previously discussed because  revenues over the longer term may change inversely with changes in the  demand for transit expenditures. For instance, policy changes, increasing  fuel prices, and increasing road congestion might lead households to use  transit more and own fewer vehicles, causing the demand for transit to  increase while revenues from vehicle registration fees are decreasing.
Collecting a specified amount of dedicated revenue from motor vehicle  registration fees requires a relatively large fee rate because the base to  which that rate would be applied is relatively small compared with sales,  property and income taxes. If, for policy reasons, some types of motor  vehicles were exempted from the fee, then the required fee rate would be  even larger. The Metro Funding Panel did not evaluate motor vehicle  registration fees as a funding source for dedicated revenues for WMATA  and thus did not estimate the fee rate required to collect any specified  amount or revenue.
section_title: Appendix III: Revenue Sources Compared on the Basis of Administrative Cost, Equity, and Efficiency
paragraphs: We identified administrative cost, equity, and efficiency as key  considerations in raising additional revenue on the basis of discussions  with state and local public finance experts and public officials and a  review of the relevant economics literature. Administrative cost includes  the cost of collecting, enforcing, and remitting the additional revenue in  addition to the compliance burden (e.g., out-of-pocket expenses for record  keeping and time) placed on taxpayers and those paying fees. Additional  administrative costs are likely to be large if revenue is increased by  implementing a new tax or fee and relatively small for an increase in a tax  or fee rate for a revenue source currently in place at the appropriate level  (e.g., state or locality).
Economists often assess equity according to two principles:     Ability to pay principle. Those who are more capable of bearing the  burden (usually those with higher income levels) of taxes or fees should  pay more in taxes and fees than those with a lesser ability to pay. A tax or  fee rate structure is generally thought to be more equitable if it is  consistent with this principle. Some tax or fee rate structures are also  progressive—that is, the tax or fee liability as a percentage of income  increases as income increases.
Benefit principle. Those who pay for a service are the same individuals  benefiting from the service.
Efficiency can be measured in different ways, but economists commonly  use two concepts to evaluate the efficiency of a revenue structure:    Economic behavioral distortions. This term refers to changes in  individual decision making due to incentives in the tax or fee system that  move the economy away from its most efficient outcome. Distortions are  likely to be smaller when a tax or fee is applied to a broad base (both  jurisdiction—who is taxed; and range—what is taxed) and rates do not  differ significantly across neighboring jurisdictions.
Accountability. Those benefiting from a service pay the full social cost of  the service. If the beneficiaries do not have to bear the full cost, they may  seek to have the government provide more of the service even when  additional amounts of the service cost more than the value of the  additional benefits provided, which would be inefficient. Although the  concept that those who benefit from a service should pay for it is similar  to the benefit principle for assessing equity, in discussing the effects of  adherence to or deviation from this principle on efficiency we are  concerned with the accountability it provides rather than the fairness.
subsections: section_title: Administrative Cost May Be a More Important Factor in Selecting a Source for Increased Revenue Than Equity and Efficiency Changes
paragraphs: Our analysis suggests that if there are substantial differences in  administrative costs among revenue sources selected to address a WMATA  funding shortfall, these differences may be more important than equity and  efficiency effects, particularly if the current formula for allocating local  contributions to fund WMATA is retained and jurisdictions are allowed to  choose their own revenue sources. There can be substantial differences in  the equity and efficiency effects among the different revenue sources  when they are being used to finance state and local government as a  whole, and for at least some of the potential revenue sources we analyzed,  these effects have been well studied in the economics literature. However,  differences in the effects associated with funding a WMATA shortfall are  likely to be much smaller because the increase in revenue needed is small  compared with the revenue raised to fund overall state and local  government operations. Moreover, equity and efficiency effects are  sometimes difficult to measure, and there is a lack of consensus in the  economics literature regarding the equity and efficiency implications for  several of the revenue sources discussed below. In contrast, differences in  administrative cost among revenue sources can be easier to identify and,  therefore, more likely to affect decision making. These costs include items  such as computer systems, forms, and collection devices, as well as the  time spent by government employees and the individuals paying the tax or  fee.
However, if the state and local jurisdictions served by WMATA implement  a regionwide tax or fee—an approach proposed by the Metro Funding  Panel but which does not have strong support among the Compact  jurisdictions—then there could be substantial additional administrative  costs as well as effects on equity and efficiency. Administrative costs  might be high because no regional collection mechanism is already in  place and implementation would require the coordination of collection  and enforcement measures across multiple state and local jurisdictions.  Equity and efficiency effects are also likely to be greater with the  implementation of a regionwide tax because it would change the  interjurisdictional allocation of WMATA payments for the shortfall.  Changes in equity and efficiency would likely be even larger if a regional  tax or fee were used to fund the entirety of state and local WMATA  payments, not just the shortfall, because of the additional revenue  involved.
section_title: Different Potential Revenue Sources Have Different Characteristics When Assessed Using the Key Considerations of Administrative Cost, Equity, and Efficiency
subsections: section_title: Sales Tax
paragraphs: Administrative costs associated with collecting additional revenue from a  sales tax are likely to be relatively low, especially when compared with  those associated with access fees and fuel taxes. Sales taxes are one of the  two main funding sources at the state level (along with income taxes) and  are often used to generate revenue at the local level and in special service  districts; thus, tax collection procedures already exist in many places.  Administrative costs could be more substantial if jurisdictions are faced  with new collection requirements, such as implementing a local option tax  where one does not already exist.
In terms of equity based on the ability-to-pay principle, economists have  traditionally viewed the sales tax as regressive (although less so when  food purchases at grocery stores are excluded from taxation); those with  lower income levels pay a higher percentage of their income in sales tax  than those with higher income levels. However, more recent analyses have  identified some factors that suggest that sales taxes may be closer to  proportional and less regressive than previously believed.
One factor is the economic incidence of the sales tax, or who actually  bears the burden of a revenue source. In taxation, the individuals who  bear the burden of a tax may or may not be the same individuals who  remit the revenue to the government. For example, when a sales tax is  added to a product, retailers remit the revenue to the government but they  may or may not actually be bearing the burden of the tax. Retailers may  leave the price of the product unchanged and simply add the sales tax to  the price, in which case the consumer pays the full amount of the tax.  Retailers might also reduce the price of the product by the amount of the  tax so as not to lose sales, in which case the retailer bears the burden of  the tax. Another possibility is that the price of the product might fall, but  not by the full amount of the tax, in which case retailers and consumers  share the burden of the tax. Traditional analyses of the sales tax have  generally assumed that consumers bear the full burden of the tax, but  more recent analyses have questioned that assumption. If the burden is  borne in part by retailers, then the sales tax may be less regressive than  previously believed.
Another factor is the definition of income used in measuring progressivity  or regressivity. Traditional analyses that have found the sales tax to be  regressive have used annual income levels as the measure of income. More  recent research has shown that lifetime income might be a more relevant  measure of income as long as there are not severe constraints on an  individual’s ability to borrow. Using lifetime income, the sales tax appears  roughly proportional. That is, people with varying levels of income spend  approximately the same percentage of their lifetime income on  consumption.
In terms of efficiency, evidence from theoretical and empirical studies  suggests that the sales tax is distortionary in that it alters individuals’  decisions about where and what to purchase. The sales tax diverts  purchases from taxed items toward untaxed or lightly taxed alternatives  (e.g., leisure, services, Internet sales, and retail in neighboring  jurisdictions). However, the increase in the sales tax needed to collect the  revenue associated with funding a WMATA shortfall is likely to be small  enough to generate only minor changes in efficiency. The biggest  distortions are likely to occur for purchases of items for which consumers  are sensitive to small changes in the price of these items, which might  happen if there are untaxed or lightly taxed alternatives that are close  substitutes.
With respect to the benefit principle of equity and the accountability  component of efficiency, the sales tax roughly matches the users of  WMATA’s services with the costs of those services to the extent that all  local residents benefit from transit, and visitors to the Washington, D.C,  region, who pay sales taxes while they are in that area, are also likely to  use the services. However, from an equity perspective, the adherence to  the benefit principle is limited because funding a shortfall with a sales tax  does not guarantee that those who receive greater benefits pay more tax;  that is, a sales tax is not well targeted toward transit beneficiaries. From  an efficiency perspective, the link with accountability is weakened  because heavy users of the transit system may advocate investment  beyond the economically efficient level because they might not have to  bear as large a share of the costs compared with the share of the benefits  they would receive.
section_title: Payroll or Personal Income Tax
paragraphs: The administrative cost associated with collecting additional revenue from  a personal income tax could be relatively low if it is collected at the state  level as part of existing state income taxes. However, a local income tax  might create significant compliance costs for employers and individuals if  it is accompanied by new forms and record-keeping requirements. A  regional, state, or local payroll tax might also generate significant  compliance costs for employers (in the case of a payroll tax collected at  the employer level) if it requires additional record keeping and submitting  revenues to a new source.
Regarding the ability-to-pay principle for equity, the economics literature  has reached a general consensus that the burden of the tax is likely borne  by employees in the case of payroll taxes and in proportion to income in  the case of income taxes. The economic evidence suggests that employees  probably bear most of the burden of a payroll tax through lower wages,  even when legislation requires employers to pay half of the tax liability. As  lower-income households rely more heavily on wage and salary income,  the payroll tax is generally regressive, particularly at the bottom part of  the income distribution, but the tax will be less regressive if there is a  minimum threshold of wages for paying the tax and more regressive if  there is a cap on the amount of income to which the tax applies. It is  generally accepted in the economics literature that income tax liabilities  are borne by individuals who remit the tax to the government; that is, the  tax is not shifted to other individuals. Most income taxes are structured to  be progressive: People with higher incomes typically pay a larger  percentage of their income in taxes than those with lower incomes. Thus,  the income tax is generally thought to be consistent with ability-to-pay  principles. However, an income tax can be made regressive, proportional,  or progressive depending on the tax rate structure and the distribution of  deductions and credits.
Income and payroll taxes have unclear efficiency implications with respect  to behavioral distortions because previous studies have not yielded a  consensus on the degree to which they create distortions. Generally,  payroll or income taxes that alter decisions about whether to work, how  many hours to work, and how hard to work can cause distortions in the  economy, but estimates of the behavioral responses to income taxes vary  widely. However, there is some consensus that within households, income  taxes are more likely to affect the work decisions of a secondary earner.
With respect to the benefit principle of equity and the accountability  perspective of efficiency, payroll taxes are likely to be better targeted  toward beneficiaries than are personal income taxes. Like a sales tax, an  income tax roughly matches the benefits of WMATA’s services to the cost  of those services, to the extent that all local residents benefit from transit,  although, unlike a sales tax, an income tax does not directly collect  revenue from visitors to the Washington, D.C., region who might also  benefit from WMATA. However, from an equity perspective, the adherence  to the benefit principle is limited because funding a shortfall with a  personal income tax does not guarantee that those who receive greater  benefits pay more tax. From an efficiency perspective, the link with  accountability is weakened because heavy users of the transit system may  advocate investment beyond the economically efficient level because they  might not have to bear as large a share of the costs compared with the  share of the benefits they would receive. A payroll tax is likely to be better  targeted to transit beneficiaries because some groups of people who  would be affected by a personal income tax but not a payroll tax, such as  retirees, might be less likely to benefit substantially from further  investment in mass transit than workers. Targeting of a payroll tax could  be enhanced if it applied to all of those who work in the WMATA Compact  region; income taxes are likely to apply to those who live in the Compact  region, which would leave out those who work in the region and benefit  from transit even though they live elsewhere (and would include those  who live in the region but work outside the region and might not benefit as  much from transit).
section_title: Motor Vehicle Fuel Tax
paragraphs: The administrative cost associated with collecting additional revenue from  a motor vehicle fuel tax may be substantial if some portion of this tax  applied only within the WMATA Compact region and was collected at the  retail level. Typically, motor vehicle fuel taxes are collected at the  distributor level, including in the District of Columbia, Maryland, and  Virginia. Collection at the retailer level would most likely involve  additional record keeping for retailers and added costs for local  jurisdictions, including setting up a revenue collection procedure,  developing standards for record keeping, and enforcing compliance with  the tax.
The equity implications with respect to ability to pay for the motor vehicle  fuel tax are uncertain. Studies indicate that higher-income households  own more cars and drive more total miles, suggesting that they will pay  more in motor vehicle fuel taxes than lower-income households, but it is  uncertain whether this larger amount of tax paid will represent a larger or  smaller share of household income. Given that rates of automobile  ownership are fairly high at all income levels beyond the very lowest, the  motor vehicle fuel tax may be regressive throughout much of the income  range. In addition, higher fuel costs increase the cost of travel and of  transporting goods. This added cost is more likely to be reflected in the  prices of goods for which the demand is relatively unresponsive to  changes in prices, or necessities such as food, clothing and prescription  drugs, rather than in the prices of goods and services that are considered  to be more luxury items. As lower-income households spend a larger  portion of their incomes on necessities, this effect of the motor vehicle  fuel tax would be expected to be regressive.
The motor vehicle fuel tax has an ambiguous effect on efficiency with  respect to behavioral distortions from a conceptual viewpoint, and there is  too little empirical evidence to arrive at a conclusion. Motor vehicle fuel  tax increases within a region decrease efficiency to the extent that they  lead drivers to waste resources traveling to service stations outside the  region to find lower prices. However, this loss in efficiency might be  partially or fully offset if the tax increase makes the total fuel price closer  to the full social cost imposed by driving (including the cost of the fuel as  well as the inconvenience imposed on others due to congestion and  pollution).
The motor vehicle fuel tax may be less equitable with respect to the  benefit principle and less efficient from an accountability perspective than  a sales or personal income tax. Because of differences in car ownership  and driving patterns that are unrelated to income, there is likely to be  more variance at any income level in the burden of a motor vehicle fuel  tax than with a sales or personal income tax, so that even if the benefits of  transit accrue to the population as a whole, there is weaker targeting of  the tax toward beneficiaries with a motor vehicle fuel tax. Furthermore,  when considering specific transit benefits, the link between transit  beneficiaries and those who pay the motor vehicle fuel tax is likely to be  weak. However, there is a clear link for automobile commuters and others  driving at peak times because they benefit from reduced congestion. In  contrast, those who drive at nonpeak times and those who do not drive  near the transit corridors also pay the motor vehicle fuel tax while  receiving little or no benefit. In addition, transit users who do not own  motor vehicles will not directly pay any of the tax, although they could be  among the largest beneficiaries. As transit users and businesses near  transit lines, not automobile commuters, are likely to be the largest  beneficiaries of transit services, they may advocate investment beyond the  economically efficient level because they might not have to bear as large a  share of the costs compared with the share of the benefits they would  receive.
section_title: Property Tax
paragraphs: The administrative cost associated with collecting additional revenue from  a property tax may be the lowest of the revenue sources we have analyzed.  Property taxes are the main funding source for local governments, so tax  collection procedures are already in place. Administrative cost would be  greater if local jurisdictions tried to uniformly implement all or a portion  of a regionwide property tax because they are likely to have different  administrative procedures, including how and when assessments are made  and the relationship between market value and assessed value.
The equity effects of an increase in a property tax are uncertain because  property taxes generally represent a combination of a land tax and a tax  on the structures on the land, and the incidence of those two taxes varies.  In addition, there are different views on the incidence of property taxes.  The traditional view of the property tax suggests that the portion of the tax  that applies to land value is likely borne by land owners, making the tax  progressive because higher proportions of land are owned by higher- income individuals. However, the portion that applies to structures is  likely borne by those who consume the services of the structures— including residents of owner-occupied housing and renters—and previous  studies suggest that this portion is proportional or regressive, depending  on the measure of income used. Thus, the overall effect is ambiguous. The  new view of the property tax suggests that the burden of the property tax  is borne by all capital owners. Assuming that capital ownership rises with  income, this view suggests that the property tax may be progressive.
With respect to efficiency pertaining to behavioral distortions, property  taxes taken by themselves might be considered inefficient because they  lead to less investment in structures. However, when the effects of other  taxes are considered as well, increases in property tax might enhance  efficiency. Because the favorable income tax treatment of investment in  housing creates incentives for investment in housing beyond the efficient  level, raising the property tax could partially offset these incentives and  increase efficiency.
With respect to the benefit principle of equity and the accountability  component of efficiency, the property tax roughly matches the  beneficiaries of WMATA service with its cost to the extent that all property  values are enhanced by the provision of WMATA’s services. However,  from an equity perspective, the adherence to the benefit principle is  limited because funding a shortfall with a property tax increases the tax  paid by all property owners, while some property owners would receive  most of the benefits. That is, like a sales or personal income tax, a  property tax is not well targeted toward beneficiaries, although it may be  better targeted than those other taxes to the extent that higher property  taxes are collected from owners of properties for which the value has  risen over the years due to nearby transit service. Similarly, the link with  accountability is weakened because heavy beneficiaries of the transit  system, including owners of property with good transit access, may  advocate investment beyond the economically efficient level because they  might not have to bear as large a share of the costs compared with the  share of the benefits they would receive.
section_title: Access Fees
paragraphs: The administrative cost associated with collecting additional revenue from  access fees is likely to be substantial, perhaps larger than for any of the  other revenue sources that we analyzed. The use of access fees would  likely involve significant additional administrative cost because local  governments would have to develop a new system for implementation,  collection, and enforcement. In addition, there would be an increased  compliance burden on owners of commercial property located near  Metrorail stations because record-keeping requirements would increase.
The equity effects of access fees are uncertain because of uncertainty  about the incidence of these fees. The burden might be split among  property owners, renters, employees, and consumers, depending on the  ability of property owners to shift the tax burden to others through price  and wage changes, and the economics literature does not contain  sufficient empirical evidence to draw conclusions about how much of the  burden would fall on each group.
There is also little existing evidence on the efficiency of access fees with  respect to behavioral distortions, although economic reasoning suggests  that there might be some small efficiency losses. Access fees increase the  cost of developing land near transit stations. To the extent that fees are  paid out of profits or windfall gains (due to increases in property values)  and do not alter decisions on where to build, there are no efficiency  effects. However, if an access fee renders an otherwise profitable venture  unprofitable, it creates inefficiency by discouraging development around  transit services.
With respect to the benefit principle of equity and the accountability  component of efficiency, access fees are most closely targeted to the  beneficiaries of transit service. Those who own property, live, and work  near transit services are most likely to draw large benefits from the system  and would likely bear a large portion of an access fee. This close  connection between beneficiaries and costs would lead to increased  efficiency, as there would be no incentive to advocate investment beyond  the efficient level because the costs would largely fall on the beneficiaries.
section_title: Vehicle Registration Fees
paragraphs: The administrative cost associated with collecting additional revenue from  motor vehicle registration fees is likely to be relatively low, especially if  the increase in revenue is achieved by just increasing the amount of the  fee already collected. Some complexity might be added if the additional  revenue is collected at a jurisdiction level not currently imposing a  registration fee. In either case, there will likely be little or no increase in  individual compliance costs, as there would likely be no additional record- keeping requirement. Compliance costs would increase if vehicle owners  were required to make an additional trip or travel to a different location to  pay the registration fee.
The equity implications with respect to ability to pay for vehicle  registration fees depend on the differences in vehicle ownership rates  among income groups and the structure of the fee schedule, such as  whether it is a flat fee per vehicle or a fee rate that is based on the value of  the vehicle. Studies indicate that higher-income households own more  cars, suggesting that they will pay more in vehicle registration fees than  lower-income households, but it is uncertain whether this larger amount of  tax paid will represent a larger or smaller share of household income.  Households owning no vehicles tend to have lower incomes, and those  households would pay nothing in vehicle registration fees. However, given  that rates of vehicle ownership are fairly high at all income levels beyond  the very lowest, throughout much of the income range, a flat vehicle  registration fee may be regressive. On the other hand, a vehicle  registration fee that is applied to the value of the vehicle is likely to be less  regressive than a flat fee because the average value of vehicles owned is  higher for higher-income households. Nonetheless, there is empirical  evidence on the equity effects of vehicle property taxes, which resemble  registration fees based on vehicle value, that these taxes are regressive.
With respect to efficiency pertaining to behavioral distortions, vehicle  registration fees make owning a vehicle more expensive, and an increase  in a flat fee would be expected to reduce the level of vehicle ownership,  although the reduction would likely be minimal. There are negative  effects on efficiency resulting from vehicle owners not facing the full costs  that their vehicle use places on others (including the inconvenience and  health effects imposed on others due to congestion and pollution). These  negative effects could be mitigated to some extent by the reduction in  vehicle ownership brought about by additional fees. However, this  efficiency gain may be small because a fee imposed at the vehicle  registration level only minimally discourages vehicle ownership and does  nothing to increase the cost of driving the vehicle on any given trip. Thus,  a fee increase would provide no incentives for reduction in the number of  trips taken by individuals who do own vehicles.
Like a motor vehicle fuel tax, a vehicle registration fee may be less  equitable with respect to the benefit principle and less efficient from an  accountability perspective than a sales or personal income tax. Because of  differences in vehicle ownership that are unrelated to income, there is  likely to be more variance at any income level in the burden of a vehicle  registration fee than with a sales or personal income tax, so that even if  the benefits of transit accrue to the population as a whole, there is weaker  targeting of the cost burden toward beneficiaries with a vehicle  registration fee. Furthermore, when considering specific transit benefits,  the link between transit beneficiaries and those who pay the vehicle  registration fee is likely to be weak. Automobile commuters and others  driving at peak times benefit from reduced congestion, so for them there is  a clear link. However, those who drive at nonpeak times and those who do  not drive near the transit corridors also pay the vehicle registration fee  while receiving little or no benefit. In addition, transit users who do not  own motor vehicles will not directly pay any of the fee, although they  could be among the largest beneficiaries. As transit users and businesses  near transit lines, not automobile commuters, are likely to be the largest  beneficiaries of transit services, they may advocate investment beyond the  economically efficient level because they might not have to bear as large a  share of the costs compared with the share of the benefits they would  receive.
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Rita Grieco, Assistant Director;  Mark Bondo; Christine Bonham; Jay Cherlow; Elizabeth Eisenstadt; Edda  Emmanuelli-Perez; Tami Gurley; Heather Halliwell; Maureen Luna-Long;  Susan Michal-Smith; SaraAnn Moessbauer; Josh Ormond; Katie Schmidt;  Tina Sherman; Albert Sim; James White; Earl Christopher Woodard; and  James Wozny made key contributions to this report.