The Donor-Donee State Issue: Funding Equity in Surface Transportation Reauthorization
Released: 2009-03-19T00:00:00

Background and Issue Overview

Historically, transportation policy battle lines have often formed along regional rather than partisan alignments. The regional character of transportation policy is evident in the debate over the need for an equitable distribution of federal highway aid among the states. Since 1982, Congress has included legislative provisions in every surface transportation reauthorization act to address these perceived funding distribution concerns through a variety of rate-of-return guarantee provisions. For many years, some states (mostly Southern as well as some Mid-Western and certain fast growing Western states) have complained that they receive significantly less federal highway aid than their highway users pay in federal highway taxes to the highway account of the highway trust fund (HTF). These states, referred to as donor states, argue that they are not getting their perceived fair share of federal-aid highway spending and have pressed for legislative remedies that would assure them a higher rate-of-return on their tax payments. Donee states, states that receive more federal highway aid than they pay in federal highway taxes, have not opposed equity provisions per se in recent years but have opposed any reduction in their own existing percent shares of total federal highway aid.

Since the 1970s much of the debate has been data driven. The data used to designate states as either donor or donee have been drawn from Table FE-221 of the Federal Highway Administration's (FHWA) annual Highway Statistics publication, which estimates states' ratios of contributions to the HTF to the federal highway funding that is made available to them each fiscal year. Data from the most recent (FY2007) Table FE-221 is reproduced in Table 1 of this report.

The current authorization, under the Safe, Accountable, Flexible, Efficient Transportation Equity Act: a Legacy for Users (SAFETEA; P.L. 109-59 ), expires September 30, 2009. Proposals for reauthorization are expected during the first session of the 111 th Congress. For an overview of reauthorization issues see CRS Report R40053, Surface Transportation Program Reauthorization Issues for the 111th Congress .

Following a background and overview discussion, this report provides a brief history of the donor-donee issue and its origins. It also describes the existing programmatic rate-of-return guarantee mechanism, the Equity Bonus (EB) Program. The report then discusses issues related to the EB program and possible modifications that may be considered as part of the reauthorization debate. Finally, the report reviews a number of overarching issues related to the donor-donee state debate that could be of interest to Congress during the upcoming reauthorization of SAFETEA.

A number of characteristics of the Federal-Aid Highway Program (FAHP) need to be kept in mind in a discussion of the donor-donee question. First, the federal monies for highway project spending are not provided to states up front. Rather, when amounts are "distributed" to the states, it is only a notification of the availability of federal funds. Once a project is approved and the work is started, the states may submit vouchers to the FHWA for reimbursement for the project's costs as, or after, they are incurred. Second, the FAHP is an umbrella term for nearly all the highway programs administered by the Federal Highway Administration (FHWA). Most of these programs can be described as being either formula (apportioned) programs, which constitute the vast majority of program funding, or discretionary (allocated) programs. The formula programs apportion funds to the State Departments of Transportation (state DOTs) based on formulas set forth in legislation. The discretionary programs are programs nominally under the control of the FHWA that were designed to provide funds to projects chosen through competition with other projects. In recent years, however, most of the discretionary program funding has been earmarked by Congress.

The distinction between formula and discretionary programs becomes especially significant in the process of creating equity programs, such as the current Equity Bonus Program (EB), that could make states' federal spending rates-of-return on their federal highway taxes more uniform. It is difficult to conceive of how discretionary programs could be constructed to guarantee a designated percent return to states on their payments to the HTF and still remain discretionary. The formula programs were originally created, at least in part, to fulfill perceived policy needs.

Some highway needs, such as roads on federal lands, border crossing infrastructure, trade corridors, and interstate system maintenance, have inherently federal aspects that would likely not be fully addressed if the Federal-Aid Highway Programs were predicated on a return to all states. Even advocates of devolving the FAHP to the states have acknowledged some federal needs. In addition, donor states themselves have in the past recognized the need for some states to get a larger than normal share of federal-aid funds. During the debate that preceded passage of the Intermodal Surface Transportation Act of 1991 (ISTEA; P.L. 102-240 ), for example, donor states agreed that large sparsely populated states and some small states (such as Rhode Island, Vermont, and Delaware) should receive larger shares. Authorizers also thought that the sparsely populated "pass-though" states had insufficient state resources to build and maintain their parts of the national highway network, so they were given larger shares.

To deal with these problems in a way that retains these programmatic policy goals and at the same time achieves improvement in the uniformity of states' rates-of-return, Congress has decided to include some programs in the equity programs (such as the current EB) and exclude others. Often referred to as the "scope," the list of programs (as well as how large a percentage of the overall federal highway aid budget they total) that are subject to the equity adjustments, has varied since the first equity program was introduced in 1982. The major formula programs were always within the scope of the equity guarantee. Which other programs were included changed under the various surface transportation authorization acts. The scope of the equity program is important for a number of reasons. First, under a guaranteed share mechanism, the more program dollars left outside the equity program's scope, the more likely that at least some donor states will not reach their minimum percentage return relative to the entire Federal-aid highway program. Second, in general, the more inclusive the equity program's scope, the more costly the program. Third, earmarking of programs within the scope generally provides no new dollars to the state receiving the earmarks. These earmarks simply allow Members of Congress to set project priorities. Earmarks of programs outside the scope actually provide more money to the state getting the earmark. Scope issues are discussed in detail in the " Overarching Issues for Congress " section, later in this report.

The highway account of the HTF is supported by revenue from a combination of a variety of fuel taxes (15.44 cents per gallon for gasoline, 21.44 cents per gallon for diesel and kerosene, and a variety of special fuels taxes, at differing rates) as well as a number of truck taxes including, a heavy tire tax, a truck and trailer sales tax, and a heavy vehicle use tax. Revenues from the fuel taxes are also distributed to the Mass Transit Account (2.86 cents per gallon) and the unrelated Leaking Underground Storage Tank Trust Fund (0.1 cents per gallon). All tire, truck and trailer, and heavy vehicle use tax revenues go solely to the highway account.

Because the federal taxes on fuel are collected at the first point of distribution (at the terminal "rack," usually at a refinery or a fuel tank farm) rather than at the retail level, most of the revenue is collected from a small number of corporations (often large oil companies or distributors that own fuel farms) located in a relatively small number of places. This means that the Treasury has no way of knowing how much fuel tax should be attributed to each state. FHWA has a process to estimate each states share of payments to the highway account.

In simplified form, the process of attributing each state's shares to the highway account is as follows:

The Treasury Department provides the basic national revenue estimates for each kind of tax (gasoline, diesel, special fuels, and truck-related sales, etc.). The FHWA then examines state fuel tax data to produce estimates of on-highway gallons of fuel taxed in each state (use is difficult to track as vehicles can gas up in one state and then travel in another). Each state's on-highway gallons are divided by national total gallons. The resulting distribution is a representation of each state's share of national consumption, measured in gallons. The Treasury's estimates of total revenues received from highway users are then multiplied by the derived state shares of gallons to produce each state's estimated payments to the highway account of the HTF. The share of the various truck-related taxes are extrapolated from diesel fuel use in the states. Gathering and compiling the data takes time, usually over a year. This means that the data underlying the state-by-state federal tax payments data is normally two years old when used to determine attribution.

A number of statistical issues have an impact on the rate-of-return guarantees. The use of non-current data (i.e., revenue estimates from two years prior) may skew the state donor-donee ratios and lead to conclusions about donor or donee status that are questionable. Also, state-by-state data may not always be completely accurate or up to date. The economic cycle can also have an impact on revenues and the budgetary process that can lead to years when revenues and spending levels differ significantly from each other: this can have an impact on relative rates-of-return. As mentioned above, the Equity Bonus and other equity adjustment proposals attempt to achieve a specified "share" return based on two year old payments data. Distribution equity, however, is almost always judged by Table FE-221 in the annual FHWA Highway Statistics Report , which compares estimated dollars paid and apportionments and allocations received for the same fiscal year. This statistical disconnect means that even an effective equity program will face criticism when the same year dollar-for-dollar return data are released. In addition, the impact of proposed revenue changes on states' relative shares of payments to the HTF are hard to predict over the life of the reauthorization. These changes can shift some donor states to donee states, or vice versa, over the years. The statistical shifts could also influence the calculation of program size under an equity guarantee.

A Brief History of the Donor-Donee Issue

The concern by states that federal spending might benefit other states' infrastructure more than theirs has a long history. It was one of the formative forces that led to a federal policy of nonparticipation in road building during the century preceding passage of the Federal Aid Road Act of 1916. In 1808, Secretary of the Treasury Albert Gallatin recommended that the federal government provide $20 million over a ten-year period for a national network of canals and roads. The plan, however, was never funded. Among the factors that mitigated against the plan was the view by Southern states, who generally opposed federal grants for roads and canals, that spending would benefit other regions more than the South. The New England states, which had relatively good roads, opposed federal funding for roads, because they expected the money would be spent for roads outside New England. Anticipating these regional concerns, of the $20 million recommended in the report, Gallatin proposed that only $16.6 million be designated for the network of roads and canals. The remaining $3.4 million was to provide benefits to those "eastern and perhaps southern states," which are part of the Union, but "are less immediately interested in those inland communications," provided for in the plan. Even with this incentive, the plan failed to gain sufficient support to be passed. This could, however, be thought of as forerunner of the modern minimum guarantees within the context of the donor-donee debate. The federal government's involvement in road building ebbed to nonparticipation until the 1890s and even then its participation was primarily technical and advisory. Consequently, since there was no federal program, there were no road issues similar to donor-donee issue until after the turn of the Twentieth Century when the "good roads" movement gained traction and interest groups began to encourage legislation for federal spending on roads.

A forerunner of the modern donor-donee argument emerged during the debate on the Federal Aid Road Act of 1916 (39 Stat. 355; hereafter referred to as the 1916 Act). The 1916 Act established the first federal aid to roads on a programmatic basis. An opponent of the Act, Senator Lippitt of Rhode Island, presented a table to his Senate colleagues showing the share of highway spending each state would receive out of each $25 million of road aid provided, in comparison to the share of every $25 million in federal income and corporate tax revenues each states citizens paid. His table indicated that 12 states (except for California, all in the Northeast and upper Midwest), would receive shares of the road aid that were less than the share that they contributed in taxes. According to his table, three states: Massachusetts, New York, and Pennsylvania would together contribute more than 50% of the tax revenue but receive only between 11% and 12% of the road spending. Senator Lippitt's table, however, did not forestall passage of the bill.

The Highway Revenue Act of 1956 (70 Stat. 387) established the HTF. The impetus was the construction of the Interstate System (IS). Because the rate and timing of construction would vary greatly from state-to-state, the construction of the Interstate System did not lend itself well to arguments in support of an equal rate of return on highway tax payments. Nothing equivalent to the modern donor-donee debate emerged as a major point of contention during the discussions that preceded the passage of the 1956 Act. The federal-state intergovernmental relations conflicts focused more on issues of state or federal preeminence in highway policy, as well as, state concerns that increases in the federal fuel taxes would have a crowding-out effect on states' ability to raise revenues through their own fuel taxes. The passage of the 1956 Act did, however, eventually have an impact on the evolution of the donor-donee issue, because the HTF made it possible to eventually attribute the flows of revenues from states' highway users to the fund.

For the most part, however, although the argument regarding a fair return on tax payments did not disappear entirely after the passage of the 1916 Act, it did not surface as a major issue until after the first publication of Table FE-221 in the 1972 edition of the FHWA's annual Highway Statistics. The table's publication provided a statistical source that supported concerns about the state "fair share" issue that persist to this day. Table FE-221, "Comparison of Estimated State Payments into and Receipts from the Highway Trust Fund, and Federal-Aid Apportionments," published for each state, presented in side-by-side format not only the state payments to and receipts from the HTF, but also the ratio of aggregate payments to receipts for fiscal year 1957 through June 30, 1973. The receipt of federal aid for each dollar paid to the highway trust fund varied greatly from state to state. Alaska appeared to fare best and North Carolina worst at $8.34 and $0.52, respectively. During the 1970s, significant construction was still underway on the Interstate Highway System, and the degree of effort required continued to vary significantly from state to state. This may have, in the minds of some, provided a reasonable justification for the disparity among state rates-of-return. By the early 1980s, however, the interstate system was nearing completion. At the same time, a general perception that U.S. roads and bridges had deteriorated coincided with growing support for increased spending on transportation infrastructure, in part, as an economic stimulus measure.

The Surface Transportation Assistance Act of 1982 (STAA; P.L. 97-424 ) included the first attempt to mitigate the dissatisfaction of donor states by providing that each state would receive a minimum core program allocation of 85% of its estimated highway tax payments to the highway account of the HTF (STAA established the mass transit account). Between STAA and SAFETEA all surface transportation reauthorization bills included equity provision modifications changing the rate-of-return guarantee percentages and scope of the various equity programs. For a detailed legislative history of these changes, see Appendix A .

The Donor-Donee State Arguments

The donor state argument is that for the sake of equity each state should receive federal highway funding roughly equal to the fees and taxes that their state's highway users pay into the HTF. Donor state advocates generally contend that they have been subsidizing the repair and improvement of donee state infrastructure, especially of the older highway infrastructure in the Northeast. Most also argue that they are more road dependent and do not benefit from federal transit spending to the same degree as some donee states. Southern and certain Western donor states also argue that they are fast growth areas, relative to most donee states, and that consequently their needs are as great or greater. Finally, they argue that with the completion of the Interstate Highway System there is no valid rationale for any donor-donee disparity.

Donee states argue that fairness should not be separated from needs. They assert that the age of their highway infrastructures (especially those in the Northeast), the high cost of working on heavily congested urban roads, as well as the limited financial resources of large, sparsely populated western states justify their donee status. They also argue that some needs exist that are inherently federal, such as a national highway network, that cannot be based solely on state or regional boundaries. Furthermore, donee states argue that Mid-Western and Southern donor states often spend less local and state money on highways than donee states, and chide these donor states for pleading for federal funds when they are unwilling to ante up their own state and local resources.

Historically there has also been a third view that has challenged the basic concept that states should be entitled to a balance between the federal taxes collected from their citizens, businesses, or highway users versus the federal spending that eventually occurs in the state. The Federal-Aid Highway Program is the only federal program that considers rate-of-return criteria. Those who challenge the basic donor-donee conceptual framework generally refer to studies showing that some highway program donor states are overall donee states in terms of federal tax and spending flows in general, or in other kinds of federal spending such as defense or human service programs. They also argue that rate-of-return mechanisms inherently constrain the federal government's ability to address changing national needs, creating a framework where state and local priorities trump federal priorities. They also point out that, especially in regard to freight, road improvement in some states (such as for ports or freight bottleneck areas) benefit the surrounding states, the region, and the nation as a whole. They argue that such projects' funding decisions should be based on efficiency not equity. In addition, some cast doubt on the mind-set that construction spending, including wages, remains in the state where a project is built by pointing out that construction companies from all over the nation bid for federally funded projects and that construction labor is mobile.

Policy Dilemmas

The 111 th Congress faces difficult policy choices in resolving the seemingly contradictory goals of meeting donor state demands for a higher rate-of-return and donee state demands to be held harmless at a time when the revenue base of the Highway Trust Fund's (HTF) highway account is insufficient (at least in real terms) and is expected by most observers to be insufficient to fund both goals. Part of the problem is that a bill that simply reduces the shares of donee states to increase the shares of donor states would have difficulty overcoming a filibuster by donee states in the Senate. To provide an equitable rate-of-return structure to overcome this obstacle, reauthorization bills have, in past practice, included "hold harmless" provisions that maintained certain base shares. This process of bringing donor state shares up to the guaranteed percentage return has required increasing the overall federal highway program size, usually by a large amount (since donee state funding could not be reduced). In other words, providing equity remedies that keep both donor and donee states reasonably content has been accomplished by giving more money to all states, but even more to donor states to meet their guaranteed share requirement, currently 92%. Providing equity in this way is very expensive. The Equity Bonus program (EB) under SAFETEA, in fact, is the largest highway program ($41 billion over the five year life of the bill). Finding sufficient funds to support an equity distribution mechanism is likely to be a major difficulty in reauthorization.

In a broader sense, the debate over equity remedies has implications for a number of issues. As was referred to earlier, a guaranteed rate-of-return that approaches roughly 95% or higher could leave little room for addressing additional transportation needs that are viewed as uniquely federal, such as the Federal Lands Highway Program or the Interstate Maintenance Program. Further, the role of the federal government vis-a-vis the states comes into question as the minimum guarantee approaches 100%. If the federal government is essentially collecting HTF revenues only to return them to the states with no redistribution, some would argue the need for a federal role is questionable.

In addition, not all highway funding has originated from the highway user taxes that provide revenue to the highway account of the HTF. Spending originating from the Treasury's general fund has been significant since passage of the Federal-Aid Highway Act of 1956. This is the primary reason that (in Table 1 ) the cumulative ratio of apportionments and allocations to payments to the HTF for FY1957-FY2007 exceeds the 1.0 break-even point by 0.12. This inclusion of general fund monies muddles the rationale for a 1.0 ratio return that underlies the donor-donee debate. The highway user taxes have nothing to do with the revenues that support the Treasury's general fund, which is supported mostly by individual income, corporate income and payroll taxes. This issue is discussed in more detail in the " Overarching Issues for Congress " section of this report.

The Statistics Underlying the Debate

Table 1 , below, reproduces Table FE-221 from the 2007 edition of Highway Statistic s , which is published annually by the Federal Highway Administration. Since 1972, Table FE-221 has provided the statistical underpinnings of the donor-donee state debate. Following the state column, the first group of four columns sets forth the dollar amount of and percentage of the total payments into the fund for both FY2007 and for the aggregate payments from the beginning of FY1957 through FY2007. The second group of four columns sets forth the dollar amounts and percentages of the national total for the flow of funds (apportionments and allocations) from the HTF for the same time periods, respectively. The last two groups of dual columns calculate the ratios that are used to determine donor or donee status via two calculation methods used by various parties to the debate: dollar-in/dollar-out and percentage-in/percentage-out.

Ratio of Apportionment and Allocations to Payments (Dollar-in/Dollar-Out Method)

To calculate the dollar-in/dollar-out ratio, each state's total apportionments and allocations from the fund for the year are divided by the estimated payments made by each state's highway users to the highway account of the HTF for the same year (based on the most recent data available, generally two years prior). The same is done for the cumulated amounts since FY1957. Assuming that the total national amounts flowing into and from the HTF are equal, if a state receives as much as it pays in, its dollar-in/dollar-out ratio is 1.0. If a state receives less than it pays in, its ratio will be below 1.0 and it may be considered a donor state. If a state receives more than it pays in, its ratio is above 1.0 and it may be considered a donee state. For example, for FY2007 Alabama is estimated to have paid into the HTF $680,178,000 and had apportionments and allocations from the HTF made available to the state totaling $817,468,000. Since Alabama, according to Table FE-221, received more than it paid in, its ratio of 1.20 and for the year it can be considered a donee state (i.e. it received $1.20 for each $1 it paid into the HTF). With a cumulative ratio of 1.12 for the period FY1957 through FY2007, Alabama is also historically a donee state. Using the percentage-in/percentage out calculation method, discussed below, Alabama's ratio for FY2007 is 1.0: Alabama is neither a donor state nor a donee state.

In recent years, the authorization legislation has been intentionally drawing down what was the unexpended balance of the highway account. Because the HTF was paying out more than was flowing into the highway account for these years, most states' ratios have exceeded 1.0 and for FY2007 all 50 states received more than they were estimated to have paid in and there were, on a dollar-in/dollar-out basis, no donor states. All states had a ratio above 1.0. The excess of spending over payments at the national level is reflected in the grand total for FY2007, which was 1.20. The cumulative grand total (FY1957-2007), however, is not significantly affected by the draw down of the HTF's unexpended balance, yet at 1.12, it is also over the 1.0 level. This is mostly because of general fund monies spent over the life of the HTF.

Relative Ratio of Apportionments and Allocations to Payments (Percentage- in/Percentage-Out Method)

Some participants in the donor-donee debate, usually donor state advocates, have argued that the dollar-in/dollar-out method of calculating the ratio is misleading because in years when the trust fund balance is drawn down, it makes many states that historically have been donor states look like donee states. They argue that the years when spending exceeds revenues are anomalous and mask the true status of donor states shares of the total relative to those of donee states. To remedy this a second method of calculation has been devised. This method is set forth in the last two columns of Table 1 . The "relative ratio of apportionment and allocations to payments" (percentage-in/percentage-out method) is calculated by dividing a state's percentage of total nationwide apportionments and allocations from the HTF by the state's percentage of the total nationwide payments into the HTF to generate a third ratio. Using Arizona in FY2007 as an example, Arizona's payments to the fund were 2.127% of the national total and its apportionments and allocations received from the fund were 1.823% of the national total. Dividing Arizona's percent of total nationwide apportionments and allocations from the fund (1.823) by Arizona's percent of nationwide payments into the fund (2.127) results in a ratio of 0.86. By contrast, Arizona's dollar-in/dollar-out ratio for FY 2007 is 1.03. This percentage-in/percentage-out method eliminates the impact of the spending down of the fund's unexpended balances on the determination of donor-donee status. It also allows donor states to argue that, even in years when in dollar terms they get more than they pay into the fund, they are not getting the share of the total distribution of funds they should be getting because their relative ratio of what they receive to their payments is below 1.0.

It is important to note that even using the percentage-in/percentage-out method, the cumulative grand total (the extreme right hand column in Table 1) is 1.12, as it is using dollar-in/dollar-out method. This indicates that, even accounting for the recent drawdown of the fund's balances, the federal government has spent more on highways than has been paid into the fund, via highway user taxes and fees, during its existence.

The outcomes from these differences in the calculation methods are significant, as indicated in Table 2 . For FY2007, using the dollar-in/dollar-out method there were no states that did not have more money made available to them than their highway users paid to the HTF. Using the percentage-in/percentage-out method, however, produces 27 states below the 1.0 ratio. Using the historical data for FY1957-2007, results in 13 states below the 1.0 threshold.

It is important to keep in mind that a 100% return on payments to all states is considered by most observers to be unrealistic. There are administrative FHWA and other costs to cover and also some programs and activities, for example the Federal Lands Highways Program, that do not lend themselves to effective distribution if based on rate-of-return on state payments to the HTF. During the last two reauthorizations, donor state advocates have pressed for a rate-of-return of 95%. The case can be made by some that a 0.95 ratio is a more realistic benchmark for determining donor state status. Using below a 0.95 ratio as the measure, the number of historical donor states (i.e. FY1957-FY2007 cumulative) drops to 6 using either dollar-in/dollar-out or percentage-in/percentage-out methods. For FY2007, using the dollar-in/dollar-out method, the number of states under 0.95 is 0, while under the percentage-in/percentage-out method, the number of states under 0.95 is 17.

Some states move back and forth across the donor-donee divide from year to year. HTF revenues are sensitive to the condition of the economy and can have a significant impact in the pattern of payments to the HTF across the states. Some of the results can seem counterintuitive. For example, a donor state may become a donee state because an economic downturn reduces the expenditures on fuel and sales of trucks and heavy tires. Thus, a state may become a donee state not because it is getting more money but because its economy is generating fewer transportation tax revenues for the HTF. This reduces the amount of federal funding needed to bring the state's ratio up to 1.0 (or 0.95 depending on your definition of donor status). Another example that can influence donor-donee status is shifts in fuel use. Gasoline, and diesel fuel have different tax rates and, because of this, shifts in use can influence the amount of revenue produced in a state. A shift from gasoline special fuels, for example, could lead to a drop in overall revenues because some special fuels are taxed at a lower rate.

Existing Law: SAFETEA's Equity Bonus Program (EB)

The current equity mechanism is the Equity Bonus Program ( P.L. 109-59 , section 1104; U.S. Code, Title 23, section 105). Simply put, the way it works is that the individual program formulas determine the initial apportionment amounts provided to each state, and then the equity bonus funding is added to these levels to bring donor states up to their guaranteed rate-of-return. The EB is funded on a such sums as necessary basis. The EB program contains a number of complex requirements of implementation. This section briefly explains these complexities.

The State Percentage Guarantee

Under the SAFETEA EB program, FHWA is directed to allocate sufficient funds to ensure that each state receives a minimum return of 90.5% for FY2005-2006, 91.5% for FY2007, and 92% for FY2008-2009, on their estimated payments to the highway account of the HTF. This percentage calculation is based on a subset of all the FAHP. The programs subject to the EB program are the Interstate Maintenance Program (IM), the National Highway System (NHS), the Surface Transportation Program (STP), the Congestion Mitigation and Air Quality Improvement Program (CMAQ), the Highway Bridge Program (HBP), Recreational Trails, Appalachian Development Highway System, High Priority Projects (HPP), metropolitan planning, the Coordinated Border Infrastructure Program, the Safe Routes to School Program, the Highway Safety Improvement Program (HSIP), and Rail-Highway Grade Crossing Program.

Together these programs and the money apportioned to them are referred to as the "scope" of the EB. As mentioned earlier, these programs are also sometimes referred to as being "below-the- line" (programs and spending outside the scope are referred to as "above-the-line). Since the EB percentage guarantee is only applied to funding within the scope of the EB program, some view the guarantee as a partial one. For example, the 92% guarantee for FY2008 and FY2009 is only to be applied against just over 90% of the total SAFETEA authorization.

Hold Harmless

The EB program also includes a number of "hold harmless" provisions that provide that certain states will either receive the greater of the annual percent return described above, or otherwise receive their percentage share of total apportionments and High Priority Projects over the six-year life of the previous surface transportation reauthorization act, the Transportation Equity Act for the 21 st Century (TEA-21; P.L. 105-178 ). These provisions include certain eligibility thresholds based on state population, population density, highway fatality rates, median household income, and state fuel tax rates. In SAFETEA as passed, the District of Columbia and the following 26 states qualify for funding as hold harmless states under these criteria: Alabama, Alaska, Arizona, Arkansas, Colorado, Delaware, Florida, Idaho, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, South Dakota, Texas, Vermont, Utah, West Virginia, Wisconsin, and Wyoming.

The Minimum Combined Allocation

The EB program sets an annual percentage funding floor, relative to a state's TEA-21 average apportionments and High Priority Projects, beneath which no state can fall. The annual percentage floors are as follows: 117% for FY2005, 118% for FY2006, 119% for FY2007, 120% for FY2008, and 121% for FY2009.

Calculation of the FY2008 Equity Bonus Apportionment

Based on these provisions, a series of calculations is used to determine the EB apportionments needed to bring each state's total apportionment into compliance with the provisions of the EB program. The EB calculation process (using FY2008) is a ten step process. For a detailed explanation, and to get an idea of the complexity of the process, see the FHWA explanatory tables, reproduced in Appendix B of this report.

Step 1: Each state's guaranteed minimum program share of the amounts within the scope of the EB program is determined by calculating each state's percent share of total FY2006 payments to the highway account and then multiplying these percentages by the guaranteed 92%. In other words the estimated dollar amounts contributed by each state to the highway account is divided by the estimated national total of highway account contributions received. This creates a percentage share of the total for each state. Since each state is guaranteed a 92% share of its contributions, each state's contribution share percentage is multiplied by 92%.

Step 2: The dollar floor is determined by multiplying each state's average annual TEA-21 apportionments and High Priority Project amounts by 120%. This establishes a dollar amount for each state below which its apportionments and High Priority Projects funding for FY2008 may not fall.

Step 3: The amounts needed to raise each of the 50 states and the District of Columbia to their required dollar floor levels (calculated in step 2) are determined.

Steps 4-8: The total amount of funding needed to bring all states' apportionments plus High Priority Projects into compliance with the EB are estimated and tested until the amount is reached that brings all states up to their minimum share. In FY2008 there were five iterations before the total was identified. For FY2008 the total program size needed to bring all states up to their required share was $37,998,923,126.

Step 9 : The EB distribution is determined by calculating the difference for each state's share of the overall program level required and the initial apportionments and High Priority Projects from step 3. The overall difference for FY2008 was $9,235,351,320 which represents the size of the total EB distribution (keep in mind the EB program is authorized on a such sums as necessary basis).

Step 10: The EB distribution is broken down into three categories: the $639 million that is exempt from the obligation limitation; the $2 billion subject to special no-year limitation; and the remainder that is subject to formula limitation (i.e. are distributed to the six core formula programs).

As mentioned earlier, the EB is the largest federal-aid highway program. For FY2008 the EB distribution was almost 25% of total apportionments.

Programmatic Distribution of EB Funding

The programmatic distribution of Equity Bonus Program funds to the states is accomplished by increasing the amounts apportioned to the core formula programs. Each year, the first $2.639 billion is apportioned to the Surface Transportation Program (STP). The rest of the distribution is to each of the core formula programs based on the ratio of each program's apportionment to the total apportionment of all six programs for each state.

Unexpected Consequences

The structure of the EB program and its method of distribution had consequences that were a surprise to some state DOTs as well as some Members of Congress. Some Members were surprised to find that the High Priority Project program earmarks that they had secured did not bring any new funds to their states. Affected Members of Congress and state officials were surprised at how significantly the HPP earmarking reduced the funding they received under the core federal formula programs. In addition, the distribution of EB funds to the core formula programs negated some of the penalties that were designed to discourage certain activities by the states. Most of the unexpected consequences are discussed in more detail in the discussion of "scope" issues in the " Overarching Issues for Congress " section of this report.

Equity Bonus Reauthorization Issues

The persistence of the donor-donee debate in the reauthorization of federal surface transportation programs is a reflection of the differing views and expressed needs of the many stakeholders in federal highway spending policy and the difficulty in addressing these differences. Since 1982, all reauthorization bills have had some form of equity adjustment designed to even out distribution of funds to the states. As mentioned earlier, historically this was achieved by providing large amounts of money to all states but relatively more to the donor states. The current problem of the sufficiency of the HTF could make this historical solution less feasible. A recent forecast by the Congressional Budget Office projected that if spending on highways and highway safety were held at SAFETEA levels, over the next seven years (FY2010-FY2016), adjusted for inflation, the highway account of the HTF would need an additional $64.7 billion (or about $9 billion per year) in new tax revenues or general fund transfers to remain solvent.

Given the condition of the highway account, as well as the constrained overall budgetary environment, there are two major underlying issues regarding the EB program: whether an equity program the size of the EB can be funded and, if so, where will the funding come from. If highway user tax revenues are insufficient and trust fund tax increases are considered out of the question, the expected source would be the Treasury general fund. However, injecting significant amounts of general fund monies into the federal-aid highway programs undercuts the basic rationale for a federal highway spending rate-of-return guarantee based on attribution of highway user tax payments by state.

President Barack Obama's fiscal year 2010 budget outline proposes to make the entire DOT budget discretionary for scorekeeping purposes. The impact of the proposal is uncertain. In any case, equity guarantees operated prior to passage of TEA-21 which created the so-called firewall protections and funding guarantees, and could continue to do so.

Some observers, have expressed concern that that the scorekeeping change would allow appropriators to lower the obligation limitation and replace contract authority with regular appropriations, which could lead to more general fund spending on highways.

Modification of the Equity Provisions

Since 1982, the equity provisions have been changed several times in various reauthorization bills and changes are also likely in SAFETEA reauthorization. An increase in the guaranteed rate-of-return percentage of 92% could be considered. Expanding the scope of the equity provisions is also something favored by donor states. In either case, such changes would require a growth in program size or a reduction in funds going to donee states to fund a larger equity overlay unless the underlying core program formulas were rewritten to bring the initial program apportionments more in line with the goals of an increased percentage return guarantee.

Ways to Modify the Existing EB Program

If Congress wishes to change the EB program, it could consider a number of strategies such as:

Phase-in Increases in the Share Guarantee

This is perhaps the simplest cost reducing option. SAFETEA phased in the increase from 90.5% to 92% over the life of the authorization. Although this tactic may save some money, it has drawbacks. First, the annual amounts saved would be small. Second, some of the large donor states would be unhappy with the phase-in proposal, believing equity delayed is equity denied.

Eliminate or modify the "Hold Harmless" provisions

The "hold harmless" provisions that protect certain donee states from losing share amounts, could be retained, modified or eliminated. Again, to bring the percentage guarantee closer to 100% would probably require a weakening of some of the hold harmless provisions (under SAFETEA, 26 states and the District of Columbia were held harmless). Hold harmless provisions, however, more than any other characteristic of equity legislation, are designed to retain or attract votes, especially in the Senate.

Determine Program Size Based on Total Annual Payments to the Highway Account of the HTF

The uncertainties of projecting total program size based on share has led to some discussion of eliminating this process (see step 7 in the earlier section on the EB calculation) and simply using the total annual payments to the highway account of the HTF to determine the program size for each fiscal year. Proponents argue that this change would not only simplify the EB calculation process but would also reduce the unexpected outcomes of tax or other revenue changes. Having total annual payments to the highway account set the total highway program size, according to supporters, would also more effectively align state payments with their allocations.

There are a number of possible disadvantages to using total annual payments to the HTF to determine the total program size. As mentioned earlier, the data on contributions are not generally available until early in the second fiscal year after the contributions are made, so the program size would be set according to older data. Also, this method would, in effect, set a ceiling on each year's spending (i.e., there would be no need for the "such sums as may be necessary" authorization for the EB). This could force a reduction in core program authorizations to make room for the EB distributions. Finally, revenues to the HTF can decline (as they did in FY2001 and FY2008). This could put Congress in the uncomfortable position of having to either draw monies from the general fund, draw down the unexpended balance of the HTF (if there is anything left to draw down), or allow program spending to drop for the year.

Restrict the Program Scope of the EB

One way to reduce the cost of the EB is to reduce the number of programs covered by the guarantee (assuming that other attributes are held constant). The states' percent share return on payments to the HTF could be applied to as small a number of the federal-aid highway programs as needed to stay within budget. In the past, donor states have usually supported as broad a scope as possible. As was mentioned earlier, however, adjustments of scope during the authorization process can lead to unexpected consequences.

Integrate the Guaranteed Rate of Return Into All Federal-Aid Highways Programs

If the assumption is that the ultimate goal of federal-aid highway programs is to guarantee each state a certain percentage rate-of-return, for example 95%, then one way to accomplish this would be to eliminate all other formula criteria and weight all the programs within the scope of the EB based on that rate-of-return. Congress would still authorize each program's dollar amount and the old core formula programs could still retain their program goals and requirements, but the apportionment of program funds to the states would be strictly determined by each state's percent share of contributions to the HTF. Funding for allocated (discretionary) programs within the scope of EB could also be divided among the states based on a 95% share of contributions to the HTF. The remaining 5% of revenues could be used to fund program administration, the Federal Lands Highways Program, Emergency Relief, and other small programs that do not lend themselves to a strict rate of return distribution.

This approach has advantages and disadvantages. The main advantage is that it would achieve the goal of a guaranteed percentage share return to the states without requiring an expensive equity program. There would be no separate equity program funding per se, since the rate of return minimum would be integrated into the individual programs. It would also have the advantage of simplicity over the existing EB program. Congress could set the size of the various programs without having to consider the impact on the core programs of the EB distributions.

On the other hand, such an option could limit the ability of the federal government to fund federal policy priorities. The program formulas that include such factors as lane miles, vehicle miles traveled, diesel fuel used, cost to repair or replace deficient bridges, or weighted non-attainment and maintenance area population, were originally, at least in part, an attempt to direct federal funding where it is needed to fulfill the program goals. Some would also argue that basing federal funding distribution primarily on the rate of return of payments to the HTF will lead to inefficiencies where states, for example, with relatively few deficient bridges could receive more bridge program funds than states with relatively more, or states with no air quality non-attainment areas could get more CMAQ funding than some states with non-attainment areas. Perhaps the main disadvantage of basing all programs on a guaranteed rate of return is that it would doubtless be opposed by donee states who could not only see their shares reduced, but would, in some cases, actually see a reduction in dollars received under the federal programs.

Reduce the Target Minimum Percent Return Below the 95% Level

Some have begun making the case that, under the current fiscal constraints, a higher return percentage is an unrealistic goal for this reauthorization cycle. During SAFETEA reauthorization there was also a major effort to increase the minimum return to 95%. In the end, as discussed previously, only a phased-in increase to 92% was enacted. In the current fiscal environment it is doubtful that an equity program structured like the SAFETEA EB could provide a 95% return. Unless the EB framework is replaced or altered, the minimum rate of return guarantee can only be maintained or modestly increased or decreased.

Statistical Caveats

Statistical analysis of the EB and EB proposals can be problematic. As mentioned earlier, the process of calculating shares and projecting the federal highway program size can lead to results that appear counterintuitive. In addition, because most supporting statistics set forth by proponents or opponents of change in the EB are based on analysis of previous years revenue and funding data, while reauthorization legislation is for future years, the analysis is limited at the outset. Because of uncertainty in future revenue and funding allocations, there is a significant degree of uncertainty in the impact of changes in the EB. Only the FHWA has the databases and expertise to project the impact of these options on equity guarantee calculations in detail and even FHWA must base future projections on assumptions that may not come to pass.

Eliminating the Equity Bonus Program

Congress could decide to forgo an equity provision altogether and allow the program formulas to determine the distribution of highway funds to the states. This scenario, however, would probably require a consensus on programmatic changes that would mitigate the donor-donee state conflicts without requiring a large spending overlay such as is provided by the EB. One way of doing this, as mentioned above, would be to modify the core formula programs so that they are all entirely weighted at or near 100% of states' annual contributions to the highway account of the HTF. Most donee states as well as some donor states would probably oppose such a change.

Overarching Issues for Congress

Although much of the reauthorization debate has focused on the state-by-state estimates of funding flows under the various bills and amendments proposed, there are broad policy implications of the equity guarantee proposals, including the appropriate federal role vis-a-vis the states, program purpose, possible implications for mass transit, as well as a number of other budgetary issues.

The Role of the Federal Government Vis-a-Vis the States

The federal-state partnership in surface transportation has been a fundamental element of federal highway policy since the passage of the 1916 Act (39 Stat. 355), although the nature and extent has changed over time. Under the Act, funding was apportioned by formula to the state highway departments, which were responsible for the construction and maintenance of the federal aid highways. The state and federal governments were seen as equal partners and this was, in part, the rationale for the 50% federal match for highway construction projects. With the passage of the Federal Aid-Highway and Federal-Aid Revenue Acts of 1956 (70 Stat. 374 and 70 Stat 387), authorizations for the Interstate Highway System were greatly increased over a 13 year period. It also established the federal match for Interstate construction at 90%. The revenue title of the act established the HTF and raised the gas and other transportation taxes to support it. These taxes were to revert back to their original rates in FY1973, the estimated completion date for the Interstate System. However, although the obligations for the Interstate System as a percent of total obligations supported by the trust fund began to decline after 1967, increasing obligations for non-interstate highway programs more than made up for the difference. In addition, with the encouragement of the states, as well as construction and other interest groups, the federal match for the major non-interstate programs was increased from 50% to 70% in 1970, to 75% in 1978, and to 80% in 1992. Over time the relative financial commitment for the federal-aid system has shifted away from the states and toward the federal government.

While the federal financial role was increasing, states were pressing for increased flexibility to move their formula apportionments among the programs, or to transit, thereby, significantly increasing state control over their spending choices under the FAHP. The case can be made that by the enactment of SAFETEA, while the federal financial role had increased significantly, through higher spending and increased federal share, state control over spending decisions was also increasing.

In addition, the EB distribution itself, which averaged roughly $8 billion per year during SAFETEA, dilutes the impact of the program apportionment formula factors, which were originally designed, at least in part, to help achieve federal program goals.

These trends, the enhanced federal financial role, increased state authority over spending decisions, as well as calls during the current reauthorization debate for an increased guaranteed rate of return on a wider scope of FAHP programs, raises important policy questions. At what point does the federal role in decision making become so limited that it might make sense to convert the FAHP to a revenue-sharing or a block grant program? Some would argue that point has already been reached, especially as federal administrative, labor, and environmental requirements do add to most states' project costs. On the other hand, some would argue that despite state complaints concerning the costs of complying with the federal highway program requirements and donor state displeasure with their rates of return, the existing federal highway programs are still seen by many as serving a national purpose and continue to be very popular with most state DOTs.

What Really is a Donor State?

For most years under the last two authorization bills (TEA-21 and SAFETEA, FY1998-FY2009) more HTF highway account funding was being spent than was flowing in through revenues. Because of this, on a dollar-in/dollar-out basis, almost all states have become donee states (i.e. the excess of spending over revenues has pulled most donor states' ratio to near or above 1.0). As was mentioned earlier, donor state advocates began to argue against the dollar-in/dollar-out method for determining donor-donee status. They argued that, instead of using dollars, each state's percentage share of tax payments to the highway account should be compared to the states percentage share of total highway funding distribution (percentage-in/percentage-out). This method of calculation allows most donor states to continue to argue that they still are not getting their fair share while in dollar terms most have been getting nearly as much or more than they have been paying into the highway account each year. Among the supporters of the percentage-in/percentage-out method are those who argue that inequitable distribution of highway fund is a reason to eliminate the federal highway program and devolve its responsibilities and financing to the states. Some observers within the transportation community argue that the percentage-in/percentage-out statistical method is questionable and are especially critical of applying percentage-in/percentage-out ratios against spending totals to project a dollar figure that a donor state should be receiving, noting that the projection has no connection to the budget process. Also, the case can be made that the percentage-in/percentage-out calculation makes the donor-donee controversy self-perpetuating. Under this calculation here will always be donor states unless the distribution of every cent of federal spending is based on 100% rate-of-return on state payments to the highway account of the HTF.

General Fund Transfers to the HTF and the Donor-Donee Debate

Over the first 50 years of the life of the HTF significant amounts of money have been transferred from the Treasury's general fund to the HTF. Although much of the transferred funding reflected federal interest payments on the HTF's unexpended balances (theses transfers ended in 1998), the interest was paid by revenues provided by the general taxpayers, and not directly by highway user fees. Some other funds have been transferred to the HTF for a variety of reasons, including the impact of compensating the HTF for lower ethanol tax rates. Given the sufficiency problems faced by the HTF, general fund support for the FAHP (similar to that which is in place for Federal Transit Administration authorization) is one of the options likely to be considered. The use of general funds are problematic for the basic donor-donee argument which is based on return of user fees and taxes paid by highway users. As was mentioned earlier, the pattern of the flow of revenue from the taxpayers in the states to the general fund is different from and has nothing to do with highway user taxes and fees. For example, some long-term HTF donee states such as New York, Massachusetts, and Connecticut are donor states when it comes to general fund expenditures. The larger the general fund contribution to the HTF, the harder it is to argue that states should get a return based on their highway users payments to the highway account.

In September 2008 Congress approved the appropriation of $8.017 billion of general fund revenues to the highway account of HTF ( P.L. 110-318 ). This transfer is equal to roughly 20% of FY2009 funding for highways. Within the context of the donor-donee debate, how general fund money is to be credited could become a significant issue. Should general fund money be treated as if it were highway taxes and credited on that basis across all states or should general fund money be treated differently, perhaps being credited according to state shares of general fund revenues?

Treatment of Stimulus Spending

The American Recovery and Investment Act of 2009 ( P.L. 111-5 ) provided for $27.5 billion in funding from the Treasury general fund to be apportioned and distributed through existing federal-aid highway programs. The version that originally passed the House would have apportioned funds to the states based on their shares of the FY2008 obligation limitation. This method would have reflected the Equity Bonus distribution in its totals. The version that originally passed in the Senate would have simply apportioned the stimulus highway funds according to the STP formulas. As such, the Senate bill would not have reflected an Equity Bonus distribution. As was mentioned earlier, some have questioned the appropriateness of applying shares based on highway tax payments to the spending of general fund-based stimulus spending. In the end, P.L. 111-5 split the difference. After funding a number of set asides, 50% of the remaining funds were to be apportioned according to the House method and 50% according to the Senate method.

The surge of general fund money as stimulus funding could also increase the likelihood of a reexamination of the donor-donee calculation methodology.

"Scope" Issues

An issue that may be seen as being a corollary to the federal role issue is whether a high rate of return percentage, such as 95%, coupled with a similarly broad program scope could constrain a federal programmatic response to federal needs as they arise. Some federal programs, such as the Federal Lands Highways programs, are accepted as being federal in nature and not lending themselves to equal distribution across 50 states. For some programs there is less of a consensus.

As was mentioned earlier, having a 95% or higher guaranteed rate of return and a similar percentage scope would leave little room for targeted federal programs outside the EB. Given the combination of the impact of the EB distribution on apportionments and program flexibility that allows states to flex much of their core program funding among these programs or to transit, the case can be made that programs that are directed toward transportation infrastructure needs that are inherently federal in nature should be outside the scope of the EB. Perhaps an option would be Congress to redefine scope in a way that only programs that serve what are clearly federal purposes could be outside the scope of the EB. These programs could be designated in law as being inherently federal. Any other programs whether formula or discretionary would be retained within the scope of the EB. The EB debate would then be focused on a more clearly defined concept of scope. Doing this would require a broad consensus among both donor and donee state Members of Congress. Donor state advocates would probably be concerned that programs defined as being federal in nature could add up over time to the detriment of donor state rates of return. The issue is whether the need for equity is greater than needs that are inherently federal.

The Impact of Scope on Earmarking

Substantial earmarking of federal-aid highway funds is a relatively recent phenomenon. Until the late 1980s, earmarks amounted to about 1% of authorized federal-aid highway spending. In SAFETEA, almost $22 billion or roughly 11% of the $199.5 billion total contract authority in Title I (the highway construction title) of the bill was earmarked.

The issue of earmarking within and outside the scope of the EB surfaced quickly as an issue after the passage of SAFETEA. These SAFETEA earmarks were broadly described as being either "below" or "above the line." It is important to keep in mind that the terms above and below the line, described in this report, are not legal or official budget terms and have no formal meaning to the FHWA, but are informal terms that emerged during the surface transportation reauthorization debate. Below the line refers to earmarks in programs that are subject to provisions of the EB program. These programs are listed in SAFETEA section 1104 (a)(2). Above the line refers to funded programs and activities that are not listed in section 1104 (a)(2) and therefore not subject to the EB.

"Below the Line" Programs

The only below the line earmark program in SAFETEA is the High Priority Project program (HPP). It is, however, by far the largest of the earmarked programs in the Act. SAFETEA provided almost $15 billion under the HPP.

HPP earmarks allow Members of Congress to define their project priorities through the authorization process to their State DOTs. HPP earmarks, however, do not add money to a state's total below the line funding (i.e., the total of core formula funds plus total HPP funds). This seemingly counterintuitive situation occurs because the below the line funding is subject to the EB Program. As has been mentioned earlier, under the EB, funds are distributed across the formula programs under a complex calculation that is designed to assure that all states get a certain minimum share of the below the line funding. Because the total funding under the line is fixed in the authorization bill, this leads to the situation where states that do not get many HPP earmarks tend to receive, in a relative sense, larger distributions from the EB program while states that get a high value of HPP earmarks tend to receive relatively smaller EB distributions (or no EB distribution). This means that the total amount received by a state under the line tends to be roughly the same whether or not they receive high or low dollar totals of HPP funds.

A further implication of this situation is that the more of a state's total below the line funding is derived from HPP funds the less funding is ultimately available to the state for the federal-aid highway core formula programs, upon which the state DOTs depend to fulfill their state transportation improvement plans.

"Above the Line" Programs

In SAFETEA the major earmarked programs above the line are the National Corridor Infrastructure Improvement Program ($1.9 billion), Projects of National and Regional Significance ($1.8 billion), and Transportation Improvements ($2.5 billion

In contrast to the below the line earmarks, these earmarks have no direct impact on the core formula programs' share of the below the line funding and are viewed as providing additional funding to the state DOTs.

Should policymakers decide to allow earmarking in the upcoming reauthorization legislation, what programs and how much funding should be above or below the line could be an issue.

The Impact of Scope on Penalties

Money forgone due to penalties, such as the penalty for transferring Highway Bridge Program funds, that are, at least in theory, imposed prior to distribution of the EB tend to, in effect, be replaced with EB funds. What the penalty takes away, the EB gives back. Congress could also consider eliminating the counteracting impact of the EB distribution on the FAHP penalty provisions perhaps by imposing the penalties after the distribution of the EB funding. This could affect some states guaranteed percentage share, however.

Minimum Guarantee for Transit?

Although the minimum guarantee/equity remedy debate during the current surface transportation reauthorization debate in Congress has focused exclusively on a guaranteed rate of return on payments to the highway account, some have argued that a similar guarantee should be applied to payments to the mass transit account of the HTF. The mass transit account is credited with the revenues from 2.86 cents of the 18.4 cents federal fuel tax (0.1 cents per gallon of this amount is also directed to the unrelated Leaking Underground Storage Trust Fund). Roughly 80% of the Federal Transit Administration's funding comes from the mass transit account, with the remaining funding provided by treasury general funds. The distribution of nearly all of these funds is, by formula and by earmark, from the federal government to the individual transit authorities (i.e., it differs from the highway programs which are funded through the state DOTs). From a state perspective, the program set-up tends to favor states that have large cities with existing fixed guideway type transit systems (heavy rail, light rail, dedicated bus lanes). Rural states and states with bus dependent transit tend to get less. The top five states receiving federal transit funding (as of FY2007), California, New York, New Jersey, Illinois, and Pennsylvania, received 53% of total transit obligations. Some transit donor states see their tax payments as subsidizing the urbanized states and argue that they have transit needs themselves that are unmet. They also argue that FTA programs unfairly underfund bus-only transit systems in general and that the need for public transportation in rural areas is, in particular, mostly ignored by the current funding distribution.

Supporters of the FTA programs can make a number of arguments in defense of the uneven geographic distribution of transit funding. The main argument is one of program national purpose. Under the statement of policies, findings, and purposes in 49 U.S.C. 1501, the focus is clearly on urban mass transportation with a goal to "efficiently maximize mobility of individuals and goods in and through urbanized areas and minimize transportation-related fuel consumption and air pollution." For transit systems to be efficient they need to serve areas of concentrated population. A mass transit 95% guaranteed rate of return would shift large amounts of funding to less densely populated areas where the number of people served would be low and the costs per passenger mile would be high (i.e. would lead to inefficiencies). Some would also argue that the support for a transit minimum guarantee is really based on the assumption by states that they could flex a significant portion of their transit funding to highway programs. Transit donee states may argue that a transit guaranteed rate of return would punish the urban areas that have taken the initiative to build, in some cases before significant federal funding was available, transit systems that are in line with federal policy goals of enhancing urban mobility, reducing fuel consumption, and improving air quality. Finally, transit interests argue that the role of cities as economic centers means that urban mobility benefits not just the cities but the nation as a whole.

The transit minimum guarantee debate has not garnered wide-spread support during the current reauthorization cycles but it would not be surprising for some form of transit equity provision to be at issue in the next reauthorization cycle. The big losers could be California and New York. Interestingly, some states that view themselves as highway donor states are major beneficiaries of the transit program. For example, should California and New Jersey support a donor state position on payments to the highway account of the HTF, they could be in the position of having to oppose a transit minimum guarantee or risk a loss of much more transit funding than they gained through the highway program guarantee. In addition, such a major shift in funding would probably require a major rewriting of the federal transit programs for the programs to make sense as a whole. It would also overturn what many see as the great compromise of 1982 under which the transit account of the HTF was created. Transit dependent states supported an expanded highway program in return.

Devolve the Highway Program to the States?

One approach to the donor-donee controversy that attracted attention during the debate prior to passage of TEA-21, but that has not yet garnered much interest in the current reauthorization debate, would be to simply devolve most of the federal highway program role to the states. The Transportation Empowerment Act ( H.R. 1470 and S. 667 , 105 th Congress), sponsored by former Senator Connie Mack of Florida and former Representative John Kasich of Ohio, would have devolved much of the federal highway program role to the states. Only a program for maintaining the Interstate System, federal lands highways, National Security Highways, Emergency Relief, and a proposed Infrastructure Special Assistance Fund would have remained federal. A four year phase out of 12 cents of the federal gas tax would have corresponded with the declining federal role. States would have had the option of replacing the declining federal taxes with gas tax increases of their own. States would then have had the freedom to spend, or not spend, on their own roads and transit systems as they saw fit.

Although this proposal garnered some support from advocates of a reduced federal role in transportation, it did not obtain broad support from many governors, state legislatures, or state DOTs, many of whom were wary of the political implications of pushing large replacement gas tax increases through their state legislatures, and at the same time keeping these funds dedicated to transportation. Despite the failure of devolution proposals to be enacted, some would make the case that the closer the EB guarantee gets to 100%, the more sense devolution to the states makes. They would argue that as the guaranteed rate of return increases, the FHWA's role becomes more like a tax collector for the states. The need for and efficiency of the federal government as middleman comes into question. At this time, however, there appears to be limited interest at the state or federal level for any radical change in the federal role in the highway program.

On the other hand, some argue that, given the nature of the practical politics required to pass surface transportation reauthorization bills, the perceived inequitable nature of the funding distribution relative to payments to the HTF is intractable. From this view, some argue that devolution is the solution to both the rate-of-return inequity in particular and the donor-donee issue as a whole.

Appendix A. Legislative History

Surface Transportation Assistance Act of 1982 (STAA)

STAA ( P.L. 94-424 ) authorized a significant increase in funding for the Federal-Aid Highway system for FY1983-FY1986 and included a provision designed to mitigate the dissatisfaction of donor states by providing that each state would receive a minimum allocation (also known as the minimum guarantee) from the core FHWA programs. Specifically, the bill ordered the FHWA to allocate among the states sufficient funds to assure that each state's total apportionments from the core highway and safety programs (Interstate Highway Substitution, Primary, Secondary, Interstate, Urban, Bridge Replacement and Rehabilitation, hazard elimination, and rail-highway crossings, and section 203 of the Highway Safety Act of 1973) would not be less than 85% of the percentage of estimated tax payments each state paid into the highway account of the HTF. These "equity adjustment" allocations could be obligated to the core highway programs.

Surface Transportation and Uniform Relocation Assistance Act of 1987 (STURAA)

STURAA ( P.L. 100-17 ) authorized the Federal-Aid Highway Program for FY1987-1991, retaining the 85% minimum allocation, but altering the basis of its calculation. The act revised the calculation to include the allocated (sometimes referred to as discretionary) programs, with the exception of federal lands programs and safety programs. For FY1987 and FY1988 emergency relief funds and interstate construction discretionary funds were not included in the calculation. The act continued the minimum allocation provision established by STAA.

With the exception of the changes in the treatment of the minimum guarantees, the formulas for allocation of funds under STAA and STURAA remained the same. Minor changes were made in the criteria for awarding discretionary program grants. Emergency Relief and Federal Lands Highways grants continued to be distributed on a project-by-project and needs basis, respectively.

Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA)

ISTEA ( P.L. 102-240 ) reauthorized surface transportation programs, including Federal-Aid Highway Programs, for FY1992-FY1997, making major changes in the overall program structure, program formulas, minimum allocation, and other provisions that could impact the state donor-donee ratios. To a great extent, the changes were an outgrowth of the fact that the remaining unfinished portions of the interstate system would be completed under ISTEA. The act also enunciated a broader vision of the mission of federal highway programs to include air quality, alternative transportation, and historic preservation. ISTEA retained the three formula programs that provided funding for the Interstate system (Interstate Construction, Interstate Maintenance, and Interstate Highway Substitution) as well as the Bridge Replacement and Rehabilitation Program. The other formula programs, such as, the Primary System, Secondary System, Urban System, and Urban Transportation Planning, were replaced by the National Highway System Program, the Surface Transportation Program, and the Congestion Mitigation and Air Quality Program. The distribution criteria for projects under the discretionary programs remained the same except that the Interstate Construction Program (renamed the Interstate Discretionary Program) was changed to be at the discretion of the U.S. Department of Transportation (USDOT) and the Interstate 4R (for resurfacing, restoring, rehabilitation, and reconstructing lanes on the Interstate System) program funds were now a set-aside within the new National Highway System Program.

Equity Adjustment Provisions

ISTEA included five provisions, with separate funding, designed to assure a more equitable distribution of federal funds to the states.

The 90% Guarantees

The act raised the minimum allocation to 90% of estimated state contributions to the highway account of the HTF (although narrowing its calculation to the core formula programs, scenic byways, safety belt and motorcycle safety grants).

The act also included a new minimum payments guarantee (of a broader scope than the minimum allocation discussed above) that assured that each state's apportionments (for the core formula programs) for the fiscal year and allocations (to the discretionary programs) from the previous year would be at least 90% of its estimated state contributions (i.e., calculated from all programs except special projects).

Donor State Bonus

For each fiscal year, donor states were identified by comparing projected contributions to the HTF with the apportionments to be received that year by each state. Under the donor state bonus, starting with the state with the lowest return, each state was brought up to the level of the state with the next highest level of return. This was repeated successively for each state until the ISTEA authorized program amount was exhausted.

Hold Harmless

This provision set a specific percentage that each state was to receive from the core formula highway programs plus Federal Lands Highway Programs, minimum allocation, donor state bonus, and Interstate Reimbursement. Each state received an addition to its regular apportionments to raise its total to the set percentage.

Reimbursement for Interstate Segments

ISTEA authorized $2 billion for FY1996 and FY1997 to reimburse each state for the costs to them of building segments of the Interstate System without federal assistance prior to or during the early days of the Interstate Construction Program.

Despite all of the above provisions significant gaps remained among states on their share return on contributions to the HTF. As reauthorization of ISTEA approached, dissatisfaction with the effectiveness of the equity provisions led to challenges to the ISTEA program paradigm.

Transportation Equity Act for the 21 st Century (TEA-21)

The reauthorization debate that preceded passage of TEA-21 ( P.L. 105-178 ) included a wide range of views on the donor-donee state issue and is worth reviewing because all the major underlying arguments that had emerged over time, reemerged during the TEA-21 debate. Significant characteristics of the debate included a greater, primarily regional role and virtually no role for party affiliation. Also in play were different philosophies of the appropriate role of the federal government vis-a-vis the states, differing views of whether the completion of the Interstate Highway system should trigger a reduction in federal involvement in highway construction; how national highway needs criteria can fit a return-on-the-tax-dollar view, and the influence of a large increase in gas tax revenue to the HTF on program structure.

Regional Conflict Over Funding

Under ISTEA, Southern and Mid-Western States made up most donor states while Northeastern, Pacific coast, and large sparsely populated Western States made up most of the donee states. In general, donee states were satisfied with the distribution under ISTEA and supported the "ISTEA works" legislation that, in general, adhered to the ISTEA funding formulas. Most of the donor states joined "STEP-21," a coalition whose centerpiece proposal was a guarantee that each state receive at least a 95% return on its estimated contribution to the highway account of the HTF. The dominance of regional differences over party affiliation was reflected on the Senate Committee on Environment and Public Works, where the Republican committee leadership supported the donee friendly "ISTEA works" bill while a Republican colleague, sponsored the Streamlined Transportation Efficiency Program for the 21 st Century (STEP 21) which included the 95 cents on the dollar guarantee, as well as program formula changes supported by donor states.

Devolution

What most observers considered a more radical approach was the Transportation Empowerment Act, sponsored by Senator Connie Mack of Florida and Representative John Kasich of Ohio. This bill would have devolved much of the federal highway program role to the states. Only a program for maintaining the Interstate System and federal lands highways would have remained federal. A four year phase out of 12 cents of the federal gas tax would have corresponded with the declining federal role. States would have had the option of replacing the declining federal taxes with gas tax increases of their own. States would then have had the freedom to spend, or not spend, on their own roads as they saw fit. Although this proposal garnered some support from advocates of a reduced federal role, it did not obtain broad support from many Governors, state legislatures, or state departments of transportation, many of whom were wary of the political implications of pushing large replacement gas tax increases through their state legislatures, and at the same time keeping these funds programmed for highways.

TEA-21 Equity Provision Changes

The equity changes that followed the debate and were included in TEA-21 were more limited than most would have expected early in the reauthorization debate. The main reason for this was the large increase (roughly 40%) in overall funding levels. Still there were equity provisions that were included in the hope that they would narrow the donor-donee divide.

Minimum Guarantee

The TEA-21 minimum guarantee had three components:

Guaranteed Base Share

TEA-21 guaranteed each state a percentage share (set forth in a table in 23 U.S.C. 105) of the total program, defined as all the apportioned programs: Interstate Maintenance Program (IM), National Highway System Program (NHS), Surface Transportation Program (STP), Highway Bridge Replacement and Rehabilitation Program (HBRRP), Congestion Mitigation and Air Quality Program (CMAQ), Metropolitan Planning, Recreational Trails Program, Appalachian Development Highway System Program and Minimum Guarantee, as well as High Priority Projects.

Minimum 90.5% Share on Contributions

All states were guaranteed at least 90.5% return (up just 0.5% over ISTEA) on their share of tax contributions to the highway account of the HTF (based on the most recent year for which the data are available — generally from two fiscal years before). Using Ohio as an example, of total FY2001 highway account contributions, Ohio's percentage share contributions amounted to 3.7578%. Ohio was guaranteed 90.5% of its share of estimated FY2001 contributions and was thus guaranteed a minimum share of 3.4008% of the FY2003 apportionments (i.e., the core formula programs), plus High Priority Projects and the Minimum Guarantee itself. If the above base share was less than a 90.5% return to a state then the share was adjusted upward until the 90.5% share was reached. The money to raise shares to 90.5% was provided by "squeezing" down the percentages (but not the total amounts) of those states that were above the minimum.

Minimum State Payment

Each state was guaranteed that as part of the minimum guarantee it would receive at least $1 million in Minimum Guarantee funds.

It is important to keep in mind that the TEA-21 Minimum Guarantee was a compromise provision. It was constructed in such a way as to give money to all states in the process of bringing the donor states up to the 90.5% minimum guarantee. Each state received the $1 million minimum. Then, the lowest percent share of any state or the District of Columbia (generally the District) was used to extrapolate the total program funding (as defined under Minimum Guarantee) needed for the District to retain its total program percentage. For example, using FY2003, because the District's program level percent share of 0.3860% was lower than the District's percentage of total apportionments (roughly 0.5%), high priority projects, and $1 million guarantee, and because no money could be taken back, the only way to achieve the District's 0.3860 % was to raise the national total. To achieve that percentage for the District, a total FY2003 program size of $27.76 billion was needed. The total Minimum Guarantee program funding needed to achieve this total was over $6 billion. Ironically, the degree of the District's donor status meant more money for all states (in absolute, not relative terms).

Minimum Guarantee Distribution

Each year, the first $2.8 billion of Minimum Guarantee funds were administered as STP funds (see STP discussion below) except that set-asides for Transportation Enhancements, Safety Construction, and certain population-based sub-state allocations did not benefit from this distribution. Any Minimum Guarantee funds above $2.8 million were distributed to the five core programs: STP, Interstate Maintenance (IM); Highway Bridge Replacement and Rehabilitation Program (HBRRP); National Highway System (NHS); Congestion Mitigation and Air Quality Improvement (CMAQ). The distributions to the states were based on the ratio of each core program's apportionment to the total apportionment of all five programs for each state.

Program Formula Changes

TEA-21 also included formula changes that were perceived as benefitting donor states.

Interstate Maintenance Program

TEA-21 reduced the weight given each state's share of total Interstate Highway System lane miles and total state share of Interstate System vehicle miles traveled to 1/3 each and created a third weighed category that provided the final 1/3 be distributed based on each state's percent share of annual contributions to the HTF attributable to commercial vehicles. This final weighted third was expected to benefit donor states.

Surface Transportation Program

STP's apportionment formula under TEA-21 was weighted 35% to estimated state share of tax payments paid into the highway account of the HTF. This also was expected to benefit donor states. State share of total lane miles of Federal-aid highways (25%) and share of total vehicle miles traveled on Federal-aid highways (40%) were the other weighted attributes in the STP apportionment formula.

National Highway System Program

TEA-21's NHS apportionment formula was weighted at 30% of a state's share of diesel fuel used on highways. Some observers expected that this would also benefit donor states.

The Resolution of the TEA-21 Donor-Donee Debate

In the end, what many observers had predicted would be a major battle between donor and donee states was resolved relatively amicably. This occurred despite the donor states only being able to achieve a 0.5% increase in the minimum guarantee percentage and formula changes, which some predicted would have little impact on donor state returns on the tax revenues these states paid to the highway account of the HTF. Some even argued that donor states would have been better off if TEA-21 had retained the ISTEA formulas. In the case of TEA-21, what alleviated the concerns of STEP-21 and other donor state advocates was the amount of money available during TEA-21's lifetime. By shifting, in 1997, revenues generated by the 4.3 cent deficit reduction gas tax to the HTF, Congress was able to provide large increases in highway funding for all states. The extra money made the donor-donee debate less urgent to the donor states. As the TEA-21 authorization neared its expiration (FY2003), however, the donor-donee state issue resurfaced.

TEA-21 created a so-called "firewall" around the highway account to prevent highway account funds being used for non-highway purposes. It also required that spending from the highway account approximately equal the revenues flowing into the account on an annualized basis. To make sure that annual spending and revenues were roughly equal each year, the Act provided for Revenue Aligned Budget Authority (RABA) to be distributed proportionally across all states to maintain a balance of spending and revenue flows. Although these changes did not affect the operation of the TEA-21 minimum guarantee they did have an overall impact on the availability of funds to support the minimum guarantee program, which was funded on a "such sums as necessary" basis.

Appendix B. How FHWA Calculates the Equity Bonus Apportionment