Propel: Fall 2020

A Case Study in Funding: Future California Transportation Revenue in a COVID-19 Future

Transportation agencies rely on stable, predictable, and adequate revenue streams to plan and deliver excellent transportation systems. The COVID-19 pandemic has created an unprecedented level of disruption to typical revenue collections, creating uncertainty among policymakers about whether they can maintain even basic services and maintenance levels, let alone make long-planned improvements.

The pandemic has hit transportation revenues from all directions. Shelter-in-place orders led to VMT drops of 50% or more in many regions, with concomitant losses in fuel tax and toll revenues. Public transit ridership—and fare revenues—has fallen even more, hit by the double-whammy of plummeting trips rates and riders who have avoided public transit out of concern for their safety. While annual vehicle registration fee revenues have not yet dropped substantially, if the economic crisis persists, households may shed vehicles or forgo upgrading vehicles, both outcomes that will reduce revenues collected. And those are just the impacts to direct user fees. Most public agencies also allocate to transportation some revenue raised from general-purposes taxes such as property, sales, income, and business taxes, all sources that will be very hard hit for as long as the economy stagnates.

To shed light on the possible future of a critical component of the transportation revenue picture in California, we conducted a rapid-response research project in April that explored the potential impact of COVID-19 on state-generated revenues. Study results are available in a report, The Impact of COVID-19 on California Transportation Revenue, published by the Mineta Transportation Institute.

We created five potential economic recovery scenarios and projected future transportation revenue in California through 2030 under each of these, as well as a “baseline” scenario of projected revenues had COVID-19 not occurred. The differences among the scenarios illuminate a range of possible futures the state may wish to consider. For example, possible recovery scenarios that provide future incentives to purchase zero emission vehicles (ZEVs) should be informed in part by assessment of their revenue implications.

State-generated transportation revenues in California

The study looked just at dedicated transportation revenue collected by the state, a package of taxes and fees that recently were adjusted by Senate Bill 1 in 2017. These are gasoline and diesel fuel taxes, an annual fee on vehicles with the rate based on vehicle value (the Transportation Improvement Fee, or TIF), and an annual fee for zero-emission vehicles (the Road Improvement Fee, or RIF) recently established in recognition of the fact that they pay no fuel taxes. The table to the right shows the rate for each tax and fee.

The Projection Methodology

We projected revenues through 2030 for five possible economic recovery scenarios, plus a baseline scenario that assumed COVID-19 had not happened. �e recovery scenarios assumed different recovery rates for transportation-specific variables that are most likely to be affected by COVID-19, including fuel consumption, the number of registered petroleum-powered and electric vehicles, and the price of cars. �e scenarios also explored outcomes in hypothetical scenarios in which government policies like tax credits were used to incentivize Californians to purchase new vehicles or new ZEVs. �e table below shows how the scenarios were constructed.

The projections were calculated using a spreadsheet model used to estimate annual transportation revenues collected the State of California. �e projections used inputs from authoritative sources, such as revenue data from the State of California and a widely-used set of national projections of transportation energy prepared by the US Energy Information Administration. Complete details about the model and data sources are provided in the project report, as well as in prior MTI publications using the model, available here and here.

Findings

Figure 1 presents the projected total revenue that California would collect from 2019 to 2030 under the baseline and five COVID-19 recovery scenarios. For each scenario, a line shows the mean value, and the shaded band shows the range between the projected upper and lower bounds. Areas in the figure with darker shading indicate that projections for two or more scenarios overlap.

Notably, by 2030 the projected annual revenue from all the scenarios will have almost converged, with the exception of the slow-recovery scenario. For the fast-recovery-with-ZEV-stimulus scenario, the projected mean revenues in 2030 are $11.4 billion (2020$), while the projected mean revenues for the three moderate recovery scenarios range from $10.1 to $11.1 billion. �e mean projected 2030 revenue from the slow-recovery scenario is only $9.4 billion.

A slower recovery would significantly compound the impact of annual revenue losses. Therefore, we summed the mean projected revenue collected every year from 2020 through 2030 for the baseline and COVID-19 scenarios. The total revenue would be $118 billion for the baseline, while the COVID-19 scenarios have totals ranging from $98 billion (a loss of 17%) for the slow-recovery scenario, to $121 billion (a gain of 3%) for the fast-recovery-with-ZEV-stimulus scenario. The latter is projected to generate more revenue than even the baseline because it assumes an aggressive ZEV stimulus policy.

The trajectory of vehicle markets has a notable impact on total revenue collected over the decade. For the moderate-recovery scenario with the stagnated vehicle market, the cumulative mean projected revenue would be $5 billion less than the moderate-recovery scenario with ZEV stimulus policies.

Figure 2 shows how the proportion of revenues collected from each tax and fee would change over time for the baseline and COVID-19 scenarios.

Fuel tax revenue dominates in every scenario in every year through 2030. Fuel taxes generate roughly three-quarters of state transportation revenue. Also, gasoline taxes remain about half of the revenue through 2030 in every scenario. For the year 2030, the percentage ranges from a low of 48% in the fast-recovery-with-ZEV-stimulus scenario, to a high of 54% in the moderate-recovery-with- vehicle-market-stagnation scenario. Diesel excise and sales tax revenue, combined, provides from 21% to 30% of total revenue across all scenarios and all years.

Revenue from annual vehicle fees is around one quarter of the total. The TIF is an annual fee assessed on all light-duty vehicles that is proportional to the market value of the vehicle. It generates between 16% and 27% of state transportation revenue across all years and scenarios. The percentage rises over the years across every scenario. The percentage is also comparatively higher in the moderate-recovery-with-ZEV-stimulus scenario because the TIF rate is based on vehicle value, and ZEVs tend to have higher values than ICE vehicles.

The RIF is a flat annual fee applied just to ZEVs in recognition that they do not pay fuel taxes. It generates revenue ranging from less than 1% to a high of 4% of total revenue. RIF contributes proportionately more in the two scenarios that include a major ZEV stimulus policy.

Conclusions and Policy Implications

The study findings highlight the possibility that California’s policy leaders will need to prepare for a future with considerably less revenue than had been expected prior to the public health emergency. At the same time, the different outcomes projected across the scenarios underscore the potential for policy choices to change the trajectory. While the scenarios in this study are not predictions of what will happen, they help policymakers ask important “what if ” kinds of questions to prepare for uncertainly about the future.

While California’s situation has unique features, three conclusions from this study offer insights that may apply to many states, as well as to federal transportation policy debates.

There is great uncertainty about how much revenue will be raised. In this California example, the worst-case scenario tested projected 17% less revenue through 2030 than the state would have received without COVID-19. The projected revenue for the slow-recovery scenario is $98 billion, compared to a projected $118 had COVID-19 not occurred.

Fuel taxes will likely continue to generate the majority of revenues, even in scenarios with fast growth in ZEVs. Across all six scenarios, gasoline taxes remain at least half of revenues through 2030. Adding diesel excise and sales tax revenues, the sum of revenue from taxes on both fuels is roughly three-quarters of the total in all scenarios for all years.

User fees levied on ZEVs can replace and potentially even exceed the revenue that will be lost because of declining gasoline sales tax revenue. In the California example, revenue from the two annual vehicle fees will rise notably as the proportion of ZEVs in the light-duty fleet rises. Revenues raised from the fee on ZEVs varies from less than 1% of total revenues under the slow-recovery and two moderate-recovery scenarios to 4% of under the fast-recovery-with-ZEV-stimulus scenario and moderate recovery scenario that includes ZEV stimulus policy.

When the future is highly uncertain, scenarios like these help planners and policy makers choose among competing potential policies. It is not possible to project future conditions with confidence, but scenarios lead to better policy choices by projecting the likely performance of the transportation system should alternative actions be taken under different possible futures.

The Authors:

Asha Weinstein Agrawal, Director, Mineta Transportation Institute (MTI) National Transportation Finance Center

Hannah King Director, PhD Student, Institute of Transportation Studies, UCLA Department of Urban Planning

Martin Wachs, Distinguished Professor Emeritus of Urban Planning