I am still perusing the 1,301 page highway bill to better understand its implications for freight transportation and infrastructure spending over the next 5 years, but today I was reading the “Joint Explanatory Statement of the Committee of the Conference”, that in 56 pages summarizes some of the changes. The transfer from the General Fund (where we spend hundreds of millions of dollars per year more than we take in) to the Highway Trust Fund (where we spend tens of millions of dollars per year more than we take in) is a beauty that could only happen in DC. I quote the exact language from the document.

Senate Language: “The Senate amendment provides that out of money in the Treasury not otherwise appropriated, the following transfers are to be made from the General Fund to the Highway Trust Fund: $34,401,000,000 to the Highway Account and $11,214,000,000 to the Mass Transit account.”

House Language: “The House amendment provides that out of money in the Treasury not otherwise appropriated, the following transfers are to be made from the General Fund to the Highway Trust Fund: $25,976,000,000 to the Highway Account and $9 billion to the Mass Transit account.”

“Compromise”: “The conference agreement provides that out of money in the Treasury not otherwise appropriated, the following transfers are to be made from the General Fund to the Highway Trust Fund: $51,900,000,000 to the Highway Account and $18,100,000,000 to the Mass Transit account.”

Isn’t that a beauty. One side wants to spend $45.6 billion more than we have and the other side wants to spend $35 billion more than we have, so they compromise on spending $70 billion more than we have. It is almost as much as the two chambers proposed if added together.

Federal gas and diesel taxes have not been raised since 1993. The nation has just recently dropped below one trillion dollars in annual deficits. There is tremendous inefficiency in federal highway spending. And the answer is to borrow $70 billion dollars over the next five years to fund infrastructure improvements. Pathetic.

The new highway bill is called “FAST” , Fixing America’s Surface Transportation Act. The only thing FAST about this bill is the way it plays fast and loose with our tax dollars and federal deficit.

We received a letter from one of our key motor carriers, Interstate Distributor, alerting us and its other customers to two California laws that will have devastating impacts on freight transportation in the state, if not corrected in the current Highway bill.

First, on top of federal hour of service regulations governing driver rest periods, California is mandating that drivers take breaks between 2 and 3.5 hours into a shift; before the 5th hour of the shift; between hours 6 and 8 of the shift; before the 10th hour of the shift; and between the 10th and 14th hour of the shift. If drivers stop on the highway it creates a safety hazard. If they pull off the road, approximately 30 minutes is lost for every break even though some of the mandated breaks are for only 10 minutes. The idea of forcing a professional driver to take three 10-minute breaks and two 30-minute breaks at government prescribed intervals during a shift is ludicrous. The penalties for failure to comply are steep.

The second law, A.B. 1513 severely limits a trucking company’s ability to pay drivers by the mile, the long-time norm in the truckload sector of the industry. It takes effect January 1, 2016. This would be extremely harmful to the trucking industry, and ultimately to the shipping public and consumers.

The Denham Amendment to the Highway Bill would restore a 1994 law that established Federal preemption over state law in meal/rest and piece rate regulations. Please contact your Congressional representatives to support the Denham Amendment.

Here is one site that provides contact information.

On 7/31 president Obama signed the 3rd extension of the MAP-21 highway bill, extending funding until October 29, 2015. MAP-21 was original passed July 6, 2012, covering the remainder of FY2012, plus FY2013 and FY2014, expiring September 30 2014. The bill was first extended last August through May of this year; and then again in May through July of this year; and now again in July through October of this year. For five weeks of the three month extension, Congress is on summer recess.

Separately, the Senate passed a six-year highway bill on July 30, which was negotiated by majority leader Mitch McConnell (R-Ky.) and Sen. Barbara Boxer (D-Calif.) but House Republicans refused to take up that plan leaving town the day before it passed, forcing the Senate to pass the three-month extension. This is the 34th short-term extension of highway funding legislation approved by Congress since 2005.

The key challenge is how to pay for the $16 billion per year gap between proposed highway spending and highway user fees raised primarily from federal fuel taxes. Federal fuel taxes have not been raised since 1993, since which time the dollar has lost 40% of its purchasing power due to inflation and fuel economy is up 14%.

The current Senate six-year proposal has a grab-bag of gimmicks that generate $48.7 billion to pay for three years of incremental spending, punting on how the final three years of spending would be financed. The two main gimmicks are cutting dividends paid by the Federal Reserve to member banks ($17 billion) and selling oil from the Strategic Petroleum Reserve ($7 billion). Talk about buying high and selling low! Increases in fees paid to the Transportation Security Administration, customs fees, and the elimination of Social Security benefits for people with outstanding warrants for their arrest would all contribute a few billion dollars toward the new program.

There are also proposals to change the U.S. tax that companies pay on overseas profits to provide tens of billions of dollars for highway funding, but Mitch McConnell ruled that out on August 6, correctly pointing out that corporate tax reform and highway funding are two separate issues. Also on August 6, Delaware Democrat Sen. Tom Carper, offered a bill designed to raise fuel taxes by four cents per year in each of the next four years to fund highway spending. Increases in fuel taxes are widely opposed in Washington, but favored by the American Trucking Associations.

So where does that leave us? Likely with another short-term extension in late October, within days of the expiration of the current extension. The can continues to get kicked down the road.

First the good news. According to an AP poll, 60% of Americans believe that the benefits of good highways outweigh the costs of building highways. Even 55% of those who drive less than once per week believe this to be true.

The bad news is, the majority do not want to pay to improve our highways. Federal gas and diesel taxes remain unchanged since 1993, but 58% oppose an increase in these taxes to improve highways. Only 14% support the increase with the remainder presumably confused by the question. Moving to a vehicle miles tax is opposed by 40%, supported by 20% with another 40% sitting out the question. I am surprised and disappointed that more people support an intrusive, inefficient and expensive vehicle miles tax over the simple, effective, and efficient act or raising gas taxes. More use of tolling is opposed by a better than 2:1 margin, and only 30% want the states to assume greater responsibility for highway repair.

"Congress is actually reflecting what people want," said Joshua Schank, president and CEO of the Eno Center for Transportation, a transportation think tank. "People want to have a federal (transportation) program and they don’t want to pay for it."

There is a major trust issue. The public does not believe that increasing federal gas and diesel taxes will lead to improved highways, as the money will be spent elsewhere or wasted in government bureaucracy and inefficiency. There is also a need to resell the public on the idea that user fees are an effective way to build and repair highways. The Interstate Highway System was built and paid for through fuel taxes. There is also a need to sell the public on the reality that with over $17 trillion in federal debt, we can’t keep transferring money from the General Fund to the Highway Trust Fund and using gimmicks like pension smoothing to shore up the shortfall in user fees.

As expected, Congress will not allow federal highway taxes and spending to expire this summer. The “solution” is a stop-gap measure that funds highway spending through May 2015 with a variety of gimmicks which do nothing to solve longer term highway funding needs.

The Senate is expected to vote this week on a bill that has already passed the House and has president Obama’s support. The bill will maintain current federal highway spending levels at a little more than $50 billion annually. The federal gas and diesel taxes remain unchanged so taxes will total only about $35 billion annually, leaving a $15+ billion dollar per year gap. The gap is being filled through May 2015 with $10.9 billion of “funding”.

The bulk of the money comes from a tactic known as pension smoothing, which allows companies to temporarily reduce pension contributions. The tactic raises revenue for the government because companies lose out on tax deductions associated with pension contributions. The bill also transfers $1 billion from a fund used to cover cleanup costs from leaking underground storage tanks, and a one-year extension, until 2024, of fees for processing passengers and vehicles through customs.

The longer term fix remains elusive but requires an increase in user fees to offset inflation since gas and diesel tax rates were set in 1993, and the increase in MPG.

I had the pleasure of participating in a roundtable at the Capitol Building with Senators Carper (D-DE), Barrasso (R-WY), Blumenthal (D-CT) and Blunt (R-MO) on April 30 along with 7 other industry representatives. The topic was the needs of the freight industries in the next highway bill. MAP-21 expires on September 30 and there are a number of proposals for a new 4-6 year highway bill. In an election year, the most likely result is an extension of MAP-21, especially considering that the previous highway bill was extended 10 times over a three-year period.

The roundtable exceeded my expectations. I found the Senators very willing to listen to the points of view being expressed around the table. The meeting was scheduled for one hour, but lasted almost twice that long.

My primary point was that the federal gas and diesel taxes have not been raised since 1993 and have lost 62% of their purchasing power to inflation plus 14% to improvements in fuel economy. The result is that the taxes raise about $38 billion per year, but the federal government spends about $50 billion per year, drawing the excess from the already depleted General Fund. We built the entire Interstate Highway System (IHS) with a user fee system and that same principal should apply to its upkeep. The federal tax should be raised and indexed to inflation and fuel economy improvements, but also the public needs to be assured that this money will be spent repairing the IHS. The Senators would welcome the return of earmarks (there were none in MAP-21), but a better mechanism would be an iron-clad guarantee that the federal dollars be spent on nothing other than the IHS repair and maintenance with each state deciding how best to spend the money. If the federal government is going to play a role in allocating money to specific projects it could be done along the lines of the Base Realignment and Closure (BRAC) commission, to ensure that the bridges and highways most in need of repair are fixed first. Republicans could also demand a repeal of Davis-Bacon in exchange for supporting the tax increase. This 1931 prevailing wage law unnecessarily raises the cost of construction, is difficult to administer,

and hampers competition. It does not seem likely at this point, but gaining truck productivity through an 88,000 pound GVW and the allowance of 33’ trailers in double combinations would be a nice offset to higher taxes.

There has been a lot of noise about needing to shift to tolls or a vehicle miles tax (VMT) to compensate for rising fuel economy and the growing potential for electric vehicles. The numbers show that inflation, not fuel economy, is the primary cause of the shortage of funds. Fuel taxes encourage fuel economy improvements, which is a good thing, and also add to the other subsidies for electric cars. The fuel tax is very efficient to collect, unlike tolls and VMTs, and very hard to avoid. The trucking industry already has to report vehicle miles for state fuel tax collection, but do we really want to develop a system for capturing that data for the 250 million cars and light trucks on the road? It is certain that expansion of highway capacity will require tolls and public-private partnerships (PPPs). Tolling the existing IHS, as proposed by the Obama administration, is double taxation for roads that we already paid to build through user fees and currently pay to maintain through fuel taxes.

I was pleased to see that Senator Carper announced his support for increasing the federal gas and diesel tax in the weeks after our roundtable. The American Trucking Association, the American Automobile Association, and the U. S. Chamber of Commerce all support increasing fuel taxes to fix our highways and bridges. The big question is, how do we convince the general public that the extra money raised will be spend repairing and maintaining the IHS?

With MAP-21 scheduled to expire on September 30 this year and mid-term elections looming, the rhetoric is starting to heat up on infrastructure “spending” or “investment” depending on your perspective. While you would be hard pressed to find anyone who does not believe our nation’s highways and bridges are in terrible shape, that is where the agreement ends. How much to spend, how to fund the expenditures, what to spend the money on, and the role of the federal government versus the states are all major points of disagreement.

President Obama’s budget calls for $73.61 billion in surface transportation spending for fiscal 2015, a 1.7 percent increase over 2014 funding, and requests $302.3 billion in spending in a new 4-year highway bill.  Since current federal highway user fees (primarily fuel taxes) generate only $38 billion per year that leaves a significant shortfall in revenue (taxes). The administration proposes to use an imagined $150 billion in extra revenue from corporate tax reform to plug the gap. That is not the kind of corporate tax reform most business leaders have in mind.

Meanwhile the American Trucking Associations (ATA) was not impressed with the Obama proposal as its president Bill Graves commented, “Today’s proposed budget misses the mark when it comes to the transportation needs of the U.S. economy. It provides no real funding solutions for the long-term health of our infrastructure and proposes massive new subsidies for a mode that moves a small proportion of America’s freight and passengers,” a reference to rail transportation. The ATA has formed a team under the leadership of Dan England to consider alternatives to raising the federal fuel tax, which has not been increased since 1993.

House Transportation Committee chairman, Rep. Bill Shuster (R-Pa.), said he opposes an increase in the fuel tax, which funds highways and helps subsidize public transit. The U. S. Chamber of Commerce, the American Automobile Association, and the ATA all want Congress to increase the gas tax. In the House, Rep. Earl Blumenauer (D-Ore.) announced the proposal (H.R. 3636) in December to increase federal fuel taxes by 15 cents over the next three years. Whether he can convince his fellow democrat and committee chair remains to be seen.

Public opinion polls come out fairly strongly against fuel tax hikes, not because people believe the roads are in good shape, but because they don’t trust the government to spend the extra money wisely. As Robert Poole of the Reason Foundation points out, “That isn’t surprising, considering the federal Highway Trust Fund has been tapped in the past to pay for things like "bridges to nowhere," mass transit, recreational trails and museums, in addition to highway construction and repair.”

Gallop reports that a record high percentage of Americans believe that Big Government is a greater threat to the future of the country than Big Business or Big Labor. Several groups, including Cato, believe that the federal government has outlived its usefulness in highway funding. Gabriel Roth of The Independent Institute summed it up pretty well, “The purpose of federal financing — completion of the Interstate Highway System — has been virtually achieved, and it is difficult to identify other advantages from federal financing. The disadvantages of federal financing — increased costs and intrusive regulation — are evident and substantial.”

The alternative of more tolling or a vehicle miles travelled (VMT) tax are also problematic. In theory, with greater fuel economy, fewer miles driven per capita, and more hybrid and electric vehicles, the federal fuel tax may not be the best long-term solution to highway funding, and electric vehicles are getting a free ride today. But that long term is a long way off and highway funding is needed now. The trucking industry is already required to track and report miles driven by state and thus is not terribly concerned about a VMT. But for passenger vehicles, the cost, complexity, and opportunity for fraud and abuse in requiring every U.S. motorist to report miles driven and pay a tax on those miles is mind boggling.

So what is likely to happen? Keep in mind that the prior highway bill SAFETEA-LU was originally set to expire September 30, 2009 but was extended 10 times for a total of 3 years before the 2-year MAP-21 bill was passed. In an election year, I think it is highly likely that MAP-21 will be extended, fuel taxes will not be increased, and we will transfer more money from the General Fund to the Federal Highway Trust Fund to keep it solvent. Everyone wins, except those concerned about $17 trillion dollars in federal debt that continues to rise and those who believe that the fuel tax user-fee system that built our fantastic Interstate Highway system can surely be modified in a manner that keeps it well maintained.

I will publish commentary on the new highway bill after I get a chance to do a little more research, but in the meantime I wanted to provide a summary of key points of the new bill.

Dollars: The bill spends $52 billion in Fiscal 2013 and $53 billion in FY14. Transit projects are targeted to receive about 20% of total expenditures or $10.6 and $10.7 billion in the two years. Federal fuel and excise taxes raise about $36 billion per year, so there is a shortfall of about $16 billion per year. The Transit Account receives only about 14% of federal fuel and excise taxes so significant dollars are being shifted from highways to transit.

Electronic on Board Recorders (EOBRs): The bill instructs FMCSA to develop rules within one year that will require EOBRs within two years after the rule is published. However, the House separately passed a bill that strips funding from the DOT to develop or implement the rules. The ATA and OOIDA remain at odds on this issue.

Hours of Service: The bill orders a field study of the 34-hour restart provisions by March 31,2013 but the study is not required to be completed in order for the new rules to take effect. Both sides are suing over the new HOS rules.

Size and Weight: The DOT is to conduct a study within two years on the safety and other impacts of twin 33-foot trailers and greater than 80,000 pound gross weight limits. It looks like there will be no relief on size and weight for the next two years.

Broker Bond: The broker bond was raised from $10k to $75k.

Drug and Alcohol Testing: A national clearinghouse will be created to share drug and alcohol test results between carriers.

Streamlining: The number of separate programs is reduced and 23 sections of the bill are designed to streamline the funding, design, and construction of highway repairs.

Industry Entry: The entry requirements for both carriers and brokers are increased. Changes include proficiency tests, safety audits, clamping down on reincarnated carriers, clarification that both carrier and broker authority is required for companies offering both services, and experience requirements for new brokers.

There are no earmarks.

The DOT is directed to develop a national freight strategic plan.

The bill is 599 pages long so it will take a while to sort out exactly what is included and what impact it will have on supply chains. It is not clear how much better it is to have a 2-year bill rather than 6-month extensions of the old bill. Neither option allows for longer-term planning and commitments.

An interesting issue is getting attention in the current highway funding bills in the House and Senate. Both bills have provisions that would require FMCSA licensed truck brokers to hold a $100k surety bond to reduce the fraudulent activity that occurs when fly-by-night brokers collect money from shippers but skip town rather than pay carriers. The proposed legislation in backed by the Transportation Intermediaries Association, the ATA, and OOIDA. Opposed are mainly small brokers who may be hard pressed to come up with $100k in cash or a bank letter of credit in that amount. The TIA is offering such a bond to qualified brokers for $10,000 up front plus $2,000 per year. That offer does not sit well with other companies that provide bonds to brokers. You can read an excellent summary of the issues in DC Velocity.

Quite a number of people have asked if I support this requirement or assume that I do support it because large financially strong brokers will benefit if some of the smaller of the 20,000 U.S. brokers are forced out of business. Actually, while I acknowledge there is a serious problem with fraudulent brokerage and my company would benefit from the legislation, I am opposed to the bond requirement. I am always amazed to hear how many shippers and carriers are willing to do business with small brokers that they don’t know and have not properly vetted. Why would a shipper trust its freight and its freight bill to a company (or person) that it does not know and that likely has limited financial wherewithal? The answer is most likely that they are desperate to move a load, see a chance to save a few bucks, and are counting on not needing to make good on the freight payment if the broker stiffs the carrier. On the other side, why would a carrier haul a load for a small broker that it does not know and has not properly vetted? Probably because they are desperate to move the truck and figure they can always go for after the shipper if the broker does not pay.

Is it really the job of the federal government to protect us from our own stupidity and poor business practices? I don’t believe so, and that is why I don’t see the need for this requirement. High quality small brokers who do pay their carriers in full and on time should not suffer economic harm because other companies are not willing to do their homework.

A bipartisan bill has been introduced in the House to eliminate the 12% federal excise tax on new trucks and trailers and roll 6.3 cents per gallon into the federal diesel tax to make the measure revenue neutral. The math seems to work. Truck and trailer excise taxes averaged $2.3 billion annually between 2000 and 2009. The federal diesel tax averaged $8.3 billion annually over the same period. The 6.3 cents is a 25.8% increase over the current 24.4 cent federal diesel tax so would expect to yield an additional $2.1 billion per year. Transport Topics has a good summary of the initiative.

The reason this makes so much sense is that while diesel fuel taxes are relatively stable, declining slightly in recessions, excise taxes are highly volatile as tractor and trailer purchases plummet in recessions and spike in the years before new engine requirements go into effect. This change will smooth out inflows to the Federal Highway Trust Fund (FHTF) while not increasing federal taxes. In addition, the excise tax is a disincentive to invest in new equipment which is often cleaner burning than the older equipment it replaces. Also, when truck and trailer sales plummet employment and profitability for manufacturers declines. Bringing slightly more stability to annual truck and trailer sales would be a big win for those manufacturers and for the supply chain in general. The graph below shows the year-over-year change in fuel taxes and excise taxes for the last decade.

FHTF fuel and other.png

As with all federal incentives and disincentives there are winners and losers. The winners are carriers that refresh their fleets more frequently as the excise tax savings will offset the extra fuel tax. The losers are carriers running older trucks that will be paying more for fuel while not benefitting as much from the excise tax relief. On balance, the excise tax is too volatile and is a disincentive to investment and therefore should be abolished.

No double dipping by the carriers though. They should not expect to recoup the 6.3 cent tax increase through the fuel surcharge mechanism. This is revenue neutral to the government and cost-neutral to the trucking industry.