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Transportation Interests Meet With Legislators

Representatives of a coalition of Michigan infrastructure interests made their annual visit to Washington, D.C., in May to meet with legislators and show support for infrastructure funding needs in Michigan and address concerns that Michigan's construction industry has. Section 511 of the Tax Increase Prevention and Reconciliation Act of 2005 (Public Law 109-222) is a sweeping new requirement m...

July 09, 2007

Representatives of a coalition of Michigan infrastructure interests made their annual visit to Washington, D.C., in May to meet with legislators and show support for infrastructure funding needs in Michigan and address concerns that Michigan's construction industry has.

Section 511 of the Tax Increase Prevention and Reconciliation Act of 2005 (Public Law 109-222) is a sweeping new requirement mandating that federal, state and local governments withhold 3 percent from payments for goods and services. The law, which takes effect in 2011, will cover all payments for products and services made by the federal government and state governments, as well as local governments that have annual expenditures that exceed $100 million.

The withholding mandate will apply to the total cost of the contract, not to the net revenue generated or the size of the company. Many companies realize a profit margin of less than 3 percent on a contract, and withholding 3 percent up front for tax purposes will force them to divert funds needed to complete the contract, creating cash flow problems, according to the Michigan Infrastructure & Transportation Association (MITA). As a consequence, government agencies may see the cost for goods and services increase as firms seek to offset the impact of the 3-percent tax withholding mandate.

The new mandate will have an adverse effect on smaller firms, both in terms of creating cash flow problems as well as affecting the important role they often play as subcontractors on large government contracts. Prime contractors may be compelled to pass the costs associated with the 3-percent withholding requirement to their subcontractors, or possibly shift from subcontracting work out to performing it internally.

The law will also impose significant administrative costs and information reporting requirements on governments and businesses. This will be a serious concern for subchapter S corporations and other pass-through entities because these withholdings will have to be reported to each partner in the partnership and will affect their tax liability.

MITA is supporting federal legislation (House Resolution 1023 and Senate Bill 777) to repeal Section 511, and opposes any effort to broaden the withholding requirement or speed up its implementation. Michigan Congressman Pete Hoekstra told representatives of the coalition that he would support the legislation.

Mike Nystrom, vice president of Government and Public Relations for MITA, told Michigan Congressman Joe Knollenberg that the goal for reauthorization of the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU) in 2009 is to get a base 95 cents return on every transportation dollar that Michigan sends to the federal government.

Jack Schenendorf, vice chair of the National Surface Transportation Policy and Revenue Study Commission, discussed the future of transportation funding at the national 2007 Transportation Construction Coalition Fly-In Legislative Briefing. The Transportation Construction Coalition is a partnership of 28 national associations and construction unions representing hundreds of thousands of individuals with a direct market interest in federal transportation programs.

"The fuel tax, which we have relied on at the federal, state and local level for a long period of time, is not going to be the long-term solution," Schenendorf said, referring to transportation funding. The commission is a 12-person commission that has been asked to look at the entire surface transportation system in the United States and make recommendations by the end of 2007.

"Congress has realized that in the next reauthorization program, it is going to have to take an entirely different approach." Schenendorf said that he believes there are two views on the commission of how the transportation system should be funded.

"One group leans toward saying that the federal government has done its job. It has put in place our national networks, so the federal government can step out. The solution in that view is that we should give the program back to the state and local governments," Schenendorf said.

"In this version, I think what they're saying is that we have to use the resources we have better, which means pricing the system. Use congestion pricing to reduce demand on the system so that you minimize the amount of increased capacity that you must build. Then, if you're pricing the system, if you're charging to use the system, then you're generating the revenue stream on the system. That revenue stream could be used to lure in the private sector to make concession payments up front and then the private sector would get that revenue stream out for the length of the lease. So, the private sector would take over the operation of the national system of roads that we have.

"The idea that the private sector would become a major funding source for the transportation program is truly a new paradigm. There are a lot of questions that need to be answered. Projects tend to cost more because there is a profit margin built into them. The private sector cannot borrow at rates that the public sector can. There is a question of how the excess revenues are used and there is a question of what to use the concession fees for. Some argue that the concession fees don't have to be used on transportation.

"The other view of the world is that we are facing a national transportation crisis and that national transportation crisis needs a national solution. We're competing with other countries around the world and those countries are stepping forward with national solutions. China is building a national system, India is and even Panama is building a third canal. They see the problem as a national problem and their national governments are stepping forward. We have a national problem, so our national government needs to step forward. Our national government needs to step forward and provide additional resources just as it has in the past, to help solve the problem.

"Tantamount to going forward with this vision would be the recognition that the present program needs to change and we need to provide what has been missing for the last 20 years, which is a national vision as to what we're trying to accomplish."

Jack Basso, director of Management & Business Development for the American Association of State Highway & Transportation Officials (AASHTO), discussed the health of the federal Highway Trust Fund.

"By the best estimate, the Highway Trust Fund Highway Account will be in a deficit at the beginning of the 2009 fiscal year by approximately $200 million. When I say the best estimate that depends on whether or not Congress enacts elimination of Revenue Aligned Budget Authority in the current appropriation process, which amounts to approximately $600 million in activity in 2008. The Congress, at this point, is showing no inclination to eliminate the Revenue Aligned Budget Authority. Consequently, the deficit becomes approximately $600 million in fiscal 2009," Basso said.

"The problem with that is, with the way the Highway Trust Fund works, when you have cash in the bank, money spends down at slow rates. For example, the first year of a $100-million project would spend down about $27 million, which means that you could make a lot of commitments in excess of what you have in the bank, as long as the revenue keeps coming in year after year.

"When you have to reverse the flow in a different direction, the rules become entirely different. In order to save the approximately $600 million, you have to cut approximately $2.5 billion in obligation authority (money that is committed to design and build projects).

"Unfortunately, when we make that cut and commit $41 billion in 2009, the effect of that in the next fiscal year when it really accelerates its payout to almost 50 percent is that we would have to have a deficit of somewhere around $5.8 billion in cash in the highway account. The consequences of that would be to reduce the highway program from approximately $42 billion down to approximately $25 billion. We have never had a reduction like that in the history of this program.

"We'd start to slowly recover in 2011. We'd be able to grow the program at approximately $1 billion per year." Basso provided some solutions to the funding problem.

"The equivalent of a 3-cent gas tax increase beginning in fiscal year 2009 would provide sufficient revenue to cover the deficit and allow the program to grow in very small proportions in subsequent years 2011 through 2015," Basso said.

Another possible solution would be to capture the value of refunds. "The Highway Trust Fund makes refunds every year for various purposes such as tax-exempt fuels. That's worth approximately $1 billion per year.

"The Gas Guzzler tax is worth approximately $75 million per year. This steps up fuel tax fraud enforcement. We know that stepping up enforcement generates revenue. The problem is that we don't know how much revenue."

Basso explained that there is money in the transit account of the Highway Trust Fund, which is accumulating approximately $300 million per year in interest. That could be tapped.

"When the Transportation Equity Act for the 21st Century passed, there was a big write-off of approximately $18 billion of the Highway Trust Fund balance in exchange for getting guaranteed spending and some other things. One thing that I think could be said to the Congress is that we wrote that off with the idea that we would have solvency well into the future and in order to maintain the guarantees you need to return some portion of that write-off to the Highway Trust Fund. Approximately $9 billion to $10 billion would take care of the immediate difficulty," Basso said.

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