As Congress's summer recess draws near, the battle over national transportation spending grows increasingly partisan as the political parties spar over what should or should not be included in the legislation. Should the proposed legislation provide a long-term solution to the decaying highway and transit infrastructure or merely be another short-term extension of the current spending authority?

The last time transportation legislation was overhauled was in 2005 when the Safe Accountable Flexible Efficient Transportation Equity Act (SAFETEA-Lu) was passed. It was scheduled for renewal in 2009. Given the 2008 financial crisis and resulting recession, politicians were reluctant to sign on to a permanent spending bill since increased highway funding was a part of President Barack Obama's economic stimulus bill to deal with the recession. Congress therefore embarked on a series of temporary highway spending extensions, now up to nine. The last 90-day extension was signed into law by President Obama on March 30th, making June 30th the next deadline.

The politics of highway spending are emotional since every politician benefits from it based on the spending formula in the law. The challenge is that revenues to fund that spending come from gasoline, diesel and other transportation-related taxes and they are declining as motorists drive less, meaning less fuel and tires are purchased. In recent years, the revenue shortfall for funding highway spending has been met by shifting money from the U.S. Treasury to the trust fund, and the amount of money transferred nearly doubled in FY2010 from the prior two years. In past Musings, we have focused on the issue of the peaking and subsequent decline in vehicle miles traveled (VMT) and the trends' implication for future economic activity, but it is having a big impact on highway funds.

Exhibit 2 shows the rolling 12-month total of VMT on all roads in America. VMT peaked in 2007 immediately prior to the financial crisis and the onset of the recession. Given its severity, it was not surprising VMT continued falling in subsequent years. An uptick in VMT began in late 2009 and extended into early 2010 before resuming its decline. The March upturn is being hailed as a sign Americans are feeling better about the economy, but the upturn came immediately prior to gasoline pump prices climbing sharply in response to higher oil prices due to geopolitical and Eurozone worries.

We do not know yet the impact high gasoline prices had on April's and May's VMT, but a review of historical data shows that when gasoline pump prices reached or exceeded $3.00 per gallon, driving declined. The late 2009/2010 uptick in VMT came as gasoline prices fell below $3. Based on history, we fully expect recent monthly VMT data to reflect a decline.

While gasoline prices are the most visible cause of the VMT decline, America's demographics also are working against future VMT increases. As America's population ages, fewer young drivers who traditionally have driven more than older adults will limit the prospect for any sustained increase in VMT. We are a nation that now has a greater percentage of older residents than ever before, suggesting an extended moderating influence on the amount of VMT per person and collectively for the country. At the same time, a number of younger people, those in their late teens to late 20s, have delayed obtaining their driver's licenses and appear to be abandoning the historical "love-affair" with the automobile, which will further hurt overall VMT.

Another phenomenon impacting VMT is the growth of social media and its role in younger Americans' socializing patterns. Surveys have shown that young adults would rather communicate via social media than get in a car and drive to someone's home. Another electronic trend impacting driving is the growth of Internet commerce. Many shoppers now buy goods on-line and have them delivered to their homes as opposed to driving to the shopping mall to purchase them. While it is difficult to quantify the impact on VMT from social media and the Internet, it is clear these forces are impacting driving at the margin.

Another consideration for VMT is the decline in the nation's vehicle population that followed the outbreak of the global financial crisis. According to the Department of Transportation's Federal Highway Administration, the U.S. vehicle stock peaked at 256 million in 2008 but has declined to 246 million by 2011. The upturn in auto sales this year to a 14 million seasonally adjusted annual rate may translate into a vehicle population increase in 2012. The lack of personal income growth over the past decade, difficult labor market conditions and more expensive vehicles, despite an improvement in automobile credit availability, may limit future new vehicle sales growth to a rate below that experienced prior to the financial crisis. That means autos will provide less economic support in the future than during the past year and half.

The last factor to consider about the future of the American automobile market is increased penetration by electric vehicles (EV) and alternative fuel vehicles such as those powered by natural gas and ethanol. While these vehicle types have barely dented the American fleet, as their presence increases, the volume of gasoline and diesel fuel consumed will fall, putting additional pressure on the Highway Trust Fund's income.

Since the late 1950s to 2000, the Highway Trust Fund generally was able to fund highway construction and maintenance from its taxes on gasoline, diesel and tire sales. Following the 2000 and 2008 recessions, highway spending was increased to the point it outstripped fuel tax revenues. As a result, the trust fund was stressed and the federal government stepped in with contributions from general tax revenues. In fiscal 2008 (starting September 2007) the federal government moved $8.0 billion into the Highway Trust Fund. The fund was further bolstered in FY2009 by $7.0 billion and in FY2010 by $14.7 billion.

The Highway Trust Fund is funded by an 18.4-cents-per gallon federal tax on gasoline and a 24.4-cents-per gallon tax on diesel fuel. The federal fuel tax was instituted in 1932 at one penny per gallon and has been increased steadily over time. The last hike in the federal tax rate occurred in 1993 and since the tax is not indexed for inflation, revenue growth is dependent almost entirely on fuel consumption, which is a combination of VMT and vehicle fuel-efficiency. In fiscal 2011, the Highway Trust Fund collected $30.1 billion, which was $1.2 billion lower than the amount collected in 2008 when fuel consumption was greater.

As the American auto fleet becomes populated with more fuel-efficient vehicles and the country's demographics contribute to a reduction in the number of licensed drivers and they drive fewer miles, revenues flowing into the Highway Trust Fund will steadily decline in the future. In order to continue supporting highway construction and maintenance, at least at the current level, the federal government will have to continue injecting money into the fund, unless they raise fuel taxes or develop another way to tax vehicle highway use.

In January, the non-partisan Congressional Budget Office (CBO) issued a forecast projecting a dire outlook for the Highway Trust Fund. It projects the highway spending portion of the fund will not be able to meet its obligations sometime during 2012 and the transit portion will be exhausted in 2014. To reach its conclusion, the CBO assumed 2012's highway and transit spending levels will increase only by the rate of inflation. On the revenue side, however, the forecast assumed the following: "Although the number of miles that people drive is projected to increase as the economy grows, CBO expects the effect of that increase on fuel use to be largely offset by improvements in the fuel economy of vehicles, mainly because of increases in the government's fuel economy standards."

At the time of the CBO forecast, gasoline prices were modest and there was less concern about prices reaching the level at which VMT has been negatively impacted in the past. Additionally, at the time of the forecast, the U.S. economic recovery appeared to be accelerating with projections that unemployment would fall increasing the number of workers driving to work. Six months later, those assumptions are questionable.

Most of the issues would appear to have short-term influences on the health of the Highway Trust Fund. Long-term, the demographic and fuel-efficiency trends will put continuing downward pressure on the volume of fuel consumed. An issue that has received little attention is the impact on the highway fund from more EVs and alternative fuel vehicles on the road. These vehicles pay no fuel taxes. Is this a serious issue? It could be, especially given the deteriorating condition of our highways, bridges and transit systems.

While the number of bridges structurally deficient has declined over the past 20 years, the number of functionally obsolete bridges has remained fairly constant. (Exhibit 6.) The question not answered by the data is whether the cost to repair the remaining bridges will be substantially greater than those already repaired. When we look at the condition of highways, the situation doesn't look quite as bad except for two states: California and New York having a significant amount of poor roads. (Exhibit 7.)

How much of a funding problem for the Highway Trust Fund might EVs and alternative vehicles create? Currently, EVs are struggling to make an impact on the nation's vehicle population as their cost, range limits and performance make them less desirable options for American car customers. Sales for the two leading EVs have been spotty so far this year. Strong EV sales in March were followed by weak sales in April. The new Toyota (TM-NYSE) plug-in Prius has experienced positive market reception since it began selling at the end of February.

The results of recent sales and their outlook for the full year are shown in Exhibit 8. One conclusion from the sales data is that President Obama's goal of one million EVs on America's roads in 2015 is unattainable despite Energy Secretary Stephen Chu's claim at the Detroit Auto Show earlier this year that EV battery costs would drop by 70% by 2015 from $12,000 to $3,500.

Lately, as natural gas prices have collapsed, consumers and businesses have begun focusing on vehicles powered by this environmentally-friendly and now cheap fuel. Many analysts wonder why the U.S. has failed to embrace natural gas vehicles (NGV) unlike other countries in the world.

NGVs have been of interest to drivers in Latin America and Europe since the early 1990s, but in recent years their acceptance has soared in the Asia/Pacific region. Both North America and Africa show almost no interest in NGVs. The primary drawbacks to increased use of NGVs has been the absence of vehicle choices, the cost of converting traditionally-powered vehicles and the lack of refueling infrastructure, creating range anxiety. All of these barriers are being lowered so the pace of NGV sales should pick up, with the primary push now coming in the medium- and heavy-duty truck markets.

Based on information from Pike Research, there are 120,000 NGVs among America's 246 million unit fleet. Sales of NGVs grew 30% in 2007 and by 25% every year since. Last year, 40% of all trash-hauling trucks sold in the U.S. were powered by natural gas and that figure is projected to grow to 50% this year. Despite these growth rates, Pike Research estimates NGVs in North America will still barely make a dent in the global fleet by 2016.

What is the market potential for EVs and NGVs? To estimate the penetration of these alternative fuel vehicles, we took the estimated sales for light-duty NGVs in 2012 according to Pike Research and grew them at 25% per year to 2019. For medium- and heavy-duty trucks, we increased sales at 10% per year, consistent with Pike's growth projection. Adding these new vehicles to the current 120,000 NGV fleet gives us a projected total of 476,000 NGVs in 2019. We estimated future EVs sales from the industry's projected 2012 sales target of 40,000 vehicles based on current sales rates. We increased annual sales at 50% per year through 2019. As a check on our projection, we estimate 202,000 EVs will be sold in 2016, which compares favorably to auto consultant LMC Automotive's estimate of 95,000 units. Over 2012-2019, we estimate 1.968 million EVs will be sold. Adding the 17,000 EVs sold since they were introduced in 2010, the EV population will total 1.985 million units by 2019. By adding all the EVs and NGVs together, in 2019, alternative fuel vehicles will represent 2.46 million units. If we assume that between now and 2019, the total U.S. vehicle population remains unchanged, alternative fuel vehicles will represent 1% of the total vehicle fleet.

We would suggest that the challenge for the Highway Trust Fund will come less from alternative fuel vehicles that are contributing no tax revenues, even if we double our estimate of their share of the future fleet, but rather from more fuel-efficient internal combustion engines, and the potential of shrinking VMT. The highway fund's challenge will be eased if alternative fuel vehicles pay into the fund, but little thought has been devoted to how to tax them. NGVs present less of a challenge since their fuel consumption can be easily converted to gasoline-gallon-equivalents (that is how NGV's fuel-cost advantage is calculated) in order for a federal fuel-tax to be assessed. EVs present a greater challenge since electricity is sold on an entirely different basis than fossil fuels. Adding a tax to the electricity to charge a battery in an EV will further complicate the economic argument for buying them. Large tax subsidies are being provided to help offset the expense of EVs, but it doesn't seem to be helping.

A big problem in taxing both EVs and NGVs is that their owners often will be using residential re-fueling systems, meaning they are tapping into the same energy supply that powers their homes, and for which there is an entirely different tax structure. Since utilities that supply homes with electricity and natural gas cannot distinguish when the power is used for vehicles rather than homes, how could they administer two tax structures? What is the appropriate way to tax these vehicles to contribute revenues to the highway fund? Maybe we need to revamp how the government raises revenues from the transportation fleet in order to build new highways and maintain existing ones? Are we headed to a highway use tax structure such as has been tested in Oregon or used in traffic congestion reduction efforts in cities such as London?

Many of us benefit from the electronic highway signs telling us how long it takes to go from point A to point B. We were surprised to learn that this information is based on reading vehicle GPS or passenger cell phone signals. These electronic systems can track exactly where vehicles drive, and thereby can be used to determine how many miles a vehicle drives on a state's highways. The data can then be used to charge vehicle owners a per-mile-tax rather than a per-gallon-tax to fund highway spending, but this technology raises privacy issues that governments are wrestling with. In the trucking industry, this technology is used to replace the daily paper/computer reports drivers now fill out showing the truck's odometer readings and hourly information that enable their employers to file reports with fuel and tire companies who then send the appropriate tax revenues to the respective states.

Philosophically, it is easier for the public to justify mandatory filing rules and electronic measurements for businesses, but Americans traditionally have prided themselves on our voluntary compliance with income taxes.

Governments, strapped for income, already are wrestling with how to tap the "lost" tax revenue of the "underground economy" where transactions are conducted in cash or bartered and the transaction's value is not reported to the government taxing authorities. An even bigger issue is emerging for states due to lost sales by stores to Internet transactions with enterprises having no physical presence in the state. The sales tax is not imposed on these Internet transactions and most buyers ignore their moral obligation to report and pay the tax. We are now starting to see agreements between large Internet merchants and states to help resolve this issue.

We expect the upcoming extension of the Highway Trust Fund, whenever it occurs, will include additional transfers from the federal government to help the fund meet its obligations. In the same vein, we expect an increased government focus on raising the fuel tax and possibly on how to extend it to those non-taxed transportation fuels (natural gas and electricity) that will grow in importance for our future transportation fuel mix. This issue will be contentious due to its privacy concerns, but the politics of highway spending dictate more money needs to flow into the fund.