This is the accessible text file for GAO report number GAO-06-516 
entitled 'Mass Transit: Issues Related to Providing Dedicated Funding 
for the Washington Metropolitan Area Transit Authority' which was 
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Report to the Chairman, Committee on Government Reform, House of 
Representatives: 

United States Government Accountability Office: 

GAO: 

May 2006: 

Mass Transit: 

Issues Related to Providing Dedicated Funding for the Washington 
Metropolitan Area Transit Authority: 

GAO-06-516: 

GAO Highlights: 

Highlights of GAO-06-516, a report to the Chairman, Committee on 
Government Reform, House of Representatives 

Why GAO Did This Study: 

A regional panel estimated that the Washington Metropolitan Area 
Transit Authority (WMATA)—Washington, D.C.’s, transit system —will have 
total budgetary shortfalls of $2.4 billion over 10 years. The panel and 
others have noted that WMATA’s lack of a significant dedicated revenue 
source may affect its ability to keep the system in good working order. 
Proposed federal legislation would make $1.5 billion available to WMATA 
if the local governments established dedicated funding. 

This report addresses (1) the characteristics of dedicated funding and 
its effects on transit agencies and governments; (2) how potential 
revenue sources compare in terms of stability, adequacy, and other 
factors; (3) major actions needed to establish dedicated funding for 
WMATA and the progress made to date; and (4) issues that dedicated 
funding poses for the region and WMATA. 

To address these issues, GAO reviewed financial data for the nation’s 
25 largest transit agencies, interviewed officials from 6 transit 
agencies and from the state and local governments that support WMATA, 
and reviewed literature on the financing of mass transit. 

GAO provided a draft of this report to WMATA and the Department of 
Transportation for review. Officials from these agencies provided 
technical clarifications that were incorporated in the report, as 
appropriate. 

What GAO Found: 

Dedicated funding, an important source of revenue for many transit 
agencies, is described by the Federal Transit Administration (FTA) as a 
specific revenue source—such as a sales or gas tax—that is designated 
to be used for transit and is not subject to appropriations. According 
to data transit agencies report to FTA, 23 of the 25 largest transit 
agencies have dedicated funding, although the transit agencies GAO 
spoke with vary in the extent to which their dedicated funding 
corresponds to FTA’s description. Most transit agencies with dedicated 
funding receive such funding from multiple sources and use it on both 
operations and capital expenses. Generally, dedicated funding is 
subject to the same oversight as other expenditures and is viewed by 
transit agencies as having a positive effect on their financial health, 
particularly with regard to long-range planning. However, dedicated 
funding has potential drawbacks: For example, it is vulnerable to 
economic cycles, and it limits the budgetary flexibility of state and 
local governments. 

Selecting a dedicated funding source for WMATA involves consideration 
of the funding source’s year-to-year stability and its longer-run 
adequacy. For state and local governments, another consideration is the 
political feasibility of the tax or fee rate required to collect a 
specified amount of revenue from a particular funding source. Revenue 
sources that GAO analyzed—the sales tax, payroll or income tax, motor 
vehicle fuels tax, property tax, access fees, and vehicle registration 
fees—have different characteristics when assessed using these 
considerations. If governments increase their overall tax and fee 
revenues to provide additional funding for WMATA, there may be equity, 
efficiency, and administrative cost issues for their tax systems. 

To establish dedicated funding and conform to the requirements of the 
proposed federal legislation, WMATA’s supporting jurisdictions would 
need to enact separate legislation to direct a specific revenue source 
to WMATA and to amend the WMATA Compact. As of April 2006, legislation 
to dedicate a portion of sales tax revenues to WMATA had been enacted 
in the District of Columbia, but neither Maryland nor Virginia had 
enacted comparable legislation. The only jurisdiction to introduce a 
bill to amend the Compact has been Maryland, and this legislation was 
later withdrawn. The District of Columbia and Virginia have not begun 
steps to amend the Compact. 

The federal government and the jurisdictions that support WMATA will 
need to resolve several issues should they choose to provide WMATA with 
dedicated funding, including (1) the proportion of the jurisdictions’ 
payments to WMATA that come from dedicated funding and how to mitigate 
its risks; (2) whether dedicated funding will result in a net increase 
in payments to WMATA and how the size of each jurisdiction’s payment 
will be determined; (3) whether dedicated funding should be used for 
operations, capital expenditures, or both; and (4) whether increased 
oversight of WMATA is needed to ensure dedicated funds are properly 
accounted for. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-516]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Katherine A. Siggerud at 
(202) 512-2834 or siggerudk@gao.gov. 

[End of Section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

Dedicated Funding Is an Important Part of Transit Agencies' Overall 
Funding and Commonly Includes a Basket of Revenue Sources Used for Both 
Operations and Capital Expenditures: 

Revenue Sources That Could Be Dedicated to WMATA Vary in Their 
Stability, Revenue Adequacy, and Required Tax or Fee Rate: 

Although All Jurisdictions Proposed Legislation in 2006 Directing a 
Revenue Source to WMATA, Actions to Provide WMATA with Dedicated 
Funding Are Not Complete: 

WMATA Funding Partners Have Yet to Resolve Several Issues Related to 
Dedicated Funding: 

Agency Comments: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Revenue Sources Compared on the Basis of Revenue Stability 
and Adequacy, and Required Tax or Fee Rate: 

Appendix III: Revenue Sources Compared on the Basis of Administrative 
Cost, Equity, and Efficiency: 

Appendix IV: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Comparison of Key Aspects of District of Columbia, Maryland, 
and Virginia Dedicated Funding Proposals and Metro Funding Panel 
Recommendation: 

Table 2: Percentage Distribution of Payments to WMATA under Current 
Allocations and under Regional Sales Tax: 

Figures: 

Figure 1: Washington Metropolitan Area Transit Zone: 

Figure 2: Sources of WMATA's 2006 Operating and Capital Budgets: 

Figure 3: Amount of WMATA Compact Jurisdictions' Operating Subsidy and 
Capital Program Payments, 2006: 

Figure 4: Types of State and Local Funds for the 23 Largest Transit 
Agencies That Received Dedicated Funding in 2003: 

Figure 5: Summary of Revenue Sources and Key Considerations: 

Abbreviations: 

BART: Bay Area Rapid Transit: 

Compact: Washington Metropolitan Area Transit Authority Compact: 

DART: Dallas Area Rapid Transit: 

FTA: Federal Transit Administration: 

H.R. 3496: House of Representatives bill no. 3496: 

MBTA: Massachusetts Bay Transportation Authority: 

MDOT: Maryland Department of Transportation: 

MTA: Metropolitan Transportation Authority: 

NTD: National Transit Database: 

NVTC: Northern Virginia Transportation Commission: 

SEPTA: Southeastern Pennsylvania Transportation Authority: 

WMATA: Washington Metropolitan Area Transit Authority: 

United States Government Accountability Office: 
Washington, DC 20548: 

May 15, 2006: 

The Honorable Tom Davis: 
Chairman: 
Committee on Government Reform: 
House of Representatives: 

Dear Mr. Chairman: 

In recent years, the Washington Metropolitan Area Transit Authority 
(WMATA) has faced serious financial and budgetary problems as well as 
continuing challenges related to the safety and reliability of its 
transit services. At the same time, ridership is at an all-time high, 
and WMATA continues to provide critical services and considerable 
benefits to the Washington, D.C., region's economic well-being and to 
the federal government. Over the years, the federal government has 
provided WMATA with about 60 percent of the funds used to construct the 
Metrorail subway system, and Congress has a continued interest in the 
viability of WMATA due to the system's importance to the functioning of 
the federal government and the orderly movement of people during major 
events and times of regional or national emergencies. 

The Metro Funding Panel--a regional panel cosponsored by the 
Metropolitan Washington Council of Governments, the Greater Washington 
Board of Trade, and the Federal City Council--reported in 2005 that 
WMATA, under its current revenue structure, will have budgetary 
shortfalls of $2.4 billion over 10 years,[Footnote 1] in spite of an 
agreement in 2003 from the WMATA Compact (Compact) 
jurisdictions[Footnote 2] to provide an additional $1.5 billion for the 
agency's critical capital needs.[Footnote 3] This panel and others have 
noted that WMATA's lack of any significant dedicated source of revenue 
may affect WMATA's ability to carry out essential equipment and 
infrastructure projects needed to keep the system in good working 
order.[Footnote 4] Past efforts to provide stable and reliable sources 
of funding for WMATA were difficult due to the agency's complex 
governance structure and the political nature of decisions related to 
how much each of the local governments should pay. 

Legislation introduced in Congress and approved by your committee would 
make $1.5 billion in federal funding available to WMATA if, among other 
things, the local governments established dedicated sources of 
revenue.[Footnote 5] This legislative proposal has motivated the region 
to renew its efforts on this front. You asked us to provide you with 
information on issues related to establishing dedicated funding for 
WMATA, including (1) the characteristics of dedicated funding and how 
it affects transit agencies and state and local governments, (2) how 
potential revenue sources that could be used for dedicated funding or 
for addressing WMATA's projected budgetary shortfall compare in terms 
of key considerations, (3) major actions that would be needed to 
establish dedicated funding for WMATA and the progress that has been 
made to date in carrying out those actions, and (4) issues that 
dedicated funding poses for the region and WMATA. 

To determine the characteristics of dedicated funding and how it 
affects transit agencies and state and local governments, we analyzed 
the financial data that the 25 largest transit agencies reported to the 
Federal Transit Administration's (FTA) National Transit Database. We 
reviewed the reliability of these data and concluded that they were 
sufficiently reliable for our purposes. We also conducted 
semistructured interviews with officials at six transit agencies, which 
we selected based on their similarity to WMATA and their use of a range 
of dedicated revenue sources.[Footnote 6] We reviewed the legislation 
establishing dedicated funding at some of these agencies, and 
interviewed state and local government officials in the Washington, 
D.C., region and experts on transportation finance. To assess how 
potential revenue sources that could be used for dedicated funding or 
for addressing WMATA's projected budgetary shortfall compare in terms 
of key considerations, we reviewed and synthesized economics literature 
on mass transit funding, and interviewed experts in transportation 
planning and finance. To determine the actions required to establish 
dedicated funding for WMATA and the progress made in carrying out those 
actions, and to identify issues that dedicated funding poses for the 
region and WMATA, we reviewed and analyzed the proposed federal 
legislation that would make additional funding available to WMATA (H.R. 
3496) and the related legislation proposed in the District of Columbia, 
Maryland, and Virginia. We also interviewed officials from all of the 
state and local jurisdictions supporting WMATA, members of the general 
assemblies of Virginia and Maryland and the District of Columbia City 
Council, and representatives from the Northern Virginia Transportation 
Commission and the WMATA Board of Directors. We conducted our work from 
August 2005 through May 2006 in accordance with generally accepted 
government auditing standards. Details of our scope and methodology are 
provided in appendix I. 

Results in Brief: 

Dedicated funding, an important part of many transit agencies' overall 
funding, has several characteristics as described by FTA: (1) Specific 
revenue sources are designated, (2) the revenue is designated to be 
provided to the transit agency, and (3) the revenue is not subject to 
appropriations. In 2006, the District of Columbia, Maryland, and 
Virginia proposed dedicated funding bills--all of which would provide a 
portion of sales tax revenues to WMATA--that demonstrate some of these 
characteristics. The six transit agencies we spoke with vary in the 
extent to which the funds they reported to FTA as dedicated have these 
characteristics--three agencies have revenue sources with all three, 
while three others receive revenue that they consider to be dedicated, 
but which is subject to appropriations or allocated among other 
transportation programs, including transit. According to the 2003 
national data collected by FTA, of the 25 largest transit agencies, 23 
reported receiving funds that they consider dedicated. Of the 23 
agencies, 18 reported receiving dedicated funding from multiple 
sources, with sales taxes being the most common source. Twenty of the 
25 largest agencies reported using dedicated funds for a combination of 
operations and capital expenses. Expenditures from dedicated sources 
are generally subject to the same oversight as expenditures from other 
sources,[Footnote 7] such as reviews of capital plans by the board of 
directors and periodic audits by federal and state auditors, although 
at two of the transit agencies we spoke with, the legislation 
establishing dedicated funding also provided for increased oversight of 
the agencies. According to almost all of the transit agencies we spoke 
with, dedicated funding can have a positive effect by enabling more 
effective multiyear planning for transit agencies and improving their 
credit ratings, which in turn lowers their cost of borrowing. However, 
the degree to which the credit ratings of transit agencies--including 
WMATA's--are improved by dedicated funding depends on how the dedicated 
funding is structured and to what degree such funding is more reliable 
than the agencies' existing revenue sources. Dedicated funding also has 
potential disadvantages for transit agencies, such as fluctuations in 
revenue streams, and for state and local governments, such as decreased 
flexibility in the budgeting process and a reduction in the funds 
available for other transportation programs. 

Selecting a dedicated local funding source for WMATA involves various 
key considerations--including the funding source's year-to-year 
stability and its longer-run adequacy to keep pace with demands for 
transit expenditures--that are important for determining how well a 
revenue source will support WMATA's planning efforts and future 
expenditures. For state and local governments, another key 
consideration is the political feasibility of the tax or fee rate 
required to collect a specified amount of dedicated revenue from a 
particular funding source. Potential revenue sources that we analyzed-
-the sales tax, payroll or income tax, motor vehicle fuel tax, property 
tax, access fees, and vehicle registration fees--have different 
characteristics when assessed using these considerations. Furthermore, 
if state and local governments increase their overall tax and fee 
revenues to provide additional funding for WMATA, there may be 
additional equity, efficiency, and administrative cost effects for 
their tax systems that vary depending on the choice of revenue source 
for this additional funding. These effects are likely to be small given 
that the additional amount of revenue collected for WMATA would be 
small in relation to the overall state and local government operations. 

To establish dedicated funding for WMATA and for WMATA to be eligible 
for additional federal funding under H.R. 3496, the Compact 
jurisdictions would need to enact separate legislation to (1) direct a 
specific revenue source to WMATA and (2) make certain amendments to the 
WMATA Compact, as required by H.R. 3496. Legislators in all three major 
jurisdictions served by WMATA--the District of Columbia, Maryland, and 
Virginia--introduced legislative proposals in 2006 to dedicate various 
amounts of sales taxes to WMATA. As of April 2006, the District of 
Columbia's legislation had been enacted but had not yet received 
congressional approval, which is required for the law to take effect, 
and Virginia's and Maryland's legislation had not been enacted. In 
addition, an issue emerged in Maryland about whether the state's 
current system for funding WMATA, which uses funds from the state 
transportation trust fund, should be considered dedicated. The position 
of the state's transportation department is that the trust fund should 
be considered dedicated, but an official with the state's Office of 
Attorney General said in a legal opinion dated February 17, 2006, that 
the fund does not constitute dedicated funding for WMATA. Regarding 
legislation to amend the WMATA Compact, such a bill was introduced in 
Maryland but was later withdrawn. Legislation to amend the Compact has 
not been introduced in either the District of Columbia or Virginia. 
Some regional stakeholders have stated that amending the Compact may 
not be necessary to achieve some of the changes called for in H.R. 
3496. 

WMATA's funding partners--which include the federal government as well 
as the local and state jurisdictions that provide subsidy payments to 
the agency--face a number of issues that will need to be resolved 
should they choose to provide WMATA with dedicated funding, including 
the following: 

* The proportion of the Compact jurisdictions' contributions to WMATA 
that should come from dedicated funding and how to mitigate risk 
associated with dependence on dedicated revenue sources. Although H.R. 
3496 specifies that all state and local contributions are to come from 
dedicated sources, the dedicated funding bills introduced in the 
District of Columbia, Maryland, and Virginia do not meet this 
requirement, and none of the state and local officials we spoke with 
indicated that measures to fulfill this requirement are likely. For the 
23 largest transit agencies with dedicated funding in 2003, on average, 
70 percent of state and local funds received were from dedicated 
sources. Additionally, if a large proportion of WMATA's state and local 
contributions is to come from dedicated funding, stakeholders must also 
determine to what extent the risk of revenue volatility should be 
balanced between the jurisdictions and WMATA. 

* Whether dedicated funding will result in a net increase in the 
payments to WMATA and how the amount of payments to WMATA will be 
allocated among the jurisdictions. Local officials we interviewed 
agreed that dedicated funding should be used to support a net increase 
in payments to WMATA, but not all of the legislative proposals 
introduced in the region reflect this perspective. Regarding how 
payments to WMATA are allocated, the three major jurisdictions have 
differing opinions on whether the formulas that are currently used to 
determine the amount of operating and capital payments should also be 
used to determine the amount of dedicated funds the jurisdictions 
should pay. Whether additional funds provided to WMATA from dedicated 
sources are distributed to WMATA based on the existing allocation 
formulas or using another method can have an effect on the distribution 
of payments among the jurisdictions. 

* Whether dedicated funding should be used for operations, capital 
expenditures, or both. The Metro Funding Panel report suggested that 
dedicated revenues should be used to cover WMATA's projected budgetary 
shortfall, which is due largely to capital expenditures, but Compact 
jurisdictions have mixed views on whether dedicated funds should be 
used solely for WMATA's capital program or for both operating and 
capital expenses. 

* Whether increased oversight of WMATA is needed to ensure that 
dedicated funds are adequately accounted for. Many local stakeholders 
told us either that they were concerned that a loss of governance could 
occur with dedicated funding or that it is important to have 
accountability mechanisms in place with dedicated funding. 
Additionally, H.R. 3496 calls for creating an inspector general's 
office at WMATA, and in April 2006, the WMATA Board of Directors voted 
to establish such an office. We provided a draft of this report to 
WMATA and the U.S. Department of Transportation for their review and 
comment. Officials from these agencies provided technical 
clarifications that were included in the report, as appropriate. We 
also provided portions of the draft report related to the legislative 
process in the District of Columbia, Maryland, and Virginia, and the 
legislative proposals on dedicated funding to officials from these 
jurisdictions to verify that the information was accurate. 

Background: 

WMATA Is a Large, Multijurisdictional Transit Agency with an Unusual 
Organizational Structure: 

WMATA was created in 1967 by an interstate compact that resulted from 
the enactment of identical legislation by Virginia, Maryland, and the 
District of Columbia, with the consent of Congress.[Footnote 8] The 
Compact also created the Washington Metropolitan Area Transit Zone, 
shown in figure 1, where WMATA provides its transit services, including 
the District of Columbia; the cities of Alexandria, Falls Church and 
Fairfax; the Virginia counties of Arlington, Fairfax and Loudoun; and 
the Maryland counties of Montgomery and Prince George's. 

Figure 1: Washington Metropolitan Area Transit Zone: 

[See PDF for image] 

Source: GAO.

Note: Although Loudoun County is in the transit zone, it does not 
provide financial support to WMATA because there is currently no 
Metrorail or Metrobus service in Loudoun County. 

[End of figure] 

WMATA is unusual among transit agencies in that it was created by an 
interstate compact; moreover, it has unique demands placed on it 
because it serves the national capital area and the federal government, 
as we discussed in a July 2005 testimony.[Footnote 9] WMATA provides 
transportation to and from work for a substantial portion of the 
federal workforce, and federal employees' use of WMATA's services is 
encouraged by General Services Administration guidelines that instruct 
federal agencies to locate their facilities near mass transit stops 
whenever possible. WMATA also accommodates increased passenger loads 
and extends its operating hours during events related to the federal 
government's presence in Washington, D.C., such as presidential 
inaugurations and funerals, and celebrations and demonstrations on the 
National Mall. WMATA's Metro Transit Police assists federal law 
enforcement agencies such as the Secret Service by making available its 
officers who have expertise in areas such as explosives detection and 
civil disturbance management. WMATA also provides Metrobuses to be used 
as a security perimeter on the grounds of the U.S. Capitol and other 
public places for events such as inaugurations and State of the Union 
addresses. 

WMATA began building the Metrorail system in 1969, acquired four 
regional bus systems in 1973, and began the first phase of Metrorail 
operations in 1976. In January 2001, WMATA completed the originally 
planned 103-mile Metrorail system, which included 83 rail stations on 
five rail lines. As of March 2006, the transit system encompasses (1) 
the Metrorail subway system, which now has 86 Metrorail stations on 
five rail lines and a fleet of about 948 railcars; (2) the Metrobus 
system, which has a fleet of about 1,451 buses serving 340 routes; and 
(3) the MetroAccess ADA complementary paratransit system, which 
provides specialized transportation services, as required by law, to 
persons with disabilities who are certified as being unable to access 
WMATA's fixed-route transit system. 

WMATA Funds Its Operations and Capital Activities through a Variety of 
Directly Generated Revenues and through Other Local, State, and Federal 
Sources: 

WMATA funds its operations through a combination of revenues from 
passenger fares, nonfare revenues such as parking and advertising fees, 
and payments from state and local governments. It funds its capital 
program primarily through grants from the federal government and 
contributions from state and local governments, and by borrowing from 
the private sector through the issuance of bonds. WMATA's funding 
sources for operations and capital are shown in figure 2. 

Figure 2: Sources of WMATA's 2006 Operating and Capital Budgets: 

[See PDF for image] 

Source: GAP analysis of WMATA data. 

Notes: Percentages may not total to 100 due to rounding. 

[A] Miscellaneous internal Capital Improvement Program (CIP) funds 
refers to revenue from interest earned on funds held by WMATA. 

[B] Future federal security funds refers to funds WMATA expects to 
receive in 2006 from the federal government for security purposes. 

[C] Funding received through the issuance of debt must later be repaid, 
with interest, from another source. WMATA's debt servicing payments for 
its current 6-year capital funding program, Metro Matters, are part of 
the capital budget. 

[D] Nonfare revenue includes advertising, parking, and joint 
development fees, among other things. 

[End of figure] 

The operating costs for bus, rail, and paratransit that are allocated 
to the Compact jurisdictions are determined by a set of formulas that 
take into consideration factors such as population, ridership, number 
of Metrorail stations, and miles of bus routes.[Footnote 10] The 
formulas for determining capital cost allocation--other than for 
extension projects, which are paid for by the sponsoring jurisdiction-
-are based on the amount that the jurisdictions pay for operating 
costs. Under these formulas, jurisdictions with higher populations and 
service levels (indicated by factors such as the number of Metrorail 
stations and miles of bus routes) generally pay more than jurisdictions 
with smaller populations and lower service levels. The operating 
subsidy and capital program payments for 2006 as determined by the 
formulas are shown in figure 3. 

Figure 3: Amount of WMATA Compact Jurisdictions' Operating Subsidy and 
Capital Program Payments, 2006: 

[See PDF for image] 

Source: GAO analysis of WMATA data. 

[End of figure] 

The Compact jurisdictions of the District of Columbia, Maryland, and 
Virginia vary in the sources they use for payments to WMATA: 

* District of Columbia. Payments to WMATA are provided by the 
District's Department of Transportation every quarter. Operating costs 
are paid for from the District of Columbia's general fund and capital 
costs are funded by general obligation bonds. 

* Maryland. Payments to WMATA for Montgomery and Prince George's 
counties are made from the Maryland Transportation Trust Fund. The 
trust fund's revenue sources include a gas tax, vehicle title tax, and 
other motor vehicle taxes and fees, along with other sources such as 
federal aid. Trust fund revenues are also used for operating and 
capital expenses for various modes of transportation in the state 
including transit, ports, and aviation, as well as for local road 
construction. Maryland is required by state law to make payments for 
the share of WMATA's operating expenses, capital equipment replacement, 
and debt service for which Montgomery and Prince George's Counties are 
responsible.[Footnote 11] 

* Virginia. The individual cities and counties are responsible for 
making payments to WMATA. A portion of these localities' payments are 
made through the Northern Virginia Transportation Commission 
(NVTC).[Footnote 12] NVTC holds, in trust, funds from a variety of 
sources that are used to pay for its members' public transit systems-- 
including WMATA and local bus systems such as the Fairfax Connector and 
Alexandria's DASH bus. Sources include a 2 percent Northern Virginia 
retail motor vehicle fuel tax and state sources such as transit 
assistance grants and state bonds issued for WMATA.[Footnote 13] NVTC 
sources accounted for about two-thirds of payments to WMATA from 
Northern Virginia counties and cities in fiscal year 2006. The portion 
of the localities' obligation to WMATA that is not covered by NVTC 
sources is usually paid directly by the localities from their general 
funds. 

History of Efforts to Provide Stable and Reliable Funding for WMATA: 

In 1980, federal legislation required that for WMATA to receive 
additional funding for construction of the Metrorail system, the WMATA 
Compact jurisdictions had to demonstrate that they had "stable and 
reliable" sources of revenue sufficient to pay for the principal and 
interest on bonds and the local share of the operating and maintenance 
costs of the transit system.[Footnote 14] The District of Columbia, 
Maryland, and Virginia took the following actions to comply with the 
requirement: 

* District of Columbia. The city adopted a law in 1982 to earmark funds 
for WMATA by establishing a Metrorail/Metrobus account within its 
general fund. The account was supported by earmarking existing revenues 
that came from sources receiving direct or indirect benefits from mass 
transit, including sales taxes on hotels, meals, and gasoline, as well 
as vehicle registration fees and parking meter fees. The earmarked 
revenues were sufficient to cover the District of Columbia's share of 
WMATA's operating, debt service, and capital expenses. This account is 
no longer the source of WMATA payments. As described above, the 
District of Columbia now provides payments to WMATA from its general 
revenue fund and general obligation bonds. 

* Maryland. The state enacted legislation in 1980 to require the 
Maryland Transportation Trust Fund to assume a portion of the costs 
WMATA allocated to Montgomery and Prince George's Counties. The 
legislation also provided the trust fund with new sources of revenue, 
including motor vehicle fuel taxes, a portion of the corporate income 
tax, and all revenues of the state motor vehicle administration. The 
trust fund was used to pay all of Montgomery and Prince George's 
Counties' share of WMATA's capital costs, and 75 percent of the 
counties' share of operating costs and debt service. Montgomery County 
provided for the balance of its obligation to WMATA through a property 
tax earmarked for mass transit, and Prince George's County met the 
remainder of its obligation by establishing the Mass Transit Special 
Revenue Fund and earmarking revenues from the state real property tax 
grant program in the event that county appropriations to the fund fell 
short. State legislation in 1992 and 1998 made the state's 
transportation trust fund the source of all payments to WMATA. 

* Virginia. In 1980, the state enacted a 2 percent sales tax on the 
retail price of gasoline within the Northern Virginia counties and 
cities in the WMATA service area and dedicated the proceeds of the new 
tax to WMATA, effective in July 1982. The state also increased its 
biennial appropriation to NVTC, increasing the amount of state money 
available for payment to WMATA. At the same time, the Northern Virginia 
counties and cities enacted local ordinances stating their intention to 
fund WMATA's debt service and operating assistance on an annual basis 
and designating their general fund revenues as the source of funding 
for what the gasoline tax and state aid did not cover. 

In 2005, the Metro Funding Panel estimated that under its current 
revenue structure, WMATA would have a total budgetary shortfall of $2.4 
billion during fiscal years 2006 through 2015 if it went forward with 
the projects remaining in its 10-year capital improvement plan, not 
including those that involved expanding the current system.[Footnote 
15] The panel's report noted that WMATA--unlike almost all other large 
transit systems--does not have a substantial dedicated source of 
revenue, such as a local sales tax, whose receipts are directed to the 
transit authority. As a result, the panel concluded that the 
Washington, D.C., region needs to develop a dedicated source of funding 
for WMATA, and recommended specifically that a regionwide sales tax be 
implemented. In the course of its work, the panel analyzed a number of 
revenue options for dedicated funding for WMATA, including estimating 
the tax or fee rate that would be required to raise sufficient revenue 
to address the projected shortfall. 

In our July 2005 testimony before the House Committee on Government 
Reform, we stated that the actual projected shortfall could, in fact, 
be much greater because the Metro Funding Panel did not include in its 
estimate costs associated with providing paratransit service, which is 
required by the Americans with Disabilities Act.[Footnote 16] These 
costs are significant; in fact, the panel estimated that these services 
could result in an additional shortfall for WMATA of about $1.1 billion 
over the 10-year period. 

The Brookings Institution in June 2004 issued a report that similarly 
concluded that WMATA's lack of dedicated revenues makes its core 
funding uniquely vulnerable and at risk as WMATA's member jurisdictions 
struggle with their own fiscal difficulties.[Footnote 17] The Brookings 
report also concluded that the Washington, D.C., region needs to 
develop a dedicated source of revenue. 

Finally, regional stakeholders have undertaken efforts to secure stable 
and reliable funding for WMATA. For example, the Metropolitan 
Washington Council of Governments established a coordinating committee 
in January 2006 to review, evaluate, and advocate for the passage of 
dedicated funding legislation for WMATA. Additionally, legislation 
passed by the Maryland General Assembly in April 2006 would require the 
Maryland Department of Transportation to conduct a study of a number of 
transit issues, including the state's transit costs and its funding 
strategies to take advantage of potential new federal funding for 
WMATA[Footnote 18] 

Proposed Legislation in Congress Would Authorize Additional Federal 
Funding for WMATA If the Compact Jurisdictions Provide Dedicated 
Funding: 

In July 2005, Representative Tom Davis, Chairman of the House Committee 
on Government Reform,[Footnote 19] introduced the National Capital 
Transportation Amendments Act of 2005 (H.R. 3496), which would 
authorize $1.5 billion to WMATA over 10 years for financing the capital 
and preventive maintenance projects included in WMATA's Capital 
Improvement Program. The bill states that WMATA is essential for the 
effective functioning of the federal government and for the orderly 
movement of people during major events and times of regional or 
national emergency, and that additional funding is necessary to ensure 
the transit system's continued functionality. H.R. 3496 does not 
appropriate funds. For WMATA to receive the funding authorized in H.R. 
3496, Congress must pass additional legislation appropriating funds. 
H.R. 3496, as amended by the House Committee on Government Reform, 
states that to be eligible for the additional funding, WMATA must amend 
the WMATA Compact to require that: 

* all payments to WMATA from the Compact jurisdictions be derived from 
dedicated funding sources, 

* an Office of Inspector General be established at WMATA, and: 

* the WMATA Board of Directors be expanded to include four additional 
members appointed by the federal government, two of whom are voting and 
two of whom are nonvoting.[Footnote 20] 

Dedicated Funding Is an Important Part of Transit Agencies' Overall 
Funding and Commonly Includes a Basket of Revenue Sources Used for Both 
Operations and Capital Expenditures: 

Definition of Dedicated Funding Has Some Common Characteristics, but 
There Is Variation in How It Is Structured: 

Using the definition in FTA's National Transit Database (NTD), we 
identified the following characteristics of dedicated funding: (1) 
specific revenue sources are designated, (2) the revenue is designated 
to be provided to the transit agency, and (3) the revenue is not 
subject to appropriations.[Footnote 21] Similarly, H.R. 3496 states 
that dedicated funding is any source of funding that is earmarked and 
required under state or local law to be used for payments to WMATA. 

In the Washington, D.C., region, legislators in the District of 
Columbia, Maryland, and Virginia proposed bills to provide dedicated 
funding to WMATA--described in detail later in this report--that 
demonstrate some of these characteristics, as follows: 

* Legislation in the District of Columbia, which was enacted in April 
2006, would set aside a portion of the sales tax revenue to be 
dedicated solely for WMATA. Under this legislation, which must be 
approved by Congress before taking effect, the provision of dedicated 
funds to WMATA would be subject to annual appropriations by Congress, 
but not by the District of Columbia.[Footnote 22] 

* Legislation introduced in the Maryland General Assembly, which was 
not enacted during the 2006 legislative session, would have set aside a 
percentage of the sales tax revenue, but the tax proceeds would have 
been dedicated to WMATA and other transit programs and expenses in the 
state, and also would have been subject to appropriations. 

* Legislation proposed in the Virginia General Assembly would set aside 
a portion of a regional sales tax to be dedicated to WMATA, and these 
funds would not be subject to appropriations. As of April 2006, this 
legislation had not been enacted. 

Although the Maryland General Assembly considered bills in its 2006 
session to provide dedicated funding to WMATA, the position of 
Maryland's Department of Transportation is that the state's current 
system for funding WMATA already constitutes dedicated funding. Under 
this system, payments are made from the state's transportation trust 
fund, which has several dedicated sources, although expenditures from 
the fund are subject to an annual appropriations process. Maryland 
officials also note that state law requires them to provide funding to 
WMATA. On the other hand, an official with Maryland's Office of 
Attorney General stated in a legal opinion dated February 17, 2006, 
that the transportation trust fund does not constitute dedicated 
funding.[Footnote 23] 

The six transit agencies we spoke with varied in the extent to which 
the dedicated revenue sources they reported to the NTD have the three 
characteristics we identified.[Footnote 24] Three of the transit 
agencies reported dedicated funding sources with all three 
characteristics, while the other three agencies reported dedicated 
funding sources that were subject to appropriations or were allocated 
among other transit or transportation programs. 

* Three agencies--San Francisco's Bay Area Rapid Transit (BART), 
Boston's Massachusetts Bay Transportation Authority (MBTA), and Dallas 
Area Rapid Transit (DART)--have dedicated funding sources with all 
three characteristics. BART receives the proceeds from a regional 
dedicated sales tax, as established by state law.[Footnote 25] The tax 
is collected by the state and the proceeds are provided directly to 
BART by the state treasury. At MBTA, state law directs that the 
proceeds of a statewide dedicated sales tax are deposited into a state 
MBTA fund from which the state treasurer will provide funds to MBTA 
upon request, without an appropriation.[Footnote 26] At DART, the state 
comptroller collects the proceeds of a regionally dedicated sales tax 
and provides those proceeds directly to DART.[Footnote 27] 

* New York's Metropolitan Transportation Authority (MTA) receives a 
number of revenue streams that it considers to be dedicated, even 
though they are subject to appropriations by the state legislature or 
by local governments and they do not always consist of a specific tax 
or fee that is dedicated to the agency. They include: (1) local 
matching payments for state aid, which in addition to being 
appropriated may come from general revenues as opposed to a specific 
revenue source;[Footnote 28] (2) payments from two state funds for MTA, 
which are composed of the receipts of several taxes statutorily 
required to be deposited in these trust funds and which are subject to 
appropriations by the state legislature; and (3) local payments--which 
are appropriated--for the operation and maintenance of commuter rail 
stations, the amount of which is designated in statute.[Footnote 29] 

* St. Louis Metro receives a portion of local sales taxes that are 
dedicated to both highway and transit purposes and that must be 
annually appropriated. The allocation between highways and transit is 
determined through the annual budgeting process and is not statutorily 
designated.[Footnote 30] 

* Philadelphia's Southeastern Pennsylvania Transportation Authority 
(SEPTA) receives dedicated funding from the state of Pennsylvania, 
which dedicates a portion of its statewide sale tax, as well as several 
motor vehicle-related fees,[Footnote 31] to two state trust funds to be 
used for aid to transit agencies statewide, not only SEPTA. Statutory 
formulas are used to determine how much each agency receives, and the 
funds are provided to transit agencies directly from the state 
treasury.[Footnote 32] 

Almost All Large Transit Agencies Have Dedicated Funding: 

Of the 25 largest transit agencies, all except 2--the Maryland Transit 
Administration, which operates Baltimore's transit and commuter rail 
systems, and the Port Authority Trans-Hudson Corporation, which 
operates rail lines and ferryboats between New York and New Jersey-- 
reported to the NTD that they received dedicated sources of revenue in 
2003.[Footnote 33] Although the NTD provides a description of dedicated 
funding, the revenue that transit agencies report as dedicated may or 
may not have the characteristics described by the NTD. In addition to 
dedicated funding, other revenue sources transit agencies reported 
receiving were a combination of state and local appropriations and 
other funding, fares and other operating revenue, and federal 
grants.[Footnote 34] Of the total revenues those 23 largest transit 
agencies received in 2003 from state and local sources--including 
dedicated funding, general revenue appropriations, and other funding 
sources--the proportion that came from dedicated sources averaged 70 
percent. For 12 of these agencies, between 90 percent and 100 percent 
of state and local funds they received in 2003 came from dedicated 
sources. Figure 4 shows the percentages of transit agencies' state and 
local funding that came from dedicated funds, general revenue, and 
other funding in 2003. 

Figure 4: Types of State and Local Funds for the 23 Largest Transit 
Agencies That Received Dedicated Funding in 2003: 

[See PDF for image] 

Source: GAO analysis of NTD data.  

[A] Other funds are any state or local government funding sources that 
are not dedicated to transit at their source or are not included in the 
budgeting process of general revenue funds. 

[B] The Massachusetts Bay Transportation Authority reported 
approximately $141 million in local assessments as general revenues. 
Based on information we received from this transit agency, revenue from 
local assessments is considered a dedicated source of funding. As a 
result, for the purposes of this analysis, we recategorized this amount 
as dedicated funding. 

[End of figure]

Most Large Transit Agencies Rely on Multiple Dedicated Funding Sources, 
Often Including Sales Taxes, to Mitigate Volatility: 

Most transit agencies reported receiving multiple dedicated revenue 
sources from state and local governments, as well as, in some cases, 
dedicated revenue that was directly generated.[Footnote 35] For 
example, GAO's analysis of NTD data for the 23 largest agencies that 
have dedicated funding shows that 18 of these agencies received 
dedicated funds from at least two sources in 2003, with the sales tax 
being the source most commonly dedicated to transit (15 of the 23 
transit agencies received dedicated funds from sales taxes). Sales tax 
also ranked at the top in revenue generation among dedicated sources; 
in 2003, approximately $4.5 billion or 43 percent of the approximately 
$10.3 billion in total dedicated revenues received by the 23 transit 
agencies came from sales taxes. According to the NTD data and to the 
transit agencies we spoke with, sales taxes dedicated to transit are 
levied at the state or local level and are sometimes enacted by ballot 
measures. All of the transit agencies we spoke with have dedicated 
funding that includes sales taxes, as follows: 

* St. Louis Metro receives two separate sales taxes--one at one-half of 
1 percent and one at one-quarter of 1 percent--that are levied in the 
localities that Metro serves. The revenues are collected by the state 
and remitted to the local governments to be appropriated to Metro. 

* San Francisco's BART receives 75 percent of a one-half of 1 percent 
sales tax that is levied in the counties in the BART transit district. 
The sales tax was first enacted in 1969 to fund the completion of the 
rail system, but the revenues are now used for operations. 

* Dallas's DART receives the proceeds of a 1 percent sales tax from the 
13 cities that are served by the transit agency. This tax is part of 
the statewide 8.25 percent sales tax; part of it can be set aside for 
localities for economic development purposes, such as schools, parks, 
and transit. 

* Boston's MBTA receives 20 percent of the statewide sales tax 
revenues. State law designates a "base revenue amount," which increases 
each year with inflation, for the amount of revenue MBTA is to receive 
from this tax each year. If the portion of the tax receipts designated 
for MBTA does not meet the base amount, the state makes up the 
difference. 

* Philadelphia's SEPTA receives a portion of the statewide sales tax. 
Approximately 2 percent of the revenue from this tax is deposited in 
state public transportation accounts and is allocated to the state's 
transit agencies, including SEPTA, based on statutory formulas. 

* New York's MTA receives the proceeds of a three-eighths of 1 percent 
regional sales tax, which is used for operating costs of the commuter 
rail and transit systems. 

Local option sales taxes--in which the sales tax rate of a city or town 
can be raised above the rate of the state sales tax and which are 
enacted by ballot measures--have become more prevalent in financing a 
variety of transportation projects, including transit. Many ballot 
measures for local option sales taxes target a mix of transportation 
programs, including highways and transit. A transportation economist we 
spoke with noted a recent trend in ballot measures for sales taxes for 
capital projects and said that an advantage of these taxes is that they 
bring about fiscal discipline because the agencies have to deliver 
results (such as a completed capital project) within a specified time. 
According to this economist, in 2002, there were 43 such ballot 
measures, and in 2004, there were 44; in both years, roughly half of 
them passed. Denver, Salt Lake City, and 23 counties in California are 
some of the localities that have local option sales taxes that are 
either dedicated to transit or can be used for any mix of 
transportation purposes. 

The second most common source of dedicated funding for transit, 
according to our analysis of NTD data, was the gasoline tax. In 2003, 7 
of the 23 agencies with dedicated funding reported receiving revenues 
from this source. In that year, the gasoline tax generated about $304 
million or 2.9 percent of about $10.3 billion in total dedicated 
revenues received by those 23 agencies. Of the 6 transit agencies we 
spoke with, 2--New York's MTA and San Francisco's BART--had revenue 
from a dedicated gasoline tax. 

Some of the transit agencies we spoke with also use other sources of 
dedicated revenue, such as mortgage recording taxes, city and town 
assessments, and motor vehicle-related fees. Following are some 
examples: 

* New York's MTA receives funds from a mortgage-based tax. New York 
City and the seven other counties within MTA's service area collect a 
tax based on a percentage of the debt secured by real estate mortgages 
and provide the receipts to MTA. 

* Boston's MBTA receives funds from assessments it makes on the 175 
cities and towns in the MBTA district. The assessments are based on a 
weighted population formula. 

* New York's MTA and Philadelphia's SEPTA receive funds from various 
motor vehicle fees (e.g., MTA receives funds from registration and 
other fees and SEPTA receives funds from car leasing and car rental 
fees.) Transportation experts we spoke with said that using a basket of 
revenue options lowers transit agencies' economic risk because 
different revenue sources are affected to different degrees by 
fluctuations in economic activity and other factors, and that a 
diversity of revenue sources helps to ensure a steady revenue stream. 
Additionally, these experts said that specific revenue sources are 
selected based on the conditions of the local economy, with the goal of 
having less volatility. 

Most Transit Agencies Use Dedicated Funds for Both Operating and 
Capital Expenditures: 

In 2003, 24 of the 25 largest transit agencies in our analysis reported 
spending dedicated funds for operating expenditures, capital 
expenditures, or a combination of both, according to our analysis of 
NTD data.[Footnote 36] Of those 24 agencies, 20 spent dedicated funds 
for a combination of operating and capital expenditures. Having the 
flexibility to spend dedicated revenues on operations or capital has 
advantages for transit agencies, according to agencies and 
transportation experts we spoke with. One transportation expert we 
spoke with noted that agencies that have flexibility to spend dedicated 
funding on operations or capital are better off because the agency can 
adjust to cost changes. Transit agencies noted the following reasons 
why this flexibility is advantageous: 

* Spending on capital projects fluctuates. For example, capital 
projects might need up-front funding in one year but not in the next. 

* The construction of capital projects, such as extending a rail line, 
typically creates a need for operating expenditures, so dedicated funds 
used to build a capital project might later be used for operating 
expenses once the project is implemented. 

* Regional and agency priorities may change, which may require a shift 
in how funds are used. 

Transit agencies we spoke with did not cite any disadvantages of having 
the ability to spend dedicated revenues on both types of expenditures. 
Some agencies are subject to restrictions on how they spend dedicated 
revenues, as illustrated in the following examples: 

* Philadelphia's SEPTA must use the dedicated revenue it receives from 
the state for capital projects, debt service, and asset maintenance. 

* San Francisco's BART uses revenues from the dedicated local sales tax 
and property assessments for operating expenditures. These are the only 
local sources of operating support the agency receives. 

* Dallas's DART is subject to an operating expenditures cap, which was 
enacted by its Board of Directors. Growth in operating expenses must 
not exceed 90 percent of the inflation rate. 

Expenditures from Dedicated Sources Are Generally Subject to the Same 
Oversight as Expenditures from Other Sources: 

Expenditures from dedicated sources are subject to the same type of 
oversight as expenditures from other sources, which at transit agencies 
includes a board of directors involved in capital planning and periodic 
audits by federal and state auditors. FTA does periodic reviews of all 
transit agencies that receive funding from FTA, including procurement 
system reviews, financial management oversight reviews, and drug and 
alcohol oversight reviews. Some of the transit agencies whose officials 
we interviewed are subject to oversight and review as follows: 

* DART's expenditures are subject to review by its internal auditor 
(which reports directly to the Board of Directors), a state auditor, 
and the Texas Department of Transportation. DART's Board of Directors 
and the cities in the Dallas region that are served by DART review 
DART's budget annually. 

* MBTA has an internal audit department that reports to the general 
manager. A state auditor also reviews certain programs and areas of 
MBTA on an annual basis, and a state inspector general's office reviews 
MBTA. The state auditor has a suboffice in MBTA's office building with 
dedicated officials reviewing transportation programs. Internal and 
state audits focus more on program reviews than on financial audits. 
The state legislature sometimes has hearings on MBTA, generally for 
capital projects. Finally, the MBTA Advisory Board, which is made up of 
representatives from each city and town within the MBTA district, 
approves MBTA's mass transportation program and its annual budget. 

* MTA is required to file reports each year with state legislators and 
other officials certifying the proper use of the dedicated funds, and 
the state comptroller is authorized to audit MTA's financial records. 
MTA also has an office of inspector general, which does programmatic 
reviews and investigations. 

While spending safeguards do not generally vary based on the source of 
revenue, safeguards can vary depending on whether funds are used for 
operations or capital. Major capital projects funded by FTA are 
monitored to ensure they are progressing on time, within budget, and 
according to approved plans, and agencies that issue debt to finance 
capital projects must make debt repayments within specified time 
frames. Also, agencies' capital projects require the review and 
approval of the board of directors, whose review sometimes includes a 
public approval process. MTA's 5-year capital program, for example, is 
subject to an extensive public approval process that is coordinated 
through the board of directors. MBTA also has an open capital planning 
process that is subject to a lengthy public review process. On the 
operations side, one agency we spoke with--DART--as noted earlier, has 
a cap on expenditures for operations that was enacted by its Board of 
Directors, which dictates that growth in operating expenses must not 
exceed 90 percent of the inflation rate. 

Although dedicated funds are generally subject to the same type of 
oversight as funds from other sources, the implementation of dedicated 
funding at transit agencies sometimes has been accompanied by enhanced 
oversight: 

* When state legislation established dedicated funding for SEPTA, it 
also required the Board of Directors to be expanded to include four 
additional members appointed by the state. According to a SEPTA 
official, the state said that since it was going to be shouldering a 
greater percentage of SEPTA's costs, it should have more of a voice in 
how SEPTA was run. 

* State legislation establishing dedicated funding sources for MTA in 
the 1980s also established oversight mechanisms, including a capital 
planning board, an inspector general, and a committee on the Board of 
Directors for capital program oversight. 

Dedicated Funding Can Improve Transit Agencies' Planning for Future 
Expenditures and Access to Bond Markets, but It Also Has Disadvantages: 

Dedicated funding is an important revenue source for transit agencies 
because it enhances their planning of future expenditures and increases 
their access to bond markets due to better predictability of revenue. 
With regard to planning, according to five of the six agencies we 
interviewed, dedicated funding makes revenue more predictable, thereby 
enabling more effective multiyear planning. With regard to raising 
revenue through the issuance of bonds, all of the agencies we spoke 
with have used dedicated funds to issue bonds for capital programs and 
projects. In addition, four of the six agencies we interviewed said 
that dedicated funding either allowed them to issue bonds or improved 
their credit rating. An improved credit rating generally allows 
agencies to issue bonds at a lower rate, thereby decreasing the cost of 
borrowing for capital projects. For example, SEPTA used the funds from 
a 1992 dedicated funding package to support the issuance of bonds for 
capital needs. SEPTA inherited most of the commuter rail service 
formerly provided by Conrail, which required major repairs to stations, 
bridges, tracks, and overhead power. 

The officials we spoke with representing local governments and 
transportation departments in the District of Columbia, Maryland, and 
Virginia, and NVTC, also cited a number of advantages of dedicated 
funding for WMATA. Officials from five of these entities stated that a 
consistent and known source of revenue would enable WMATA to plan more 
efficiently for future expenditures. Another local official said that 
dedicated funding would also allow WMATA to provide a consistent level 
of quality. That WMATA stands to receive $1.5 billion in additional 
federal contributions if dedicated funding is established is an 
advantage cited by officials from one local jurisdiction, as well as 
NVTC. 

An analyst with one of the major credit rating agencies told us that 
dedicated funding is one factor that can strengthen transit agencies' 
bond ratings. According to this analyst, who has expertise in transit, 
dedicated funding can provide better access to the capital markets, but 
any effect on the cost of borrowing will depend on how the dedicated 
funding is structured. For example, a dedicated revenue stream is more 
stable if the legislation creating it is difficult to reverse. 
Additionally, requiring that revenues be spent first on debt servicing 
is looked upon favorably by bond rating agencies. This analyst also 
noted that the credit-rating history of transit agencies--including 
WMATA--is based partly on that of the local or state jurisdictions that 
provide the agency with subsidy payments. WMATA has a good, steady 
credit-rating history in part because of the high credit ratings of its 
member jurisdictions. The key downside to WMATA's current funding 
arrangement is the appropriations risk--that local jurisdictions might 
not make their payments or might be late. However, the analyst noted 
that the jurisdictions supporting WMATA had a long history of making 
payments on time, which, to a certain degree, offsets the risk of 
appropriations. Furthermore, although dedicated funding could also 
offset the appropriations risk--if the dedicated revenue source were 
structured so that it was not subject to appropriations--it could 
increase the risk associated with the revenue source, such as economic 
fluctuations. 

Despite the advantages of dedicated funding, there are risks of revenue 
volatility and a loss of budgetary flexibility for governments 
supporting transit agencies. Although the transit agencies we spoke 
with cited the predictability of revenue as an advantage of dedicated 
funding, they also acknowledged that a risk of dedicated funding is 
that it may be too volatile or not meet funding expectations. For 
example, BART is largely dependent on local sales tax revenues for 
operating expenses; when the local economy began declining in 2000, 
revenues were no longer sufficient, leading BART to cut operating costs 
and raise fares. 

According to three transit agency officials we spoke with, it can be 
difficult or impossible to obtain additional money from state and local 
governments that have already provided the agencies with dedicated 
funds. For example, although SEPTA officials told us that their 
dedicated revenues were too small a proportion of their overall funding 
to enhance the agency's long-term planning ability, they said that they 
had been unsuccessful in obtaining additional dedicated funding. 
Moreover, not all transit agencies have the authority to raise tax 
rates or fees themselves. In addition, local option taxes for capital 
projects are a potentially problematic means of providing dedicated 
funding in that, although they do provide agencies with additional 
funds, they often expire after a certain number of years, requiring 
agencies to have another ballot measure or to find other ways to 
increase revenue. 

However, some transit agencies benefit from laws that mitigate the risk 
of revenue fluctuations associated with dedicated funding sources. 
MBTA, for example, is protected by legislation designating that 20 
percent of the statewide sales tax revenues go to the agency; this 
legislation specifies a base revenue level that changes each year with 
the inflation rate. If revenues do not meet the base level, the state 
makes up the difference. MTA also has access to additional funding if 
the local matching shares for state operating assistance are 
insufficient. If localities are unable to provide the matching funds to 
MTA, the state takes out the shortfall from the amount the locality 
would have received in state aid, and provides it directly to MTA. 
Additionally, some agencies have reserve funds they can draw on if 
revenues are not sufficient. 

Officials in the Washington, D.C., region identified similar concerns 
when discussing what they believe the effects of dedicated funding for 
WMATA might be. An official from one local jurisdiction stated that a 
dedicated funding system is only as reliable as its funding source; 
another local official said that revenues dedicated to WMATA from a 
specific source may fluctuate from year to year with changing economic 
conditions. 

Regarding the loss of budgetary flexibility, we have previously 
reported that setting government funds aside for a specific use--such 
as with federal trust funds--may affect the funding available for other 
spending priorities.[Footnote 37] We also reported that constituencies 
may create pressure to spend revenues that are set aside for a specific 
purpose, regardless of the need for the spending at the moment or the 
priority that would otherwise be given such spending.[Footnote 38] Some 
of the officials in the Washington, D.C., region we interviewed also 
cited disadvantages related to state and local budgeting. Maryland 
officials from the state Department of Transportation and a local 
jurisdiction noted that funding dedicated strictly for WMATA may reduce 
funds available for other transportation programs. Officials from 
another local jurisdiction also noted that revenue dedicated from an 
existing tax--rather than from a new source of revenue--reduces that 
locality's general fund and decreases spending flexibility. 

Revenue Sources That Could Be Dedicated to WMATA Vary in Their 
Stability, Revenue Adequacy, and Required Tax or Fee Rate: 

In light of the proposed federal legislation to provide additional 
funding to WMATA (H.R. 3496), state and local officials are faced with 
two main issues, should they choose to enact dedicated funding for 
WMATA: (1) which revenue source or sources to dedicate to WMATA and (2) 
whether and how to address a WMATA budgetary shortfall. The two issues 
are not necessarily linked since implementing a dedicated revenue 
source does not automatically require a change in revenue sources or in 
the amount of revenue collected. Important considerations in selecting 
a revenue source or sources to be dedicated to WMATA are the stability 
and long-run adequacy of the revenue source, as well as the political 
feasibility of the size of the tax or fee rate necessary to provide 
sufficient revenue to WMATA. In evaluating revenue sources to provide 
additional funding to WMATA, equity, efficiency, and administrative 
cost are potentially important considerations. 

Year-to-Year Revenue Stability, Longer-Run Revenue Adequacy, and 
Required Tax or Fee Rate Are Key Considerations for a Revenue Source to 
Be Dedicated to WMATA: 

One key budgeting consideration identified in the economics literature 
that is relevant for establishing a dedicated revenue source, from the 
perspective of the transit agency, is year-to-year revenue stability. 
Year-to-year revenue stability refers to the degree to which both short-
term fluctuations in economic activity (the business cycle) and other 
factors not directly linked to the business cycle influence dedicated 
tax revenues. The revenue stability of different taxes and fees with 
respect to economic fluctuations is often compared by estimating the 
percentage change in year-to-year revenues that results from a 1 
percent change in year-to-year income levels. The variability in these 
estimates is then used to evaluate the relative magnitude of 
fluctuations not related to the business cycle. A greater degree of 
variability in the estimate of economic response indicates a higher 
degree of instability from noncycle variations. 

Year-to-year revenue stability is an important consideration because it 
influences the ability of a government or agency to carry out effective 
planning and budgeting. A stable revenue source is not subject to 
substantial year-to-year fluctuations, making it easily predictable. 
Greater predictability leads to more accurate revenue forecasts and 
allows for better budgeting and planning as it reduces the probability 
of a significant funding shortfall (or surplus) in any given year. 

In the longer run, an important consideration for WMATA's financial 
health is that the revenues yielded by a dedicated source adequately 
keep pace with increases over time in transit expenditure demands. 
Although many economists used to believe that there was a trade-off 
between year-to-year stability and long-run revenue growth, current 
research suggests that a revenue source can exhibit relatively high 
long-run growth and be relatively stable. Long-run revenue adequacy is 
measured by how revenues are expected to grow over time as income 
grows.[Footnote 39] The relationship between income levels and the 
revenue generated by a tax or fee is a convenient benchmark for 
comparing different revenue sources. However, to assess the adequacy of 
a revenue source for transit spending, one would need to know how 
transit demand (and, consequently, spending) is related to income. 
There is considerable uncertainty, however, about the relationship 
between income growth and growth in demand for transit services. As a 
result, it is uncertain what relationship between revenue growth and 
income growth over the longer run is necessary to ensure that revenues 
will adequately keep pace with transit expenditure demands. 

Estimates of long-run revenue growth rates for a given revenue source 
often differ at the state or county level, creating further potentially 
important budgetary and political implications for dedicated funding 
for WMATA, which has a service area that encompasses multiple 
jurisdictions. From a budgeting perspective, these jurisdictional 
differences should be taken into account to arrive at accurate 
forecasts of transit revenues. Political concerns might arise because 
of different revenue growth rates in the Compact area, which could mean 
that the allocation of payments among jurisdictions could change over 
time unless tax or fee rates are adjusted or floors and ceilings are 
placed on contribution levels. 

Another key consideration in choosing a revenue source to be dedicated 
to WMATA is the tax or fee rate required to dedicate a specified amount 
of revenue from that source--that is, the rate required may influence 
the choices of state and local officials among various revenue sources. 
In general, the rate required will be smaller when the tax or fee is 
applied to a larger base. 

As part of its analysis of WMATA's funding issues, the Metro Funding 
Panel estimated the tax or fee rate required to generate specified 
amounts of dedicated revenue from six potential revenue 
sources.[Footnote 40] The specified amounts were based on different 
categories of WMATA's spending that could be covered by dedicated local 
revenues. For example, the panel estimated the tax or fee rate required 
to dedicate $148 million in 2010. That amount represents 50 percent of 
what the panel estimated would be needed for capital spending to renew 
aging components of the WMATA system and add system capacity to meet 
growing demands, plus operating spending related to this capital 
investment.[Footnote 41] In addition to its estimates of the level of 
dedicated revenue needed to fund different specified levels of 
spending, the panel made several critical assumptions in developing its 
estimates of the tax or fee rate required.[Footnote 42] The accuracy of 
these assumptions will affect the accuracy of the panel's 
estimates.[Footnote 43] 

Potential Revenue Sources Have Different Characteristics When Assessed 
Using the Key Considerations of Year-to-Year Stability, Long-Term 
Adequacy, and Required Tax or Fee Rate: 

Figure 5 provides a summary--based on our analysis of the economic 
literature and the Metro Funding Panel report--of how these six revenue 
sources (sales tax, payroll/income tax, motor vehicle fuel tax, 
property tax, access fees, and vehicle registration fees) compare 
according to stability, long-run adequacy, and tax or fee rate 
required. Additional analysis of each of the taxes and fees, and how 
they compare with respect to the key considerations, is presented in 
appendix II. 

Figure 5: Summary of Revenue Sources and Key Considerations: 

[See PDF for image] 

Source: GAO analysis of economic literature and Metro Funding Panel 
report. 

[End of figure] 

Tax and Fee Changes Used to Provide Additional Funding for WMATA Can 
Affect the Equity, Efficiency, and Administrative Cost of the State and 
Local Tax Systems, but the Effects May Be Small: 

Experts and state and local officials commonly identified the economic 
considerations of equity, efficiency, and administrative cost as 
potential key considerations in evaluating revenue sources. However, 
these considerations are only relevant if the amount of revenue or the 
methods for its collection are altered.[Footnote 44] In the context of 
dedicated funding for WMATA, these considerations come into play 
primarily when addressing a shortfall. State and local governments 
could establish a dedicated funding source for WMATA without increasing 
their revenue collections. However, if they want to provide WMATA with 
enhanced funding to address the revenue shortfall identified by the 
Metro Funding Panel, they would have to take some offsetting fiscal 
action, such as increasing their revenues, reducing their spending on 
other functions, or taking money from available surplus revenues, if 
any. 

In the case of raising additional funding for WMATA, administrative 
costs are likely to be a more important decision factor than equity or 
efficiency, particularly if the state and local jurisdictions choose to 
implement at the state or local level a tax or fee that is not 
currently being administered at that level of government (even though 
the tax or fee might be collected by another level of government). 
Conversely, administrative costs are likely to be small if the tax or 
fee is already being collected at the desired level of government. 
Equity and efficiency effects are likely to be small given that the 
additional amount of revenue collected for WMATA would be small in 
relation to the overall state and local government operations. Possible 
exceptions are the vehicle fuel tax and vehicle registration fees, 
which might require larger rate increases because of their relatively 
small bases. Possible administrative, equity, and efficiency effects 
are discussed in appendix III.[Footnote 45] 

Although All Jurisdictions Proposed Legislation in 2006 Directing a 
Revenue Source to WMATA, Actions to Provide WMATA with Dedicated 
Funding Are Not Complete: 

To Conform to the Current Requirements of H.R. 3496, the Enactment of 
State or Local Legislation Directing Specific Revenue Sources to WMATA 
Would Be Needed: 

To establish dedicated funding as defined in H.R 3496 (i.e., a revenue 
source that is legislatively directed solely to WMATA), each Compact 
jurisdiction would need to enact legislation directing a specific 
revenue source or sources to WMATA. The legislative process for 
enacting such legislation in the District of Columbia, Maryland, and 
Virginia is as follows: 

* Legislation in the District of Columbia would be taken up first by 
the District of Columbia City Council. If passed by the council and 
signed by the District of Columbia mayor, the WMATA legislation would 
require approval by Congress.[Footnote 46] 

* In Maryland, if it is determined that the state's current system for 
funding WMATA does not constitute dedicated funding, the General 
Assembly could pass legislation--signed by the governor--to order a tax 
rate change, shift the use of an existing tax, impose a new fee or 
surcharge, or enable localities to enact a tax rate change. Dedicated 
funding legislation could have a local or statewide scope. If the scope 
were local--which would be a departure from the current funding 
structure--local input would be considered and a consensus would be 
reached by a local delegation; the legislation would then go to the 
state legislature for final approval.[Footnote 47] If the scope of the 
legislation were statewide, the legislation would not require initial 
approval by the local delegation and would go directly to the state 
legislature. Legislation in Maryland to enact dedicated funding for 
WMATA may also have to address the issue of parity in transit spending 
across the state, particularly between the Baltimore and Washington, 
D.C., regions. If additional funds are raised for or dedicated to 
WMATA, there may need to be additional funds provided for other state 
transit programs. 

* In Virginia, the General Assembly could pass a law--signed by the 
governor--ordering a tax rate change or redirecting existing taxes 
statewide to establish dedicated funding. According to local officials 
in the state, to change the existing tax structure, Northern Virginia 
jurisdictions would have to be given the authority to raise or dedicate 
a tax by the General Assembly, unless that tax is currently under local 
control.[Footnote 48] State legislation can require local approval 
through a voter referendum or a vote by the local governing bodies. 
Legislation concerning a dedicated funding system for WMATA may or may 
not need the approval of the local jurisdictions it would encompass. 
The state also determines whether a tax shall be statewide in scope or 
limited to certain localities. 

Legislative Bodies in the District of Columbia, Maryland, and Virginia 
Have Considered Dedicated Funding Legislation: 

Bills were introduced in 2006 in the District of Columbia, Maryland, 
and Virginia that would dedicate a portion of sales tax revenues to 
WMATA. These bills differ from one other in a number of aspects, and 
they also differ from the approach recommended by the Metro Funding 
Panel, which included dedicating a sales tax increase of one-quarter of 
1 percent across the WMATA Compact area to be used for capital 
maintenance and system enhancement.[Footnote 49] The panel also 
recommended that the proceeds of the regional sales tax be in addition 
to the jurisdictions' current payments for operations and capital. 
Table 1 provides details on the legislative proposals and the panel's 
recommendation. 

Table 1: Comparison of Key Aspects of District of Columbia, Maryland, 
and Virginia Dedicated Funding Proposals and Metro Funding Panel 
Recommendation: 

Type of tax dedicated to WMATA: Tax rate; 
Sales: District of Columbia: One-half of 1 percent; 
Sales: Maryland[A]: Varies from one-quarter of 1 percent to 1 percent; 
Sales: Virginia[B]: One-quarter of 1 percent; 
Sales: Metro Funding Panel recommendation: One-quarter of 1 percent. 

Type of tax dedicated to WMATA: Estimated annual revenue that would be 
available to WMATA[C]; 
Sales: District of Columbia: $50 million to $60 million, about one-
fourth of the District's total fiscal year 2006 payments to WMATA of 
$225.3 million; 
Sales: Maryland[A]: No applicable estimate--funds are split among WMATA 
and other transit expenses of state; 
Sales: Virginia[B]: $51.5 million, about 33 percent of Virginia's total 
fiscal year 2006 payments to WMATA of $154.3 million; 
Sales: Metro Funding Panel recommendation: $148 million. 

Type of tax dedicated to WMATA: Scope of tax; 
Sales: District of Columbia: District-wide; 
Sales: Maryland[A]: Statewide; 
Sales: Virginia[B]: Five Northern Virginia Compact jurisdictions; 
Sales: Metro Funding Panel recommendation: Regionwide. 

Type of tax dedicated to WMATA: Revenues from existing tax or tax 
increase; 
Sales: District of Columbia: Existing tax; 
Sales: Maryland[A]: Existing tax; 
Sales: Virginia[B]: Tax increase; 
Sales: Metro Funding Panel recommendation: Recommended either a tax 
increase or using existing revenues. 

Type of tax dedicated to WMATA: Method of allocation to WMATA; 
Sales: District of Columbia: Maryland and Virginia will each pay 
amounts at least equal to that paid by the District of Columbia; 
Sales: Maryland[A]: Does not specify; 
Sales: Virginia[B]: Funds will be applied to each Virginia locality's 
obligations to WMATA; 
Sales: Metro Funding Panel recommendation: Funds allocated based on tax 
receipts in each jurisdiction. 

Type of tax dedicated to WMATA: Recipients of revenue; 
Sales: District of Columbia: WMATA; 
Sales: Maryland[A]: WMATA, Maryland Transit Administration, and other 
local transit programs in Maryland; 
Sales: Virginia[B]: WMATA; 
Sales: Metro Funding Panel recommendation: WMATA. 

Type of tax dedicated to WMATA: Where funds are held prior to payment 
to WMATA; 
Sales: District of Columbia: A separate fund for WMATA outside of the 
District of Columbia's general fund; 
Sales: Maryland[A]: Mass Transit Account within Maryland Transportation 
Trust Fund; 
Sales: Virginia[B]: Northern Virginia Transportation Commission; 
Sales: Metro Funding Panel recommendation: Not applicable. 

Type of tax dedicated to WMATA: Specified uses of revenue for WMATA; 
Sales: District of Columbia: Maintenance and improvement; 
Sales: Maryland[A]: Capital and operating expenses, including 
maintenance and improvement; 
Sales: Virginia[B]: Operating deficit, capital, and debt service; 
Sales: Metro Funding Panel recommendation: Projected shortfall for 
capital maintenance and system enhancement. 

Type of tax dedicated to WMATA: Revenues in addition to or in place of 
current subsidy payments; 
Sales: District of Columbia: Revenues shall provide additional funding 
for WMATA; 
Sales: Maryland[A]: Revenues from sales tax may not replace other state 
funds necessary to pay WMATA's costs; 
Sales: Virginia[B]: Revenues are intended to be in addition to current 
payments; 
Sales: Metro Funding Panel recommendation: Revenues would be in 
addition to existing payments. 

Type of tax dedicated to WMATA: Other action bill is contingent upon to 
take effect; 
Sales: District of Columbia: The bill is contingent upon additional 
federal grants for WMATA, and Maryland and Virginia passing legislation 
to dedicate an amount of funds at least equal to that dedicated by the 
District of Columbia; the fiscal impact of the bill on the rest of the 
District's budget must also be included in an approved District budget 
and financial plan before the bill can take effect; 
Sales: Maryland[A]: Two bills state that funds for WMATA shall be used 
consistent with additional federal grants for WMATA and bills passed by 
the District of Columbia and Virginia dedicating revenue to WMATA; the 
others do not specify; 
Sales: Virginia[B]: One bill was amended to be contingent upon 
additional federal funding being made available; 
Sales: Metro Funding Panel recommendation: Not applicable. 

Source: GAO analysis of the Metro Funding Panel report and the 
dedicated funding legislation in the District of Columbia, Maryland, 
and Virginia. 

Notes: The following legislation was included in this analysis: 
District of Columbia B16-0569; Maryland H.B. 981, H.B. 1345, H.B. 1392, 
and S.B. 850; and Virginia H.B. 1003, H.B. 1082, and S.B. 267. 

[A] The four Maryland bills are largely identical; variation is noted 
in table. 

[B] There were other legislative proposals considered in Virginia that 
address transportation funding, in addition to those included in this 
analysis. We only included proposals that dealt strictly with funding 
for WMATA, rather than broader transportation proposals. 

[C] The revenue estimates for the District of Columbia, Virginia, and 
the Metro Funding Panel were prepared by the District of Columbia Chief 
Financial Officer, NVTC, and the Metro Funding Panel, respectively. 

[End of table] 

As of April 2006, dedicated funding legislation in the District of 
Columbia had been enacted by the city but had not yet received 
congressional approval. Additionally, this legislation will not take 
effect until H.R. 3496 and dedicated funding laws in Maryland and 
Virginia are passed. In Maryland, two of the bills--one in the House 
and one in the Senate--that were originally introduced to provide 
dedicated funding, were amended to remove the dedicated funding 
provisions and to add language requiring that the Maryland Department 
of Transportation (MDOT) undertake a study on the state's transit costs 
and funding strategies, as noted earlier. The amended bills do not 
provide any funding for transit. The other dedicated funding bills in 
Maryland did not proceed beyond the committee level. In Virginia, 
dedicated funding legislation was approved by the Senate but not by the 
House. However, the Virginia proposal to dedicate a one-quarter of 1 
percent sales tax levied in Northern Virginia to WMATA is included in 
the Senate's budget proposal, so, as of April 2006, it was still 
possible that dedicated funding could be enacted through this vehicle. 

As discussed earlier in this report, although legislators in the 
Maryland General Assembly have introduced dedicated funding bills, 
MDOT's position is that the state's current system for funding WMATA 
already constitutes dedicated funding. On the other hand, an official 
with the state's Office of Attorney General said in a legal opinion 
dated February 17, 2006, that the fund does not constitute dedicated 
funds for WMATA. An MDOT official we spoke with said that Maryland 
would consider making adjustments to the trust fund to meet the goal of 
dedicated funding. 

Amendments to the WMATA Compact Would Require State Legislation and 
Congressional Consent, but There Has Been Little Movement in the Region 
to Pursue Amendments: 

As currently written, H.R. 3496 requires the WMATA Compact to be 
amended, a process that entails state legislation and congressional 
consent. H.R. 3496, as amended, requires the WMATA Compact to be 
amended to require that (1) all payments from the Compact jurisdictions 
come from a dedicated source, (2) WMATA establish an inspector general, 
and (3) four federal representatives be added to the WMATA Board of 
Directors, one of whom must be a regular Metrobus or Metrorail 
rider.[Footnote 50] To amend the WMATA Compact, identical legislation-
-which would be separate from legislation establishing dedicated 
revenue sources--must be enacted by the states of Maryland and 
Virginia, and the District of Columbia, and must be consented to by 
Congress. No amendment can be enacted until this process is complete. 

According to our legal analysis of the WMATA Compact and H.R. 3496, 
amending the Compact would not be necessary for the WMATA Compact 
jurisdictions to establish dedicated funding or to create an inspector 
general for the agency, but would be necessary for changing the 
structure of WMATA's Board of Directors: 

* It is unnecessary to amend the WMATA Compact for jurisdictions to 
provide payment to WMATA from dedicated sources of funding. However, if 
the Compact were amended to require dedicated funding, then the 
jurisdictions would be bound to this requirement as long as it remains 
in the Compact. The Compact does not specify what the source of the 
jurisdictions' payments to WMATA shall be nor how WMATA's costs are to 
be allocated among the jurisdictions. 

* WMATA could establish an office of inspector general without amending 
the Compact; however, some provisions in H.R. 3496 about the inspector 
general's office conflict with the Compact. For example, H.R. 3496 
would require a unanimous vote of all board members to remove the 
inspector general. Under the Compact, most actions by the board do not 
require a unanimous vote; rather, they require a majority vote and the 
majority must include at least one board member from each of the three 
jurisdictions. Conflicts such as this between H.R. 3496 and the Compact 
could be resolved through an amendment to either one. The WMATA Board 
of Directors voted in April 2006 to create an office of inspector 
general. WMATA's policy outlining the structure and functions of this 
office is similar to the provisions in H.R. 3496, although WMATA 
officials told us that they wrote this policy to avoid any conflicts 
with the WMATA Compact. 

* Adding federal representatives to the Board of Directors would 
require a Compact amendment because the Compact specifically sets forth 
the composition of the board, which is composed of six members, two 
each from the District of Columbia, Maryland, and Virginia. 

Legislation that would amend the WMATA Compact as required by H.R. 3496 
has not been proposed in the District of Columbia or Virginia, 
according to a WMATA official. Such legislation was introduced in the 
Maryland General Assembly in February 2006, but was later withdrawn. 
Currently, the jurisdictions are more focused on enacting legislation 
to establish dedicated funding. Additionally, officials with the 
transportation departments of the District of Columbia, Maryland, and 
Virginia noted that even if H.R. 3496 is enacted, there is no guarantee 
that federal funding for WMATA would be appropriated. Also, officials 
in Northern Virginia questioned whether Compact amendments are 
necessary to implement the requirements of H.R. 3496 to establish an 
inspector general and to provide dedicated funding to WMATA. 

Timeline for Implementing Dedicated Funding Is Uncertain: 

There is no clear consensus among Compact jurisdictions about which 
legislation--amending the Compact or revenue legislation--should be 
dealt with first. Although Maryland officials stated that it makes more 
sense to amend the Compact to establish oversight first, the officials 
we spoke with in the District of Columbia and Virginia stated that 
enacting revenue legislation should be the first priority before trying 
to amend the Compact. 

The schedules for considering legislation in the District of Columbia, 
Maryland, and Virginia are different in each jurisdiction. In the 
District of Columbia, council members can file legislation to be 
introduced at any time during normal business hours, unless the council 
is at recess.[Footnote 51] The council generally meets to vote on 
legislation on the first Tuesday of every month. The legislative 
sessions of the Maryland and Virginia general assemblies both begin 
annually in January. In Maryland, the session adjourns after 90 days; 
bills may be filed throughout the 90-day session, but bills introduced 
after the 21st day of the Senate's session and the 31st day of the 
House's session need special approval before they are returned to the 
floor. In Virginia, the adjournment date varies based on the 
legislative year and whether the General Assembly chooses to extend the 
session, and the deadline for filing legislation is in January, the 
same month the session begins. The short legislative sessions and large 
volume of bills leave a limited window for considering and passing 
dedicated funding legislation for WMATA. 

WMATA Funding Partners Have Yet to Resolve Several Issues Related to 
Dedicated Funding: 

WMATA's funding partners face a number of issues that will need to be 
resolved should they choose to provide WMATA with dedicated funding. As 
discussed previously, the Compact jurisdictions have differing views on 
what constitutes dedicated funding, with Maryland officials having 
different opinions on whether their current system for supporting WMATA 
is dedicated, and the District of Columbia and Virginia viewing 
dedicated funding as a specific source statutorily dedicated to WMATA. 
In addition to addressing this fundamental issue, the jurisdictions 
must also resolve the following issues: 

* what proportion of the jurisdictions' payments to WMATA would come 
from dedicated sources and how to mitigate the risk associated with 
dependence on these sources; 

* whether dedicated funding would result in a net increase in the 
amount WMATA receives from the Compact jurisdictions and what portion 
of the total amount dedicated to WMATA each jurisdiction would pay; 

* whether dedicated funding should be used exclusively for WMATA's 
capital or operating needs, or both; and: 

* whether increased oversight of WMATA is needed to ensure adequate 
accountability for dedicated funds. 

Stakeholders Would Have to Determine the Proportion of the Compact 
Jurisdictions' Contributions to WMATA That Should Come from Dedicated 
Funding and How to Mitigate Risk Associated with Dependence on 
Dedicated Revenue: 

There is currently no agreement among WMATA's stakeholders--at the 
local, state, and federal levels--as to what proportion of the Compact 
jurisdictions' total payments to WMATA should come from dedicated 
funding. Although as currently written, H.R. 3496 would require that 
all state and local contributions come from dedicated funding, no 
jurisdiction has offered a proposal that would meet this requirement 
and none of the state and local officials we spoke with indicated that 
measures to fulfill this requirement are likely. As noted earlier, 
among the 23 largest transit agencies with dedicated funding, an 
average of 70 percent of their state and local contributions came from 
dedicated sources in 2003. Among the District of Columbia and the 
cities and counties in Maryland and Virginia, officials from two 
jurisdictions expressed support for providing all payments to WMATA 
from dedicated sources, although officials from one of these 
jurisdictions also recognized that such an approach was not likely to 
have regional support. As a result, WMATA's stakeholders will need to 
determine a dedicated funding level that is acceptable to all parties. 

If a large proportion of WMATA's state and local contributions were to 
come from dedicated funding, stakeholders would also need to determine 
how the risk of revenue volatility would be balanced between the 
jurisdictions and WMATA. The revenue sources chosen for dedicated 
funding for WMATA may fluctuate from year to year, requiring the 
transit agency to work within the constraints of the available revenue 
or necessitating additional appropriations from the state and local 
jurisdictions supporting WMATA. Legislation establishing dedicated 
funding for other transit agencies sometimes provided safeguards for 
revenue streams, such as specifying an annual revenue floor. These 
safeguards can better protect the transit agencies from revenue 
fluctuations, but the state or local government bears the burden of 
ensuring adequate revenue to the transit agency each year. WMATA's 
funding partners will need to determine the extent to which they or 
WMATA should take on this risk. 

Compact Jurisdictions Would Have to Determine Whether Dedicated Funding 
Would Result in a Net Increase in Payments to WMATA and How the Amount 
of Payments to WMATA Would Be Allocated among the Jurisdictions: 

Officials we interviewed from each of the localities in Maryland and 
Virginia said that dedicated funding should result in a net increase in 
payments to WMATA. Officials from two Virginia jurisdictions 
elaborated, saying that dedicated funds could be used both to replace 
part of the current subsidy payments jurisdictions currently make from 
their general funds, and to provide additional funding to WMATA, to 
result in an overall increase. An official from another Virginia 
jurisdiction said that dedicated funding should only result in a net 
increase in the jurisdictions' payments to WMATA if the federal 
government participates in supporting WMATA. Officials from the 
District of Columbia did not offer an opinion on this topic. 

Although the officials we interviewed generally said that dedicated 
funding should be used to increase their financial support of WMATA, 
the dedicated funding proposals introduced in the region are not all 
clear about whether dedicated revenues are to be in addition to the 
jurisdictions' current payments. The legislative proposals introduced 
in Maryland and Virginia state that the dedicated revenues are not 
meant to reduce or replace other funding sources. However, because 
these proposals do not explicitly state that dedicated revenues will be 
used to provide WMATA with additional funding--above the jurisdictions' 
current level of payments--it remains unclear if these proposals would 
result in a net increase in the payments to WMATA. The District of 
Columbia's legislation does, however, state that its purpose is to 
provide additional payments to WMATA. 

Regardless of whether dedicated funding results in a net increase in 
the amount of payments to WMATA, the region would need to determine 
what portion of the total amount dedicated to WMATA each jurisdiction 
would pay--that is, whether the amount of payment from dedicated 
sources would be based on current allocation formulas or would be 
determined using another means. None of the legislative proposals 
explicitly states how the amount of payments to WMATA from dedicated 
revenues would be determined, but local officials we interviewed did 
express views on this matter. The District of Columbia officials we 
spoke with said that the amount of payments to WMATA from dedicated 
revenue sources should not be determined using the current allocation 
formulas. These officials said they believe the burden of providing 
financial support for WMATA should be more evenly distributed across 
the three major jurisdictions. This view is reflected in the District 
of Columbia's legislative proposal, which includes a provision that 
would require Maryland and Virginia to dedicate an amount of revenue at 
least equal to that dedicated by the District of Columbia, although it 
does not specify how that amount would be determined. Officials from 
two of the Northern Virginia Compact jurisdictions and from the 
Virginia Department of Transportation stated that they believed the 
current allocation formulas should also be applied to dedicated 
revenues provided to WMATA. Neither the Virginia legislation nor the 
Maryland legislation explicitly states how the relative size of 
payments to WMATA would be determined. State and local officials from 
Maryland, along with other Virginia officials we met with, did not 
express strong views about whether the current allocation formulas 
would be applied to additional funding provided to WMATA. 

Whether additional funds provided to WMATA from dedicated sources are 
distributed to WMATA based on the existing allocation formulas or using 
another means could have an effect on the distribution of payments 
among the jurisdictions. For example, using the approach recommended by 
the Metro Funding Panel--in which all local Compact jurisdictions would 
provide the entire proceeds of a one-quarter percent or one-half 
percent sales tax to WMATA--the amount of funds that each jurisdiction 
would provide to fund WMATA's estimated capital shortfall would be 
based on the jurisdiction's tax receipts, rather than on the allocation 
formulas. As a result, the payments would be shifted away from the 
District of Columbia and Maryland and toward Virginia. Table 2 compares 
the current distribution among the jurisdictions of payments for 
WMATA's operating subsidy and capital improvement program to the 
distribution of additional payments for the estimated capital shortfall 
using a dedicated regional sales tax. 

Table 2: Percentage Distribution of Payments to WMATA under Current 
Allocations and under Regional Sales Tax: 

Percent. 

District of Columbia; 
Distribution of current operating subsidy payments: 38%; 
Distribution of current capital improvement program payments: 35%; 
Distribution of payments for WMATA's estimated capital shortfall under 
a regional sales tax levied at the same rate in all jurisdictions: 20%. 

Maryland; 
Distribution of current operating subsidy payments: 38%; Distribution 
of current capital improvement program payments: 35%; 
Distribution of payments for WMATA's estimated capital shortfall under 
a regional sales tax levied at the same rate in all jurisdictions: 32%. 

Virginia; 
Distribution of current operating subsidy payments: 24%; 
Distribution of current capital improvement program payments: 30%; 
Distribution of payments for WMATA's estimated capital shortfall under 
a regional sales tax levied at the same rate in all jurisdictions: 
48%.  

Source: GAO analysis of information from WMATA and the Metro Funding 
Panel Report. 

Notes: Distributions for operating subsidy and capital improvement 
program payments are based on WMATA's fiscal year 2006 approved budget. 

Capital improvement program payments include those for projects funded 
by Metro Matters and Beyond Metro Matters, two capital funding packages 
that address infrastructure rehabilitation and expansion of capacity 
within the current fixed-route system. 

[End of table]

Stakeholders Would Have to Determine Whether Dedicated Funding Would Be 
Used for Operations, Capital Needs, or Both: 

Whether funds are used for operations, capital projects, or both has 
implications for key issues, such as the purpose of the dedicated 
funding and the appropriate amount of that funding. The Metro Funding 
Panel proposed that dedicated funding be used to cover WMATA's 
budgetary shortfall, which the panel projected would occur largely due 
to planned capital expenditures. Dedicated funding legislation 
introduced in Maryland and Virginia states that funds are to be used 
for operations and capital, while the District of Columbia's 
legislation states only that funds are to be used for "maintaining and 
improving the transportation system [of WMATA]." Officials we spoke 
with from local jurisdictions also had varied views on this topic: 

* Representatives from three of the eight local jurisdictions stated 
that dedicated funding should go toward funding WMATA's capital needs, 
citing the following advantages: (1) Capital planning benefits from the 
predictability of dedicated funding because such planning tends to 
involve multiple years; (2) WMATA's unfunded needs are mostly capital 
needs related to system rehabilitation and capacity, a conclusion 
reached by the Metro Funding Panel report; and (3) an annual subsidy is 
already in place to fund operations. 

* Representatives from two other local jurisdictions stated that 
dedicated funding should be used for both operations and capital needs. 
They noted that: (1) operations and capital programs can both benefit 
from the stability provided by dedicated funding, (2) transit agencies 
can be more efficient when given the flexibility to use funds for 
either purpose, and (3) making operating payments to WMATA from 
dedicated funding, rather than from the jurisdictions' general funds, 
can make budgeting easier for both WMATA and the jurisdictions. 

* Representatives from three of the eight local jurisdictions had no 
opinion on whether dedicated funding should be used for operations or 
capital needs. 

Stakeholders Would Have to Determine Whether Increased Oversight of 
WMATA Would Be Needed to Ensure Dedicated Funds Were Adequately 
Accounted For: 

In earlier testimony on WMATA, we highlighted the importance of having 
reasonable assurances that if WMATA were to receive additional funds, 
it would spend these funds effectively.[Footnote 52] H.R. 3496 would 
make additional federal funding contingent upon WMATA's establishing an 
office of inspector general, and, in April 2006, the WMATA Board of 
Directors approved a resolution that would establish such an office. 
The issue of appropriate oversight was also discussed by regional 
stakeholders during a summit on dedicated funding for WMATA in October 
2005. Summit participants--who included state and local officials from 
the Compact jurisdictions--agreed that steps should be taken to improve 
oversight of WMATA. Additionally, U.S. Representative Albert Wynn, 
whose district includes parts of Prince George's and Montgomery 
Counties, sent a letter to WMATA urging the Board of directors to 
create an "independent investigative authority" to study WMATA's 
budgets, plans, purchases, and employee relations with the goal of 
improving operations and alerting the public to problems. Officials in 
six out of eight local jurisdictions, as well as an official with a 
state department of transportation, told us either they were concerned 
that a loss of governance could occur with dedicated funding or that it 
is important to have accountability mechanisms in place with dedicated 
funding. For example, one official said that additional oversight of 
WMATA is necessary and particularly important if WMATA is given greater 
control over its revenue stream through dedicated funding. An official 
from a state transportation department said it was important to improve 
oversight of WMATA through such steps as increasing access to WMATA's 
financial and operating data if WMATA were to receive additional funds. 

Agency Comments: 

We provided copies of a draft of this report to WMATA and the U.S. 
Department of Transportation for their review and comment. We received 
comments, consisting of technical clarifications, from officials from 
the Department of Transportation's Office of Budget and Policy and from 
WMATA's Interim General Manager, Auditor General, and Director of 
Intergovernmental Relations, which we incorporated in the report, as 
appropriate. We also provided officials from the District of Columbia, 
Maryland, and Virginia with an opportunity to comment on segments of 
the report pertaining to their legislative processes and the dedicated 
funding bills introduced in their legislative bodies. These officials 
also provided technical clarifications, which we incorporated in the 
report, as appropriate. 

As agreed with your office, unless you publicly announce its contents 
earlier, we plan no further distribution of this report until 30 days 
from the report date. At that time, we will send copies to the 
appropriate congressional committees and to the Secretary of 
Transportation, the Interim General Manager of WMATA, and officials in 
the state and local jurisdictions with whom we spoke. We will also make 
copies available to others upon request. In addition, this report will 
be available at no charge on the GAO Web site at [Hyperlink, 
http://www.gao.gov]. 

If you or your staff have any questions about this report, please 
contact me at (202) 512-2834 or siggerudk@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. GAO staff who made key contributions 
to this report are listed in appendix IV. 

Sincerely yours, 

Signed by:

Katherine Siggerud: 
Director, Physical Infrastructure Issues: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

To determine the characteristics of dedicated funding, and how it 
affects transit agencies and state and local governments, we reviewed 
the literature on transit agencies' use of dedicated funding and 
interviewed representatives of a major credit rating agency and the 
Government Finance Officers Association. We performed semistructured 
interviews with six transit agencies--Bay Area Rapid Transit, Dallas 
Area Rapid Transit, Massachusetts Bay Transportation Authority, New 
York's Metropolitan Transportation Authority, Southeastern Pennsylvania 
Transit Authority, and St. Louis Metro--which we selected to include a 
cross section of characteristics that are similar to the Washington 
Metropolitan Area Transit Authority (WMATA), including size of total 
budget, modes operated, age of rail system, and service area. 
Additionally, we selected agencies that had a diversity of dedicated 
revenue sources. We also reviewed the legislation establishing 
dedicated funding and budget and financial documents from some of these 
agencies. We analyzed financial data for the 25 largest transit 
agencies using information in the Federal Transit Administration's 
(FTA) National Transit Database (NTD). The NTD contains financial data 
reported to FTA by transit agencies.[Footnote 53] We used 2003 data, 
the most recent year for which data were available at the time of our 
analysis. We selected the top 25 agencies based on the size of their 
combined operating and capital budgets. To assess the reliability of 
the NTD, we interviewed an FTA official knowledgeable about the 
database and reviewed pertinent documentation. FTA has several 
processes in place to assure the reliability of the NTD data, including 
the following: 

* The data that agencies report have to be reconciled against the 
agencies' own audit reports. The data are then certified by the chief 
executive officer of the agency. 

* FTA uses an automated program that checks transit agencies' current 
year entries against the previous year's data. If an inconsistency is 
identified, the general manager of the agency is contacted to verify 
the information. 

* The NTD system is backed up every hour to ensure that in the event of 
a power loss or other disruption to the system, the data would not be 
lost. 

We also compared the NTD data with the information we received from our 
interviews with the six transit agencies, as well as with some 
agencies' budget and financial documentation. Generally, the 
information we received from transit agencies supported the information 
in the NTD. However, there was one instance in which we recategorized a 
revenue source reported by an agency. MBTA reported the revenue from 
local assessments as general revenues; these assessments, according to 
MBTA officials and financial documents, are dedicated. Because our 
analysis of NTD data included determining the proportion of state and 
local contributions that come from dedicated sources, we placed the 
revenue from local assessments into the dedicated category. Based on 
our assessment, we determined that the NTD data were sufficiently 
reliable for our purposes. 

To compare potential revenue sources that could be used as dedicated 
funding for WMATA, we reviewed literature on the economics of state and 
local public finance and mass transit funding and the Metro Funding 
Panel report, and met with experts in state and local public finance 
and the financing of transportation and with staff from the Metro 
Funding Panel. Based on that review and those discussions, we: 

* identified year-to-year revenue stability, longer-run revenue 
adequacy, and the tax or fee rate necessary to yield a specified amount 
of revenue as key considerations for choosing a revenue source to 
dedicate to WMATA; 

* identified equity, efficiency, and administrative cost as additional 
considerations that could be affected if there are tax and fee 
increases to provide additional funding to WMATA; 

* identified the sales tax, the payroll or income tax, the motor 
vehicle fuel tax, the property tax, access fees, and vehicle 
registration fees as revenue sources that we would compare; and: 

* assessed these revenue sources based on the considerations 
identified. 

To determine the major actions required to establish dedicated funding 
for WMATA, what progress on these actions has been made so far, and 
what issues related to dedicated funding have emerged, we interviewed 
the following state, local, and regional officials, including: 

* the chief administrative officers or other appropriate official from 
each of the eight local Compact jurisdictions[Footnote 54] or their 
representatives; 

* the Director of Transportation from the District of Columbia and the 
Secretaries of Transportation from Maryland and Virginia; 

* members of the Maryland General Assembly, the Virginia General 
Assembly, and the City Council of the District of Columbia--we selected 
officials who sit on committees that would be involved in dedicated 
funding legislation; 

* officials from the Offices of the Parliamentarian at the U.S. House 
of Representatives and the U.S. Senate; 

* representatives from the Northern Virginia Transportation Commission; 
and: 

* WMATA officials, including representatives from the Board of 
Directors, the Office of Policy and Intergovernmental Relations, and 
the Office of General Counsel. 

We also reviewed dedicated funding legislation that was proposed in the 
District of Columbia, Maryland, and Virginia, and Maryland statutes 
pertaining to the payment of WMATA. We performed a legal analysis of 
how the requirements of H.R. 3496 compare with the provisions in the 
WMATA Compact. We also attended public meetings relating to dedicated 
funding for WMATA, including an October 2005 regional summit and 
hearings of the District of Columbia City Council and the Maryland 
General Assembly. 

[End of section] 

Appendix II: Revenue Sources Compared on the Basis of Revenue Stability 
and Adequacy, and Required Tax or Fee Rate: 

The following paragraphs provide a summary--based on our analysis of 
the economic literature and the Metro Funding Panel report[Footnote 
55]--of how six revenue sources (the sales tax, the payroll/income tax, 
the motor vehicle fuel tax, the property tax, access fees, and vehicle 
registration fees) compare according to stability, long-run adequacy, 
and tax or fee rate required. 

Sales Tax: 

Previous studies suggest that revenues from the sales tax are more 
susceptible to economic fluctuations than property or fuel tax 
revenues. Sales tax revenues are susceptible to economic fluctuations 
because they are dependent on consumer purchases, and these purchases 
vary with changes in income. Studies estimate that the economic 
fluctuations of retail sales tax revenues are about the same as those 
for income tax revenues, but that the sales tax is less prone to random 
variations.[Footnote 56] Economic estimates suggest that sales tax 
revenues are more stable if the tax base includes items for which 
purchases remain relatively constant. These items are commonly referred 
to as necessities, including food, clothing, and prescription drugs. 
However, caution is needed when applying these results because there 
can be significant variations at the state level. For instance, the 
results of two studies suggest that Maryland sales tax revenues are 
more responsive to economic fluctuations than are sales tax revenues in 
Virginia.[Footnote 57] 

In terms of long-run revenue growth, there is a general consensus in 
the economics literature that sales tax revenues do not keep pace with 
overall economic expansion. This slower growth, compared with income, 
occurs because retail sales usually take up a declining share of income 
as income rises. Two studies produced very similar state-specific 
estimates for Maryland and Virginia consistent with this finding; a 10 
percent increase in total personal income is associated with a roughly 
8 percent increase in sales tax revenues.[Footnote 58] Economic 
estimates also suggest that tax bases that include food have lower 
levels of long-run growth than those that exclude food, although bases 
including food tend to be more stable. In addition, other results 
suggest that sales tax revenues grow faster as income rises when the 
sales tax base includes more services because spending on the service 
sector has been rapidly increasing. 

Collecting a specified amount of dedicated revenue from a general sales 
tax usually requires a relatively small tax rate because the base to 
which that rate would be applied is relatively large. When retail 
purchases of many services, as well as goods, are taxed, the base is 
particularly large and a smaller tax rate would be needed than if the 
tax applied only to retail purchases of goods. When retail purchases of 
major categories of goods, such as food purchases from grocery stores, 
are excluded, then the base is smaller and a higher tax rate would be 
needed. 

The Metro Funding Panel estimated that a sales tax rate of 25 cents per 
$100 of taxed retail sales throughout the WMATA Compact region would be 
required to collect $148 million in 2010.[Footnote 59] Compared with 
some of its estimates for other revenue sources, the panel's estimate 
for the sales tax was relatively straightforward and based on publicly 
available data. However, for several reasons, the retail sales tax base 
might increase at a rate different from the historical average growth 
rate that the panel assumed in developing its estimate. These reasons 
include future population or income growth that differs from such 
growth in the past; increased retail sales through the Internet; and 
decisions by state and local governments to apply the sales tax to some 
previously untaxed purchases, or to stop applying it to some currently 
taxed purchases. 

Payroll or Personal Income Tax: 

Previous studies suggest that income tax revenues are more susceptible 
to economic fluctuations than property or fuel tax revenues because 
income varies more over the course of the business cycle than do 
property values or fuel purchases. The variability in income tax 
revenue is about the same as for sales tax revenue, but random 
variations are larger. Unlike the sales tax discussed above, which is 
more stable with a broader base, tax revenues from personal income are 
more stable under the payroll tax, or when the tax base is limited to 
wage income.[Footnote 60] Economic studies indicate that there are some 
large differences in the fluctuation of income tax revenues due to 
changes in economic conditions at the state level. Two studies provide 
conflicting estimates of the relative volatility of income tax revenues 
in Virginia and Maryland, with one study suggesting more volatility in 
Virginia and the other suggesting more volatility in Maryland. These 
differences at the state level indicate the need for caution in 
generalizing from state or national studies because smaller 
jurisdictions, such as cities or counties, might also differ 
substantially in measures of revenue stability. 

In terms of long-run revenue growth, previous studies have consistently 
indicated that income or payroll tax revenues more than keep pace with 
overall economic growth. Income tax revenues grow faster than income 
levels because of the progressive nature of most income taxes: People 
with higher incomes typically pay a larger percentage of their income 
in taxes than those with lower incomes.[Footnote 61] This progressivity 
occurs because of graduated tax rates that get higher as incomes grow 
and deductions and credits that are often phased out at higher income 
levels. Payroll tax revenues may not increase as much as income tax 
revenues due to economic growth because a payroll tax might not have 
graduated tax rates. A study of individual states found that evidence 
from Maryland and Virginia is consistent with the broader observation 
that income tax revenues generally rise faster than income levels, with 
the long-run growth rate in tax revenues for an equal growth rate in 
income larger in Virginia.[Footnote 62] 

Collecting a specified amount of dedicated revenue from an income or 
payroll tax generally requires a relatively small tax rate because the 
base to which that rate would be applied is relatively large. A lower 
tax rate would be needed for an income tax because the tax base would 
include both nonwage and wage income, while the payroll tax base would 
include only wage income. Exempting some income from tax--such as by 
putting a cap on the amount of wage income subject to a payroll tax, as 
is done for Social Security, or allowing some form of deduction for 
income up to some level--would raise the tax rate required on the 
remaining income because the base would be smaller. 

The Metro Funding Panel estimated that a payroll tax rate of 16 cents 
per $100 of wages earned by residents of the WMATA Compact region, with 
wages below $15,000 per year and above $100,000 per year exempt, would 
be required to collect $148 million in 2010. According to a panel staff 
member who participated in developing these estimates, the payroll tax 
estimate was the most complex to develop. Because the panel derived 
this estimated tax rate from an estimate of the tax base that itself 
was derived from Census Bureau data on income that included nonwage 
income, the tax rate may be lower than the rate that would be needed to 
raise the same amount of revenue from a tax that applied only to wage 
income. On the other hand, the estimated tax base did not include any 
income earned by nonresidents of the Compact region. If such income 
could be taxed, then the tax base could be higher, which would allow 
the same amount of revenue to be collected with a lower tax rate. 

Motor Vehicle Fuel Tax: 

Previous studies indicate that motor fuels tax revenues exhibit the 
highest degree of stability in the presence of economic fluctuations 
compared with property, income, and sales taxes. The revenues are more 
stable because in the short run fuel purchases do not change much in 
response to changing economic conditions. However, the literature 
indicates that fuel tax revenues have the most severe random 
fluctuations, such as those due to natural disasters or other events 
that disrupt the supply of oil. 

In terms of long-run growth, studies have found that motor vehicle fuel 
revenues have historically grown more slowly than general measures of 
economic growth, but not as slowly as sales tax revenues. Future long- 
run adequacy concerns remain because of potential fuel efficiency 
improvements and increased transit use resulting from rising fuel 
prices and congestion. This concern is exacerbated because motor fuel 
taxes are generally applied on a per-gallon basis, not as a percentage 
of the total sale price. Under this structure, revenues are 
proportional to fuel consumption, not total fuel expenditures, which 
may require that the motor fuels tax rate be increased over time if 
revenues are to keep pace with the demand for transit expenditures in 
periods of high inflation. 

Collecting a specified amount of dedicated revenue from a tax on retail 
purchases of motor vehicle fuel requires a relatively large tax rate 
because the base to which that rate would be applied is relatively 
small compared with, for example, the base for a general sales tax on 
retail purchases. If for various policy reasons some fuel purchases are 
exempt from the tax, then the required tax rate on the remaining fuel 
purchases would be even higher. 

The Metro Funding Panel estimated that a motor vehicle fuel tax rate of 
11.1 cents per gallon of motor vehicle fuel purchases within the WMATA 
Compact region would be required to collect $148 million in 2010. 
However, uncertainty about some of the assumptions underlying this 
estimate may make it less reliable than the panel's more 
straightforward estimates for some of the other revenue sources. For 
example, this estimate is based on an assumption that average fuel 
efficiency does not change throughout the period analyzed--until 2015. 
However, if fuel efficiency improves in response to high fuel prices, 
then the number of gallons purchased will be less than the panel 
estimated and the tax rate required would be higher than the panel 
estimated. In addition, the panel's estimate of the number of gallons 
of fuel purchased in the Compact region in the baseline period is based 
on an estimate from the Metropolitan Washington Council of Governments 
on the number of vehicle miles traveled within the Compact region. 
Using vehicle miles traveled introduces uncertainty in an estimate of 
fuel purchases because some driving in the Compact region is done by 
vehicles that were filled up with fuel outside the region, while some 
fuel purchased within the Compact region was used in cars driven 
outside the Compact region, and these two influences might not be 
completely offsetting. 

Property Tax: 

Previous studies suggest that property tax revenues are moderately 
susceptible to economic fluctuations, but generally less so than sales 
and income/payroll taxes, because assessed property values tend to vary 
less over the course of the business cycle than do retail sales or 
incomes. Fluctuations in property tax revenues due to changes in 
economic conditions are generally more predictable than those of other 
revenue sources because there is often a lag between changes in 
economic conditions and their effects on property tax revenues. This 
lag occurs because it often takes a while for changes in property 
values to be reflected in property assessments. However, this advantage 
in predictability is only captured using more sophisticated forecasting 
techniques that take into account economic indicators from the recent 
past. In addition, random fluctuations in property tax revenues are 
relatively small. 

The evidence from previous studies on the long-run revenue growth of 
property tax revenues is inconclusive. Studies indicate that revenues 
exhibit widely variant long-run growth patterns at the county level, 
sometimes increasing faster than income and sometimes more slowly. 
Researchers have provided evidence suggesting that these large local 
disparities are generated by differing local economic conditions and 
implementation structures. 

Collecting a specified amount of dedicated revenue from a property tax 
generally requires a relatively small tax rate because the base to 
which that rate would be applied is relatively large. The Metro Funding 
Panel estimated that a property tax rate of 3.44 cents per 100 dollars 
of assessed value in the WMATA Compact region would be required to 
collect $148 million in 2010. Compared with some of its estimates for 
other revenue sources, the panel's estimate for the property tax was 
relatively straightforward and based on publicly available data, as was 
the sales tax estimate. However, long-run property value growth might 
differ from the growth rate in the past, which could cause the required 
tax rate to differ from the panel's estimate. 

Access Fees: 

Access fees[Footnote 63] are not as widely used as the previously 
discussed revenue sources, and the economic literature on the 
characteristics of access fees is sparse. Intuition suggests that 
revenues would likely be stable in the face of economic fluctuations if 
the fee rate were set on a per-square-foot basis, unless the property 
around a Metrorail station was relatively undeveloped and significant 
building was taking place or expected to occur.[Footnote 64] In this 
instance, rapid short-run growth in revenues would be expected until 
the development was completed. 

Although access fee revenues would likely be relatively stable, long- 
run revenue growth would be limited if the fee rate were applied per 
square foot and remained the same over time. Revenue growth would only 
occur to the extent that taxable space increased and would likely be 
minimal, or even negative, in real dollars if the rate is not indexed 
for inflation. However, to the extent that revenue growth is due to 
increased development near stations, there might be a link between 
revenue growth and the increased demand for transit expenditures. 

Collecting a specified amount of dedicated revenue from an access fee 
generally requires a fee rate that, especially compared with a property 
tax, is large relative to the assessed value of the property, because 
the base is much narrower than that of a general property tax. Many 
details could determine the required fee rate, such as the radius of 
the area around a rail station within which properties would be subject 
to an access fee. 

The Metro Funding Panel estimated that an annual transit access fee 
rate of 30 cents per square foot of federal and commercial property 
within 0.5 miles of designated Metrorail stations would be required to 
collect $148 million in 2010. The panel derived this estimate from data 
on the square footage of federal property and all commercial and hotel 
space within 0.5 miles of 63 Metrorail stations. If an access fee were 
in place, it might apply to additional categories of property not 
included in the estimated tax base, which would lower the required fee 
rate. However, if federal properties were not subject to the access 
fee, the required fee rate would be higher. 

Vehicle Registration Fees: 

Revenues from vehicle registration fees are also likely to be 
relatively stable from year to year. In addition, their response to 
economic fluctuations is likely to lag because car ownership rates are 
not likely to vary much over the course of the business cycle, and any 
variation that might occur is likely to occur after a downturn, rather 
than during it. 

Long-run growth in vehicle registration fee revenues is unlikely to 
keep pace with economic growth. Car ownership rates are already so high 
that higher household income is unlikely to lead to a proportionate 
increase in the number of cars owned per household (for example, a 
doubling of average income levels is unlikely to lead to double the 
number of cars per household).[Footnote 65] However, longer-term 
increases are possible in areas with high sustained levels of 
population growth and, therefore, vehicle ownership growth. This 
revenue source might provide less long-run adequacy for funding transit 
than those previously discussed because revenues over the longer term 
may change inversely with changes in the demand for transit 
expenditures. For instance, policy changes, increasing fuel prices, and 
increasing road congestion might lead households to use transit more 
and own fewer vehicles, causing the demand for transit to increase 
while revenues from vehicle registration fees are decreasing. 

Collecting a specified amount of dedicated revenue from motor vehicle 
registration fees requires a relatively large fee rate because the base 
to which that rate would be applied is relatively small compared with 
sales, property and income taxes. If, for policy reasons, some types of 
motor vehicles were exempted from the fee, then the required fee rate 
would be even larger. The Metro Funding Panel did not evaluate motor 
vehicle registration fees as a funding source for dedicated revenues 
for WMATA and thus did not estimate the fee rate required to collect 
any specified amount or revenue. 

[End of section] 

Appendix III: Revenue Sources Compared on the Basis of Administrative 
Cost, Equity, and Efficiency: 

We identified administrative cost, equity, and efficiency as key 
considerations in raising additional revenue on the basis of 
discussions with state and local public finance experts and public 
officials and a review of the relevant economics literature. 
Administrative cost includes the cost of collecting, enforcing, and 
remitting the additional revenue in addition to the compliance burden 
(e.g., out-of-pocket expenses for record keeping and time) placed on 
taxpayers and those paying fees. Additional administrative costs are 
likely to be large if revenue is increased by implementing a new tax or 
fee and relatively small for an increase in a tax or fee rate for a 
revenue source currently in place at the appropriate level (e.g., state 
or locality). 

Economists often assess equity according to two principles: 

* Ability to pay principle. Those who are more capable of bearing the 
burden (usually those with higher income levels) of taxes or fees 
should pay more in taxes and fees than those with a lesser ability to 
pay. A tax or fee rate structure is generally thought to be more 
equitable if it is consistent with this principle. Some tax or fee rate 
structures are also progressive--that is, the tax or fee liability as a 
percentage of income increases as income increases. 

* Benefit principle. Those who pay for a service are the same 
individuals benefiting from the service. 

Efficiency can be measured in different ways, but economists commonly 
use two concepts to evaluate the efficiency of a revenue structure: 

* Economic behavioral distortions. This term refers to changes in 
individual decision making due to incentives in the tax or fee system 
that move the economy away from its most efficient outcome. Distortions 
are likely to be smaller when a tax or fee is applied to a broad base 
(both jurisdiction--who is taxed; and range--what is taxed) and rates 
do not differ significantly across neighboring jurisdictions. 

* Accountability. Those benefiting from a service pay the full social 
cost of the service. If the beneficiaries do not have to bear the full 
cost, they may seek to have the government provide more of the service 
even when additional amounts of the service cost more than the value of 
the additional benefits provided, which would be inefficient. Although 
the concept that those who benefit from a service should pay for it is 
similar to the benefit principle for assessing equity, in discussing 
the effects of adherence to or deviation from this principle on 
efficiency we are concerned with the accountability it provides rather 
than the fairness. 

Administrative Cost May Be a More Important Factor in Selecting a 
Source for Increased Revenue Than Equity and Efficiency Changes: 

Our analysis suggests that if there are substantial differences in 
administrative costs among revenue sources selected to address a WMATA 
funding shortfall, these differences may be more important than equity 
and efficiency effects, particularly if the current formula for 
allocating local contributions to fund WMATA is retained and 
jurisdictions are allowed to choose their own revenue sources. There 
can be substantial differences in the equity and efficiency effects 
among the different revenue sources when they are being used to finance 
state and local government as a whole, and for at least some of the 
potential revenue sources we analyzed, these effects have been well 
studied in the economics literature. However, differences in the 
effects associated with funding a WMATA shortfall are likely to be much 
smaller because the increase in revenue needed is small compared with 
the revenue raised to fund overall state and local government 
operations. Moreover, equity and efficiency effects are sometimes 
difficult to measure, and there is a lack of consensus in the economics 
literature regarding the equity and efficiency implications for several 
of the revenue sources discussed below. In contrast, differences in 
administrative cost among revenue sources can be easier to identify 
and, therefore, more likely to affect decision making. These costs 
include items such as computer systems, forms, and collection devices, 
as well as the time spent by government employees and the individuals 
paying the tax or fee. 

However, if the state and local jurisdictions served by WMATA implement 
a regionwide tax or fee--an approach proposed by the Metro Funding 
Panel but which does not have strong support among the Compact 
jurisdictions--then there could be substantial additional 
administrative costs as well as effects on equity and efficiency. 
Administrative costs might be high because no regional collection 
mechanism is already in place and implementation would require the 
coordination of collection and enforcement measures across multiple 
state and local jurisdictions. Equity and efficiency effects are also 
likely to be greater with the implementation of a regionwide tax 
because it would change the interjurisdictional allocation of WMATA 
payments for the shortfall. Changes in equity and efficiency would 
likely be even larger if a regional tax or fee were used to fund the 
entirety of state and local WMATA payments, not just the shortfall, 
because of the additional revenue involved. 

Different Potential Revenue Sources Have Different Characteristics When 
Assessed Using the Key Considerations of Administrative Cost, Equity, 
and Efficiency: 

Sales Tax: 

Administrative costs associated with collecting additional revenue from 
a sales tax are likely to be relatively low, especially when compared 
with those associated with access fees and fuel taxes. Sales taxes are 
one of the two main funding sources at the state level (along with 
income taxes) and are often used to generate revenue at the local level 
and in special service districts; thus, tax collection procedures 
already exist in many places. Administrative costs could be more 
substantial if jurisdictions are faced with new collection 
requirements, such as implementing a local option tax where one does 
not already exist. 

In terms of equity based on the ability-to-pay principle, economists 
have traditionally viewed the sales tax as regressive (although less so 
when food purchases at grocery stores are excluded from taxation); 
those with lower income levels pay a higher percentage of their income 
in sales tax than those with higher income levels. However, more recent 
analyses have identified some factors that suggest that sales taxes may 
be closer to proportional and less regressive than previously believed. 

One factor is the economic incidence of the sales tax, or who actually 
bears the burden of a revenue source. In taxation, the individuals who 
bear the burden of a tax may or may not be the same individuals who 
remit the revenue to the government. For example, when a sales tax is 
added to a product, retailers remit the revenue to the government but 
they may or may not actually be bearing the burden of the tax. 
Retailers may leave the price of the product unchanged and simply add 
the sales tax to the price, in which case the consumer pays the full 
amount of the tax. Retailers might also reduce the price of the product 
by the amount of the tax so as not to lose sales, in which case the 
retailer bears the burden of the tax. Another possibility is that the 
price of the product might fall, but not by the full amount of the tax, 
in which case retailers and consumers share the burden of the tax. 
Traditional analyses of the sales tax have generally assumed that 
consumers bear the full burden of the tax, but more recent analyses 
have questioned that assumption. If the burden is borne in part by 
retailers, then the sales tax may be less regressive than previously 
believed. 

Another factor is the definition of income used in measuring 
progressivity or regressivity. Traditional analyses that have found the 
sales tax to be regressive have used annual income levels as the 
measure of income. More recent research has shown that lifetime income 
might be a more relevant measure of income as long as there are not 
severe constraints on an individual's ability to borrow. Using lifetime 
income, the sales tax appears roughly proportional. That is, people 
with varying levels of income spend approximately the same percentage 
of their lifetime income on consumption. 

In terms of efficiency, evidence from theoretical and empirical studies 
suggests that the sales tax is distortionary in that it alters 
individuals' decisions about where and what to purchase. The sales tax 
diverts purchases from taxed items toward untaxed or lightly taxed 
alternatives (e.g., leisure, services, Internet sales, and retail in 
neighboring jurisdictions). However, the increase in the sales tax 
needed to collect the revenue associated with funding a WMATA shortfall 
is likely to be small enough to generate only minor changes in 
efficiency. The biggest distortions are likely to occur for purchases 
of items for which consumers are sensitive to small changes in the 
price of these items, which might happen if there are untaxed or 
lightly taxed alternatives that are close substitutes. 

With respect to the benefit principle of equity and the accountability 
component of efficiency, the sales tax roughly matches the users of 
WMATA's services with the costs of those services to the extent that 
all local residents benefit from transit, and visitors to the 
Washington, D.C, region, who pay sales taxes while they are in that 
area, are also likely to use the services. However, from an equity 
perspective, the adherence to the benefit principle is limited because 
funding a shortfall with a sales tax does not guarantee that those who 
receive greater benefits pay more tax; that is, a sales tax is not well 
targeted toward transit beneficiaries. From an efficiency perspective, 
the link with accountability is weakened because heavy users of the 
transit system may advocate investment beyond the economically 
efficient level because they might not have to bear as large a share of 
the costs compared with the share of the benefits they would receive. 

Payroll or Personal Income Tax: 

The administrative cost associated with collecting additional revenue 
from a personal income tax could be relatively low if it is collected 
at the state level as part of existing state income taxes. However, a 
local income tax might create significant compliance costs for 
employers and individuals if it is accompanied by new forms and record- 
keeping requirements. A regional, state, or local payroll tax might 
also generate significant compliance costs for employers (in the case 
of a payroll tax collected at the employer level) if it requires 
additional record keeping and submitting revenues to a new source. 

Regarding the ability-to-pay principle for equity, the economics 
literature has reached a general consensus that the burden of the tax 
is likely borne by employees in the case of payroll taxes and in 
proportion to income in the case of income taxes. The economic evidence 
suggests that employees probably bear most of the burden of a payroll 
tax through lower wages, even when legislation requires employers to 
pay half of the tax liability. As lower-income households rely more 
heavily on wage and salary income, the payroll tax is generally 
regressive, particularly at the bottom part of the income distribution, 
but the tax will be less regressive if there is a minimum threshold of 
wages for paying the tax and more regressive if there is a cap on the 
amount of income to which the tax applies. It is generally accepted in 
the economics literature that income tax liabilities are borne by 
individuals who remit the tax to the government; that is, the tax is 
not shifted to other individuals. Most income taxes are structured to 
be progressive: People with higher incomes typically pay a larger 
percentage of their income in taxes than those with lower incomes. 
Thus, the income tax is generally thought to be consistent with ability-
to-pay principles. However, an income tax can be made regressive, 
proportional, or progressive depending on the tax rate structure and 
the distribution of deductions and credits. 

Income and payroll taxes have unclear efficiency implications with 
respect to behavioral distortions because previous studies have not 
yielded a consensus on the degree to which they create distortions. 
Generally, payroll or income taxes that alter decisions about whether 
to work, how many hours to work, and how hard to work can cause 
distortions in the economy, but estimates of the behavioral responses 
to income taxes vary widely.[Footnote 66] However, there is some 
consensus that within households, income taxes are more likely to 
affect the work decisions of a secondary earner.[Footnote 67] 

With respect to the benefit principle of equity and the accountability 
perspective of efficiency, payroll taxes are likely to be better 
targeted toward beneficiaries than are personal income taxes. Like a 
sales tax, an income tax roughly matches the benefits of WMATA's 
services to the cost of those services, to the extent that all local 
residents benefit from transit, although, unlike a sales tax, an income 
tax does not directly collect revenue from visitors to the Washington, 
D.C., region who might also benefit from WMATA. However, from an equity 
perspective, the adherence to the benefit principle is limited because 
funding a shortfall with a personal income tax does not guarantee that 
those who receive greater benefits pay more tax. From an efficiency 
perspective, the link with accountability is weakened because heavy 
users of the transit system may advocate investment beyond the 
economically efficient level because they might not have to bear as 
large a share of the costs compared with the share of the benefits they 
would receive. A payroll tax is likely to be better targeted to transit 
beneficiaries because some groups of people who would be affected by a 
personal income tax but not a payroll tax, such as retirees, might be 
less likely to benefit substantially from further investment in mass 
transit than workers. Targeting of a payroll tax could be enhanced if 
it applied to all of those who work in the WMATA Compact region; income 
taxes are likely to apply to those who live in the Compact region, 
which would leave out those who work in the region and benefit from 
transit even though they live elsewhere (and would include those who 
live in the region but work outside the region and might not benefit as 
much from transit). 

Motor Vehicle Fuel Tax: 

The administrative cost associated with collecting additional revenue 
from a motor vehicle fuel tax may be substantial if some portion of 
this tax applied only within the WMATA Compact region and was collected 
at the retail level. Typically, motor vehicle fuel taxes are collected 
at the distributor level, including in the District of Columbia, 
Maryland, and Virginia. Collection at the retailer level would most 
likely involve additional record keeping for retailers and added costs 
for local jurisdictions, including setting up a revenue collection 
procedure, developing standards for record keeping, and enforcing 
compliance with the tax. 

The equity implications with respect to ability to pay for the motor 
vehicle fuel tax are uncertain. Studies indicate that higher-income 
households own more cars and drive more total miles, suggesting that 
they will pay more in motor vehicle fuel taxes than lower-income 
households, but it is uncertain whether this larger amount of tax paid 
will represent a larger or smaller share of household income. Given 
that rates of automobile ownership are fairly high at all income levels 
beyond the very lowest, the motor vehicle fuel tax may be regressive 
throughout much of the income range.[Footnote 68] In addition, higher 
fuel costs increase the cost of travel and of transporting goods. This 
added cost is more likely to be reflected in the prices of goods for 
which the demand is relatively unresponsive to changes in prices, or 
necessities such as food, clothing and prescription drugs, rather than 
in the prices of goods and services that are considered to be more 
luxury items. As lower-income households spend a larger portion of 
their incomes on necessities, this effect of the motor vehicle fuel tax 
would be expected to be regressive. 

The motor vehicle fuel tax has an ambiguous effect on efficiency with 
respect to behavioral distortions from a conceptual viewpoint, and 
there is too little empirical evidence to arrive at a conclusion. Motor 
vehicle fuel tax increases within a region decrease efficiency to the 
extent that they lead drivers to waste resources traveling to service 
stations outside the region to find lower prices. However, this loss in 
efficiency might be partially or fully offset if the tax increase makes 
the total fuel price closer to the full social cost imposed by driving 
(including the cost of the fuel as well as the inconvenience imposed on 
others due to congestion and pollution). 

The motor vehicle fuel tax may be less equitable with respect to the 
benefit principle and less efficient from an accountability perspective 
than a sales or personal income tax. Because of differences in car 
ownership and driving patterns that are unrelated to income, there is 
likely to be more variance at any income level in the burden of a motor 
vehicle fuel tax than with a sales or personal income tax, so that even 
if the benefits of transit accrue to the population as a whole, there 
is weaker targeting of the tax toward beneficiaries with a motor 
vehicle fuel tax. Furthermore, when considering specific transit 
benefits, the link between transit beneficiaries and those who pay the 
motor vehicle fuel tax is likely to be weak. However, there is a clear 
link for automobile commuters and others driving at peak times because 
they benefit from reduced congestion. In contrast, those who drive at 
nonpeak times and those who do not drive near the transit corridors 
also pay the motor vehicle fuel tax while receiving little or no 
benefit. In addition, transit users who do not own motor vehicles will 
not directly pay any of the tax, although they could be among the 
largest beneficiaries. As transit users and businesses near transit 
lines, not automobile commuters, are likely to be the largest 
beneficiaries of transit services, they may advocate investment beyond 
the economically efficient level because they might not have to bear as 
large a share of the costs compared with the share of the benefits they 
would receive. 

Property Tax: 

The administrative cost associated with collecting additional revenue 
from a property tax may be the lowest of the revenue sources we have 
analyzed. Property taxes are the main funding source for local 
governments, so tax collection procedures are already in place. 
Administrative cost would be greater if local jurisdictions tried to 
uniformly implement all or a portion of a regionwide property tax 
because they are likely to have different administrative procedures, 
including how and when assessments are made and the relationship 
between market value and assessed value. 

The equity effects of an increase in a property tax are uncertain 
because property taxes generally represent a combination of a land tax 
and a tax on the structures on the land, and the incidence of those two 
taxes varies. In addition, there are different views on the incidence 
of property taxes. The traditional view of the property tax suggests 
that the portion of the tax that applies to land value is likely borne 
by land owners, making the tax progressive because higher proportions 
of land are owned by higher-income individuals. However, the portion 
that applies to structures is likely borne by those who consume the 
services of the structures--including residents of owner-occupied 
housing and renters--and previous studies suggest that this portion is 
proportional or regressive, depending on the measure of income used. 
Thus, the overall effect is ambiguous. The new view of the property tax 
suggests that the burden of the property tax is borne by all capital 
owners. Assuming that capital ownership rises with income, this view 
suggests that the property tax may be progressive. 

With respect to efficiency pertaining to behavioral distortions, 
property taxes taken by themselves might be considered inefficient 
because they lead to less investment in structures. However, when the 
effects of other taxes are considered as well, increases in property 
tax might enhance efficiency. Because the favorable income tax 
treatment of investment in housing creates incentives for investment in 
housing beyond the efficient level, raising the property tax could 
partially offset these incentives and increase efficiency.[Footnote 69] 

With respect to the benefit principle of equity and the accountability 
component of efficiency, the property tax roughly matches the 
beneficiaries of WMATA service with its cost to the extent that all 
property values are enhanced by the provision of WMATA's services. 
However, from an equity perspective, the adherence to the benefit 
principle is limited because funding a shortfall with a property tax 
increases the tax paid by all property owners, while some property 
owners would receive most of the benefits. That is, like a sales or 
personal income tax, a property tax is not well targeted toward 
beneficiaries, although it may be better targeted than those other 
taxes to the extent that higher property taxes are collected from 
owners of properties for which the value has risen over the years due 
to nearby transit service. Similarly, the link with accountability is 
weakened because heavy beneficiaries of the transit system, including 
owners of property with good transit access, may advocate investment 
beyond the economically efficient level because they might not have to 
bear as large a share of the costs compared with the share of the 
benefits they would receive. 

Access Fees: 

The administrative cost associated with collecting additional revenue 
from access fees is likely to be substantial, perhaps larger than for 
any of the other revenue sources that we analyzed. The use of access 
fees would likely involve significant additional administrative cost 
because local governments would have to develop a new system for 
implementation, collection, and enforcement. In addition, there would 
be an increased compliance burden on owners of commercial property 
located near Metrorail stations because record-keeping requirements 
would increase. 

The equity effects of access fees are uncertain because of uncertainty 
about the incidence of these fees. The burden might be split among 
property owners, renters, employees, and consumers, depending on the 
ability of property owners to shift the tax burden to others through 
price and wage changes, and the economics literature does not contain 
sufficient empirical evidence to draw conclusions about how much of the 
burden would fall on each group. 

There is also little existing evidence on the efficiency of access fees 
with respect to behavioral distortions, although economic reasoning 
suggests that there might be some small efficiency losses. Access fees 
increase the cost of developing land near transit stations. To the 
extent that fees are paid out of profits or windfall gains (due to 
increases in property values) and do not alter decisions on where to 
build, there are no efficiency effects. However, if an access fee 
renders an otherwise profitable venture unprofitable, it creates 
inefficiency by discouraging development around transit services. 

With respect to the benefit principle of equity and the accountability 
component of efficiency, access fees are most closely targeted to the 
beneficiaries of transit service. Those who own property, live, and 
work near transit services are most likely to draw large benefits from 
the system and would likely bear a large portion of an access fee. This 
close connection between beneficiaries and costs would lead to 
increased efficiency, as there would be no incentive to advocate 
investment beyond the efficient level because the costs would largely 
fall on the beneficiaries. 

Vehicle Registration Fees: 

The administrative cost associated with collecting additional revenue 
from motor vehicle registration fees is likely to be relatively low, 
especially if the increase in revenue is achieved by just increasing 
the amount of the fee already collected. Some complexity might be added 
if the additional revenue is collected at a jurisdiction level not 
currently imposing a registration fee. In either case, there will 
likely be little or no increase in individual compliance costs, as 
there would likely be no additional record-keeping requirement. 
Compliance costs would increase if vehicle owners were required to make 
an additional trip or travel to a different location to pay the 
registration fee. 

The equity implications with respect to ability to pay for vehicle 
registration fees depend on the differences in vehicle ownership rates 
among income groups and the structure of the fee schedule, such as 
whether it is a flat fee per vehicle or a fee rate that is based on the 
value of the vehicle. Studies indicate that higher-income households 
own more cars, suggesting that they will pay more in vehicle 
registration fees than lower-income households, but it is uncertain 
whether this larger amount of tax paid will represent a larger or 
smaller share of household income. Households owning no vehicles tend 
to have lower incomes, and those households would pay nothing in 
vehicle registration fees. However, given that rates of vehicle 
ownership are fairly high at all income levels beyond the very lowest, 
throughout much of the income range, a flat vehicle registration fee 
may be regressive. On the other hand, a vehicle registration fee that 
is applied to the value of the vehicle is likely to be less regressive 
than a flat fee because the average value of vehicles owned is higher 
for higher-income households. Nonetheless, there is empirical evidence 
on the equity effects of vehicle property taxes, which resemble 
registration fees based on vehicle value, that these taxes are 
regressive. 

With respect to efficiency pertaining to behavioral distortions, 
vehicle registration fees make owning a vehicle more expensive, and an 
increase in a flat fee would be expected to reduce the level of vehicle 
ownership, although the reduction would likely be minimal.[Footnote 70] 
There are negative effects on efficiency resulting from vehicle owners 
not facing the full costs that their vehicle use places on others 
(including the inconvenience and health effects imposed on others due 
to congestion and pollution). These negative effects could be mitigated 
to some extent by the reduction in vehicle ownership brought about by 
additional fees. However, this efficiency gain may be small because a 
fee imposed at the vehicle registration level only minimally 
discourages vehicle ownership and does nothing to increase the cost of 
driving the vehicle on any given trip. Thus, a fee increase would 
provide no incentives for reduction in the number of trips taken by 
individuals who do own vehicles. 

Like a motor vehicle fuel tax, a vehicle registration fee may be less 
equitable with respect to the benefit principle and less efficient from 
an accountability perspective than a sales or personal income tax. 
Because of differences in vehicle ownership that are unrelated to 
income, there is likely to be more variance at any income level in the 
burden of a vehicle registration fee than with a sales or personal 
income tax, so that even if the benefits of transit accrue to the 
population as a whole, there is weaker targeting of the cost burden 
toward beneficiaries with a vehicle registration fee. Furthermore, when 
considering specific transit benefits, the link between transit 
beneficiaries and those who pay the vehicle registration fee is likely 
to be weak. Automobile commuters and others driving at peak times 
benefit from reduced congestion, so for them there is a clear link. 
However, those who drive at nonpeak times and those who do not drive 
near the transit corridors also pay the vehicle registration fee while 
receiving little or no benefit. In addition, transit users who do not 
own motor vehicles will not directly pay any of the fee, although they 
could be among the largest beneficiaries. As transit users and 
businesses near transit lines, not automobile commuters, are likely to 
be the largest beneficiaries of transit services, they may advocate 
investment beyond the economically efficient level because they might 
not have to bear as large a share of the costs compared with the share 
of the benefits they would receive. 

[End of section] 

Appendix IV: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Katherine A. Siggerud, (202) 512-2834 or siggerudk@gao.gov: 

Staff Acknowledgments: 

In addition to the individual named above, Rita Grieco, Assistant 
Director; Mark Bondo; Christine Bonham; Jay Cherlow; Elizabeth 
Eisenstadt; Edda Emmanuelli-Perez; Tami Gurley; Heather Halliwell; 
Maureen Luna-Long; Susan Michal-Smith; SaraAnn Moessbauer; Josh Ormond; 
Katie Schmidt; Tina Sherman; Albert Sim; James White; Earl Christopher 
Woodard; and James Wozny made key contributions to this report. 

FOOTNOTES 

[1] PB Consult Inc., Report of the Metro Funding Panel (Washington, 
D.C., Jan. 6, 2005). The panel estimated this amount by comparing 
WMATA's projected capital and operating expenditures with its projected 
revenues for 2005 through 2015. 

[2] For the purposes of this report, "Compact jurisdictions" refers to 
the political entities that fall within the Metrorail service area and 
to which WMATA currently allocates its costs. These jurisdictions are 
the states of Maryland and Virginia; the District of Columbia; the 
counties of Montgomery and Prince George's in Maryland; the counties of 
Fairfax and Arlington in Virginia; and the cities of Alexandria, 
Fairfax, and Falls Church in Virginia. Although Loudoun County is 
within the WMATA transit district, there is currently no bus or rail 
service provided to this county; as a result, WMATA does not allocate 
any of its costs to Loudoun County. Some WMATA riders reside in 
jurisdictions to which WMATA does not allocate costs; according to a 
WMATA official, these individuals account for more than 10 percent of 
WMATA's daily riders. 

[3] We testified in July 2005 that the panel's estimate may not be 
comprehensive because it does not include the costs of WMATA's 
paratransit system, which provides services that are required under the 
Americans with Disabilities Act. See GAO, Mass Transit: Preliminary 
Views on Options for Additional Fiscal Oversight of the Washington 
Metropolitan Area Transit Authority, GAO-05-922T (Washington, D.C.: 
July 28, 2005). 

[4] See Robert Puentes, Washington's Metro: Deficits by Design 
(Washington, D.C., The Brookings Institution Series on Transportation 
Reform, June 2004); and GAO, Issues Being Faced by the Washington 
Metropolitan Area Transit Authority, CED-79-52 (Washington, D.C.: Apr. 
10, 1979). 

[5] H.R. 3496, the National Capital Transportation Amendments Act of 
2005, was introduced by Rep. Tom Davis on July 28, 2005, and was 
amended by the House Committee on Government Reform and ordered to be 
reported to the full House on October 20, 2005. 

[6] We interviewed officials at the following transit agencies: Bay 
Area Rapid Transit (San Francisco), Dallas Area Rapid Transit, 
Massachusetts Bay Transportation Authority (Boston), Metropolitan 
Transportation Authority (New York), Southeastern Pennsylvania Transit 
Authority (Philadelphia), and St. Louis Metro. 

[7] Other sources of revenue transit agencies receive include state and 
local appropriations and other funding, fares and other operating 
revenue, and federal grants. 

[8] Washington Metropolitan Area Transit Authority Compact, Pub. L. No. 
89-774 (1966). 

[9] GAO-05-922T. 

[10] The formulas that are used to allocate WMATA's operating and 
capital costs among the jurisdictions are a matter of policy determined 
by WMATA's Board of Directors and are not contained in the WMATA 
Compact. 

[11] Md. Code Ann., Transp. §§ 3-216 and 10-205. 

[12] The Northern Virginia Transportation Commission was created in 
1964 to plan and coordinate public transportation in Northern Virginia. 

[13] Va. Code Ann. §§ 58.1-815.1 and 58.1-1720. 

[14] National Capital Transportation Amendments of 1979 (also known as 
the Stark-Harris Act), Pub. L. 96-184, 93 Stat. 1320 (1980). 

[15] Report of the Metro Funding Panel. The estimates also took into 
account additional operating expenditures that would result from the 
completion of capital projects. 

[16] GAO-05-922T. 

[17] Washington Metro: Deficits by Design (June 2004). 

[18] See Maryland H.B. 1345 and S.B. 850. As of April 2006, this 
legislation was awaiting the governor's signature. 

[19] Mr. Davis represents the 11th Congressional District, which 
includes parts of Fairfax County and Prince William County in Northern 
Virginia. The House Committee on Government Reform, which also has 
jurisdiction over the municipal affairs of the District of Columbia in 
general, has oversight of WMATA because of the transit agency's unique 
position serving the nation's capital and the large level of federal 
investment in the construction of the original 103-mile Metrorail 
system. 

[20] When H.R. 3496 was introduced in July 2005, the bill provided for 
expanding the WMATA Board of Directors to include two additional board 
members appointed by the federal government, one of whom was voting and 
one of whom was nonvoting. In October 2005, the House Committee on 
Government Reform amended H.R. 3496 and revised the requirement to 
expand the WMATA Board of Directors to include four additional board 
members appointed by the federal government. 

[21] In general, dedicated taxes and fees are levied at the state or 
local level. 

[22] Under the District of Columbia Home Rule Act, the District of 
Columbia's annual budget must be approved by Congress through annual 
appropriations. See D.C. Code Ann. § 1-204.46. 

[23] Letter from Bonnie A. Kirkland, Assistant Attorney General, Office 
of Counsel to the General Assembly, Office of the Attorney General of 
Maryland, to the Honorable Ann Kaiser, Maryland General Assembly, House 
of Delegates (Feb. 17, 2006). 

[24] All transit agencies that receive urbanized area formula program 
funds from FTA must submit reports to NTD through its Web-based 
reporting system. The financial section of the NTD reporting system 
allows agencies to enter data in predetermined categories of funding, 
including but not limited to general revenues, other funds, and 
dedicated sources, including sales tax, income tax, property tax, gas 
tax, other dedicated taxes, tolls, bonds and loans, and other dedicated 
sources. The reporting system also requires transit agencies to report 
whether each source is generated by the transit agency or comes from 
the locality, state, or federal government. 

[25] Cal. Pub. Util. §§ 28952 and 29142.2. 

[26] Mass. Ann. Laws ch. 10 § 35T. 

[27] Tex. Tax Code Ann. §§ 322.001, 322.201, and 322.301. 

[28] N.Y. Transp. Law § 18-b. 

[29] N.Y. Pub. Auth. Law § 1277. See also Metropolitan Transportation 
Authority, 2005 Combined Continuing Disclosure Filings (New York, Apr. 
29, 2005). 

[30] Mo. Ann. Stat. §§ 94.600 to 94.660. 

[31] These other fees include a $1 per tire fee on the sale of new 
tires for highway use, a 3 percent tax on the total lease price on 
leased vehicles, and a $2 daily fee on the rental of motor vehicles. 
See Pa. Stat. Ann. Taxation and Fiscal Affairs, 72 § 9301. 

[32] Pa. Stat. Ann. Transportation, 74 §§ 1310 and 1310.1. 

[33] WMATA receives dedicated funding from the receipts of a Northern 
Virginia gasoline tax that equaled about 4.3 percent of all state and 
local contributions in 2003. 

[34] Other state and local funding is any state or local government 
funding that is not dedicated to transit at its source or is not 
included in the budgeting process of general revenue funds, such as 
funds for a specific project or from special state or local programs. 

[35] Directly generated funds are funds obtained from nongovernmental 
sources. These funds are derived from revenues generated by or donated 
directly to the transit agency and, if the transit agency has taxing 
authority, can include revenues from dedicated taxes and fees. 

[36] Our analyses of the 25 largest transit agencies discussed earlier 
in this report showed that 23 of those agencies received dedicated 
revenues in 2003. However, in this section of the report, we are 
analyzing the portion of those agencies' expenditures that were funded 
from dedicated revenues, including revenues received in earlier years. 
In 2003, one transit agency that did not report receiving dedicated 
revenue in 2003--the Port Authority Trans-Hudson Corporation in New 
York and New Jersey--spent dedicated funds that it received in an 
earlier year. 

[37] GAO, Long-Term Fiscal Issues: Increasing Transparency and 
Reexamining the Base of the Federal Budget, GAO-05-317T (Washington, 
D.C.: Feb. 8, 2005). 

[38] GAO, Federal Trust and Other Earmarked Funds: Answers to 
Frequently Asked Questions, GAO-01-199SP (Washington, D.C.: January 
2001). 

[39] Adequacy is assessed using a long-run elasticity or the percentage 
growth in revenue given a 1 percent increase in income levels. A long- 
run elasticity of more than one indicates that revenues grow faster 
than income (a 1 percent increase in income levels leads to a more than 
1 percent increase in revenues). 

[40] We did not analyze parking taxes, one of the panel's six potential 
revenue sources. 

[41] More specifically, this estimate includes funding for increasing 
the number of rail cars and expanding the capacity of existing stations 
to increase system capacity, but does not include funding for new 
system extensions, such as the proposed rail line to Dulles 
International Airport. However, the operating spending related to 
capital investment includes operating costs for the extension to Dulles 
and the Anacostia light rail line. In addition, this estimate was based 
on several assumptions, including that fares would increase over time 
to keep the level of costs covered by fares unchanged, that state and 
local government contributions would increase by 5.3 percent per year, 
and that the costs of MetroAccess would be covered by some other means 
than WMATA's budget. 

[42] Some of the assumptions that the panel made follow: The tax or fee 
would be assessed throughout the WMATA Compact region, except for 
Virginia's Loudoun County, and not elsewhere in Maryland or Virginia; 
each tax or fee base would grow in the future at the same rate as it 
grew in the recent past; compliance with each tax or fee would be 100 
percent; and, with one exception (parking tax), dedicating revenue from 
any source would not lead to any behavioral effects, such as reduced 
motor vehicle fuel purchases in the Compact region if some motor 
vehicle fuel tax revenues were dedicated to WMATA. 

[43] The actual tax or fee rate required in 2010 would be higher than 
the panel's estimate if the tax or fee base grew less rapidly in the 
future than in the recent past, if compliance with the dedicated tax or 
fee were less than 100 percent, or if dedicating a tax or fee led to 
substantial behavioral effects. On the other hand, the rate required 
would be lower than the panel's estimate if the tax or fee was assessed 
in all of Maryland and Virginia rather than just in the WMATA Compact 
region or if the tax or fee base grew more rapidly in the future than 
in the recent past. 

[44] The preceding section on stability and long-run revenue growth 
implicitly assumes that a source is dedicated without altering the 
amount of revenues collected or the way in which they are collected. 
This section addresses the economic implications of increasing the 
amount of revenue raised. However, state and local jurisdictions could 
choose to implement a policy somewhere in between these two cases. For 
instance, they could change the composition of revenues without 
increasing revenue collections, such as implementing a new dedicated 
tax or fee and lowering an existing tax or fee. This change in revenue 
composition would have efficiency and equity effects, although they are 
once again likely to be small. In the interest of brevity, the 
discussion presented in this text does not take into account these more 
complicated cases, although their effects can be assessed by applying 
the same reasoning. In the preceding example, the efficiency and equity 
effects of both the new source and lowered tax or fee rate should be 
considered jointly to arrive at a net effect. 

[45] Also see appendix III for a brief discussion of the issues 
surrounding the possible implementation of a regionwide tax or fee. 

[46] All new laws in the District of Columbia require congressional 
approval before taking effect. See D.C. Code Ann. § 1-206.01. 

[47] A local delegation usually consists of the state representatives 
of the districts involved in the local legislation. 

[48] The real estate tax is one of the major taxes commonly controlled 
at the local level, although localities have limited authority from the 
state to levy such taxes as recordation and sales taxes. 

[49] The panel's one-quarter of 1 percent estimate was based on the 
assumption that the federal government would make additional 
contributions to WMATA. According to the panel's assumptions, in the 
absence of an additional federal contribution, the sales tax rate 
necessary would be one-half of 1 percent. The panel's recommendation 
was based on analysis using the jurisdictions' existing sales tax 
bases, which are not identical; for example, in Virginia, groceries are 
taxed under the sales tax, while in the District of Columbia, they are 
not. The report also states that jurisdictions might be able to 
dedicate a portion of an existing tax rather than increasing a tax. 

[50] According to H.R. 3496, two of the members would be voting and two 
would be nonvoting. 

[51] An exception to this rule is emergency bills, which may be 
introduced during a recess of the council. 

[52] GAO-05-922T. 

[53] As noted earlier in this report, all transit agencies that receive 
urbanized area formula program funds from FTA must submit reports to 
the NTD. The NTD uses a Web-based reporting system for transit agencies 
to submit their reports. The financial section of the NTD reporting 
system allows agencies to enter data in predetermined categories of 
funding, including local general revenues, state general revenues, 
other funds, and dedicated sources, including sales tax, income tax, 
property tax, gas tax, other dedicated taxes, tolls, bonds and loans, 
and other dedicated sources. The reporting system also requires transit 
agencies to report whether each source is directly generated by the 
transit agency or comes from the locality, state, or federal 
government. 

[54] Alexandria, Arlington County, Falls Church, Fairfax City, Fairfax 
County, Montgomery County, Prince George's County, and the District of 
Columbia. 

[55] PB Consult Inc., Report of the Metro Funding Panel (Washington, 
D.C., Jan. 6, 2005). 

[56] As has been done elsewhere in the literature, we use the term 
"random" variations to refer to short-term variability in tax revenues 
resulting from factors other than economic fluctuations caused by the 
business cycle. 

[57] Donald Bruce, William F. Fox, and M.H. Tuttle, "Tax Base 
Elasticities: A Multi-State Analysis of Long-Run and Short-Run 
Dynamics," Southern Economic Journal (forthcoming); and Randall G. 
Holcombe and Russell S. Sobel, Growth and Variability in State Tax 
Revenue: An Anatomy of State Fiscal Crises (Westport, Conn.: Greenwood 
Press, 1997). 

[58] "Tax-Base Elasticities: A Multi-State Analysis of Long-Run and 
Short-Run Dynamics." (forthcoming) and Growth and Variability in State 
Tax Revenue: An Anatomy of State Fiscal Crises (1997). 

[59] As discussed earlier, this amount represents the panel's estimate 
of what would be needed for capital spending to renew aging components 
of the WMATA system and to add system capacity to meet growing demands, 
plus operating spending related to this capital investment. We use this 
amount to be able to show the panel's estimates of the tax or fee rate 
required from each revenue source on a consistent basis. However, we 
neither endorse the panel's estimate of how much it would cost for that 
level of capital and operating spending, which we did not review, nor 
take a position on whether this is an appropriate concept for the level 
of WMATA spending that should be covered by dedicated local revenues. 

[60] Payroll tax revenues are more stable than income tax revenues 
because nonwage income, such as capital gains, tends to vary more than 
wage income over the course of the business cycle. 

[61] Income tax revenues grow faster than income levels because of 
progressivity in the tax structure even though there is some evidence 
that as total income rises, taxable income rises less rapidly. 
Differences in taxable and total income arise because some types of 
income are exempted or taxed at lower rates, deductions and credits are 
available to filers that qualify, and not all taxable income is 
reported on income tax forms. 

[62] "Tax-Base Elasticities: A Multi-State Analysis of Long-Run and 
Short-Run Dynamics" (forthcoming). 

[63] An access fee is a fee charged to property owners whose property 
benefits in value from the location of some nearby transportation 
infrastructure, such as a transit station. It is typically charged on a 
per-square-foot basis for property within a specified distance of the 
station. 

[64] If the access fee is based on property values, not square footage, 
access fee revenue characteristics would be similar in spirit to those 
of the property tax, but with a much narrower base. 

[65] This assessment assumes that vehicle registration fees are 
assessed as a fixed fee per vehicle. A vehicle property tax that is 
assessed as a percentage of the value of the vehicle would have greater 
growth potential because tax revenues could keep pace with inflation 
and because households whose incomes increase are likely to upgrade, or 
purchase more expensive vehicles, even though the total number of 
vehicles per household does not increase. 

[66] See, for example, Martin Feldstein, "The Effect of Marginal Tax 
Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," 
National Bureau of Economic Research Working Paper No. 4496 (1993); 
James P. Ziliak and Thomas J. Kniesner, "Estimating Life Cycle Labor 
Supply Tax Effects," Journal of Political Economy, vol. 107, no. 2 
(April 1999); Jon Gruber and Emmanuel Saez, "The Elasticity of Taxable 
Income: Evidence and Implications," National Bureau of Economic 
Research Working Paper No. 7512 (2000); and the references contained 
therein. 

[67] The analysis is further complicated in that an income tax with a 
graduated rate structure (the statutory rate is higher at higher levels 
of income) might create efficiency benefits by providing implicit 
insurance to individuals. The implicit insurance is triggered when a 
household experiences a loss in income significant enough to place them 
in a lower tax bracket. The tax savings from being in a lower bracket 
helps offset the income loss. (The insurance effects might be quite 
small at the state and local level because they are greater in systems 
with more brackets and larger rate differentials.) The full efficiency 
effects of an increase in the income tax must include both the 
distortions to work decisions and the effects on implicit income 
insurance. 

[68] One offsetting factor is that lower-income drivers might tend to 
own more fuel-efficient vehicles, which would reduce the regressivity 
of a motor vehicle fuel tax. 

[69] The ability to deduct property taxes from income in computing 
income tax liability limits the extent of this offset. 

[70] A fee that is based on vehicle value would have more complex 
effects on vehicle ownership because households might substitute 
quantity for quality. For more discussion of this issue, see Erik D. 
Craft and Robert M. Schmidt, "An Analysis of the Effects of Vehicle 
Property Taxes on Vehicle Demand," National Tax Journal, vol. LVIII, 
no. 4 (December 2005). 

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