Funding Transportation Infrastructure with User Fees

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Released: February 2013

Related Topics: Infrastructure, State & Local

Authors:

  • Jack BassoChief Operating Office, American Association of State Highway and Transportation Officials
  • Tyler DuvallAssociate Principal, McKinsey & Company
 
 

Introduction

Federal surface transportation programs are intended to improve the quality, utility, and productivity of the surface transportation system by enhancing the system's safety (e.g., achieving reduced vehicle crashes, including fatalities) and operating performance (e.g., reducing congestion, increasing freight throughput etc.); and by reducing the environmental impact of surface transportation.  Although federal transportation spending is less than 2 percent of the overall federal budget, that spending—like spending in the rest of the budget—is currently on a collision course with reality. Unlike most federal programs, the federal surface transportation program has historically been funded by dedicated taxes on gasoline, diesel, and other transportation-related taxes. These taxes are deposited into the Federal Highway Trust Fund and then invested in roads, bridges, transit systems, and a variety of other surface transportation projects through state and local governments.

After being replenished by the general fund multiple times in recent years (adding billions to the federal deficit in the process), however, the Highway Trust Fund (the Fund) is currently projected to go negative again in 2015, with the negative balance growing rapidly each year after that (figure 9-1).


The 2012 federal surface transportation legislation Moving Ahead for Progress in the 21st Century Act (MAP-21) bought several years of solvency in the Fund, but did not address the long-term trajectory of the program. Going forward, it is undisputed in transportation policy circles that a new approach will be needed to sustainably fund surface transportation in the United States. The key questions that remain unanswered are these: How do we balance a looming near-term funding cliff with the long lead times associated with funding reforms that are more fundamental? And what role does the revenue policy choice play in improving transportation performance outcomes, particularly as it relates to congestion levels? If one accepts the premise that continued deficit spending to fund surface transportation projects is undesirable (some would argue this point), there are two distinct near-term options: (1) reduce federal spending to match revenues, or (2) adjust certain federal taxes in the near term. Given the growing costs to rehabilitate, maintain, and operate existing surface transportation, some experts express concern that state and local governments would not increase their own investments to fill the gap left by a shrinking federal program. Today, forty states rely on the federal government for more than 25 percent of their transportation funding.

Revenue options begin to expand when we look beyond the next two years, however. One approach that has been implemented relatively narrowly in the United States but that has achieved success in other countries is a direct road- pricing system where motorists pay fees directly to drive on certain roads (as opposed to paying taxes indirectly as they do today), potentially combined with some form of dedicated local taxes tied to specific transit projects. Economists from all backgrounds have strongly supported some form of direct pricing for roads, similar to the way other utilities are priced. In fact, Nobel Prize–winning economist William Vickrey proposed a specific road-pricing system to reduce congestion in Washington, DC, as far back as 1959 and in the New York City subway system in 1952. Vickrey said, “You’re not reducing traffic flow, you’re increasing it, because traffic is spread more evenly over time. . . . People see it as a tax increase, which I think is a gut reaction. When motorists’ time is considered, it’s really a savings” (quoted in Trimel 1996).

According to the U.S. Department of Transportation, an effective road-pricing system—once fully implemented— could generate between $38 billion and $55 billion annually in revenue while simultaneously reducing road congestion and reducing environmental impacts (U.S. Department of Transportation 2008a). Singapore’s broad use of fully electronic road pricing is one of the key reasons the World Bank perennially ranks it number one in the world in terms of logistics performance. With a population of more than 5 million and only 250 square miles of land, Singapore’s transportation system achieves free flow speeds on its expressways and arterials every day. Indeed, the key strength of such a solution is not only that it raises revenue to support surface transportation investments and operations, but also that it does so in a way that confers additional benefits including reduced congestion and pollution.

 

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