Skip to comments.Rethinking Federal Highway and Transit Funding
Posted on 05/20/2014 10:06:25 AM PDT by Tolerance Sucks Rocks
Mr. Chairman and members of the committee, thank you for inviting me to testify today regarding the federal role in highway and transit funding.
Federal policymakers are considering ways to close the large funding gap in the Highway Trust Fund. One option would be to reduce spending and downsize the federal role in transportation. That approach would encourage state governments to pursue their own innovative solutions for highways and transit, such as new types of user charges, public-private partnerships, and privatization.
Federal aid programs for highways and transit have many shortcomings. Aid redistributes transportation funds between the states in ways that are unfair and inefficient. Aid can get misallocated to low-value projects, and it distorts efficient decisionmaking by state and local governments. Also, federally funded projects are known for mismanagement and cost overruns.
Many advocacy groups support increases in federal transportation spending, but a better policy approach would be to ensure that the nation’s investments are financed, constructed, and managed more efficiently. My testimony discusses why we should decentralize transportation infrastructure to the largest extent possible.
The Good News about Highways
Congress faces important decisions regarding the Highway Trust Fund (HTF), which currently has a large gap between revenues and spending. At the same time, the nation faces challenges in upgrading its aging highways, bridges, and other infrastructure.
Nonetheless, I am skeptical of the doom and gloom from many groups that want to increase federal infrastructure spending. Here are a few salient points:
Despite these items of good news, it is true that America faces many transportation challenges. Highway congestion in many regions imposes a large cost on individuals and the economy. Highways and bridges are aging, and the gas tax will fall short as a highway financing mechanism in the years ahead. So it is important for policymakers to consider major changes in the way that our infrastructure is managed and financed.
Problems with Federal Transportation Spending
There are frequent calls for increased federal spending on highways and other types of infrastructure. But there are many shortcomings of federal aid that should be considered:
While advocacy groups claim that more federal aid would boost economic growth, these sorts of problems suggest otherwise. Transportation expert Clifford Winston of the Brookings Institution recently noted that current “transportation policy is so inefficient that infrastructure spending fails to generate the large promised benefits.”21
A mistake that advocates of transportation aid often make is to assume that common problems are automatically “national priorities” that need federal action. But as a believer in constitutional federalism, President Reagan noted the fallacy of those sorts of claims in a 1987 executive order:
It is important to recognize the distinction between problems of national scope (which may justify federal action) and problems that are merely common to the states (which will not justify federal action because individual states, acting individually or together, can effectively deal with them).22
It is true, for example, that traffic congestion is a problem facing many cities across the nation. It is a common problem. But that does not mean that there has to be a top-down solution imposed from Washington.
Downsizing the Federal Role in Highways and Transit
Congress faces important decisions regarding the Highway Trust Fund (HTF). Under the Congressional Budget Office baseline, combined revenues to the highway and transit accounts will be about $39 billion in coming years, while outlays are $53 billion this year and rising after that.23That leaves a large gap of at least $14 billion in annual funding.
In the past, such gaps have been filled with federal fuel tax increases, and some groups are proposing that approach this time around. The Obama administration has proposed a short-term transportation funding fix based on corporate tax revenues. Others have proposed a new federal transportation tax based on vehicle miles traveled.24
However, increasing federal taxing and spending is the wrong way to go. That approach would exacerbate the current problems of federal aid, and it would probably make the Byzantine sprawl of top-down mandates and complex allocation formulas even worse. Also, “fixing” the HTF by raising federal revenue would miss an opportunity to empower the states and private sector to pursue their own transportation solutions.
A bipartisan commission created by Congress produced a report in 2008 called “Transportation for Tomorrow.”25 A minority statement from that report by former Secretary of Transportation Mary Peters and two other commissioners made the case for reducing the federal role in transportation, not increasing it:
increased financial participation will come with additional procedural requirements, greater delays in project decision-making, more special interest programs and projects and unjustified federal involvement in issues that are best treated as local policy matters. In contrast, revenues collected at the state and local levels allow greater flexibility, responsiveness, and accountability to local transportation consumers. Planning and construction flexibility is much greater without the onerous procedural requirements and ‘one size fits all’ approach that come with federal funds.
Accountability is also improved by state and local funds because those agencies have a stronger incentive to be accountable to their voters than to the federal government, which can often be blocked from acting through political intervention. Taxpayers are less inclined to hold state and local officials accountable for the careful spending of federal funds, in part because these funds are perceived (often incorrectly) to come from outside the state.26
Secretary Peters and her colleagues hit the nail on the head. Reducing federal intervention should be seen as a positive shift for transportation, not a negative one. They were right to argue that it is our “… federal-centric funding and regulatory structure that stifles creativity and innovation at the state and local levels.”27
A straightforward solution to the HTF funding gap would be to reduce spending to match current revenues. State governments would be free to fill the void as they choose—by adjusting their state budgets, raising their fuel taxes, adding electronic tolling to some highways, or pursuing more privatization of their transportation systems. Many transportation experts think that the future of highway financing involves systems that charge users based on vehicle miles traveled, and the states should be free to experiment with such approaches.28
Congress can help the states improve their highway finances by reducing costly regulations, such as repealing Davis-Bacon rules. A 2011 Joint Economic Committee study found that these rules inflate wages on highway construction projects by an average of 22 percent, while also slowing projects and piling paperwork on contractors.29 Congress should also lift the ban on tolling of the Interstates—which, after all, are owned by state governments.30 The administrative costs of modern electronic tolling are a small fraction of the costs of old-fashioned toll booths.31
A good way to cut HTF spending to close the gap with revenues would be to end federal aid for transit and other non-highway spending. Transit formula grants from the HTF are about $9 billion annually.32 The idea behind the Highway Revenue Act of 1956, which established the HTF, was that federal fuel taxes would be user charges to fund the building of the Interstate Highway System. But from the 1970s onward, fuel taxes have been siphoned off for non-highway purposes, particularly with the creation of the transit program in 1982. About one-quarter of HTF spending today is for non-highway purposes.33
Historically, citizens strongly approved of the state gas taxes that funded the early automobile roads because they could clearly see the benefits.34 But the link between user benefits and road charges has partly broken down today. With the diversion of federal gas taxes to transit, bicycle paths, and many other non-highway uses, the public is more skeptical about gas tax increases.35 As Mary Peters and colleagues noted: “The fact that the public has overwhelmingly opposed an increase in federal fuel taxes since 1993 represents a lack of investor confidence in current transportation policy.”36
Solutions for America’s urban transit should be found at the state, local, and private levels. Before the 1960s, most urban bus and rail services in America were privately owned and operated. But that ended with the passage of the Urban Mass Transportation Act of 1964. The Act provided subsidies only to government-owned bus and rail systems, not private systems.37 That prompted state and local governments across the country to take over the private systems, swiftly ending more than a century of private transit investment in America’s cities.
That is unfortunate because government-run bus and rail systems miss out on the innovations and cost savings that entrepreneurs could bring. Removing federal aid from the transit equation would have the beneficial effect of encouraging cities to experiment with private transit options. It would also remove current distortions that federal aid creates for local decisionmaking about transit.
After dealing with the immediate HTF funding gap, Congress should consider the approach taken in the Transportation Empowerment Act proposed by Senator Mike Lee and Representative Tom Graves. The bill would devolve most surface transportation taxing and spending to the states by cutting the federal gasoline tax from 18.4 cents to 3.7 cents over five years. The federal role in transit aid would be eliminated, and federal aid would be focused on the Interstates and roads owned by the federal government.
Such a devolution would be an opportunity to create a more efficient transportation system.38 Transportation expert Robert Poole notes that “a key rationale for devolution is that the funding approach developed to build the Interstate system is now obsolete. That approach transfers large sums from larger and faster-growing states to smaller and slower-growing states … That is exactly backwards of what a real user-fee system would do—which is to generate and spend large sums in the places with huge problems of congestion and insufficient highway capacity.”39
The answer to America’s infrastructure challenges is not greater federal intervention, but more innovation by the states, including greater use of privatization and public-private partnerships (P3s).
There has been a worldwide trend toward infrastructure privatization, and hundreds of billions of dollars of assets have been privatized in high-income nations.40 What spurred the trend? The Organization for Economic Cooperation and Development (OECD) says that concern about public infrastructure being misallocated and mismanaged has “led to a reconsideration of the role of the state in infrastructure provision.”41
P3s differ from traditional government contracting by shifting various elements of design, finance, operations, maintenance, and project risks to the private sector. In a 2011 report, the OECD found a “widespread recognition” around the world of “the need for greater recourse to private sector finance” in infrastructure.42
Unfortunately, the United States lags behind nations such as Canada, Britain, and Australia in P3s and privatization. Few of the top firms doing transportation P3s around the world are American, and only a couple dozen projects out of hundreds are in the United States.43
If we were to embrace P3s and privatization, there would be a large amount of private capital available to aid state governments in upgrading their transportation infrastructure. The Congressional Research Service said “it is widely believed that there are hundreds of billions of dollars of private monies available globally for infrastructure investment, such as surface transportation.”44
A number of U.S. states have moved ahead with P3s, including Texas, Florida, California, and Virginia.45 In Virginia, a partnership of Transurban and Fluor built and is now operating electronic toll lanes along 14 miles of the Capitol Beltway (I-495). Virginia kicked in one-fifth of the project’s $2 billion cost, and the rest was financed with debt and private equity.46 The lanes were completed on time and on budget in 2012. A government official overseeing the project lauded the private firms for their efficient and nonbureaucratic project management, which is “not the way government works typically.”47
Full privatization is also possible for some transportation projects. The Dulles Greenway, for example, is a privately owned toll highway in Northern Virginia completed in the mid-1990s with $350 million of private debt and equity.48 The highway did not receive government subsidies, and today the owners even pay local property taxes and the costs to police the 14-mile artery.
Elsewhere in Virginia, FIGG Engineering Group and partners financed and constructed the $142 million South Norfolk Jordan Bridge over the Elizabeth River. The bridge opened in 2012, and its cost will be paid back to investors over time with toll revenues.49 FIGG had approached the local government to say that they could tackle the project without any federal, state, or local government funds. FIGG raised the money, built the bridge, and has worked hard to partner with the local community with such activities as walking and jogging events across the bridge.
FIGG is an interesting company, known for its innovative bridge designs. It is expected to start construction this year on another fully private bridge—the Cline Avenue bridge in East Chicago.50 The firm will be raising up to $250 million in private funds for the bridge, and then will pay off the cost with electronic toll revenues over time.
Hopefully, such entrepreneurial efforts can play a greater role in America’s transportation future because there are many advantages of partial and full privatization. When private businesses are taking the risks and putting their profits on the line, funding is more likely to be allocated to high-return projects and completed in the most efficient manner.
Foreign experience indicates that P3s are more likely to be completed on time and on budget than traditional government projects. An Australia study compared 21 P3 projects in that country with 33 traditional projects and found: “PPPs demonstrate clearly superior cost efficiency over traditional procurement … PPPs provide superior performance in both the cost and time dimensions, and … the PPP advantage increases (in absolute terms) with the size and complexity of projects.”51
A Canadian expert testified in April to the House that the large P3 effort in that country has “focused primarily on transferring construction and asset availability risks to the private sector concessionaire, in an attempt to stem the trend of infrastructure mega-projects being plagued by endemic cost overruns and delays.”52 So far, the effort has been a success: “Canadian PPPs have a strong reported record of projects coming in on time and on budget.”513
At the April House hearing, the head of one of the provincial P3 agencies in Canada said that “competition and the profit motive can lead to startling results, where the winning proposal provides solutions that the public owner never contemplated. This happens over and over again.”54 He said Canadian experience shows that P3s create more discipline in the planning stages of large projects, they are more likely to be completed on time and on budget, and they generate benefits from life-cycle asset management.
On the last point, a Brookings Institution study noted that traditional government projects decouple construction from the future management of facilities, resulting in contractors having little incentive to build projects that minimize long-term costs.55 But P3s “bundle construction, operations, and maintenance in a single contract. This provides incentives to minimize life-cycle costs.”56
The publisher of Public Works Financing, William Reinhardt, notes that the “contracting approach used in P3s guarantees the construction price and project completion schedule of large, complex infrastructure projects that often befuddle state and local governments.”517 He says that P3s can experience capital cost savings of 15 to 20 percent compared to traditional government contracting.
Looking ahead at U.S. transportation challenges, “the problem is not how to raise a certain level of revenue, but rather how to develop a policy framework that will unleash efficient capital investments, empower consumers, reduce congestion, stimulate technology improvements, improve America’s quality of life, and support the increased productivity of American businesses.”58
The way to do that is to reduce hurdles to entrepreneurship and more private investment. Private infrastructure is not a new or untried idea. Urban transit services in America used to be virtually all private.59 And before the 20th century, private turnpike companies built thousands of miles of toll roads.60 The takeover of so much infrastructure by governments in the 20th century was a mistake, and policymakers should focus on correcting that overreach.
Thank you for holding these important hearings.
1 Author’s calculation based on gross fixed investment data from the Bureau of Economic Analysis, National Income and Product Accounts, Table 1.5.5, www.bea.gov. See Chris Edwards, “Infrastructure Investment,” Cato Institute, August 2013, www.downsizinggovernment.org/infrastructure-investment.
2 The Highway Trust Fund is supported by the 18.4 cent per gallon gasoline tax, a 24.4 cent diesel tax, and other charges on trucks and tires.
3 Author’s calculations over 1982-2012 based on data in William McBride, “Federal Gas Tax Hikes Proposed by Senator Carper,” Tax Foundation, April 30, 2014.
4 Federal Highway Administration data is available atwww.fhwa.dot.gov/bridge/deficient.cfm.
5 Jeffrey R. Campbell and Thomas N. Hubbard, “The State of Our Interstates,” Federal Reserve Bank of Chicago, July 2009.
6 Jeffrey R. Campbell and Thomas N. Hubbard, “The State of Our Interstates,” Federal Reserve Bank of Chicago, July 2009.
7 Fatality rates and other transportation indicators are examined in David T. Hartgen, et al, “Are Highways Crumbling? State and U.S. Highway Performance Trends, 1989-2008,” Reason Foundation, February 2013.
8 Texas A&M Transportation Institute, “Annual Urban Mobility Report,” 2012, Tables 9 and 10. Available at http://mobility.tamu.edu/ums/.
9 Ronald Utt, “Federal Highway Program Shortchanges More Than Half the States,” Heritage Foundation, April 18, 2011.
10 Pengyu Zhu and Jeffrey R. Brown, “Donor States and Donee States: Investigating Geographic Redistribution of the U.S. Federal-Aid Highway Program 1974-2008,” Boise State University, January 1, 2013.
11 Tad DeHaven, “Privatizing Amtrak,” Cato Institute, June 2010, www.downsizinggovernment.org/transportation/privatizing-amtrak.
12 Author’s calculation for 2005 to 2009 based on Table 1 in Robert S. Kirk, “The Donor-Donee State Issue in Highway Finance,” Congressional Research Service, June 13, 2011.
13 Pengyu Zhu and Jeffrey R. Brown, “Donor States and Donee States: Investigating Geographic Redistribution of the U.S. Federal-Aid Highway Program 1974-2008,” Boise State University, January 1, 2013.
14> Chris Edwards, “Government Cost Overruns,” Cato Institute, March 2009, www.downsizinggovernment.org/government-cost-overruns.
15 For background, see the Boston Globes “Easy Pass” series of reports by Raphael Lewis and Sean Murphy, www.boston.com/globe/metro/packages/bechtel.
126 For example, see Allen Consulting Group and the University of Melbourne, “Performance of PPPs and Traditional Procurement in Australia,” November 30, 2007.
17 Bipartisan Policy Center and Eno Center for Transportation, “The Consequences of Reduced Federal Transportation Investment,” September 2012, p. 17.
18 Randal O’Toole, “Urban Transit,” Cato Institute, June 2010, www.downsizinggovernment.org/transportation/urban-transit.
19 Randal O’Toole, “High-Speed Rail,” Cato Institute, June, 2010, www.downsizinggovernment.org/transportation/high-speed-rail.
20 See “Issues” under “Lobbying” at www.opensecrets.org.
21 Clifford Winston, “We Don’t Need Another ‘Bridge to Nowhere’,” Boston Globe, April 13, 2014.
22 Ronald Reagan, Executive Order 12612, October 26, 1987, www.reagan.utexas.edu/archives/speeches/1987/102687d.htm.
23 Congressional Budget Office, “Updated Budget Projections: 2014 to 2024,” April 2014. See “Highway Trust Fund Accounts.”
24 For example, the National Surface Transportation Infrastructure Financing Commission of 2009 proposed adding a federal vehicle miles tax to raise funds. See http://financecommission.dot.gov/.
25 National Surface Transportation Policy and Revenue Study Commission, “Transportation for Tomorrow,” January 15, 2008, http://transportationfortomorrow.com.
26 National Surface Transportation Policy and Revenue Study Commission, “Transportation for Tomorrow,” January 15, 2008, http://transportationfortomorrow.com. See “Minority Views.”
27 National Surface Transportation Policy and Revenue Study Commission, “Transportation for Tomorrow,” January 15, 2008, http://transportationfortomorrow.com. See “Minority Views.”
28 For example, see Richard Geddes, Cornell University and American Enterprise Institute, Testimony to the House Committee on the Budget, April 24, 2013. And see Randal O’Toole, “Ending Congestion by Refinancing Highways,” Cato Institute Policy Analysis no. 695, May 15, 2012.
29 Republican staff of the Joint Economic Committee, “Highway Robbery: The Davis-Bacon Act Increases Costs, Decreases Employment,” March 31, 2011.
30 For a discussion of ideas on tolling some Interstates, see Robert Poole, “Interstate 2.0: Modernizing the Interstate Highway System via Toll Finance,” Reason Foundation, September 2013. The 2012 highway bill (MAP-21) allowed for the tolling of new capacity on the interstates. For a discussion, see Robert S. Kirk, “Tolling of Interstate Highways,” Congressional Research Service, February 13, 2013.
31 Testimony of Robert Poole, Reason Foundation, before the House Committee on the Budget, April 24, 2013.
32> Additional transit grants are provided from federal funds. See Budget of the U.S. Government, Analytical Perspectives (Washington: Government Printing Office, March 2014), Table 29.1.
33 Testimony of Robert Poole, Reason Foundation, before the House Committee on the Budget, April 24, 2013.
34 Jonathan Williams, “Paying at the Pump,” Tax Foundation, October 2007.
35 For a discussion of some of the non-road funding, see Emily Goff, “Next Highway Bill Should End the Transportation Alternatives Program,” Heritage Foundation, May 2, 2014. And see Emily Goff, “Congress Should Reprioritize Highway Trust Fund Money to Improve Mobility,” Heritage Foundation, April 22, 2013.
36 National Surface Transportation Policy and Revenue Study Commission, “Transportation for Tomorrow,” January 15, 2008, http://transportationfortomorrow.com. See “Minority Views.”
37 National Research Council, “Contracting for Bus and Demand-Responsive Transit Services,” Special Report 258, 2001, Chapter 2.
38 For a discussion of devolution, see Ronald Utt, “Turn Back Transportation to the States,” Heritage Foundation, February 6, 2012.
39 Robert Poole, “Letting States Keep Gas Tax Money, Opt Out of the Highway Trust Fund,” Reason Foundation, April 29, 2009.
40 Organization for Economic Cooperation and Development, “Pension Funds Investment in Infrastructure: A Survey,” September 2011. For data on global privatization of all types, see William L. Megginson, “Privatization Trends and Major Deals in 2012 and 1H2013,” in The PB Report 2012, www.privatizationbarometer.net.
41 Organization for Economic Cooperation and Development, “Pension Funds Investment in Infrastructure: A Survey,” September 2011.
42 Organization for Economic Cooperation and Development, “Pension Funds Investment in Infrastructure: A Survey,” September 2011.
43 Public Works Financing, October 2011, p. 3, www.pwfinance.net.
44 Robert S. Kirk and William J. Mallett, “Funding and Financing Highways and Public Transportation,” Congressional Research Service, September 23, 2013, p. 23.
45 A recent summary of P3 highway projects is in Joseph Kile, Congressional Budget Office, “Public-Private Partnerships for Highway Projects,” March 5, 2014.
47 Comments of Ron Kirby, Washington Council of Governments, Public Works Financing, December 2012, p. 21.
50 Keith Benman, “Cline Ave. Bridge Construction Could Start Next Year,” www.nwitimes.com.
51 Allen Consulting Group and the University of Melbourne, “Performance of PPPs and Traditional Procurement in Australia,” November 30, 2007.
52 Testimony of Dr. Matt Siemiatycki, University of Toronto, before the House Committee on Transportation and Infrastructure, April 8, 2014.
53 Testimony of Dr. Matt Siemiatycki, University of Toronto, before the House Committee on Transportation and Infrastructure, April 8, 2014.
54 Testimony of Dr. Larry Blain, Partnerships British Columbia, to the House Committee on Transportation and Infrastructure, April 8, 2014.
55 Eduardo Engel, Ronald Fischer, and Alexander Galetovic, “Public-Private Partnerships to Revamp U.S. Infrastructure,” Brookings Institution, February 2011.
56 Eduardo Engel, Ronald Fischer, and Alexander Galetovic, “Public-Private Partnerships to Revamp U.S. Infrastructure,” Brookings Institution, February 2011.
57 William G. Reinhardt, “The Case For P3s in America,” Public Works Financing, January 2012.
58 National Surface Transportation Policy and Revenue Study Commission, “Transportation for Tomorrow,” January 15, 2008, http://transportationfortomorrow.com. See “Minority Views.”
59 Randal O’Toole, “Urban Transit,” Cato Institute, June 2010, www.downsizinggovernment.org/transportation/urban-transit.
60 Gabriel Roth, “Federal Highway Funding,” Cato Institute, June 2010, www.downsizinggovernment.org/transportation/highway-funding.
If the best a state can get back is what they paid in--and we know that through inefficiencies of money transfers, some of that is spent on overhead between various government agencies--what's the point in going through the fed?
And as pointed out in the article, Texas pays in a lot more than it receives (no doubt politics coming into play), why shouldn't states just keep and maintain their own roads and infrastructures?
Maybe we should erect toll gates across the land, set the toll high enough that people won't be able to travel from state to state, cool.
Yep, libs are libs. Cut useless regulatory offices in rural areas. Shut them down. The administrators in them arent doing anything now anyway. Cut government teacher and administrator salaries. Lay off socialist workers.
I believe that this direction was implied by the speaker.
Best way to improve how infrastructure dollars are spent would be to repeal the Davis-Bacon act.
Why should public construction and maintenance contracts cost significantly more simply because they are government contracts?
I’m with him on Bacon-Davis, of course. User fees (i.e., tolls) are nothing more than Crony Capitalism, since highway operators MUST work hand-in-hand with the government (i.e. give someone $1B and they can start up a complete airline - try to build a toll road with that, forget it, unless the government grabs the land for you - people will hold out otherwise).
But, at this point, I have enough money to pay whatever they wind up charging, and so will my kids, so what the hell, I’m done fighting this battle here - LET THE TOLLS BEGIN!!