The best way to understand highway funding is to think of three concentric circles.
Concentric Circle #1: Fuel Taxes
Thanks to the efforts of the Better Roads Movement in the post-World War I period, many states have constitutional amendments that restrict the use of fuel tax money for highways only. Those who managed to escape this effort of the highway lobby ended up with similar statutory restrictions on fuel tax use.
The federal fuel tax was cracked by Amtrak in 1974, and the crack was widened in 1980. But the lion’s share of federal fuel taxes go to the Highway Trust Fund.
It would be wonderful if the contents of Concentric Circle #1 could pay the total cost of highway construction and maintenance, but it can’t. More money is needed.
Concentric Circle #2: Other Transportation Taxes
Many states have motor vehicle excise taxes, a sort of property tax on cars. There are state licensing fees for cars and trucks. There are taxes and fees galore in different states, and while some of them can be spent on ports, rail, transit, environmental abatement and port facilities, the lion’s share goes to highways.
It would be wonderful if the contents of Concentric Circles #1 and #2 could pay the total cost of highway construction and maintenance, but they can’t. Still more money is needed.
Concentric Circle #3: The General Fund
We all know about the federal income tax. Most states have a broad-based tax such as a sales tax or income tax. This money can be used for anything, but in every state the legislature appropriates some money for highway construction and maintenance out of the general fund. Here transportation needs compete with education, welfare and a whole lot of other state needs, so the battles can be savage.
When you average a lot of numbers you can lose sight of each number’s individual uniqueness. So when I say that an average of 58% of highway funding comes from state and federal general funds, that covers a multitude of higher and lower numbers. But it’s a fact.
The contents of this circle are a subsidy, pure and simple. This subsidy permits you to drive on the public highways and not pay what a cost accountant would deem “your fair share”.
If you truly want highways to be funded from the contents of Concentric Circles #1 and #2 -- i.e. by “user fees” and “subsidy-free” -- you’ll have to raise the combined federal and state fuel taxes to $3 per gallon to pay for it. This will effectively destroy the trucking industry and force shippers to move goods by rail. It will also take the ability to own and operate a car out of the hands of millions of Americans, who will actually be forced to rub shoulders with their neighbors on buses and trains.
But it gets even worse: Transportation taxes will never go down.
Every time you build a new highway or increase capacity on an old one, you increase the maintenance base of your system. That means the costs of maintaining your highway system will always increase. And that means your transportation tax burden will always increase. You’re on a treadmill to penury unless you find a way to step off. There are two ways: triage and privatization.
Triage
Have you ever seen a state remove the number from a highway and turn it over to a county or municipality? It does happen on occasion. Some state highway departments have the authority to give and take highways at will. In other states the legislature makes the call, either consulting with the highway department or dictating to it.
But this merely shifts the burden elsewhere. Most states have formulae for handing out the contents of Concentric Circles #1 and #2 to counties and municipalities. But these monies get mixed with property tax revenue and other county and city taxes to maintain non-state highways. Somebody’s taxes will still go up.
Another method of triage is to tear out a highway. This has only been done in two places that I know of. In Portland, Oregon, a short freeway was demolished to make way for an urban park along the Willamette River. In San Francisco a freeway was demolished because it was both an eyesore and was badly damaged in the 1989 earthquake.
I don’t see roads being torn out on a massive scale in my lifetime.
Old Privatization Paradigm: The “Closed” Financial System
The Pennsylvania Turnpike was built in the Thirties on the model of the German autobahns. It had no speed limit and bypassed the major cities.
After World War II, New Jersey, Ohio, Indiana and Illinois linked up to the Pennsylvania Turnpike and spent a decade building a toll limited access highway to permit people to go from New York to Chicago at high speed without encountering a traffic light. People gladly paid for the privilege.
To avoid complaints that people were paying twice -- once at the toll booth and again at the gas pump -- the highways were built on a “closed” financial system. The toll highway authority was authorized by the state legislature to issue revenue bonds based on future revenues to be generated by tolls and by leases from gas stations and restaurants at the service plazas. No tax money was used. (A member of the authority that owns the Atlantic City Expressway toll road once commented to me, “Owning and operating a toll road is like having a license to print money.”)
Some of these toll authorities were authorized to exist in perpetuity, and others were to be reviewed by the legislature every time a bond issue was redeemed.
When the National Interstate and Defense Highway Act of 1956 was passed, the federal government forbade the use of Highway Trust Fund money on any toll road, even if it carried an interstate number. This created an interesting situation in Connecticut.
In 1975, a bridge on the Connecticut Turnpike collapsed into a river, killing nearly 100 people. An engineering study showed the cost of fixing up the basic infrastructure to be in the billions and the cost of expanding the highway to be even higher. You may remember the cost of money in the Carter era, which is why the state thought that authorizing a new bond issue for the turnpike would be a mistake. So the state legislature violated the principle of a closed financial system and appropriated enough money to call the remaining bonds, dissolve the turnpike authority and take the tolls off the turnpike. This opened it up for Highway Trust Fund money because it was Interstate 95, and the federal-state split in those halcyon days was 90-10. The Connecticut congressional delegation went to Washington with palms outstretched and brought home enough highway pork to rebuild Interstate 95 on the federal nickel.
New Privatization Paradigm: The “Mixed” Financial System
Virginia, Florida, Texas, Colorado and California have been building toll roads where the principle of “toll equity” permits mixing gas tax money with toll income. These toll highways permit motorists to bypass badly congested suburban areas and charge a premium on this based on time of day. It is a “mixed” financial system, which normally would have people up in arms because they are in fact paying for the highway twice. But the roads have become popular enough that Texas is considering building an entirely new statewide network using this principle.
The Future
The ISTEA law now permits states to charge tolls on interstate highways. No state has done this because of the political firestorm that would develop, but more and more it is being acknowledged by state highway departments that future limited access highways will carry tolls. Someday a state will be forced to put tolls on an existing freeway to avoid yet another tax hike caused by perpetually climbing maintenance bills. Like it or not, it’s where we’re headed.
The free lunch is about to end.
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