National Academies Press: OpenBook

The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 (2006)

Chapter: 3 Evaluating the Present Finance System

« Previous: 2 Present Finance Arrangements
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Suggested Citation:"3 Evaluating the Present Finance System." Transportation Research Board. 2006. The Fuel Tax and Alternatives for Transportation Funding: Special Report 285. Washington, DC: The National Academies Press. doi: 10.17226/11568.
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3
Evaluating the Present Finance System

This chapter is a summary of evidence relevant to evaluating existing highway and transit finance arrangements. Chapter 1 observed that the finance system ought to be judged on the basis of its effect on the performance of the transportation system. The measure of performance is the benefits derived from highways and transit in return for their costs. The elements of the finance system are the fees users pay, sources of funds, and the rules and practices that govern spending decisions. Each of these elements influences performance. User fees influence whether facilities are used efficiently because they discourage trips that travelers value little in comparison with the cost of providing them. Also, the revenue available from user fees and other sources is a constraint on decisions to build and upgrade facilities. If existing facilities are inefficiently operated (that is, if they are producing net benefits that are less than they could produce with better management or pricing), if capital spending is not being reliably directed to high-payoff projects, or if low-payoff projects are receiving funds, then the finance system is not giving travelers and transportation agencies the feedback that a well-designed system could provide to guide decisions.

As Chapter 1 also described, in political discussions the transportation finance problem is defined primarily as a problem of revenue adequacy, and proposals for new finance arrangements commonly take the form of packages of revenue enhancements designed to meet a target.1 The effect of finance on performance

1

For example, a 2004 state revenue proposal was reported as follows: “[The governor] proposed raising nearly $250 million for transportation projects throughout the state … by increasing fees and fines on speeders, drunk drivers and anyone who owns a car. Under the plan, … vehicle registration fees would jump from $81 to $128 every two years for most cars and from $108 to $180 for larger cars and SUVs. Moving violations would carry a $50 surcharge…. And a conviction for drunken driving would come with … an extra $200 fee. The plan would also dedicate taxes on rental cars entirely to transportation projects…. Together with previously announced plans to increase driver’s license fees

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Suggested Citation:"3 Evaluating the Present Finance System." Transportation Research Board. 2006. The Fuel Tax and Alternatives for Transportation Funding: Special Report 285. Washington, DC: The National Academies Press. doi: 10.17226/11568.
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usually has not received explicit consideration. Public officials have, however, generally respected certain historical principles in developing finance arrangements. These include the practice of user fee finance (motorists pay special taxes according to their use of roads, and revenue from these taxes covers highway spending); trust funds to keep track of the balance between fee revenue and spending; cost allocation rules that dictate higher charges for heavy than for light vehicles; and a division of revenue-raising responsibility and spending authority among the federal, state, and local governments. The question this chapter addresses is whether the principles that public officials rely on have led to finance arrangements that promote good performance.

Alternative sets of principles for transportation finance are in use or have been proposed. Other U.S. transportation modes follow different practices with respect to reliance on user fees and federal involvement in funding (see Table 2-6 in Chapter 2). It is probable that the performance of these modes would be greatly altered if they were to adopt finance systems more similar to the one used for highways. In most other countries, no connection exists between highway spending and the revenues generated by fuel taxes and vehicle fees, and it has been proposed that the United States follow the more common practice internationally in this regard. Finally, proposals for expanded use of tolling and for road use metering and charging, which will be examined in Chapter 5, represent fundamentally different finance practices.

A confident evaluation of the effect of present finance arrangements on performance is not possible with available information. Transportation agencies seldom conduct economic evaluations of their operations or of completed capital projects (GAO 2005). There have been few analyses of how changes in the structure of highway user fees changed users’ behavior or of how the practice of trust fund finance in highways or other modes has influenced total spending and project selection. Therefore, only fragmentary evidence can be cited in this chapter, and conclusions are tentative. Better information derived from systematic evaluations of finance practices will be necessary to guide successful policy reforms.

The first section below reviews criteria that have been applied for evaluating revenue sources for government-owned highways and transit. The next two sections review evaluations of the overall performance of the U.S. highway and transit industries from the standpoint of economic efficiency—that is, whether the level of spending is justified, whether capital spending has been directed toward the projects with the best returns, and whether existing capacity is efficiently

and collect more taxes from corporations, the proposal would pump an additional $266 million into the transportation trust fund” (Montgomery 2004). This perspective also was expressed in congressional testimony by the Executive Director of the American Association of State Highway and Transportation Officials (AASHTO) on the federal-aid program: “needs continue—by anyone’s measures—to far outstrip available … resources…. AASHTO is seeking a substantial increase in funding … for both highway and transit programs…. The challenge is how to fashion a funding solution that can achieve these goals and garner the bipartisan support needed for enactment” (Horsley 2002).

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Suggested Citation:"3 Evaluating the Present Finance System." Transportation Research Board. 2006. The Fuel Tax and Alternatives for Transportation Funding: Special Report 285. Washington, DC: The National Academies Press. doi: 10.17226/11568.
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managed. These evaluations provide evidence on whether the institutions and practices that govern finance have tended to promote prudent spending.

The fourth section examines how certain features of the existing finance system, including user fees, the practice of dedicating revenues from users to specified purposes, and the federal structure of the system, may affect government transportation programs. These features are relevant because they influence the cost-effectiveness of spending today and because they would require revision if new funding sources are introduced.

CRITERIA FOR EVALUATING FUNDING SOURCES

A standard set of criteria has evolved in past evaluations of tax alternatives and sources of funds for public infrastructure programs. Box 3-1 shows criteria from two sources, the Oregon Road User Fee Task Force study described in Chapter 1 and a study of funding alternatives prepared for the state departments of transportation through the National Cooperative Highway Research Program (NCHRP). The criteria proposed in the NCHRP study were derived from a review of about a dozen tax studies carried out by state governments mainly in the 1980s. The criteria in all the studies involve revenue adequacy, administrative feasibility or cost, and some fairness or equity concept. All the studies seem to accept as a premise that a dedicated revenue source is sought; that is, that transportation expenditures are to be funded by revenue from identified taxes or fees.

These lists together contain all the relevant considerations, but definition and application of some of the criteria have been difficult. Equity or fairness is given diverse and sometimes subjective definitions. As noted in Chapter 1, the concept of efficiency often is vaguely defined or missing. (It is missing from the Oregon study’s list, even though the study recommends congestion pricing.) Few if any of the original studies attempt to quantify efficiency impacts of alternative transportation tax or fee schemes.

The difficulty that governments have experienced in defining measures of fairness and efficiency that provide useful direction on highway funding is illustrated by the highway cost allocation studies. These studies have been conducted periodically since at least the 1950s by the federal government and by many states to determine the relative taxes or fees that should be charged to different classes of vehicles—in particular, to large trucks. To establish criteria for evaluating the federal highway user fee schedule, the federal studies have sought to follow the declaration of policy in the 1956 highway act, which created the Federal Highway Trust Fund: “if it hereinafter appears … that the distribution of the tax burden among the various classes of persons using the Federal-aid highways, or otherwise deriving benefits from such highways, is not equitable, the Congress shall enact legislation in order to bring about … such equitable distribution” (Highway Revenue Act of 1956, P.L. 627, June 29, 1956, Section 209). The federal study authors

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Suggested Citation:"3 Evaluating the Present Finance System." Transportation Research Board. 2006. The Fuel Tax and Alternatives for Transportation Funding: Special Report 285. Washington, DC: The National Academies Press. doi: 10.17226/11568.
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BOX 3-1

Examples of Criteria Used to Evaluate Highway Funding Alternatives

Oregon Road User Fee Task Force (Whitty 2003, 23)

(The task force was charged by the legislature with designing new revenue sources to support Oregon roads and replace the existing sources.)

Criteria for new revenue sources:

  • Any new revenue system should be founded on the principle that users pay.

  • Revenue sources traditionally the province of local government should not be usurped by the state.

  • New sources should generate sufficient revenue to replace the fuel tax.

  • Financing should be transparent: fees should be visible to payers and the public should know how much they are paying and how rates are calculated.

  • The costs of collection and of payers’ record keeping should not be substantial financial burdens.

  • Revenue collection must be enforceable.

  • The new system must support all roads of the state and local governments.

  • Any new revenue source should be acceptable to the public.

NCHRP Report 377: Alternatives to Motor Fuel Taxes for Financing SurfaceTransportation Improvements (Reno and Stowers 1995, 49–51)

Criteria for evaluating tax alternatives (derived from a review of tax studies produced by 13 states):

  • Adequacy:

    • Yield in relation to need, uses, investment requirements

    • Responsiveness to inflation

    • Stability of revenues over time

    • Potential for needed increases

  • Equity:

    • With respect to costs occasioned

    • With respect to ability to pay and benefits received

    • By geographic area

    • In perception as well as in fact

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Suggested Citation:"3 Evaluating the Present Finance System." Transportation Research Board. 2006. The Fuel Tax and Alternatives for Transportation Funding: Special Report 285. Washington, DC: The National Academies Press. doi: 10.17226/11568.
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  • Efficiency:

    • Bringing about better decisions on travel and investments

    • Paying costs imposed on others

    • Creating disincentives for undesirable activities

    • Enabling economic growth

  • Simplicity:

    • Administrative cost

    • Compliance cost

    • Enforcement cost

    • Evasion potential

have interpreted this declaration to require that the share of fee revenue generated by each of a number of vehicle classes (i.e., cars in each of several size classes and trucks in classes defined by size and axle configuration) should equal the share of government expenditures attributable to each class’s use of the highways. The federal studies acknowledge efficiency as an ideal criterion but do not apply it to discriminate among tax alternatives2 (USDOT 1997, VI-22–VI-29).

Past Transportation Research Board (TRB) committees noted that the missing analysis in the highway cost allocation studies is an evaluation of how adjustments in the structure of user fees would affect the economic benefits derived from the highway system. A TRB committee studying the social costs of transportation advised that “practical constraints on user fee policies—revenue requirements and considerations of administrative and political feasibility—do not preclude promoting efficiency through user fees…. For any two fee options under comparison, … one will encourage economically beneficial use of the facility more than the other. These differences ought to be weighed carefully in decisions on tax policy” (TRB 1996, 126–128). A committee on cost allocation offered step-by-step guidelines for analyzing the effects of changes in user fees on highway performance and benefits (Committee for the Review of the Federal Highway Cost Allocation Study 1996, 4–6).

2

The 1997 federal study contains comparisons of estimates of marginal costs of highway travel (including congestion costs) with user fees. This approach to assessing whether fees promote efficiency is insufficient because it provides no basis for judging whether the correspondence between fees and costs is “close enough.” The NCHRP study cites discussions of efficiency in the state transportation funding studies, but no example of a study that used efficiency as a quantitative criterion for comparing alternatives (Reno and Stowers 1995, 103–110).

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Suggested Citation:"3 Evaluating the Present Finance System." Transportation Research Board. 2006. The Fuel Tax and Alternatives for Transportation Funding: Special Report 285. Washington, DC: The National Academies Press. doi: 10.17226/11568.
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The elements of a comparison of user fee alternatives on the basis of their effect on the benefits derived from highways are illustrated in the Brookings Institution study of road user charges, Road Work. The study compared the savings from charging trucks for pavement wear through an ideal pricing scheme with savings if a simplified tax schedule were applied (Small et al. 1989, 71–74). The ideal pricing case assumes that each large truck is charged a fee per mile that depends on the number and spacing of the truck’s axles, the load on each axle, and the road that the truck is traveling on. The fee would equal an estimate of the actual increment in the highway agency’s pavement maintenance cost caused by each trip of the truck on the road. The charge would depend on the road because the wear a truck causes depends on pavement thickness and other roadway characteristics.

In the simplified fee case, each truck is charged a fee per mile that depends on its axle configuration and axle loads but is the same for all roads and is set so as to maximize the highway agency’s savings, less the added costs to shippers and carriers (not counting fee payments). In both cases, it is assumed that the highway agency designs pavements to minimize the sum of vehicle operating costs and agency construction and maintenance costs. The following are the study’s estimates of changes in highway agency pavement costs and in shipper and carrier costs if such charges were imposed, compared with costs if actual user fees were continued (Small et al. 1989, Tables 4-2, 4-4) (figures are in billions of 1982 dollars):

Item

Ideal Pricing

Simplified Fees

Change in highway agency pavement costs

−2.1

−1.8

Change in shipper and carrier costs before user fee payments

0.4

0.4

Change in user fee payments

−0.6

0.8

In both scenarios, highway agency costs decrease (by $2.1 billion annually in the ideal pricing scenario and $1.8 billion with simplified pricing), primarily because of the change in pavement designs but also because the new fees induce truck operators or shippers to reduce axle loads, change truck configurations, shift some freight to rail, and (in the ideal pricing scenario) change routes to travel on roads with stronger pavements. Ideal pricing increases pavement wear savings only moderately compared with the simplified fees (by $2.1 billion minus $1.8 billion, or $300 million annually). In both scenarios, shipper and carrier costs before user fee payments increase (by $400 million annually) because of the changes in their operating practices induced by the fee changes. In the ideal pricing scenario, user fees paid by carriers decline and shippers and carriers realize a net gain of $600 million annually. However, in the simplified fee scenario, user fee payments increase by $800 million annually (because fees must be raised even on roads with low pavement costs in order to attain the optimum systemwide pavement savings), and shippers and carriers suffer a net loss.

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Suggested Citation:"3 Evaluating the Present Finance System." Transportation Research Board. 2006. The Fuel Tax and Alternatives for Transportation Funding: Special Report 285. Washington, DC: The National Academies Press. doi: 10.17226/11568.
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Selection between the two tax schemes would be a policy choice that weighed the trade-offs involved. The potential economic benefit under ideal pricing would be greater, and the option would have the practical attraction that both shippers and highway agencies would gain. Potential savings from the simplified pricing system would be only a little less, and the fee scheme would be easier to administer, but the high fees required to gain the pavement savings might make the option politically unattractive.

This example is presented here not for the significance of its quantitative results [the authors of the study acknowledge that their estimation methods are very approximate, the data are now old, and the magnitudes of some impact estimates may have been distorted by problems in the U.S. Department of Transportation (USDOT) data employed)] but to illustrate the kind of comparison of economic consequences that ought to be the basis of evaluations of all transportation user fee schemes. Projections of economic impacts will always be uncertain; however, in practice, once an initial evaluation is made and a fee change put into effect, the consequences can be monitored and fees readjusted on the basis of new information.

In summary, the tax policy studies show that the criteria that the states and Congress recognize are revenue adequacy, fairness, and administrative practicality. Actual tax policies are driven by the objective of meeting revenue targets; however, in enacting transportation funding arrangements, governments generally have respected the user fee finance principle because it is seen as practical and fair. Explicit consideration of how changes in user fees and other funding arrangements will affect transportation system performance or the economic benefits derived from transportation programs seldom enters into finance or fee decisions. Nonetheless, it would be possible to compare fee alternatives on this basis and gain useful guidance for policy if a program were put in place to evaluate systematically the impacts of fees on the behavior of highway users and on the costs and benefits of the highway program.

HIGHWAY SYSTEM PERFORMANCE

This section summarizes estimates of the return earned by highway investments in recent decades. This information will help decide whether present finance arrangements are promoting sound decisions on capital spending levels and project selection. It was argued above that one mechanism by which present finance arrangements may affect system performance is through limiting total spending. A facility that provided a service whose value to users was less than the cost of providing the service probably could not generate enough revenue from user fees to sustain itself in the long run. Also, because fee levels are tied to spending, users have an incentive to oppose spending on a facility that is worth less to them than the

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Suggested Citation:"3 Evaluating the Present Finance System." Transportation Research Board. 2006. The Fuel Tax and Alternatives for Transportation Funding: Special Report 285. Washington, DC: The National Academies Press. doi: 10.17226/11568.
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fees they pay. Therefore, user fee finance, as it is practiced in the highway program, might be expected to reduce the risk of overspending, that is, spending to provide services that are not justified by their benefits. In contrast, it might be expected that the risk of overspending is greater in other public infrastructure programs in which spending is not effectively limited by revenue from users, for example, inland waterways (where user fees cover one-eighth of total expenditures; see Table 2-6) and passenger rail (where fare revenue covers approximately half of expenses).

In opposition to this argument, critics of user fee finance have characterized dedicated highway user fee revenues as a cash cow providing funds regardless of justified needs and argue that public officials would do a better job of targeting funds to worthwhile applications if they were unhindered by the constraints of trust funds and dedicated taxes. Evidence concerning the economic return on highway investments would help in judging which of these two points of view is more accurate. If incremental investments are found to earn high rates of return, the case for the view that user fee finance promotes overspending is weakened and the view that present finance arrangements are a positive influence is strengthened, However, such evidence alone would not prove the linkage between present finance arrangements and performance.

The estimates discussed in this section include results from the latest of a biennial series of federal reports to Congress (formerly called the National HighwayNeeds reports and now the Conditions and Performance reports) on the performance of the highway system and several estimates by economists of incremental rates of return on highway investment. It has already been noted that quantitative information on the benefits of highway investment is much weaker than would be desirable for sound policy guidance.

Results from the Conditions and Performance studies are not presented here with the intent of arguing that highway spending should be increased.3 As Chapter 1 states, the committee has not considered whether the present rate of transportation spending is too high or low, and its task does not involve finding revenue mechanisms capable of supporting increased spending. Rather, the studies’ results are examined solely to investigate whether historical spending levels have been economically justified.

Because users of roads are not charged market prices, the benefits of road improvements to users must be estimated from various sources of information about the effect of road conditions on travel time, vehicle operating costs, and other components of the total cost of transportation. The absence of market pricing does not invalidate the estimates of the benefits of incremental expansions of

3

The studies are commonly used for this purpose, e.g., by AASHTO (AASHTO 2002) and the Chamber of Commerce (Cambridge Systematics 2005).

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Suggested Citation:"3 Evaluating the Present Finance System." Transportation Research Board. 2006. The Fuel Tax and Alternatives for Transportation Funding: Special Report 285. Washington, DC: The National Academies Press. doi: 10.17226/11568.
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the highway system presented below; however, if prices more closely reflected costs, greater benefit could be derived from existing facilities and service quality could be maintained in the future at lower total cost. Also summarized below are results of studies that estimate savings from better pricing.

Appendix A presents the estimates from the studies summarized here in more detail and describes the studies’ methods, including some important shortcomings.

Federal Highway Conditions and Performance Studies

USDOT submits biennial reports to Congress that project the effects of alternative levels of highway capital spending (for all levels of government) on highway performance and highway user costs (travel time, vehicle operating costs, and accident costs). The 2002 study projections, for the period 2001–2020, indicate that if all highway capital projects nationwide with a benefit–cost ratio greater than 1 were carried out, annual capital spending over the period would average 65 percent higher than actual 2000 spending. To maintain overall conditions and performance at 2000 levels, annual capital spending 17 percent higher would be required (USDOT n.d., ES-14).

The 2002 study did not report rates of return. However, the previous study reported that if all projects with benefit–cost ratio greater than 1 were carried out over the 20-year period 1998–2017, the average benefit–cost ratio would be 3.7 (USDOT 2000). In comparing the mix of kinds of projects that highway agencies were carrying out in recent years with the mix of kinds of projects that would be most beneficial, the 2002 study concluded that benefits would be increased if agencies shifted spending from system preservation to capacity expansion (USDOT n.d., iii).

The 2002 study concluded that physical conditions of highways were unchanged or slightly improved during the 1990s. Performance was found to have deteriorated: the fraction of all travel on freeways and principal arterial streets that occurred under congested conditions increased. The projections show that, although spending more would slow the rate of deterioration, at all future spending levels analyzed up to the maximum economically justified level, congestion delay will increase or will be little improved (USDOT n.d., 9-8).

In summary, the USDOT Conditions and Performance studies indicate that the direct benefits to highway users of additional capital spending for highway system preservation and expansion would exceed the cost to the government and that spending would have to expand to a level substantially greater than present spending before highway agencies ran out of worthwhile projects. This conclusion implies a high marginal rate of return to increased spending and that total spending historically has been constrained within economically justified limits.

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Suggested Citation:"3 Evaluating the Present Finance System." Transportation Research Board. 2006. The Fuel Tax and Alternatives for Transportation Funding: Special Report 285. Washington, DC: The National Academies Press. doi: 10.17226/11568.
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Productivity Benefits of Highway Investment

A series of economic studies has examined how highway infrastructure affects business costs for the national economy or for industry groups. Results of four such studies are outlined below. The first two measured the effect of highway investment on particular costs that have an evident link to highways: trucking company costs and industry inventory costs. The final two take a more aggregate approach and examine the historical contribution that expansion of the highway system has made to productivity growth in broad industry classes.

In spite of the differences in methods among the four studies, they all are attempts to measure approximately the same category of benefits. Savings in truck freight and the consequent savings in logistics costs (estimated in the first two studies) are the initial steps in a chain of transfers of the benefits of improved highway transportation. This chain leads to overall productivity growth (measured in the second pair of studies) and ultimately to lower prices for the goods and services that consumers purchase and to higher incomes. All of these studies’ estimates exclude, by design, major components of highway benefits; in particular, they leave out most or all of the benefits of passenger travel. The findings, which are representative of recent credible research on the national economic return to highway investment in the United States, were as follows:

  • The study of trucking (Keeler and Ying 1988) estimated the relationship of total annual production costs in the intercity trucking industry to industry output, the prices of inputs, and external factors that influence productivity, including the stock of highway infrastructure, for 1950 to 1973. The results show savings, for the total of U.S. intercity truck traffic that would have occurred without the expansion of the highway system, reaching $6 billion to $9 billion annually by 1973 (in 1973 dollars). These savings justified between 33 and 80 percent (depending on assumptions about interest rates) of the capital cost and 30 to 67 percent of the total cost of intercity highways during the period. Year-by-year estimates showed that by the early 1970s, the incremental benefits from increases in the highway capital stock were becoming very small.

  • The inventory costs study (Shirley and Winston 2004) estimated the reduction in inventory holding costs and associated logistics costs in U.S. business caused by expansion of the highway system in the period 1973–1996. Transportation system improvements are expected to reduce inventory holding costs by increasing the speed and reliability with which firms can replenish inventory. The estimated annual rate of return on net investment in the highway capital stock was 18 percent during the 1970s (i.e., an additional dollar of net highway capital stock reduced costs by $0.18), 5 percent during the 1980s, and 1 percent during the 1990s.

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Suggested Citation:"3 Evaluating the Present Finance System." Transportation Research Board. 2006. The Fuel Tax and Alternatives for Transportation Funding: Special Report 285. Washington, DC: The National Academies Press. doi: 10.17226/11568.
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  • The first of the two studies of the link between highway capital expansion and industry productivity growth (Fernald 1999) used data on production and inputs for 29 industry groups for the period 1953–1989. It estimated the relationship of growth in total factor productivity in each sector to growth in the national highway system. The results indicate that for the period as a whole, road expansion contributed strongly to productivity growth and that the return on additional road investment greatly exceeded the normal private-sector rate of return. Separate estimates for the pre- and post-1973 periods indicated that after 1973, the estimate of rate of return was not statistically different from the normal rate of return or from zero.

  • The second industry productivity study estimated the contribution of highway capital to productivity in 35 industries and in the entire U.S. economy for the period 1950–1991 (Nadiri and Mamuneas 1998). The model was more detailed than that of the previously described study. It found annual rates of return on additional highway capital of 54 percent for 1960–1969, 27 percent for 1970–1979, and 16 percent for 1980–1991. That is, in the 1980–1991 period, an incremental addition to the highway capital stock produced annual cost savings in private business equal to 16 percent of the total social cost of providing the additional capital. The authors observe that by the end of the study period, rates of return on highway capital and private-sector capital appear to have converged.

It is noteworthy that each of the four studies measured a decline over time in the benefits of incremental additions to the stock of highways. Interpreting the significance of this reported pattern is difficult because the timing of the declines is inconsistent among the four studies. The trucking cost study (Keeler and Ying 1988) and the first of the industry productivity studies (Fernald 1999) report that by the 1970s, the rate of return on highway expansion was nearing zero. However, the inventory cost study (Shirley and Winston 2004) and the second industry productivity study (Nadiri and Mamuneas 1998) measure 27 percent and 18 percent rates of return, respectively, during the 1970s. Of course, the four studies are measuring different components of total benefits, but the benefits measured are related, so consistent trends would be expected.

The authors of the trucking cost study observe that a decline in the benefits of expansion in the 1970s would not be implausible since by the early 1970s the basic network of Interstate highways had been completed. The authors observe also that at this time, expansion of the capital stock slowed markedly (growth in the stock of roads was 5 percent per year in 1955–1975 and 1 percent per year in 1975–1985; see Figure 2-12). They speculate that this brake on growth could have been the rational response of governments to the decline in the benefits of expansion. The inconsistent results among the studies, as well as certain simplifying assumptions and uncertainties embodied in the estimates (as described in

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Suggested Citation:"3 Evaluating the Present Finance System." Transportation Research Board. 2006. The Fuel Tax and Alternatives for Transportation Funding: Special Report 285. Washington, DC: The National Academies Press. doi: 10.17226/11568.
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Appendix A), suggest that the studies’ estimates of the time trends of returns may not have great reliability.

Regardless of the significance of the measured declines in returns over time, the estimates in these studies are evidence of positive rates of return on investments in incremental expansion of the U.S. highway system in the period from the 1950s to the 1990s. The studies considered only direct benefits (carrier operating costs or production costs of industries that use highway services in their production processes) and excluded large categories of benefits (including benefits of personal travel as well as certain benefits to businesses). They therefore provide additional support for the conclusion stated at the end of the previous section that, in the aggregate, the highway finance mechanisms that determine funding and priorities have been effective in providing funding to worthwhile projects and in keeping total spending within economically justifiable limits.

Cost of Inefficient Highway Use and Benefits from Improved Pricing

The preceding section presented evidence that the transportation finance system has on the whole helped to direct resources to worthwhile applications. Transportation programs also have several important failings that are related to the structure of the finance system. First, because highway agencies do not practice peak pricing, congestion is tolerated that could be avoided at relatively low cost. Second, some road users, including operators of certain types of trucks and buses, do not pay fees commensurate with the construction and maintenance costs that they impose on highway agencies. This misalignment of fees with costs encourages inefficient vehicle design and operating practices and adds unnecessarily to highway costs. Third, the finance system does not provide a strong internal check that individual projects are economically justified or that the most beneficial projects receive the highest priority.4 Such a check would exist if projects were financed with funds they generated themselves (although it is likely that some road projects that produced benefits exceeding their costs could not be funded by revenue from marginal cost–based user fees alone). Finally, less spending for capacity expansion would be required to attain any given level of performance of the road system if pricing were improved. Because better pricing would lead to more efficient utilization of existing capacity, the amount of improvement to be gained from expansion would be reduced in many cases. Therefore, some highway projects that would be carried out according to today’s practices (including projects that are fully

4

The finance system does impose some constraints on project selection. Because most federal highway aid is apportioned by formula, each federal-aid project that a state chooses to construct has an opportunity cost—by selecting the project the state eliminates some other potential project. Also, because of federal grant matching requirements and the overall importance of state and local funding, spending tends to be directed to regions where demand is greatest.

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justified economically under present practices) would no longer appear to be worth high priority in spending plans.

This section summarizes estimates of the costs of these shortcomings of present road management practices and of the potential benefits of extensive application of improved road pricing. Improved pricing means more closely matching the charge that each road user pays with the actual costs of the user’s trip to the highway agency and the public. Under improved road pricing, charges could depend on distance, route, time of day, degree of congestion on the road, or other conditions affecting costs. However, pricing improvements do not have to be complex to be worthwhile. Simple refinements, such as adjusting registration fees in line with the results of cost allocation studies or instituting a peak-period toll on a toll bridge or high-occupancy/ toll (HOT) lane, could have large benefits. Proposals for practical pricing improvements are described in Chapters 5 and 6.

The estimates summarized below relate to five issues:

  • The costs of congestion today and the prospects for reducing costs through conventional means,

  • The potential benefits of congestion reduction brought about by peak pricing,

  • The potential contribution of refined truck fees to improving freight transportation efficiency,

  • The potential revenue from road pricing, and

  • How road pricing would affect perceived needs for capacity expansion.

Costs of Congestion and Prospects for Mitigation

Highway congestion causes several billion vehicle hours of delay annually, and only modest potential exists for cost-effectively reducing delay through traffic engineering improvements or capacity expansion.

USDOT’s 2002 Conditions and Performance report (described earlier) estimates that annual congestion delay in 2000 was 31 hours per driver (the difference between total time spent on the road and time for the same travel if all traffic were free-flowing), or 6 billion total vehicle hours per year. The projections of impacts of alternative spending rates indicate that increasing annual capital spending to the maximum economically justified level (a 65 percent increase over 2000) would reduce annual driver delay per driver by 16 percent in 2020 and the fraction of all travel that occurs under congested conditions would continue to rise (USDOT n.d., 9-7).

The Texas Transportation Institute (TTI) Annual Urban Mobility Report series contains similar estimates: 3.5 billion vehicle hours of congestion delay and $9 billion of additional fuel consumption caused by congestion in 2001 in 75 met-

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Suggested Citation:"3 Evaluating the Present Finance System." Transportation Research Board. 2006. The Fuel Tax and Alternatives for Transportation Funding: Special Report 285. Washington, DC: The National Academies Press. doi: 10.17226/11568.
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ropolitan areas (Shrank and Lomax 2003, Tables, A-5, A-7). TTI projects that more extensive application of three demand management techniques—traffic signal coordination, freeway incident management to clear crashes quickly, and freeway entrance ramp metering—could cost-effectively save 6 percent of estimated total congestion delay.

Benefits of Congestion Reduction Through Peak Pricing

Peak pricing on congested roads probably could bring about congestion reduction at least as great as the most ambitious justifiable program of capacity expansions and traffic engineering measures in the absence of pricing.

Peak pricing or congestion pricing is any scheme that imposes charges that are higher for travel on congested roads or during times of peak congestion than under uncongested conditions. The charges reflect the delay cost that each user imposes on other users during the peak. Peak pricing can take the form of a per-mile charge that depends on the time of day or the actual current congestion on a road, or it can take a simpler form such as the London congestion charging scheme under which motorists pay a fee to enter a central city zone.

The estimates of peak pricing impacts cited here and in the following three sections are all projections, because experience with these kinds of pricing mechanisms as a means of funding a road network is extremely limited.5 Existing applications whose primary function is congestion relief in center cities—for example, the congestion charging scheme introduced in central London in 2003—demonstrate impacts of congestion pricing but are not directly relevant to this study’s task of examining alternative means of funding highways, because road finance was not among their primary objectives.6

The committee that authored TRB’s 1994 Curbing Gridlock study of the prospects for congestion pricing in urban areas concluded that practical applications could reduce the average automobile commute trip in congested metropolitan areas by 20 percent, or 10 to 15 minutes per round-trip, and that aggregate time savings would be “hundreds of millions of hours” annually (TRB 1994, 4). Such estimates assume that prices are set so as to maximize the public’s travel benefits, that is, the difference between the benefits to those who gain from faster travel

5

Chapter 6 describes the experience that does exist, including expressway segments with variable tolls in the United States and mileage fees imposed on trucks on some European expressways, and technological advances that have greatly reduced practical barriers to road pricing.

6

The central London congestion charging scheme charges motorists £8 daily to drive or park in an 8-square-mile zone between 7:00 a.m. and 6:30 p.m. on weekdays. The scheme has reduced average automobile trip times by 1 minute per mile and automobile traffic by 18 percent in the zone. Net revenue, £97 million in 2004, is mostly dedicated to the bus system (TfL 2005). The transport agency’s monitoring reports do not address whether the benefits from faster travel times outweigh the costs of trips forgone or diverted to other modes.

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and the losses to those who lose mobility because they do not want to pay the charges. Obviously, it would be possible to eliminate congestion if prices were high enough, but such a policy would not be desirable as a rule because prices would be so high that many trips that were worth more to the traveler than their cost to the public would be priced off the roads.

Truck Fees and Freight Transportation Efficiency

Misaligned truck fees cause inefficiencies in road construction and maintenance and in freight transportation costs.

Past TRB committees have estimated that coordinated changes in truck fees, size and weight regulations, and road design could produce net savings to the public equivalent to $4 billion to $9 billion annually at today’s prices and traffic volume (TRB 1990a, 12–22; TRB 1990b, 3–14; TRB 2002, 2–11). Under some proposed policies, both shippers’ freight costs and highway agencies’ construction and maintenance costs would fall. Under other proposals, highway agency costs in a state could increase or decrease, depending on the previous condition of the infrastructure, but extra highway spending would be worth the freight savings it allowed. In either case, charging truck operators fees closely aligned with the costs of serving them is key to the policy. The fees would encourage operators to choose truck specifications, operating practices, and routes that minimized the sum of public and private costs, and they would be a revenue source to finance infrastructure improvements needed to serve trucks. Funding the improvements from fees would provide a check that helped to ensure that the improvements were worthwhile.

Potential Revenue from Improved Road Pricing

An efficiently sized road system could pay for itself from the revenues generated by peak charges, plus possibly an additional flat per-mile fee or registration fee.

Economists have long argued that the correct size of the transportation network that should be built is the size that could support itself with the revenue from user charges, if charges equal the cost of providing service to each user. Parts of the network that are generating surpluses should be expanded, and (with some exceptions) parts operating at a deficit should be allowed to contract.7 Results of some empirical analyses of road economics suggest how such a road finance system could work in practice.

7

The appropriate charge is the short-run marginal cost of the trip, that is, the added cost of one additional trip over the network to the system operator, other users, and the public. This includes the added congestion cost to other users. Marginal cost pricing will lead to the optimum-sized system if there are no scale economies—that is, if the total cost of providing service grows proportionally to the size of the network (Mohring 1965, 232–241).

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The Brookings Road Work study modeled the finances of hypothetical urban road segments on which users are charged fees equal to marginal congestion and road wear costs of their travel (Small et al. 1989, 108–109). The study estimated the economically optimum designs (numbers of lanes, pavement durability, and congestion levels), maintenance and capital costs, and user charges for expressways and nonexpressway arterial roads carrying various volumes of automobile and heavy truck traffic. In the results, the peak-period volume–capacity ratio on the optimized urban expressways is around 0.74. For comparison, about half of all miles of urban expressway travel today is on roads with volume–capacity ratio over 0.8 (USDOT n.d., 4-15). (The authors caution that the purpose of the study is not to judge whether existing road designs are appropriate because the best design depends on numerous specific local circumstances.)

Over a wide range of volumes, the optimized urban expressways and non-expressway arterial roads would nearly be able to cover total capital and maintenance costs from the revenues of congestion and road wear charges. Estimated deficits are a few percent of total costs and depend on assumptions concerning scale economies in road construction. Typical peak-period charges would be equivalent to $0.30 per mile for cars and $0.60 per mile for large trucks in 2005 dollars. Trucks would also pay a road wear charge at all times ($0.01 to $0.08 per mile in 2005 dollars, depending on road design). The authors comment that any deficit could be closed by retaining small registration fees or fuel taxes; it could also be covered by a small flat-rate off-peak mileage charge.

Recent projections of the impact of practical road pricing schemes in metropolitan Washington, D.C., give a more detailed indication of possible consequences for highway performance and finance. The study used a detailed network model of the region’s highway and transit systems to forecast the effect of alternative road pricing policies on travel and congestion, the revenues from road charges, and differences in impacts among income groups (Safirova et al. 2004). The transportation system and locations of jobs and residences are assumed to be fixed. The three policies examined are converting existing high-occupancy vehicle (HOV) lanes into HOT lanes (which admit high-occupancy vehicles for free or any vehicle that pays a toll), charging tolls on all lanes of expressways that now have HOV lanes, and charging on all lanes of all major freeways. Only simple fee structures are considered: fees differ among two or three road classes and two daily time periods.

In the most comprehensive pricing option (charging on all lanes of all major freeways), single-occupancy vehicles pay a toll of $0.22 per mile to travel on former HOV lanes, and all vehicles pay $0.07 per mile on non-HOV expressways, during peak periods. Tolls are selected to maximize the benefit of pricing, which equals the value of net travel time savings from reduced congestion plus the benefits to travelers of new trips stimulated by the reduced congestion, less the losses from trips that are no longer made. The benefit of the policy is $220 million per

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year, which is equal to 19 percent of pretolling congestion costs. Toll revenue is $446 million per year, and the travelers in every income group gain less in time savings than they pay in tolls. Since tolls are a transfer from travelers to the road authority, the public as a whole gains. Remarkably, the benefit from converting all existing HOV lanes into HOT lanes is projected to be $170 million per year, 77 percent of the benefit from tolling all expressways. Benefits could be increased if a more refined fee structure were employed (e.g., adjusting fees according to actual congestion and imposing fees on a larger portion of the road system). The authors note that these estimates reflect only the gains from reducing recurrent congestion (i.e., congestion not caused by accidents, construction, or other exceptional events) and assert that taking into account the effect of pricing in reducing the costs of nonrecurrent congestion would result in larger estimates of benefits.

The projected revenue for the policy of tolling all expressways is roughly comparable with current annual expenditures on expressway construction, maintenance, and operation in the Washington metropolitan region (FHWA 2004, Tables SF-12, HF-10). The absence of tolls on roads other than expressways in the projections limits expressway revenue, because tolls must be set low enough to avoid excessive congestion on parallel untolled roads. Under a policy of charging peak mileage fees on expressways only, optimum tolls should not be expected to raise revenue sufficient to fund the optimum level of spending. If mileage charges were imposed on roads other than expressways, the revenue-generating capacity of expressways would be greater. Another recent estimate puts the potential revenue from comprehensive road pricing in metropolitan Washington at $700 million annually (Nelson et al. 2002).

The estimates of the revenue potential of road pricing cited here all apply to urban road networks. Rural roads (ranging from Interstate highways to local farm access roads) account for 40 percent of state government highway spending (FHWA 2004, Table SF-12) and probably a comparable share of local spending. Most rural road mileage would generate no revenue from congestion fees. If a net-workwide system of mileage charging (such as the proposals described in Chapter 5) were to come into use, the pricing and investment rules and financing practices for rural roads would probably have to be different from those for the urban parts of the system. Revenues from marginal cost–based fees would cover an important part of the cost of rural roads, including pavement and bridge wear costs attributable to traffic, and congested rural roads (e.g., certain heavily traveled Interstates) would generate congestion fee revenue to pay for capacity expansion. Rural roads that are maintained primarily for the sake of a social interest in sustaining rural communities and farms could appropriately be subsidized out of government general revenue. However, investment in some rural roads may be economically justified by their direct transportation benefits even though the roads could not be funded by revenue from marginal cost–based fees (because there is a minimum scale to which a road can be built). Such roads could be funded by flat-rate mileage

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charges or property tax assessments. If such roads were funded by user fees, rates would be selected to minimize the loss caused by overcharging for roads that have low operating costs.

Road Pricing and Capacity Expansion

Improving road pricing would alter the benefits of capacity expansion projects and therefore would be expected to affect project selection and the rate and direction of evolution of the network.

The TRB Curbing Gridlock committee predicted that peak pricing would “reduce the demand for new highway capacity in urban areas … [and] ease capital requirements for expanding highways” (TRB 1994, 46). Because better pricing would lead to more efficient utilization of existing capacity, the amount of improvement to be gained from expansion would be reduced in many cases. Therefore, some highway projects that would be carried out according to today’s practices (including projects that are fully justified economically under present practices) would no longer appear to be worth high priority in spending plans. Improved road pricing would also highlight parts of the network where capacity has been underfunded because these roads would be able to generate surplus revenue.

One study examining these long-run effects used a network model to project benefits of four hypothetical expansions to the road network of the city of Cardiff in the United Kingdom, under present practices and with congestion charges imposed on motorists on all roads (Williams et al. 2001). The four projects were a bypass, a new road link to the city center, an expansion of a through route across the center, and a partial bypass. The projected benefits of the first three projects were lower if congestion pricing was in place for a wide range of assumed rates of traffic growth. For example, the travel time savings produced by the bypass and the through route expansion are up to 30 percent less with congestion pricing because speeds on preexisting roads are higher and because less total travel takes place. (In the case of the fourth project, pricing diverts much traffic to the new road, rendering it more valuable.) The study illustrates that some projects, which may produce benefits that fully justify their costs in the absence of congestion pricing, would cease to be economically attractive if pricing were introduced.

In general, improved pricing would reduce the infrastructure cost of attaining any specified level of service quality. However, there would be locations where highly congested roads were yielding surplus revenues and expansion of capacity would be economically justified and practical. Then the highway agency would have the funds (if fee revenue were dedicated to transportation) and the justification to expand capacity and improve service. In regions where highways are under-funded, the result of road pricing could be increased construction spending.

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Summary: Relevance of Performance Evaluations to Finance

Although the evidence is fragmentary, available estimates indicate that the investment embodied in the present highway system as a whole has been beneficial, that total spending probably has not greatly exceeded (and may be less than) the amount that would be economically justified, and that opportunities exist for investments in incremental expansion and upgrading of the system that would yield worthwhile payoffs.

The paucity of data makes comparisons difficult, but there appear to be public infrastructure programs in the United States that have not had this degree of success—that is, programs in which total spending has significantly exceeded justified levels and in which incremental investments are being directed to projects with low returns. It is likely that the financial checks and balances in the highway finance system have contributed to the relative success of the highway program in producing a satisfactory return from the public funds invested. The fuel taxes and vehicle fees that users pay are about 10 percent of the private cost of operating a motor vehicle. They vary with use and have been adjusted from time to time in accordance with changes in the cost to the government of providing highways. Therefore the fees, to a limited extent, discourage wasteful use of the system.

More significant, spending has been constrained by the revenues generated from users. Reliance on user fee finance should reduce the risk of excessive spending: an overbuilt facility that produced low levels of benefits for its users in relation to its costs would be unlikely to generate revenue from user fees sufficient to sustain the facility. Also, in the political process of setting highway budgets and fees and selecting projects, users are unlikely to support fee levels in excess of those producing benefits the users consider worthwhile. And with total spending subject to a budget constraint, users will be likely to oppose projects that yield lower returns than other available projects.

However, the present finance system has important shortcomings that reduce the benefits of transportation programs. The following conclusions are supported by the review above of the costs of these shortcomings and the potential benefits of finance reform that incorporated improved road pricing:

  • Highway congestion causes several billion vehicle hours of delay annually, and only modest potential exists for cost-effectively reducing delay through traffic engineering improvements or capacity expansion.

  • Peak pricing on congested roads could bring about congestion reduction and public benefits at least as great as justifiable capacity expansions and traffic engineering measures in the absence of pricing.

  • Better aligning truck fees with the costs of serving trucks would yield efficiencies in road construction and maintenance and in freight transportation.

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  • An efficiently sized road system (that is, a system that could not be expanded or contracted without loss of benefits) could pay for itself from the revenues generated by peak charges at rates that maximized public benefits, plus probably modest additional flat per-mile or registration fees.

  • Improving road pricing would alter the benefits of capacity expansion projects and therefore would be expected to affect project selection and the rate and direction of evolution of the network.

TRANSIT PERFORMANCE

The impetus for this study was concern for the viability of present highway user fees as a revenue source. Therefore, the committee has considered transit finance insofar as it is linked to highway user fees. A prominent feature of the present finance system is the dedication of portions of federal and state highway user fee revenues to transit. As Chapter 2 described, the amounts are fairly modest compared with total highway spending but are important for transit, amounting to about a quarter of transit spending.

A part of the committee’s charge (presented in Chapter 1) is to assess the implications of finance trends for the performance of the transportation system and whether benefits could be attained through reform. Therefore, it is relevant to the charge to examine the economic performance of transit in parallel with the review of highway system economic performance above. The examination will help in judging whether the practice of partially funding transit with highway user fee revenue is justified economically today and whether it ought to be continued if a transition to new funding sources takes place in the future.

This section addresses the first of these questions: whether the public derives benefits from subsidies to transit (i.e., funding from sources other than fare revenues from operations). In Chapter 6, highway user fee revenue and alternative sources for such funding are compared. At least two characteristics of urban transportation may justify subsidies to transit. Highway travelers do not pay the full costs to the public of their trips, especially trips during congested periods. Therefore, some road trips cost the public more than they are worth to the traveler, and a subsidy to transit that diverts some trips from highways can yield a net public benefit. Second, there are scale economies in the provision of transit services over a wide range of passenger volumes. That is, at least in some circumstances, the long-run cost per passenger falls as volume increases (and capacity is expanded to accommodate it). In these circumstances, additional passengers lower the costs for all in the long run, and the public can gain from a transit subsidy that increases traffic volume. Of these two possible benefits from transit subsidies, the benefit from congestion reduction is the better documented and probably the larger benefit in cities today. If highway subsidies were reduced or eliminated in the future

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(e.g., through mileage charges as described in Chapter 5), it might become more important to take scale economies into account in transit finance. There also may be scale economies in the provision of highway transportation (Gómez-Ibáñez 1999, 112–114; Small 2006; Mohring 1965, 253–254; Meyer et al. 1965, 341–344).

As in the case of highways, few estimates of the historical benefits of transit programs have been carried out. USDOT’s Conditions and Performance reports consider transit; however, the method differs from its analysis of highways described above. The USDOT reports present estimates of transit spending levels required to meet specified service criteria but not of economically justified spending (USDOT n.d., iv). Summarized below are the results of two studies that do assess whether the present level of subsidies is appropriate by estimating benefits from transit.

The first study, from the Brookings Institution, used an urban transportation demand model to estimate the value that travelers place on bus, rail transit, and road travel (Winston and Shirley 1998, 29–47). The demand model relates travelers’ choices about transportation mode and the timing of trips to measures of transportation service quality and cost. The model was used to calculate the payment that would be required to compensate travelers for their loss if their preferred mode was unavailable. The calculation includes the loss to automobile travelers when elimination of transit increases highway congestion.

These estimates of the benefit that travelers derive from each mode are then compared with government subsidies to the modes. The estimated annual benefit of bus service to travelers in 1990 was $4 billion (in excess of bus fares paid, and including the benefit to automobile travelers of reduced highway congestion). The study estimates 1990 bus subsidies to be $10 billion and concludes that the subsidies were not cost-effective, since their discontinuance would have resulted in a loss of at most $4 billion in benefits. Highways are estimated to yield large net benefits. For rail transit, the benefit to travelers, $3 billion, just equaled government subsidies. The authors emphasize that the benefits and costs of bus and rail systems vary from city to city and that with appropriate service and pricing, bus systems could generate positive benefits.

The Federal Transit Administration (FTA) has evaluated the economic performance of transit with a conceptually similar method (FTA 2000, 37–52). The result is expressed as the optimal subsidy that the public ought to pay to transit to allow it to lower its fares to attract travelers off roads. The study recognizes that the primary economic rationale for transit subsidies is that urban highway use generally is undercharged. Because a highway traveler does not pay a price for using a congested road that reflects the cost (in added travel time) the traveler imposes on others on the road, some trips cost the public as a whole more than they are worth to the individual traveler. If congestion charges cannot be imposed on roads, the public can benefit by subsidizing transit as long as the cost of attracting an addi-

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tional traveler from road to transit is less than the public benefit of the resulting reduction in road congestion. The FTA analysis uses an urban travel demand model to compute this optimum annual subsidy for seven metropolitan areas and the nation as a whole.

The resulting estimate is that the optimal nationwide annual transit subsidy in 1999 was $19 billion ($10 billion for bus and $9 billion for rail). Actual transit operating subsidies (i.e., operating expenses less fare revenue and other revenues from operations) in 1999 were $13 billion and capital grants were $9 billion (APTA 2004, 37, 44, 46; Table 2-4, Chapter 2). The study concludes that the optimum subsidy exceeds the actual operating subsidy plus that portion of capital spending devoted to maintaining and renovating existing capacity, and therefore that transit subsidies for these purposes are economically justified.

Comparison of the FTA study estimates with actual subsidies suggests that, although their total magnitude may be appropriate, present subsidies are misallocated. For example, FTA’s metropolitan area estimates indicate that New York should receive 39 percent of all subsidies, whereas New York City Transit’s share of nationwide operating subsidies is 12 percent (FTA 2004). The FTA study estimates that rail transit’s share of the optimum subsidy should be 46 percent, but according to the Brookings study, rail in 1990 received only 23 percent of actual subsidies.

In summary, the two studies indicate that the present nationwide total level of rail transit subsidies and at least some part of bus subsidies are justified by the benefits to travelers, although benefits probably could be increased by shifting subsidies in favor of the more transit-dependent cities and rail. Transit subsidies can be of benefit because urban road users are not charged fees commensurate with costs. Therefore, improving the pricing of roads would alter the rationale for transit subsidies.

EVALUATION OF FINANCE PROGRAM FEATURES

The conclusions of the section above on highway system performance were that, although the quality of the evidence is weak, the highway program appears to be relatively successful in providing benefits that justify its costs and that the finance system probably has contributed to this success because user fees function as prices and because user fee finance tends to check excessive spending. However, the connections between performance and the particular features of the finance system are complex and not well understood. Aspects of present practices have been controversial, and proposals to modify them are common.

The two defining features of the system are the practice of user fee finance, which tends to link fee revenue to spending, and the federal structure of the system, that is, the sharing of responsibilities among federal, state, and local

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governments. Understanding of the impacts of these two features will be necessary to guide either improvements in present arrangements or design of a long-term alternative. If the present system is basically sound, it will be valuable to extend its life span by reinforcing finance practices that contribute to its success and altering those that do not. For example, Chapter 2 described how pressures to find expedient funding are prompting some jurisdictions to decrease reliance on user fee revenue for transportation programs. If user fee finance has historically contributed to good performance, the risk involved in allowing the practice to erode ought to be considered in such decisions. Similarly, if adjustments to the rules of the federal-aid program could promote more cost-effective state and local government spending choices, such actions would reinforce the existing federal structure of transportation programs and extend the life of the present finance system.

If the nation eventually develops fundamentally new finance arrangements that rely more on direct charging for highway use (for example, through expanded use of tolls and road use metering, as Chapter 5 describes), governments will need to reconsider both these features of the finance system (the federal structure and the link between fee revenue and spending). With direct charging, the capability of states and local jurisdictions to collect fees from all users of their roads would be enhanced, so the historical justification for intergovernmental aid would be diminished, and jurisdictions would expect to control the revenue generated by the roads that they own. If the road user fees in the new charging scheme properly reflected costs, it would be appropriate to have tighter links between revenue and spending than exist today, because the revenue that each link in the road network generated would be the best indicator of the value of expanding that part of the network. Present practices with regard to government responsibilities, trust funds, and dedicated revenues were developed in the context of the existing scheme of funding sources. Simply substituting new sources for the existing ones while leaving all other finance practices untouched probably will not be practical or desirable.

The following two sections briefly outline key questions concerning the impacts of user fee finance and the federal structure of finance on the performance of government transportation programs. Adequate information for answering many of the questions is not available. Chapter 6 reviews proposals from various sources for changing certain of these features to improve performance.

User Fee Finance and Dedicated Revenues

Chapter 2 outlined federal highway finance practices. Most states’ finance practices parallel the main features of the federal program—user fees, trust funds, and dedication of fee revenues for specific purposes. This collection of practices influences total spending, spending priorities, the use of roads and transit, and consequently the benefits of transportation programs. That is, the outcomes of transportation programs would be different if alternative practices were employed

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(for example, eliminating the connection between user fee revenue and spending). The following practices are the elements of user fee finance in the highway program:

  • Imposing highway user fees (principally motor fuel taxes and vehicle registration fees);

  • Matching the fees, to some extent, to the government’s costs of providing services;

  • Dedicating most revenue from the fees to highways and transit, with trust funds to enforce the connection between revenue and spending; and

  • Deriving most highway funding from highway user fee revenues.

This finance arrangement is the outcome of two independent policy decisions, each of which should be evaluated on its own merits: the decision to impose fees related (to some extent) to costs and the decision to depend primarily on fee revenue to fund highways.

User Fees

The practice of charging fees to highway users generally has not attracted criticism (although the level and form of fees can be controversial). The federal government, all the states, and most other developed countries impose special fees or taxes on road users, and similar charges are imposed on users of other government-provided transportation facilities in the United States.

Even if they are uncontroversial, user fees can be harmful if the charges that travelers incur for many trips exceed the added cost to the public of providing those trips. User fees can promote efficient use of facilities if they bear at least a degree of correspondence to the public’s costs of providing the facilities. Then users will make decisions (e.g., whether to make a trip, whether to travel by car or bus, what size of freight truck to use, whether to ship by truck or rail) that take these costs into account. Fees set too low allow wasteful use of facilities, and fees set too high needlessly discourage travel.

Many studies have compared highway user fees with costs. One recent economic study that considered congestion, pollution, and the external costs of highway accidents concluded that, in the absence of more effective policies to address these costs (for example, peak period charges that reduced congestion), the optimal gasoline tax in the United States would be $1 per gallon (Parry 2002) (the actual average rate is $0.38 per gallon). (A tax at this level would discourage much travel on uncongested rural roads that was valuable to travelers and had low cost.) Of the $1 per gallon estimate, $0.20 would serve to substitute fuel tax revenue for some of the revenue now derived from income taxes. The public could benefit

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from such a substitution because all taxes distort private economic decisions and thus cause economic losses. For example, road user taxes in excess of the costs of travel cause the loss of some valuable travel, and income taxes reduce employment. The study estimated that up to $0.20 per gallon, the added loss of this kind from the fuel tax would be less than the gain from lower income taxes.

In another study, a TRB committee compared prices with costs of freight transportation by truck, barge, and rail. The committee considered infrastructure, pollution, congestion, and accidents. It found that, for typical trips where the modes compete, the mismatch between prices (including user fees for public infrastructure) and costs for trucks usually was smaller than the mismatch for barges and greater than for rail (TRB 1996, 6–10). Chapter 6 describes proposals from federal highway cost allocation studies and past TRB committees for improving the alignment between present highway user fees and costs. Introduction of road use metering or other forms of congestion charging, as described in Chapter 5, would be needed to allow fees to reflect adequately the congestion costs that road users impose on others.

Dedicated Revenues

The other main feature of user fee finance in the highway program—the practice of tying spending on a particular government program to revenue from a particular tax—has been controversial. Analyses of dedicated taxes have produced at least four competing assessments:

  • Dedicated taxes are harmful because any constraint that prevents government officials from allocating funds to the activities that will yield the greatest benefit will reduce public welfare. In this view, the revenue a particular tax happens to raise in a time period is a poorer guide to appropriate spending than the judgment of officials (Wilkinson 1994, 122; Buchanan 1963, 457).

  • Dedicated taxes are justifiable as an expediency to gain public acceptance of certain worthwhile taxes or programs and to provide financial stability, even if the practice does tend to reduce the efficiency of government spending by limiting officials’ flexibility. According to this pragmatic view, citizens who are skeptical of the benefits of general tax increases are more likely to acquiesce to a tax that is presented as supporting a specific popular program (Farrell 1999, 59; Wilkinson 1994, 120–122, 132). The financial stability provided by guaranteed revenue is viewed as necessary in an infrastructure program that must construct and operate large, long-lived facilities.

  • Dedicated taxes promote efficient government by giving taxpayers more direct control over the uses of tax revenue. In this view, the constraint that earmarking places on the independence of government budget makers is

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likely to enhance rather than reduce the efficiency of public spending decisions in many circumstances, because citizens know best what programs are worth and public officials often have biases stemming from their bureaucratic interests. Under general fund budgeting, the main choice for each citizen is whether to support higher or lower general taxes, and each citizen must speculate as to whether raising general taxes will sufficiently increase spending on the services he or she most values to make the general tax increase worthwhile. In contrast, dedicating tax revenues to particular uses creates opportunities for more direct citizen input to individual program funding decisions (Buchanan 1963).

  • Dedicating taxes has little or no impact. Government officials generally have enough budgeting flexibility, despite restrictions from dedicated taxes, that total spending and spending allocations end up close to the amounts that would occur under general fund financing. In this view, it is a deception to lead taxpayers and voters to believe that dedicating taxes controls or guarantees spending choices when in reality it does not (Patashnik 2000, 188; Wilkinson 1994, 122).

These views are hypotheses about the merits of dedicated tax financing in general, including such applications as school district property and sales taxes to fund education. The highway finance system is a special case; because the dedicated taxes are user fees, they may have consequences that differ from those of dedicated broad-based taxes (such as a school district tax). Specifically, the willingness of highway users to pay the fee conveys some information about the value of the highway facility. It was argued above that reliance on dedicated revenue from user fees may reduce the risk of overspending, because a facility that produced little benefit would not generate fee revenue sufficient to sustain it and because users will not lobby for added spending that entails fees higher than the value to them of the improved service. Demonstrating that transportation spending is constrained in this way would require research, but there is some evidence in support of the assertion. National highway spending has historically tracked user fee revenue fairly closely (Table 2-3), although spending exceeds revenues and there have been periods of divergence (e.g., 1972–1982 and 1997–2003). Another sign of how finance practice constrains spending was the 2-year delay in reauthorization of the federal surface transportation aid program between the expiration of the previous program in 2003 and enactment of the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU) in 2005. The obstacle to action in that period was the gap between desired spending and projected revenue from user fees.

Gaining the efficiency benefits of charging fees to highway users does not require that the revenues raised be dedicated to highways. User fees are beneficial

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as long as they induce reductions in costs of highway travel (for example, congestion, pollution, or road wear costs) that are greater than the value of lost travel benefits to highway users who forgo or alter travel because of the fees. It was noted above that if the charge for each trip is the marginal cost of the trip (that is, the added cost of the trip to the system operator, other users, and the public), and the highway agency invests in expanding links of the system that are generating surplus revenue, then the highway system will evolve toward the economically optimum scale and the fee revenue will approximate the spending needed to support it. However, if fees are not equal to marginal costs (for example, if a monopolist set fees so as to maximize revenue), then, in the case of a service like highways that users value highly and whose use is fairly insensitive to price, the fees could generate large revenues, in excess of the economically justified level of road spending.

The possibility of excess revenue has been a long-standing objection to dedicated funding for highways, whether from fuel taxes or tolls.8 The legitimacy of this concern is difficult to assess because of lack of evidence. If road charges were set to maximize revenue and all revenue was then spent on expanding capacity, the likely result would be a growing capacity surplus and low or negative returns on investments for incremental capacity expansion. However, the evidence presented in the section above on highway system performance suggests that historically, incremental highway expansions have yielded good returns on average. Comparison of tax rates and revenues in the United States with those in Europe (where the gasoline fuel tax rate typically is 10 times higher than in the United States and revenues generally are not dedicated) suggests that U.S. rates are far below the revenue-maximizing rates. It has been argued that dedication of revenue tends to suppress fuel tax rates by making the fuel tax a less useful revenue-raising instrument in the eyes of legislators (Pisarski 2004).

Evidence for another supposed effect of dedicating tax revenue—that it gains public support for user fees or other taxes—is mainly anecdotal. The following are examples:

  • In debates over transportation finance in Pennsylvania, rural and small town legislators are reported to have opposed proposals to increase highway user fees to pay for transit but to have supported a broad-based transit tax plus user fee increases dedicated to highways (Barnes 2005).

8

For example: “The net result [of tying spending to revenue from road pricing] could be an inexhaustible supply of capital for highway investment unrelated to desired levels that might otherwise be formulated from policy planning considerations at the local or national level” (Sitton 1965); and “Originally intended to ensure completion of the interstates [the Highway Trust Fund] is now primed to sponsor much superfluous road construction. A bulging stream of proceeds from the trust’s ‘user fee’ (gas-tax income) is presumed to pay for each new mile of concrete and macadam…. Few other advanced nations have hitched the financing of their transportation systems to a cash cow of this sort” (Nivola 1999, 69).

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  • Proponents of devolution of highway finance responsibilities from the federal government to the states regularly cite diversion of federal user fee revenue from highways to other purposes as a primary argument for abolishing the federal gas tax (e.g., Utt 2004, 2).

  • A referendum calling for dedication of state highway user fee revenue to transportation passed by a 79 percent majority in Missouri in 2004 (ARTBA 2004).

  • The history of transportation funding referenda suggests that the more specific the proposed uses of the revenue, the more likely it is that voters will support the tax (Ernst et al. 2002, 5–11; Center for Transportation Excellence 2004).

Experience in Europe runs counter to the claim that dedication of revenues is necessary to gain support of fees. Taxpayers there have been willing to accept very high fuel excise tax rates, although most revenue is not dedicated to transportation and some toll revenues have been dedicated to nonhighway purposes. However, the direction of European transport finance reform may be toward U.S.-style user fee finance with dedicated taxes (Commission on Transport Infrastructure Funding 2000).

In view of the fundamental importance of dedicated tax revenues to the financing of transportation programs in the United States, it is unfortunate that better information is not available for assessing the conflicting claims concerning the impacts of the practice. Research could evaluate the effect of the practice on total spending, public support for taxes, and the quality of government spending decisions. Despite the uncertainties, it appears that the practice of user fee finance in the highway program has positive consequences and that allowing the practice to erode would risk a decline in the performance of transportation programs. User fee finance appears in some cases to earn public support for specific programs, although systematic evidence for this effect is lacking. It provides stability and may promote efficiency through the budget constraint it imposes and through the influence of fees on user decisions.

Federal, State, and Local Government Responsibilities

Chapter 2 described the division of responsibilities among the federal, state, and local governments for finance and for operation of transportation programs, and it outlined the rules governing the federal-aid highway program with regard to allocations of grants among the states, project eligibility, project design, and contracting and labor practices requirements. These two related aspects of the federal structure of transportation finance—the division of responsibilities and federal program rules—exert a major influence on program outcomes.

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Chapter 1 stated, as a guideline for policy, that the lowest level of government (federal, state, or local) that represents most of the population that uses and benefits from a transportation facility ought to be responsible for providing and funding the facility. That is, ideally, local governments would provide local streets and transit; states, regional facilities like intercity roads; and the federal government, facilities whose scope genuinely demands a national perspective in planning, like the Interstate highway system or the air traffic control system. The advantage of following this rule is that the governmental unit providing the facility is accountable to the users and beneficiaries of the facility, who also pay for it through their taxes and fees. Transportation budgets and priorities are then more likely to correspond to the services that the beneficiaries value most and are willing to pay for.

The federal and state roles in highways and transit are greater today than this rule would appear to require, for three reasons. First, grants to lower levels of government have been used as a means of redistributing resources among regions of the country and between urban and rural areas. Second, cities and towns lack good mechanisms for charging the users of their streets and highways. Finally, the present federal highway program was designed with construction of the Interstate system—a genuinely national project—as its most important objective. Since the substantial completion of the Interstate program in the 1980s, proposals have regularly been made to reduce the federal government’s involvement in highways and transit. At the state level, a realignment of state and local responsibilities has occurred gradually, in part as the result of federal-aid program requirements that states give local governments more control over priorities for spending federal-aid funds in urban areas. Chapter 6 reviews a range of proposals for adjusting federal, state, and local roles, within the basic framework of existing finance arrangements, with the aim of increasing the cost-effectiveness of highway and transit spending. Chapter 5 describes proposals for introducing direct charging for road use through tolls or road use metering. By giving all governments the ability to raise revenues from all users of their roads, direct charging probably would entail a major restructuring of federal, state, and local responsibilities.

The following are important issues concerning the effects of program rules in the existing federal transportation aid program:

  • The impact of project eligibility rules on state project selection (federal grants carry numerous restrictions concerning the class of road or the type of improvement for which the state may spend the funds, including the restriction of nearly all highway grants to capital projects);

  • The effect of federal engineering standards and planning requirements on the cost-effectiveness of projects and project selection;

  • The significance of the geographical transfers that the federal-aid program accomplishes, among states and between urban and rural areas, from the standpoint of fairness and cost-effectiveness; and

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  • The effect of the federal highway user taxes on state tax effort and the effect of federal-aid matching requirements on total state transportation spending.

There is scope for reforms in federal-aid program rules that would allow the program to produce greater transportation improvement and fulfill federal goals more effectively. Studies from government and other sources have suggested how changing specific rules could improve results. For example, Government Accountability Office (GAO) reports have shown that, because the state matching share required in most federal-aid highway projects is small (usually 20 percent), much federal highway aid is in effect paying for general state spending and taxpayer relief rather than for expanding the highway system (GAO 2004); a Congressional Budget Office study noted how relaxation of federal restrictions on debt financing, tolling, and public–private partnerships has helped states to increase the value of federal aid, and assessed prospects for greater improvement in this direction (CBO 1998); and a study by a TRB committee showed how federal design rules affect costs of projects and state project selection decisions (TRB 1987).

Revisions to federal-aid highway program rules would be a necessary element of any comprehensive proposal concerning reform of transportation finance at the federal level. In the 2005 reauthorization of the federal surface transportation aid program, Congress created two commissions to examine questions related to finance, the National Surface Transportation Policy and Revenue Study Commission [SAFETEA-LU Section 1909(b)] and the National Surface Transportation Infrastructure Financing Commission (SAFETEA-LU Section 11142). When the provisions in the charges of these commissions were under consideration during debate over reauthorization, GAO recommended that the mandate include consideration of options to redesign the structure and funding formulas of the federal-aid highway program, in order to increase the effectiveness of aid and better promote national goals (GAO 2004, 47). The commissions’ charges do not specifically refer to this task, but it would not be inconsistent with the broad definitions of the charges in the legislation.

REFERENCES

Abbreviations

AASHTO American Association of State Highway and Transportation Officials

APTA American Public Transportation Association

ARTBA American Road and Transportation Builders Association

CBO Congressional Budget Office

FHWA Federal Highway Administration

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×

FTA Federal Transit Administration

GAO Government Accountability Office

TfL Transport for London

TRB Transportation Research Board

USDOT U.S. Department of Transportation


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×

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TRB Special Report 285: The Fuel Tax and Alternatives for Transportation Funding examines the viability of existing revenue sources, the merits of present transportation finance arrangements, and potential directions for reform of transportation finance. According to the report, fuel taxes can remain the primary funding source for the nation's highways for at least another decade, but eventually replacing them with a system for metering road use and charging accordingly could benefit travelers and the public. In addition, the committee that developed the report suggests that while the current funding system helps maintain existing highways and build new ones and ensures that users pay most of these costs, it does not help transportation agencies alleviate congestion or target investment in the most valuable projects.

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