The Fuel Tax and Alternatives for Transportation Funding Special Report 285 (2006) / Chapter Skim
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3 Evaluating the Present Finance System
3 Evaluating the Present Finance System
Pages 62-94
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From page 62... ...
Also, the revenue available from user fees and other sources is a constraint on decisions to build and upgrade facil ities. 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)
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From page 63... ...
. There have been few analyses of how changes in the struc ture 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 proj ect selection.
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From page 64... ...
The fourth section examines how certain features of the existing finance sys tem, including user fees, the practice of dedicating revenues from users to speci fied 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.
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From page 65... ...
NCHRP Report 377: Alternatives to Motor Fuel Taxes for Financing Surface Transportation Improvements (Reno and Stowers 1995, 4951) Criteria for evaluating tax alternatives (derived from a review of tax studies produced by 13 states)
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From page 66... ...
. 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, 46)
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From page 67... ...
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)
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From page 68... ...
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 arrange ments will affect transportation system performance or the economic benefits derived from transportation programs seldom enters into finance or fee decisions.
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From page 69... ...
. 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.
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From page 70... ...
. 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.
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From page 71... ...
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 dur ing the 1980s, and 1 percent during the 1990s.
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From page 72... ...
It found annual rates of return on additional highway capital of 54 percent for 19601969, 27 percent for 19701979, and 16 percent for 19801991. That is, in the 19801991 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.
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From page 73... ...
This misalignment of fees with costs encourages inefficient vehicle design and operating practices and adds unnecessarily to high way 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 costbased user fees alone)
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From page 74... ...
Proposals for practical pricing improve ments 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 trans portation efficiency, · The potential revenue from road pricing, and · How road pricing would affect perceived needs for capacity expansion.
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From page 75... ...
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.
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From page 76... ...
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 net work 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.
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From page 77... ...
. 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.
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From page 78... ...
Revenues from marginal costbased fees would cover an important part of the cost of rural roads, including pavement and bridge wear costs attribut able to traffic, and congested rural roads (e.g., certain heavily traveled Interstates) would generate congestion fee revenue to pay for capacity expansion.
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From page 79... ...
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 .
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From page 80... ...
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.
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From page 81... ...
· Improving road pricing would alter the benefits of capacity expansion proj ects 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.
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From page 82... ...
USDOT's Conditions and Performance reports con sider 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)
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From page 83... ...
Therefore, improving the pricing of roads would alter the rationale for tran sit 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.
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From page 84... ...
User Fee Finance and Dedicated Revenues Chapter 2 outlined federal highway finance practices. Most states' finance prac tices parallel the main features of the federal program -- user fees, trust funds, and dedication of fee revenues for specific purposes.
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From page 85... ...
. The following practices are the elements of user fee finance in the highway program: · Imposing highway user fees (principally motor fuel taxes and vehicle regis tration fees)
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From page 86... ...
. 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.
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From page 87... ...
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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From page 88... ...
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)
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From page 89... ...
Research could evaluate the effect of the practice on total spending, public support for taxes, and the quality of government spending deci sions. 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.
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From page 90... ...
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 restric tion 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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From page 91... ...
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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From page 92... ...
5. Committee for the Review of the Federal Highway Cost Allocation Study.
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From page 93... ...
1995. NCHRP Report 377: Alternatives to Motor Fuel Taxes for Financing Surface Transportation Improvements.
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From page 94... ...
2003. Road User Fee Task Force: Report to the 72nd Oregon Legislative Assembly.
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