With the federal role in highway funding set to decline, states may find they have to take up the slack. While costs of highway construction and maintenance are rising, Congress has disagreed about whether to raise the federal gas tax or otherwise find a sustainable alternative revenue source to fund highways. In new research from the Mercatus Center at George Mason University, I suggest a few things states can do to cushion the blow to their budgets.
States already play an important role both in collecting taxes to pay their share of highway funding and in managing the highway funds provided to them by the federal government. With fewer federal funds and competing demands on their budgets, states must find ways to make their highway spending go further by reducing regulations, finding better ways to deal with congestion, and improving maintenance.
Regulations like prevailing wage laws and in-state preference policies raise highway construction and maintenance costs in many states. Eliminating these and other regulations could reduce costs substantially in some states.
Congestion is more than just an annoyance on our daily commutes. It’s also an economic problem caused when drivers do not pay the full price for using highways during certain times of the day. During congested periods, each driver imposes costs on surrounding drivers by increasing the time it takes them to reach their destinations. Because drivers don’t pay for their respective contributions to the congestion, they lack incentive to change their schedules, take public transportation, work from home, or find other solutions.
Inadequate highway maintenance, which damages vehicles, is the result of the way funds are allocated among the different roads and highways within a state and by choices made about highway durability. Better management could help: Increasing the role of private firms in managing highways is one way to bring this about.
The use of adjustable rate tolls, in which prices vary based on factors such as the current congestion level or time of day, can significantly reduce congestion problems. Tolls can be set high enough during rush hour to virtually eliminate congestion, as demonstrated by the use of high-occupancy toll lanes in a number of metro areas. Besides having an incentive to construct and maintain highways efficiently, private firms also prioritize ways to reduce congestion problems on the highways they manage.
Because their profit depends on how well the highways they manage satisfy the preferences of drivers, private highway managers find ways to keep costs down while providing well-maintained highways. Enabling drivers to reach their destinations quickly — even if they have to pay a little extra during rush hour — is in everyone’s best interest.
State highway agencies could also consider giving local governments greater responsibility to fund and manage local roads and transit systems. When a large share of the funding for a local road or transit system comes from the federal or state government, local governments compete against each other for funds, even if the benefits of those projects do not cover the costs.
If set high enough, user fees and fares give drivers and transit riders incentives to use the most cost-effective mode of transportation available. To the extent that residents and businesses gain additional benefits from highways or transit lines that are unrelated to how often they are used, it makes sense to charge users less than cost while subsidizing highways and transit. If the tax revenue used to subsidize local roads and transit systems comes primarily from local residents, they have an incentive to vote only for really necessary projects.
Skeptics may argue that tolls deny us an important public good: the free public roads we all rely on. But we must not forget that every taxpayer is already paying a high (and sometimes unnoticed) cost for these roads, and in most large cities, we are not getting a good return on investment. Ultimately, what we pay in tolls for efficient roads must be balanced against what we would otherwise pay in taxes as well as the time we waste navigating poorly managed roadways.
Relying more heavily on market forces and federalism will get us more bang for our transportation buck. While controversial, privatization—together with more local control—will benefit taxpayers and drivers by reducing congestion, improving the quality of our roads, and lowering overall costs.