May 16, 2017

Should the Federal Government Spend More on Transportation Infrastructure?

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The Trump administration and Congress are now discussing several proposals to rebuild America’s infrastructure. Key Senate Democrats have offered a plan to increase direct federal spending on infrastructure projects by $1 trillion. The administration has also proposed reducing regulatory red tape and offering tax credits to encourage private firms to invest in infrastructure. Although bipartisan support exists for upgrades and better maintenance of roads, highways, and transit systems, spending federal money is not the best way to address infrastructure problems. A better approach would be to increase reliance on user fees and to expand the role of state and local governments and private firms in funding and managing transportation infrastructure.

Most highway funding comes from taxes on gasoline and diesel fuel, but a growing number of vehicles use alternative fuels and do not pay their share of highway costs. Recent changes in technology have made it possible to use a revenue source other than fuel taxes that is more closely tied to highway use: mileage-based user fees (MBUFs). Employing technology similar to GPS, each vehicle could be assessed a fee on the basis of when and where it drives. With MBUFs, the fee could vary with congestion and the cost of maintaining specific roads. Revenue could be allocated to each road on the basis of how much traffic uses it. Decision makers would be more likely to build roads if greater demand led to the collection of more user fees.

Although a transition to MBUFs could take 15 to 20 years, the federal government could help begin the transition to direct user fees by permitting states to implement tolls on interstate highways. Many interstate highways are past their forecast useful life. Reconstructing and modernizing them would enhance mobility. Tolls would be more politically viable if states borrowed money to rebuild and modernize their interstates and then imposed tolls to pay back the costs of upgrading the highways.

Tolls also could be used to reduce or eliminate congestion by adjusting the level of tolls according to time of day, with higher tolls during rush hour. Several highways, such as California’s State Route 91 and Virginia’s Capital Beltway, use congestion tolls on express lanes, adjusting tolls so that traffic on those lanes flows freely throughout the day. If drivers must pay tolls high enough to cover the congestion costs they impose on other drivers, more would have an incentive to use mass transit or drive during less congested times.

Along with congestion tolls, reducing or eliminating the federal fuel tax and giving state and local governments more responsibility to raise their own funds for highways and mass transit would enhance efficiency. State and local governments—with greater awareness of the circumstances of a specific metropolitan area, town, or rural area—can do a better job of funding and managing roads, highways, and public transportation that serve primarily local residents. If residents of a particular city value the availability of transit service more than what they pay to use it, they may be willing to pay taxes to cover the difference between fare revenue and total costs. When the federal government funds transit expansion, each city has an incentive to compete for transit grants even if costs exceed benefits, because its residents pay a small share of the federal taxes used to pay for the expansion.

Transit users pay fares for each trip they take, just as drivers pay for highways with fuel taxes. Yet fuel taxes directly finance less than half of state spending on highways, streets, and roads, and the money collected is not necessarily allocated in proportion to how much each highway is used. Fares cover less than 35 percent of mass transit operating costs. The remaining costs of mass transit—including almost all capital costs—are paid for by subsidies from federal, state, and local governments. This contributes to inefficient management, above-market wages, and service extensions to low-density suburbs where transit is not cost-effective.

Some states have turned to public-private partnerships to lease and manage several toll highways, as have some foreign countries. If tolls or mileage-based user fees financed more highways, private firms could own and operate them and would have an incentive to keep costs down and manage highways to maximize their benefits for users.

Whenever taxes fund highways or transit infrastructure, the process of deciding which projects get priority becomes inherently political. Although such decisions are ostensibly made on the basis of objective factors, politics influences debates on how much federal fuel tax revenue goes to each state. Likewise, politics plays some role in what areas get federal discretionary grants awarded for new or expanded transit systems. For example, urban areas in states with representatives on the House Transportation and Infrastructure Committee get more transit funding.

Instead of having the federal government spend money from the general fund on transportation infrastructure, transportation infrastructure could easily be paid for with user fees—whether through tolls, MBUFs, transit fares, or fuel taxes collected by state or local governments. Highways and transit infrastructure provide valuable services that users are willing to pay for. If prices are high enough, users will have more incentive to consider the costs of the trips they expect to take, as well as decisions about where to live, where to work, and what mode of transportation to use. In addition, those who manage the infrastructure will have incentives to expand capacity in response to demand, to maintain it well, and to limit congestion to attract users who are willing to pay a high price to use it.