Problems with Washington’s Role in Transportation Funding

President Trump and Congress seem poised to boost spending on highways, bridges, and mass transit. Yet if this increase in spending ends up being funneled through the existing transportation funding system, the results will be disappointing. Instead of increasing Washington’s influence over infrastructure spending, it makes more sense to leave most funding responsibilities with the states. That approach would result in better project selection and a superior transportation infrastructure.

As things stand, Washington plays a significant role in highway funding. The 2015 Fixing America’s Surface Transportation Act contains five formula-based surface transportation funding programs that will cost about $45 billion per year from 2016 to 2020. Although this and previous transportation funding bills have increased state and local government discretion, two fundamental problems persist. First, federal funding distorts the benefit-cost calculation associated with project selection. Second, the federal share of project funding remains too high relative to potential jurisdictional spillovers.

In order to use limited highway funds efficiently, project selection should weigh costs against benefits. To ensure a positive return on transportation investment dollars, only those projects for which the benefits outweigh the costs should be funded.

If a community or state were responsible for the entire cost of a local highway or transit project from its own budget, there would be pressure on decision makers to choose projects for which total benefits exceed total costs. When the federal government provides matching funds for a highway project, the actual cost to a community for financing the project goes down. As a result, even when the project’s true total cost is greater than total benefits, federal matching funds can cause local expenditures to be lower than total benefits, resulting in the selection of noneconomical highway projects.

A complicating factor that makes choosing the efficient level of transportation spending difficult is the possibility that some users of a highway may live outside the taxing jurisdiction. Those users benefit from the highway without paying taxes that finance the project. Local decision makers might not take those users into consideration when deciding whether to build a highway. That failure could result in underinvestment in highways in a community. To ensure an efficient amount of highway investment, benefit spillovers such as these justify Washington funding equal to the value of the spillover. A better approach for solving the spillover problem, at least for major highways, would be to charge users a toll. That way, the “user-pays principle” ensures that those who benefit from using the road pay for it.

Allowing Washington to play a major role in funding highways—what is essentially a state and local responsibility—creates two additional problems. First, another layer of politics enters the decision-making process. Every senator or representative wants to get a piece of the highway funding pie, whether or not it makes economic sense. Politicians design funding formulas that work in ways that automatically ensure funding to states or communities, even in cases in which additional spending is unwarranted. In addition, because the funding of federal highway spending comes from fuel taxes, each state’s representatives fight to ensure that their constituents get their “fair share” of these tax revenues. Although that later problem is understandable on equity grounds, it would be better to just leave most of the money with the states.

Second, it is difficult to determine what the appropriate project matching grant rate should be. The current federal grant rate is 80 percent for noninterstate road projects and 90 percent for interstate projects. The funds focus on highway construction over more essential maintenance. Those grant rates are determined not by attempts to measure the size of spillovers but by politics.

Although it is difficult to determine the size of spillover benefits, it is unlikely that 80 to 90 percent of drivers on most state highways and interstates are from outside a given state or community. Evidence is limited, but one US Department of Transportation travel study found that only about one-third of drivers on interstate highways are from out of state. Most vehicle trips are local. In 2009, the average household vehicle trip was only 9.7 miles. That finding suggests that benefit spillovers, at least at the state level, are low. Federal matching grant rates are too high and should be lowered on future grants.

Rather than increasing highway spending from Washington, the president and Congress should focus on finding ways to improve how transportation dollars are spent. They can accomplish this by using the geographic distribution of those who receive the benefits as the basis for determining which government is responsible for paying for the construction of highways, bridges, and mass transit.

When Washington has a reduced role, the federal fuel tax can be lowered, giving each state the flexibility to set the fuel tax at levels appropriate to fund its own highway needs. Revisions to federal laws that would allow states to toll all interstate highways would reduce congestion and lessen the need to expand highway capacity. Shifting most of the financing responsibilities back to states, and having each state or town pick up all or most of a project’s cost, would result in the more efficient use of highway funds.