Citizens Against Government Waste has the answer in this new, link-rich backgrounder, and it lends support to Gov. Palin's "thanks, but no thanks" assertion (which she's apparently not using anymore). From the CAGW press release:
The Bridge to Nowhere was first funded in August 2005 through the 2005 SAFETEA-LU Act through a $223 million earmark inserted by then-House Transportation and Infrastructure Committee Chairman Don Young (R-Alaska). In October, 2005, Sen. Tom Coburn (R-Okla.) offered an amendment to the fiscal 2006 Transportation Appropriations Act to transfer $75 million in funding for the Bridge to Nowhere, along with money for the Knik Arm Bridge in Alaska, to support the rebuilding of the Twin Spans Bridge in New Orleans following Hurricane Katrina. His amendment was defeated by a vote of 15-82. Senators Biden (D-Del.) and Obama (D-Ill.) voted against the amendment; Sen. McCain (R-Ariz.) was not present for the vote.
In November, 2005, Congress included language in the final version of the fiscal 2006 Transportation Appropriations Act that allowed the state of Alaska to either spend money on the two bridges or on other surface transportation projects. In October, 2006, Alaska Governor Frank Murkowski included $91 million for the Gravina Island Bridge in his budget submission for fiscal year 2007. As a candidate for governor, Sarah Palin expressed a mixture of support and doubt about the bridge, particularly about how the project would be funded. As governor, she submitted her budget on January 17, 2007 without any money for the bridge. On July 17, 2007, the Associated Press reported that "The state of Alaska on Friday officially abandoned the 'bridge to nowhere' project that became a nationwide symbol of federal pork-barrel spending." Governor Palin said in a statement that "Ketchikan desires a better way to reach the airport, but the $398 million bridge is not the answer."
"Media reports that Congress killed the Bridge to Nowhere are not accurate," said Schatz. "The 2006 transportation appropriations bill allowed Alaska to decide whether or not to move forward. Governor Murkowski said yes; Governor Palin said no. Any discussion about the project should begin with facts."