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Reason Foundation

Toll Financing Should Play a Leading Role in Building 21st Century Highways

New technology allows us to manage traffic flow better than ever before, but we need to shift away from reliance on gas taxes, which are failing to deliver necessary revenue

May 3, 2007

Los Angeles (May 3, 2007) – Already-frustrated commuters are going to waste more and more time stuck in traffic jams. By 2030, drivers in 30 U.S. cities will experience daily traffic delays that make their commutes 50 percent longer than they would be in free-flowing traffic conditions. Today just four cities – Los Angeles, Chicago, San Francisco, and Washington, D.C. – experience that level of congestion.

With states struggling to maintain existing highways, let alone pay for new ones that would reduce gridlock, a growing number of state and local governments are considering toll financing to help build much-needed new road capacity.

A new Reason Foundation study examines the various methods being used to fund major new highway projects and concludes toll financing is an "important part of our transportation system" that should be utilized more frequently.

"Our current funding system primarily consists of outdated, ineffective gas taxes that fund pet projects for those with political clout," concludes Peter Samuel, author of the report and senior fellow at Reason Foundation. "Instead of making marginal improvements to our transportation system when funds occasionally become available, we can use toll financing to prioritize projects and build new highways and bridges. Toll financing allows projects to be built more quickly today and then to be paid for directly by the users who derive the benefits of the roads."

Reason finds that state and federal fuel taxes (on gasoline and diesel) are the largest single highway user fee at $53 billion per year, but they provide less than half of the nation’s total road funding and are unable to deliver the revenue needed to add highway capacity. The federal fuel tax (gasoline 18.4 cents per gallon, diesel 24.4 cents per gallon) has not been increased since October 1, 1993. During that time the cost of living, as measured by the consumer price index, has risen 40.4 percent, which means that the purchasing power of the gas tax has declined 29 percent. As a result, fuel taxes that averaged about six cents (in 2001 dollars) per vehicle-mile traveled in the 1960s have declined to about three and a half cents today, due in large part to improved fuel efficiency.

"By 2009, the federal highway trust fund will be $21 billion in the red and unable to even maintain our existing roads," says Robert Poole, director of transportation studies at Reason Foundation. "We need alternatives, and toll financing should be at the top of the list."

Toll concessions, where a private company agrees to pay for, build and operate a toll road for a period of usually 35 to 99 years, offer several advantages over gas taxes and traditional state toll authority methods of road funding, including:

  1. Toll concessions offer greater access to capital and the ability to fund large, mega-projects that governments avoid because they don’t have the money;
  2. Private companies have much-needed flexibility to raise or lower tolls to meet demand and mange traffic flow. In contrast, political agencies are reluctant to raise rates, allowing the infrastructure to decay and traffic conditions to worsen;
  3. Toll concessionaires have demonstrated greater cost savings in project construction and day-to-day operations;
  4. Toll concessions give us the ability to do multi-state projects, which will be particularly important if the United States moves forward with dedicated heavy-duty truck lane projects along Interstate routes.

Reason also suggests that as toll financing becomes more common, we will need to "break free of the limitations of traditional government toll road agencies, which are subject to political influences that are often not in the best interest of highway users or the public at large."

Also since government toll agencies must rely almost entirely on borrowing, they don’t have equity investors who can tide them through the risky start-up period, when there might be cost overruns, delays in opening, and lower than expected traffic. That limits the range of projects that can be financed by state toll agencies, the Reason study finds.

"America has shown the world that investor-owned electric, gas, and telecom utilities work better than the state-owned utilities. Today, nearly every developed country has followed suit and privatized those utilities," Poole says. "Major roadways also make sense as investor-owned utilities. Because the private company is willing to invest its own money on a long-term basis, it is willing and able to manage risks that public toll authorities are ill-equipped to handle. By being able to pool risks and deploy expertise across multiple jurisdictions and countries, these companies operate more efficiently and deliver better services and value to taxpayers."

"With toll funding we can build important new roads in an environmentally friendly manner, such as underground," add Samuel. "And if tolls are varied by time of day we can maintain free-flowing traffic conditions even during rush-hours – making for more efficient, safer travel."

The study also examines additional ways to fund major projects, including shadow tolls (payments from the government to private road builders/operators based on the number of vehicles using the road), borrowing against future grants, and the creation of non-profit corporations to operate highways. It concludes that these alternatives can be useful in limited cases, but offer nowhere near as much potential as toll concessions.

Full Study Online

The full study, The Role of Tolls in Financing 21st Century Highways, is online at reason.org/ps359.pdf. A summary of the report is available at reason.org/ps359_tollfinancing_polsum.pdf. And Reason's transportation research and commentary is here: reason.org/transportation/index.shtml.

About the Authors

Peter Samuel is senior fellow at Reason Foundation and editor and publisher of TollRoadsNews.com. He is the author of numerous research reports on transportation policy and previously taught economics at Monash University in Australia.

Robert Poole is director of transportation studies at Reason Foundation, a free market think tank he founded. The New York Times says Poole is the “chief theorist for private solutions to gridlock. His ideas are now embraced by officials from Sacramento to Washington."

Poole, an MIT-trained engineer, has advised the last four presidential administrations on transportation and policy issues. In the field of surface transportation, Poole has also counseled the Federal Highway Administration, the Federal Transit Administration, the White House Office of Policy Development, National Economic Council, Government Accountability Office, and state DOTs in numerous states.

About Reason

Reason Foundation is a nonprofit think tank dedicated to advancing free minds and free markets. Reason produces respected public policy research on a variety of issues and publishes the critically acclaimed monthly magazine, Reason. For more information, please visit www.reason.org.

Contacts

Robert Poole, Director of Transportation, Reason Foundation, (310) 292-2386
Peter Samuel, Senior Fellow, Reason Foundation, (301) 631-1148
Chris Mitchell, Director of Communications, Reason Foundation, (310) 367-6109



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