Public Works Financing Newsletter

Why We Need Transparent Highway Funding

The longer-term goal should be to convert our highway systems into actual highway utilities, run as businesses and paid directly by their customers

I’ve been doing a lot of thinking about how politically difficult it has become to increase needed investment in the U.S. highway system. The federal gasoline and diesel tax rates have not been increased since 1993. To preserve its real buying power, after inflation, the 18.4¢ per gallon federal gasoline tax would have to be 29.7¢ in 2013. Likewise, the average total (state + federal) gas tax of 41¢ per gallon would be 66¢ today. Yet any such increase is fought bitterly as a “tax increase” and seems impossible at the federal level.

Yet this inability to raise needed funding comes in the face of credible studies, by FHWA and two national commissions, indicating very large unmet needs—such as adding networks of express toll lanes to congested urban freeways, upgrading or replacing 22% of all bridges, and reconstructing and modernizing the Interstate highway system.

The highway system is, in fact, a network utility—like electricity, natural gas, water supply, cable, and telecommunications. When any of these other utilities needs to replace an aging facility or add capacity to keep pace with growth, it can go to the capital markets to raise the needed funds, and may need to increase the rates charged to its customers to ensure enough revenue to cover the new debt service. To be sure, there are sometimes arguments about the specifics of the investment, but there is nothing like the overwhelming resistance to “gas tax increases” that we see in the highway sector.

What accounts for this striking difference? I think there are several reasons. First, the highway system’s funding is widely seen as politicized, with spending decisions based on horse-trading and maximizing political gains, rather than on allocating resources to their highest and best use (e.g., based on rate of return on the investment), as in other utilities. Voters especially distrust the federal system as not making wise use of their gas-tax dollars.

Second, the model used for all the other network utilities is essentially a business model. Most of the other utilities are investor-owned, so it’s to be expected that they operate as businesses, but even most municipal water and electric utilities operate far more like businesses than any highway agency (apart from the better-run toll agencies). When people get their electric bill, mobile phone bill, or water bill, they know that what they pay is based on how much they used. And they know that the money goes directly to the utility, to pay for its capital and operating cost. It’s a prime example of users-pay/users-benefit—and of transparency.

And this leads to the third reason for the difficulties of the highway sector. The average motorist has no idea what he or she is paying for highway services. Last spring ARTBA commissioned a public opinion survey on transportation. One of the questions asked each respondent what he or she pays each month in fuel taxes. A full 40% had no idea, and another 24% estimated about twice the actual amount, which is $46/month for the average household. That’s a pittance compared with the average $160/month bill for electricity and natural gas and the $161/month bill for landline and mobile phone service and $124/month for cable and satellite.

You’d think state DOTs would be making an effort to explain these comparative numbers to motorists. But several recent measures that increased transportation funding (e.g., in Pennsylvania and Virginia) did just the opposite. Some governors and legislators seem to be going to great lengths to hide or obscure the amount they are now requiring people to pay for highways and other transportation infrastructure—by reducing or eliminating the per-gallon tax and instead taxing fuel wholesalers, adding new sales taxes, etc.

Instead, legislators and state DOTs should be making highway user payments more visible. When I was growing up, I remember that every gas pump had a sign on it stating how many cents out of the total charged per gallon represented federal and state taxes. That policy should be reintroduced, as a first step toward greater transparency.

Second, state DOTs should create and publicize the average motorist’s monthly “highway bill,” showing what they pay each month in highway user taxes and what this amounts to in cents per mile. To get an idea of what this looks like on a national level, I pulled data from the Oak Ridge National Laboratories website (Table 8.1, Population and Vehicle Profile, 1950-2011). Using their 2011 figures for the number of households, personal vehicles, drivers, and vehicle miles of travel, I computed the average annual VMT per driver as 13,900 and the average number of drivers per household as 1.785. Using FHWA’s figure of $46/month per household in federal plus state fuel taxes gives us $522/year per household. Dividing that by the VMT per household (1.785 times the VMT per person) yields a national average rate of 2.2¢ per mile. The result for each state would be somewhat higher or lower than that, given the variation in state fuel-tax rates.

The monthly “highway bill,” averaging $46 per household (or its state-specific counterpart) should regularly be contrasted with the other (much higher) monthly utility bills people routinely pay, asking them to consider the value they obtain from streets, roads, highways, and Interstates. I expect that would open people’s eyes to how little they pay for critically important infrastructure that they depend on every day—and might make them more receptive to increased funding for well-justified improvements.

And translating this figure into an average charge per mile driven, as I did above, would start getting people used to thinking about per-mile charges, which will eventually have to replace per-gallon charging.

The longer-term goal should be to convert our highway systems into actual highway utilities, run as businesses and paid directly by their customers. One way to start this transformation would be as part of rebuilding and modernizing each state’s Interstate highways via per-mile toll financing, as I suggested in a recent PWF column. Since the Interstates handle 25% of all U.S. VMT, that would be a major step toward replacing per-gallon funding with transparent per-mile financing.

Robert W. Poole Jr. is the Searle Freedom Trust Transportation Fellow and Director of Transportation Policy at the Reason Foundation.

Robert Poole is Searle Freedom Trust Transportation Fellow and Director of Transportation Policy