Modernizing the Interstate System and Rethinking How We Spend Federal Gas Tax Money

Every time you gas up your car, the pump price includes 18.4 cents a gallon in federal fuel taxes. The proceeds go into the Highway Trust Fund, which Congress allocates to numerous federal highway and mass transit programs. This tax and the Trust Fund originated in 1956 as the politically preferred way to pay for building the Interstate Highway System. With the Interstates long since completed, you may wonder why this tax and the federal program still exist.

Members of Congress love allocating highway money, so when the original Interstate system was nearing completion, they broadened the spending categories, and periodically increased the gas tax rate. Congress greatly expanded the scope of spending, first to all sorts of non-Interstate highways and later (during the early Reagan years) to mass transit.

Along the way they also added numerous costly regulations—Buy America, Davis-Bacon, etc—that drive up the price of infrastructure projects. And every time they “reauthorized” the highway program, they diverted a larger share of the gas tax funds coming from highway users to non-highway purposes. Today the highway program funds not only mass transit but sidewalks, bike paths, recreational trails, and even transportation museums—all with “highway user tax” dollars. And of course, in the last two decades the number of “earmarks” for low-priority projects like bridges to nowhere has multiplied enormously.

Increasingly, libertarians and conservatives have suggested scrapping the whole federal program, devolving both the taxing power and the responsibilities for highways and transit to the states. I’m sympathetic to that view, but there is one notable exception: the Interstates. One of the reasons for enacting the Constitution was to facilitate interstate commerce. States were erecting tariff barriers to interstate trade, which is why the commerce clause was put into the Constitution, creating one of the world’s largest free-trade areas.

In today’s global economy, the Interstates are inherently federal, facilitating both interstate commerce and international trade. And contrary to the view that the Interstate system is “completed,” it actually needs large-scale investment.

The basic map for the Interstate system was drawn up in the 1940s, based on what America looked like then. Today, it fails to link major metro areas such as Las Vegas and Phoenix (which much smaller towns then) and does not directly connect with all of the country’s major ports and airports. Much of the Interstate system is nearing its 50-year design life, requiring costly reconstruction over the next several decades. About 200 key interchanges on the system are major national bottlenecks. The congestion points cost Americans tens of billions of dollars per year in congestion and the highways require redesign and reconstruction. And much of the Interstate system is undersized even for today’s car and truck traffic, let alone what’s coming as our economy continues growing.

Our new Reason Foundation study therefore calls for a new program to revitalize and rebuild the Interstate system for the 21st century, while devolving everything else to the states. With the existing federal fuel tax, plus new freedom to use pricing and toll financing, Interstate 2.0 would address both chronic urban freeway congestion and the productivity of interstate trucking. By refocusing federal priorities on Interstate 2.0, we estimate that about $10 billion more per year could be invested in the modernization effort.

Urban transit is clearly a local/regional responsibility, not federal, and should be funded at those levels. But it’s almost certain that Congress will continue making grants for this purpose, so our study argues that such funds should no longer be taken from highway users but should instead come from federal general funds, like the government’s other community development programs. That’s especially the case now that the Obama administration and Congress seem to want to focus on goals such as “livability” rather than congestion-reduction.

Under our proposal, with the federal role and funding limited to the Interstates, the states would be freed from federal regulations on all other highways. A previous Reason Foundation study estimated that due to all the costly federal regulations, a federal-aid highway dollar buys only about 70% as much as a state highway dollars, so the states’ resources would go a lot further under our proposal. States would also have a stronger incentive to set funding priorities (e.g., requiring projects to pass a serious benefit/cost threshold in order to be funded), rather than trying to fund everything on politicians’ wish lists. They would also be free to use tolling as an additional user-pays revenue source, and to use public-private partnerships to shift financing risks away from taxpayers and onto the private sector while speeding up project delivery.

To be sure, many state politicians and state DOTs have grown used to depending on federal aid funding and will hesitate to support such a major change from the status quo. But our proposal represents a long-overdue sorting out roles and responsibilities between the federal and state governments.

For nearly all of our history, states (along with the private sector) were responsible for the highways within their jurisdiction, just as local governments were responsible for local streets and roads. With the federal government increasingly acknowledged to be far too large and on an unsustainable fiscal path, now is the time to begin devolving functions that are not clearly federal to other levels of government.

Policy-makers need to narrow the focus of the federal highway program and to direct federal fuel taxes to the most critically important federal transportation infrastructure: the Interstates.

More on the study:

Full Study (pdf)
Executive Summary
Press Release
Frequently Asked Questions