It Is Time to Rethink the U.S. Highway Model

Commentary

It Is Time to Rethink the U.S. Highway Model

Our highway funding system based on per-gallon fuel taxes is breaking down for several reasons.

I’ve been writing this Public Works Financing column for more than two decades. During this time, I’ve researched and written dozens of policy studies on transportation infrastructure, advised federal and state transportation agencies, and served on various transportation committees and commissions. From all of this I’ve concluded that the way we fund and manage the U.S. highway system is broken and needs serious rethinking if it’s going to meet the needs of 21st century America.

The problems are legion, beginning with the huge direct cost of traffic congestion in America’s 200 or so urban areas—a whopping $160 billion per year just in wasted time and fuel. And while our highways and bridges are not “crumbling,” there are chronic problems of deferred maintenance, leading to many rough roads and a surprisingly large number of structurally deficient or functionally obsolete bridges.

Our highway funding system based on per-gallon fuel taxes is breaking down for several reasons. A growing share of the proceeds is no longer spent on highways, so people have come to view gas taxes as just another tax, which politicians are therefore leery of increasing. Yet as cars continue to get more efficient—using fewer gallons to go a given distance—revenues from per-gallon fuel taxes can’t keep pace with either the growth in driving or the cost of building and maintaining highways.

Moreover, with decisions on how to spend transportation revenues being largely political, at both state and federal levels, the billions raised and spent each year are often not spent on projects that would produce the most bang for the buck. Most federal highway and transit money is doled out by formula, and although members of Congress are no longer allowed to “earmark” pet projects, the overall process is based far more on politics than on sound economic principles (such as ensuring that benefits of a project exceed its costs).

I now think that a far better model would be to reconceive highways as another category of network utility, in addition to the familiar examples of electricity, water supply, telecommunications, and natural gas. Most network utilities are not run by government agencies, with key decisions made by legislators. Instead, the providers are organized as companies that sell services to customers, under government oversight. That’s true regardless of whether those companies are owned by investors or are government enterprises (like municipal electric and water utilities).

If highways were provided by highway utility companies—investor-owned concession companies, government toll agencies, or nonprofit user co-ops—a great many things would be different. For example:

  • People would pay for highways based on how much they use them, just as we pay for water by the gallon and electricity by the kilowatt hour.
  • People would be just as familiar with what highways cost, based on their monthly bill, as they are with the cost of cable television, cell phones, electricity, etc.
  • Per-mile highway charges would be subject to some form of regulatory oversight, based on the extent to which the highways and bridges in question had competitors or were essentially monopolies.
  • Large-scale highway investments—for new highways and for replacing worn-out ones—would be financed via the capital markets, just as individuals do in buying a home and as other utilities do in building new facilities, rather than being paid for piecemeal out of annual appropriations.
  • Major highway investments would be primarily business decisions, not political decisions, subject of course to the same kinds of land-use and environmental constraints faced by all other commercial developments.
  • Highway operations would be managed in real time, to provide customers with the quality of services they were willing to pay for.
  • Highway companies would have strong incentives to keep their facilities in excellent condition, to attract and keep customers.

That may sound like a utopian vision, but there are reasons to think we are at a point where dramatic change will be necessary. The federal government is on a path toward insolvency, where nearly all federal revenues will be consumed by entitlements, defense, and paying the interest owed on the national debt. There will be no “general revenue” left over to bail out a Highway Trust Fund.

Most state governments are saddled with huge unfunded pension and health care obligations to retired public employees, so they are not in a position to take up the slack from a reduced federal role in transportation. And per-gallon fuel taxes will have to be replaced by a propulsion-neutral funding source—some form of per-mile charging.

These conditions set the stage for the transformation to a new highway system, supported by three other key developments. One is the growing worldwide success of revenue-financed public-private partnership (P3) concession projects for highways and other transport infrastructure. Compared with Australia, Chile, France, and Spain, the United States has hardly scratched the surface of what is possible.

Second is the emergence of global infrastructure investment funds, which have amassed over $350 billion of equity to invest in revenue-producing infrastructure in the past five years. Most of this is being invested in European, Asia-Pacific, and Latin American infrastructure—but these funds clearly desire to invest far more in the United States, if only there were a “pipeline of projects.” America’s aging, hyper-congested highway system could offer an ample pipeline.

A third development is the increasingly recognized need for public pension funds to diversify their portfolios by investing more in revenue-producing infrastructure. That’s hard to do in U.S. transportation, because nearly all airports, highways, and seaports are owned and operated by governments. But P3 concessions open such infrastructure to serious investment by non-profit pension funds as well as for-profit investment funds.

The transformation of U.S. highways from state-owned enterprises to highway utility companies could not happen overnight. But in my forthcoming book, Rethinking America’s Highways: A 21st Century Vision for Better Infrastructure (University of Chicago Press, June 2018), I lay out scenarios showing how a several-decades transition could occur. The book shows that investor-owned toll roads have a long European and U.S. history that was overlooked once motor vehicles arrived on the scene. The concept was rediscovered in post-World War II Europe, and it spread to Australia, China, and Latin America late in the 20th century. It is only in the last 15 years that P3 highway infrastructure has gained a toe-hold in the USA.

The preview of the White House infrastructure plan (leaked on January 22nd) offers some steps toward beginning this transition. It recognizes the need to reduce the direct funding role of the federal government for infrastructure owned and operated by state and local governments. It provides for expanded P3 financing tools (Private Activity Bonds, Transportation Infrastructure Finance and Innovation Act programs, etc.) as well as repealing the federal ban on toll-financed Interstate reconstruction and modernization. And by not embracing a federal fuel tax increase, it de-facto encourages the needed shift from per-gallon gas tax to per-mile charging, led (as it should be) by the states that own the highway infrastructure.

A version of this column first appeared in Public Works Financing.

Robert Poole is director of transportation policy and Searle Freedom Trust Transportation Fellow at Reason Foundation.