What if there’s a way for states to jump-start the needed rebuilding and modernization of major highways by embracing long-term design-build-finance-operate-maintain (DBFOM) revenue-risk public-private partnerships (P3s)?
I suggested such an opportunity at the International Bridge, Tunnel & Turnpike Association’s (IBTTA) Road User Charge and Transportation Finance Conference in May.
The opportunity comes about because the United States, over the next several decades, will need to shift from per-gallon fuel taxes to mileage-based user fees (MBUFs), which are typically called MBUFs in the eastern U.S. and road user charges—RUCs—in the west.
This need to replace gas taxes with something more sustainable comes about for a variety of reasons. The purchasing power of the federal gas tax, which hasn’t been increased since 1993 and isn’t indexed to inflation, is eroding. Ever-stricter federal fuel economy requirements for new vehicles and the impending several-decade shift from petroleum-fueled to electrically-powered vehicles, both personal and commercial, will make fuel taxes even less viable as a source for maintaining and building roads and highways going forward.
Mileage-based user fees are the most practical alternative to gas taxes but their benefits haven’t been explained to the public and they aren’t politically popular. Many motorists have major concerns over ‘big brother being in their car’ tracking when and where they drive. Conservative and taxpayer groups regularly use that privacy argument and also question assurances that per-mile charges will replace fuel taxes, fearing the fees will just be added on top of existing gas taxes. Progressives are somewhat more receptive to shifting to mileage fees but often express concerns about equity and lower-income drivers being charged by the mile.
Across the country, about a dozen states have conducted federally-assisted pilot projects in which motorists and truckers tested mileage-based user fees. In the pilot programs, drivers could choose among several means to record their miles driven and were shown the amount they would have paid as mileage-based user fees compared to what they are now paying in fuel taxes. Those pilot projects overcame some of the objections—but only a handful of motorists and truckers have had this kind of first-hand experience. The large majority of drivers don’t see an immediate need for change and oppose mileage-based user fees.
My suggestion at the IBTTA conference was that the country now needs a few states to carry out larger-scale demonstrations, done in way that is customer-friendly and uses widely-accepted technology that makes clear exactly what data is shared with the government. The program would begin with limited-access highways (Interstates and freeways) where prepaid transponder accounts are feasible and collection costs (if billing is minimized) can be as low as 5% of the revenue collected (versus the current 1-2% of the revenue for fuel taxes).
To address the fears about mileage fees amounting to just another tax increase on drivers, the state would have to provide refunds or rebates of fuel taxes incurred by all drivers paying mileage-based user fees for using a newly converted Interstate. The refund would make it real to motorists and truckers that the new state road charges were replacing the state gasoline and diesel tax for the converted corridors.
Highway user groups have several other concerns about the wider use of tolls—which apply as well to new per-mile charges. Quite a few toll roads (e.g., the Pennsylvania Turnpike) are forced by state legislatures to divert sizeable fractions of their toll revenues away from the toll roads and to other purposes. In Pennsylvania, for example, money is diverted from the Turnpike to provide statewide transit subsidies. To address this revenue-diversion concern, the state would enact statutory protection for the new mileage-based user fee revenue, restricting it to be used only for the capital and operating costs of the converted corridors.
One more concern is over bait-and-switch. A number of states in recent years have proposed putting tolls on their Interstates that would generate revenue for reconstruction and selective widening of those highways. But their plans called for first putting up toll gantries and perhaps, at some future point, investing the revenues to improve the tolled corridors. So another customer protection would require that projects such as reconstruction or widening be financed upfront via revenue bonds based on investment-grade traffic and revenue studies of the projected MBUF revenue stream. This would be comparable to replacing an obsolete non-tolled bridge with a new tolled bridge. Motorists and truckers would only start paying a mileage-based user fee after the needed corridor improvements were completed.
While half a dozen states have conducted feasibility studies of toll-financed Interstate highway and/or bridge reconstruction and modernization, federal legislation makes it illegal to charge tolls (and by implication MBUFs) on any “existing” non-tolled Interstate highway lane. Congress could fix this via a simple amendment to a never-used toll pilot program, the Interstate System Reconstruction and Rehabilitation Pilot Program (ISRRPP).
Instead of being offered only to three states, it would be opened to all. And instead of allowing each to rebuild only one Interstate highway, it would allow them all to be converted to per-mile charges and rebuilt. A draft version of this reform was provided to the Senate Environment & Public Works Committee in 2021, but it was not included in the Infrastructure Investment and Jobs Act legislation that passed and was signed by President Joe Biden.
Were such legislation enacted, it would offer a major expansion of the toll industry. If the state opting in to the program already had an effective state toll agency, that would be the default candidate to lead the way toward a mileage-based user fee conversion and MBUF-financed modernization of various non-tolled Interstates.
States without such a toll agency would be new markets for global infrastructure companies with design-build-finance-operate-maintain (DBFOM) revenue-risk public-private partnerships (P3s) expertise, such as has been demonstrated in California, Colorado, Florida, Indiana, North Carolina, Texas, and Virginia (and soon, I hope, in Georgia and Maryland).
Converting the limited-access portion of a state’s roadway system to mileage-based user fees would, on average, convert roads handling 34.5% of all vehicle miles of travel. That’s what I mean by a large-scale demonstration of road user charges. And demonstration effects can be powerful.
Back in 1995, the world’s first investor-financed P3 express toll lanes opened to traffic in Orange County, California. Today, there are more than 60 express toll lane facilities across the country, thanks to the first few pioneer efforts demonstrating that variable pricing is effective in controlling traffic congestion—and that revenue-based financing is feasible where traffic projections are robust.
State toll agencies may or may not pick up on this idea. As with the break-the-mold 91 Express Lanes in Orange County decades ago, it will likely require the DBFOM P3 industry to begin this challenging transition. The states that have done, or are doing, toll-financed Interstate highway reconstruction and modernization studies but that lack a state toll agency would be good places for the industry to start prospecting.
A version of this column first appeared in Public Works Financing.