In recent Public Works Financing columns, I’ve discussed the growing trend of equity concerns, such as offering free and reduced-rate trips to lower-income drivers to use express toll lanes and the separate trend of politicians disguising the real costs of using highways. In terms of effective transportation policy, the bad news is both trends are getting worse, with serious consequences for future highway revenue adequacy.
In Dec. 2022, Florida Gov. Ron DeSantis signed a one-year “toll-relief bill” that applies to every toll road, toll bridge, and express toll lane in the state. Those who drive 35 or more trips per month on Florida’s tolled roadways will be given a 50% discount on the tolls they were charged. The state will compensate toll operators via $500 million in general fund money.
Not to be outdone, New Jersey legislators are considering a similar measure for that state’s toll roads. Oregon’s Department of Transportation (DOT) is working on low-income discounts for drivers who might use soon-to-be-tolled Interstates and bridges in the Portland area.
In Michigan, what shocked me most, was one section of an otherwise very well-done January 2023 study of potential toll-financed Interstate highway modernization in the state. It was researched and written for Michigan DOT by HNTB and CDM Smith, two firms with great expertise in toll financing. The most promising near-term corridors would be rebuilt and modernized, corridor-by-corridor, financed by toll revenue bonds over the next 10 years, at a cost of $18.5 billion. The toll financing plan is estimated to fully cover the capital and operating costs and attain an investment-grade bond rating.
The financial projections in Michigan took 5% of revenue off the top to account for an array of possible discounts, mitigations, and rebates the state could offer to toll lane users. One component, which I think is defensible, is called “local community transportation mitigation.” Because some traffic that now uses Interstates would divert to other roads when the Interstates are tolled, spending a bit of the toll revenue to assist impacted communities in funding things like signal timing improvements, park-and-ride lots, and commuter buses is defensible. In addition, quite a few toll roads offer discounts for frequent commuters, which is also suggested.
But I draw the line at what the Michigan study calls “local community non-transportation mitigation.” It suggests using toll revenue to buy community support by funding “arts and cultural abundance,” “public health and well-being,” “learning,” and “sustainable environment and natural resources,” among other nice-sounding things.
Also proposed is 100% discounts (i.e., no tolls at all) for “environmental justice communities.” Remember, this is for people who own and drive cars, not those who commute via subsidized transit.
Part of the rationale for these mitigations is the projected extent of traffic diversion. The report includes diversion rate estimates for each corridor, ranging from 6% to 18%, based on the most-viable car/SUV toll of 6 cents per mile. An alternative way to reduce diversion—mentioned in the report but not included in the plan—is to provide rebates of state fuel taxes for all miles driven on newly tolled corridors. The state gas tax is about one cent per mile, so if motorists received a rebate of that amount, the net cost per mile to use the tolled Interstate would drop from 6 cents to 5 cents (17% less). And since diversion rates are proportional to the cost of using a toll road, diversion would likely be 17% less than the study estimated.
In a research paper of mine, published last month in Transportation Research Record, I estimated that the net present value of a fuel-tax rebate for newly tolled Interstates in a mid-size state would be less than 7% of gross toll revenue. That is within the ballpark of the 5% that HNTB would set aside for its set of mitigations and discounts in Michigan.
Let’s now consider some of the downsides to this growing trend of discounts and exemptions from tolling. In a report on the new Florida legislation, Moody’s Investors Service points out how unsustainable a one-year discount program will be. State budgets go up and down, and in the immediate term, in 2023, many states still have unspent windfalls from trillions of dollars in COVID-19 pandemic-era federal programs. That is not going to be the case in many future years.
But once motorists are used to paying far less to use toll lanes than before, that will likely seem like an entitlement, and there will be political pressures to continue the discounts—either at the expense of other state obligations (Medicaid, public schools, etc.) or at the expense of the toll roads. Ultimately, that could reduce toll road bond ratings, increasing their debt service costs.
Toll discount programs likely also lead drivers to think highways cost less to build, maintain and expand than they actually do. In this case, that would lead to political pressure for more federal and state funding of what had previously been self-supporting major highways and bridges. That is bad news for the long-term sustainability of highway funding. The true costs of building and maintaining highways and bridges should be paid for by those who use them.
And that brings me to one last point. The United States is facing a once-in-a-century need to replace what will soon be an obsolete method of highway funding—per-gallon fuel taxes—with a funding source that is independent of vehicle propulsion source. The general consensus is that the fairest and best replacement is to charge per mile driven, with higher charges for the heaviest vehicles that produce the most wear and tear on roadways.
The easiest way to begin this transition to mileage-based user fees is with per-mile tolls on limited-access highways, such as Interstates and freeways. With all-electronic tolling and prepaid accounts, the cost of toll collection can be a very small fraction of the gross revenue collected. The transponder technology—E-ZPass and equivalents—is in widespread use in much of the country and widely accepted with little concerns about privacy.
If states adopt this path toward shifting from charging per gallon of gas to per mile driven, it’s vital that they do it right. The gas tax was designed as a users-pay/users-benefit road-use charge. There are no gas tax discounts for social justice communities, nor are there such discounts for electric bills, water bills, cable bills, or smartphone bills. Some utilities offer reduced lifeline rates to low-income customers. Something similar could be considered for per-mile highway charges. But as I wrote in a recent PW FInancing column on transportation equity:
Politicizing urban highways and undermining tolling, which should be used to finance and maintain highways, is not a good or effective solution to the nation’s infrastructure problems and won’t produce more equity.
We need solidly funded highways going forward, and those who use them should pay for them.
A version of this column first appeared in Public Works Financing.