The Budget Promise and Perils From P3s: A Lesson from Indiana

When the Indiana toll road was leased for $3.8 billion in 2006, the political controversy up-ended the governorship of Mitch Daniels briefly and contributed to the Republican Party’s loss of the statehouse. Now, five years later, the deal is appropriately being heralded as signature accomplishment. The money fully funded the Daniels Administration’s 10-year transportation plan dubbed “Major Moves,” and is credited with funding 200 road and bridget projects and 400 new miles of highways.

But, as the Bond Buyer notes (August 23, 2011), there is a downside. The public private partnership (P3) netted the state a one-time lump sum payment. Beyond 2015, the state will face a shortfall of $5.4 billion, or $800 milllion a year, for its next ten year transportation plan. The P3 forestalled the inevitable–identifying a sustainable revenue source for transportation.

Fortunately, Indiana policymakers know they are, literally, on borrowed time. The gas tax is no longer a robust and dependable long-term revenue source. Over the long-term, Indiana and other states will have to wean themselves off the gas tax. The best alternative is a direct user fee, like a fee based actual use such as miles-travelled, as a substitute for current taxes.

While we are still 20 years away from an integrated, national system, Indiana can get a start by adopting a pilot project to work out a practical strategy for replacing the gas tax within the next 10 years. Mitch Daniels and state legislators were forward thinking enough to seize the opportunity to lease the tollroad and fully fund the state’s transportation plan. They ended up being national pioneers. Now, they have to use that experience wisely and pave the way for even longer term change to put transportation infrastructure finance on an even firmer footing.