Commentary

Are Toll Roads Subsidized or Self-Supporting?

Some conservatives and libertarians are opposing toll roads, claiming that toll roads cannot be profitable without “massive government subsidies.” Let’s take a calm look at what that could mean.

First, we need to distinguish between public-sector toll roads and the newer type of toll roads developed under long-term public-private partnerships (PPPs). Public sector toll agencies are generally required to be self-supporting. They are almost always set up as separate entities, do not receive any taxpayer support, and can do only projects for which projected toll revenues will cover both capital and operating costs. They don’t make a “profit,” per se, but they publish audited financial statements and are subject to stringent oversight by those who buy the toll revenue bonds which provide the money to build their projects.

Public-private partnerships toll roads exist, or are under development, in states that have passed enabling legislation—including Arizona, California, Florida, Georgia, Texas, and Virginia. Their financing is similar to that of public-sector toll agencies, except that instead of the up-front capital being provided 100% as debt (toll revenue bonds), the toll road company also attracts equity investors for a portion of the funding. A typical funding structure might be 20% equity, 80% debt. Equity investors expect to make a return (profit) on their investment, but they are also the ones who take the main risk if sufficient traffic (and hence toll revenue) does not materialize. A funding base of equity plus debt is better able to withstand the high-risk early years of a toll road’s life, because of the willingness of the equity investors to bear that risk, in hopes of future gains.

The “equity cushion” also enables public-private partnership companies to take on some proposed toll roads that don’t meet the very conservative criteria typically required in public-sector toll projects. For example, on the new SH 130 toll road between Austin and San Antonio, the private-sector team was able to generate nearly twice as much capital to build the project as the Texas Department of Transportation estimated it could raise using a public-agency tolling model. That is enabling this new toll road to be built many years sooner, and with no taxpayers’ money.

In America’s limited experience with public-private partnership toll roads thus far, there are two kinds of circumstances in which critics could identify something as a “subsidy.” First, they can point out that Congress in 2005 allowed for tax-exempt toll revenue bonds to be issued for use in PPP toll projects. All this did was level the playing field between government and the private sector when it comes to issuing bonds. As long as we’ve had a federal tax code, governments have been able to issue bonds that are exempt from taxation on the interest they pay to bondholders. Prior to 2005, PPP toll roads were at an artificial disadvantage compared with public-sector toll roads, since the latter could issue revenue bonds at (lower) tax-exempt rates, but PPP toll roads could not. Most conservatives and libertarians do not consider exemptions from taxes as subsidies. (Personally, I would like to see all tax-exemptions for bonds abolished, but until that day comes, I’m all for a level playing field.)

The other claim for “subsidies” to public-private partnership toll projects could be made in cases like the Beltway High-Occupancy Toll (HOT) lanes in Virginia and the LBJ HOT lanes in Dallas. In both cases, the government wanted a larger and more costly project than the private sector could finance, based on projected toll revenues. So in both cases, the end result was the government agreeing to pay for certain portions of the project that it required to be included and the PPP company financing the rest. And in both of these cases, the long-term agreement between the state DOT and the PPP company includes revenue-sharing, so that if the project does well in terms of toll revenue, in future years the government will get a share of the revenue as a return on its investment in the project.

Recently in Texas, TxDOT did agree to provide financial assistance to a public-sector toll agency, after that agency did some very aggressive debt financing to ensure that it, rather than a private-sector toll company, would be the winning bidder for a new toll road. I would count that as a subsidy. But that’s a rare exception to the general rule of toll agencies being self-supporting.

In the vast majority of cases, toll roads – whether public-sector or public-private partnerships – are self-supporting. And their only revenue comes from people who choose to drive on them, because the time savings and other attributes of the toll road are worth more to them than the price of the toll.

Bottom line: toll roads, both old ones like the Pennsylvania Turnpike and newer ones in places like Texas and Virginia, are paid for by tolls, not taxes. And those tolls are paid voluntarily (unlike taxes) by those who drive on the roads. Use them and pay the toll. Don’t use them, and you don’t pay.

Robert Poole is director of transportation policy and Searle Freedom Trust Transportation Fellow at Reason Foundation. Poole, an MIT-trained engineer, has advised the Ronald Reagan, the George H.W. Bush, the Clinton, and the George W. Bush administrations.

Surface Transportation

In the field of surface transportation, Poole has advised the Federal Highway Administration, the Federal Transit Administration, the White House Office of Policy Development, National Economic Council, Government Accountability Office, and state DOTs in numerous states.

Poole's 1988 policy paper proposing privately financed toll lanes to relieve congestion directly inspired California's landmark private tollway law (AB 680), which authorized four pilot toll projects including the successful 91 Express Lanes in Orange County. More than 20 other states and the federal government have since enacted similar public-private partnership legislation. In 1993, Poole oversaw a study that coined the term HOT (high-occupancy toll) Lanes, a term which has become widely accepted since.

California Gov. Pete Wilson appointed Poole to the California's Commission on Transportation Investment and he also served on the Caltrans Privatization Advisory Steering Committee, where he helped oversee the implementation of AB 680.

From 2003 to 2005, he was a member of the Transportation Research Board's special committee on the long-term viability of the fuel tax for highway finance. In 2008 he served as a member of the Texas Study Committee on Private Participation in Toll Roads, appointed by Gov. Rick Perry. In 2009, he was a member of an Expert Review Panel for Washington State DOT, advising on a $1.5 billion toll mega-project. In 2010, he was a member of the transportation transition team for Florida's Governor-elect Rick Scott. He is a member of two TRB standing committees: Congestion Pricing and Managed Lanes.

Aviation

Poole is a member of the Government Accountability Office's National Aviation Studies Advisory Panel and he has testified before the House and Senate's aviation subcommittees on numerous occasions. Following the terrorist attacks of Sept. 11, 2001, Poole consulted the White House Domestic Policy Council and the leadership of the House Transportation & Infrastructure Committee.

He has also advised the Federal Aviation Administration, Office of the Secretary of Transportation, White House Office of Policy Development, National Performance Review, National Economic Council, and the National Civil Aviation Review Commission on aviation issues. Poole is a member of the Critical Infrastructure Council of the Los Angeles Economic Development Corporation and of the Air Traffic Control Association.

Poole was among the first to propose the commercialization of the U.S. air traffic control system, and his work in this field has helped shape proposals for a U.S. air traffic control corporation. A version of his corporation concept was implemented in Canada in 1996 and was more recently endorsed by several former top FAA administrators.

Poole's studies also launched a national debate on airport privatization in the United States. He advised both the FAA and local officials during the 1989-90 controversy over the proposed privatization of Albany (NY) Airport. His policy research on this issue helped inspire Congress' 1996 enactment of the Airport Privatization Pilot Program and the privatization of Indianapolis' airport management under Mayor Steve Goldsmith.

General Background

Robert Poole co-founded the Reason Foundation with Manny Klausner and Tibor Machan in 1978, and served as its president and CEO from then until the end of 2000. He was a member of the Bush-Cheney transition team in 2000. Over the years, he has advised the Reagan, George H.W. Bush, Clinton, and George W. Bush administrations on privatization and transportation policy.

Poole is credited as the first person to use the term "privatization" to refer to the contracting-out of public services and is the author of the first-ever book on privatization, Cutting Back City Hall, published by Universe Books in 1980. He is also editor of the books Instead of Regulation: Alternatives to Federal Regulatory Agencies (Lexington Books, 1981), Defending a Free Society (Lexington Books, 1984), and Unnatural Monopolies (Lexington Books, 1985). He also co-edited the book Free Minds & Free Markets: 25 Years of Reason (Pacific Research Institute, 1993).

Poole has written hundreds of articles, papers, and policy studies on privatization and transportation issues. His popular writings have appeared in national newspapers, including The New York Times, The Wall Street Journal, USA Today, Forbes, and numerous other publications. He has also been a guest on network television programs such as Good Morning America, NBC's Nightly News, ABC's World News Tonight, and the CBS Evening News. Poole writes a monthly column on transportation issues for Public Works Financing.

Poole earned his B.S. and M.S. in mechanical engineering at Massachusetts Institute of Technology (MIT) and did graduate work in operations research at New York University.