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.