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Policy Brief

Funding Important Transportation Infrastructure In a Fiscally Constrained Environment

Rethinking how America pays for and manages its critically important transportation infrastructure

Transportation infrastructure is too important to the economy to be subject to across-the-board cuts in federal funding without first ensuring that alternate revenue streams are available. Ideally, each transportation mode should be made as self-supporting as possible via direct user fees. This would also make it feasible to use revenue-bond financing to do more reconstruction and new construction than would occur under the current policy of funding capital investment from operating cash flow. This approach would also tend to weed out projects whose benefits don’t significantly exceed their costs.

One inspiration for this policy brief is the report of the National Commission on Fiscal Responsibility and Reform (Simpson-Bowles Commission) in 2010. While its recommendations were not implemented, its proposals for transportation infrastructure reflected the above approach, including utilizing highway user tax revenues to make the Highway Trust Fund once again self- supporting, removing large and medium hub airports from the federal airport grants program to allow them to support themselves via passenger fees, and making inland waterway systems fully user-funded. This policy brief seeks to apply these users-pay/users-benefit principles more thoroughly to transportation infrastructure.

Problems with Current Federal Transportation Funding

The federal government assists the major modes of transportation via several systems of user taxes and trust funds:

  • Highway users pay several federal user taxes (mostly on gasoline and diesel fuel) that support the Highway Trust Fund, from which grants are made for highway and transit programs.
  • Air travelers pay a tax on airline tickets, and aircraft operators pay fuel taxes, with the proceeds of these and other user taxes feeding the Aviation Trust Fund, which pays for airport grants and for the capital costs and some of the operating costs of the air traffic control system.
  • Ships unloading cargo at U.S. seaports pay a harbor maintenance tax, which streams into the Harbor Maintenance Trust Fund, from which funds are allocated for harbor dredging projects overseen by the Army Corps of Engineers.
  • And users of U.S. inland waterways pay a diesel fuel tax for the Inland Waterways Trust Fund, which pays for a portion of the cost of maintaining and improving waterways, locks and dams.

While this approach sounds somewhat market-oriented, it fails to direct resources to their most productive use, for the following reasons:

  • First, user taxes are still legally taxes. Seen as such, Congress is often reluctant to increase their levels, even though in many cases transportation infrastructure urgently requires additional investment.
  • Second, each of the above programs builds in significant redistribution from some parts of the country to others, from some categories of users to others, and from general taxpayers to specific transportation modes, with political factors far outweighing any rigorous assessment of whether the economic benefits exceed the costs of the projects being funded.
  • Third, federal involvement significantly increases the cost of building projects with federal money, via such policies as the Davis-Bacon Act, Buy America Act, the Jones Act, and other regulations and requirements.
  • Fourth, since many of the federal grant programs focus on new capacity, decisions made by infrastructure owners tend to be biased in favor of more capital-intensive projects (e.g., light rail rather than bus rapid transit) than would be the case were they spending mostly their own money. This same focus on capital programs tends to encourage the ever-present temptation of state and local policymakers to under-invest in proper levels of maintenance in favor of creating more-politically desirable ribbon-cutting opportunities.

Another underlying problem is that the current federal grant funding approach has encouraged state and local infrastructure owners to fund most capital projects out of annual cash flow, rather than financing them. A basic principle of public finance is that long-lived infrastructure can and should be financed (i.e., capital should be raised up-front from the capital markets) and paid for over time, as the users of that infrastructure derive benefits from it. This is analogous to the way most people acquire their homes: not by saving until they can afford to pay cash, or building the home a room at a time as cash flow permits, but by taking out a long-term mortgage and paying it off over time, so as to obtain the benefits of home-ownership much sooner. Non-transportation infrastructure entities-electric and gas utilities, pipelines, telecommunications and water utilities-generally finance their major projects via revenue bonds, paid for by their users over many years. Railroads and toll roads do likewise, as do airports (to some extent) and air traffic control providers overseas. The United States is one of the few advanced developed countries that makes relatively little use of revenue-based financing for its transportation infrastructure.

Thus, the emerging and ongoing fiscal crisis of the federal government offers an opportunity to rethink how this country pays for and manages its critically important transportation infrastructure.

Attachments

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.