Policy Study

Where the Rubber Meets the Road

Reforming California's Roadway System

Executive Summary

California’s roadway system with an estimated value over $100 billion is in serious trouble both financially and physically. These roadway problems affect a lot of people; California’s roadways serve about 26 million vehicles and consume about eight billion hours of traveler’s time each year.

As most drivers know from jarring firsthand experience, the physical condition of California’s roadways is terrible: only 62 percent of California’s interstate system and less than 40 percent of the arterial and collector system is in good condition. Worse still, roadway quality is decreasing even as congestion increases. Of the eight most traffic-congested cities in the United States, four are located in California. Fifty percent of the miles in California’s urban freeway system experiences volume-to-capacity ratios greater than 95 percent during peak periods. Nearly 10 percent of the principal urban arterials and almost 7 percent of the minor arterials face similar congestion levels.

Financially, the integrity of the California roadway finance system is also in disrepair. There is not enough money available to fund the perceived “needs” of California’s transportation agencies for roadway maintenance and new capacity-reconstruction and resurfacing backlogs alone exceed $16 billion on major California roadways.

An oft-proposed solution to this problem is a general increase in motor fuel taxes. This idea is flawed, however, because it fails to address the underlying problems with the structure of California’s transportation funding system. In fact, the reliance on a fuel-tax financing system is a large part of the problem. The very nature of the fuel tax finance system tends toward financial insolvency because of its noneconomic pricing and noneconomic transportation project selection methods. Increasing fuel taxes would only make things worse, leading to the overpricing of low-cost roads, and wasteful under-utilization of the off-peak capacity of expensive roads.

Detailed examination of the sources and the uses of California roadway revenues reveals that:

  • Automobile users are not only paying their way, they are overpaying. Of the nearly $16 billion collected from auto-users through gasoline taxes, license fees, registration fees and user tolls, less than $12 billion is actually used to build, maintain and operate California roadways. Of that $12 billion, almost $4.5 billion is used to subsidize mass transit and for transportation planning in California.
  • Failure to differentially price the most expensive capacity (usually the peak, urban capacity) leads to overuse of these facilities and deterioration in their performance due to congestion. More than 56 percent of all vehicle miles traveled in the state occur on just 4.5 percent of the centerline miles and 12.2 percent of the lane miles in the state.
  • The lack of pricing signals on these expensive urban roadways leads to continually increasing congestion which, in turn, leads to pressure for new, ever more expensive capacity. This capacity may be built even if the expansion is too expensive to be financed solely by its users. Predictably, this new capacity also displays deteriorating performance over time.
  • The subsidization of expensive roadways leads to under-funding of less-expensive roadways. Revenues collected from some locales and roadway users must be used to subsidize others’ new capacity, leaving less revenue for the expansion and maintenance of their own local roadways, as illustrated by the statistics on poor roadway conditions cited above.

Overall, the problem with roadway financing in California is not a lack of funds. The problem is that the available funds are not used rationally. The current system of financing leads to a ninefold under-pricing of congested capacity, and a twofold overpricing of uncongested capacity. As things stand, roadway users pay about two cents per vehicle mile traveled on congested roads, instead of the eighteen cents per mile traveled that they should be paying. Users of uncongested roads also pay about two cents per mile traveled while they should only be paying one cent per mile traveled.

Rather than make things worse by increasing fuel taxes or other noncongestion related fees, the solution to California’s roadway problems lies in phasing in more rational pricing mechanisms. Short-term financing difficulties can be solved by instituting congestion pricing on the most easily priced parts of the system, namely the urban freeway and arterial system. Off-peak and low-peak charges ranging from one cent to about four cents per vehicle mile traveled and average high peak charges around eighteen cents per vehicle mile traveled on urban freeways and arterials should provide sufficient revenue to cover short-run costs. Longterm solutions will probably depend on the reconstruction of roadways to higher durability standards and the extension of differential pricing to automobiles and trucks to account for the disparate impacts that these forms of transportation have on the California roadways.


Randall J. Pozdena, Ph.D., is Managing Director of ECONorthwest, an economics/finance consulting firm in northwest Oregon. Dr. Pozdena served as the Vice President of Research for the Federal Reserve Bank of San Francisco and has taught both Economics and Finance at two University of California campuses, Irvine, and Berkeley. Dr. Pozdena has studied issues in highway and transit finance for nearly 25 years.