Turning Back Road Financing to the States

Gabriel Roth

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The principle of “subsidiarity” postulates that government decisions should occur at the lowest possible level. This paper explores the applicability of subsidiarity to the federal financing of state roads and concludes that road financing should be “turned back” to the states.

History¹

Substantial federal involvement in US road finance was the result of the 1956 Highway Revenue Act that created the Federal Highway Trust Fund (FHTF) to finance the construction of the 41,250- mile Interstate Highway System (IHS). However, subsequent legislation extended the length of the IHS several times. In 2002 the designated length was 46,726 miles, and all but 5.60 miles were complete.² The FHTF is funded mainly by dedicated taxes on fuel. Revenues accumulated in the FHTF can be used to pay for up to 90 percent of project construction costs, without the states having to borrow, or to draw on general funds. The powers under this legislation were designed to expire on June 30th, 1972.

The Status of Federal Legislation in August 2012

The 1956 law required Congress to appropriate monies from the FHTF for road improvement, which it did every five or six years between 1960 and 2012. The latest transportation legislation, passed on June 29, 2012, and signed by President Obama on July 6, 2012, was Public Law 112-141, the $127 billion “Moving Ahead for Progress in the 21st Century” Act (MAP-21)³ to keep federal financing in force until June 29, 2014.

Advantages and Disadvantages of Federal Financing of State Roads

Advantanges

The main advantage was the financing of the IHS, possibly the greatest public works project since the completion of the 56,000-mile Roman system of paved roads, which took some 500 years to build. In view of the difficulty many governments have executing projects, the men and women involved with the IHS deserve the highest praise.

Disadvantages

The basic disadvantage is that substantial federal payments give states incentives to select lowpriority projects for federal financing. Boston’s “Big Dig” project, which grew in cost from $2.8 billion to $8.1 billion (both figures in 1982 dollars), would never have been funded by Massachusetts alone. Other disadvantages are the diversion of over a third of the revenues to non-road purposes,⁴ that federal involvement raises road costs substantially, that the federal congress uses its powers to favour some states at the expense of others, that it imposes damaging conditions, such as 55 miles/ hour speed limits, on the use of the funds it appropriates, and that it imposes uncertainties and delays that severely impede infrastructure planning and implementation not only by the states but also by the private contractors concerned.

States as Innovators

Reforming the way road users pay for roads in the 21st century raises challenging and difficult problems for at least two reasons:

• First, as vehicles become more fuel efficient, and as electrically-powered vehicles need use no fossil fuel, taxes on fuel become less suitable as a road financing method; and
• Second, the development of electronic methods of charging for road use, such as EZ-Pass, opens the possibilities of road use charges varying from place to place, and even by time of day, to reflect the costs involved.

The federal government employs bright people, who may hit on the best way to charge for road use and to allocate the funds thus raised. But it is much more likely that fifty separate states, introducing different methods, would enable the best solutions to emerge. This was the experience with welfare reform, which was achieved after 20 years of state experimentation.⁵ On the other hand, for over 50 years, Congress has been unable to reform air traffic control, mainly because federal procedures are so slow that when reforms were eventually agreed to they were out-of-date.

Of course, no method of charging for road use could survive without being useable in other states. But the development of the telephone and the Internet show that technologies developed in individual states can be applied nationwide.

Political Implications

The 1956 legislation was meticulous in protecting general revenues from being used to finance roads. Congress could only appropriate monies earlier paid into it by road users, in conformity with the “user pays” principle. But this principle was abandoned in the June 2012 legislation and the traditional “user pays” policies for roads have been augmented by “taxpayer pays”, thus increasing the influence of federal officials, with infrastructure supply becoming more dependent on political preferences rather than on consumer choice.

And this change has other significant consequences:

• Under the “user pays” tradition, infrastructure financing can come from many sources, both governmental and private, e.g. by the use of tolls.
• But under “taxpayer pays”, the supply of transportation infrastructure is limited by federal budget considerations and governed by priorities having nothing to do with consumer preferences. For example, under “user pays”, road users with limited budgets could decide for themselves to spend less on vehicles and more on roads. But, under “taxpayer pays”, it would become harder for travellers to make their preferences effective.
• The problem facing Congress is that members want infrastructure expenditures to be maintained without having to vote to obtain the required revenues by raising the rates of dedicated fuel charges. Turning back financing to the states offers a simple solution. The federal government could get out of infrastructure financing altogether, wind down the FHTF, and leave infrastructure financing to states, local authorities or private entities.

This solution would be economically efficient, fiscally responsible and politically attractive:

• It would be economically efficient because, as shown above, federal financing of infrastructure is wasteful.
• It would be fiscally responsible because the federal government has run out of money.
• And it would be politically attractive to the federal congress, as it would transfer to the states, where it belongs, the odium of having to increase charges in accordance with voters’ wishes, and it would give significant benefits to road users, who vote.

Transit users and providers could become worse off by losing federal subsidies. But transit projects should be funded locally, not federally. Furthermore, transit users (whose travel comprises less than two percent of US urban travelmiles, but who get twenty percent of federal subsidies) are concentrated in states (such as California, Massachusetts, Illinois and New York) that generally support Democrats, so transit users’ displeasure is unlikely to change federal voting results.

A Process for Turning Back Road Financing to the States

In theory, the simplest way to abolish the federal financing of roads would be to sunset the 1956 legislation, as envisaged by those who passed it. Then, following a transition period (to enable the completion of projects already approved), both the fuel taxes and the congressional powers would expire, and the funding of state roads reverts (gets “turned back”) to the states, where it was until 1956.

A principal obstacle to “Turnback” is that it would require members of Congress to give up power, which many might be reluctant to do. Therefore, an effective way to achieve this objective might be for road users to lobby in the states — such as Arizona, Colorado, Florida, Georgia, Indiana Ohio and Texas — that would make substantial gains from Turnback. A study published in 2005⁶ calculated that road users in some thirty-five states were made worse-off by the federal involvement in roads.

Because gains by free market proponents in the 2012 national election are possible, and because they could lead to better legislation, the time to start the Turnback process is now, and the place is in the states likely to gain from it.

Conclusions

Because of the damaging policies, costs and regulations associated with the federal financing of state roads, the principle of subsidiarity applies to this case with particular force. State provision of roads would be quicker, less costly, and more responsive to road users’ needs. States would be better at reforming the current systems of owning, funding and managing roads. They would be more likely to reform road-use charges and to make it easier for private providers to maintain existing roads and provide new ones on a commercial basis, eventually eliminating the need for government financing, even by the states. Therefore the next legislation on infrastructure financing, now due by June 2014, should replace our out-dated road financing mechanism with one more suited to the 21st century.

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Endnotes

1. I am indebted to Federal Highway Administration Historian Richard F. Weingroff for information and insights relating to the Interstate Highway System and federal Highway Trust Fund.
2. As of October 31, 2002, all but 5.60 miles of the 46,726-mile Interstate System were completed and open to traffic. “Dwight D. Eisenhower National System of Interstate and Defense Highways”, Federal Highway Administration, Washington DC, March 2012. http://www.fhwa.dot.gov/programadmin/interstate.cfm
3. http://www.dot.gov/map21/
4. Utt, Ronald. “Federal Highway Trust Fund: Recommit to Better Highways and En-hanced Mobility”. WEBMEMO #2944, Heritage Foundation, Washington DC, June 30, 2010. http://heritage.org/Research/Reports/2010/06/Federal-Highway- Trust-Fund-Recommit-to-Better-Highways-and-Enhanced-Mobility
5. Archambault, Joshua, and James Capretta, Amy Lischko, and Tom Miller. “The Great Experiment: The States, The Feds, and Your Health Care”, Pioneer Institute, Boston, 2012.
6. Gabriel Roth “Liberating the Roads: Reforming US Highway Policy”, Policy Analysis No. 538, Cato Institute, Washington DC, 2005.