Good infrastructure is an essential component of a well-functioning, growth-oriented economy. One area of infrastructure that is vital to every American’s life is highways and roads. Although there is general agreement on the importance of highway infrastructure, little has happened in recent years on the federal level to provide sufficient support for the country’s need to maintain and improve that infrastructure. In particular, reliable federal funding for highway projects has been lacking for much too long.
The federal Highway Trust Fund (HTF) has flirted with underfunding for a number of years. Under current legislation, new projects can’t be approved after September 30, 2020. Most of the taxes to fund the HTF expire on September 30, 2022. Most estimates expect the trust fund to run out of money by the end of September 2020.
This is not a new situation. In the past, Congress has extended the authorization for spending and for taxing (but without increasing the gasoline tax) and filling any budgetary shortfalls with transfers from general revenues.
Although it seems likely that this will occur again, it is not certain. For the past few years, both parties have touted the need for increased spending on infrastructure, but little has happened even though the need is great. The American Society of Civil Engineers in their 2017 report (the most recent year for the report) gave U.S. roads a grade of D and bridges, C+. The American Road & Transportation Builders Association in their 2019 Bridge Report rated 47,052 U.S. bridges as “structurally deficient.” The group estimated that the cost of repairing, rehabilitating, or replacing all bridges in need of repair/replacement (roughly 235,000 bridges) would cost close to $171 billion.
The cost to the nation from the failure to properly maintain roads and bridges comes in the form of repair costs to cars and trucks (replacing damaged tires, fixing broken axles, etc.) added commute and delivery time (due to slowdowns and detours), and sadly, the occasional injury or loss of life from an infrastructure-generated accident or due to infrastructure failure such as the August 2007 I-35W Minneapolis, Minnesota bridge collapse over the Mississippi River.
Funding the HTF
The HTF has been largely a “pay as you go” program funded principally from gas taxes. However, the gas tax has not been raised since 1993 despite years of inflation as well as more highways being built. According to the producer price index (PPI), the prices for both cement and rebar (major materials in highway and bridge construction) have more than doubled in the ensuing 25 years. As a result, Congress has filled the gap not with higher gas taxes, but with money from general revenues (general tax collection).
The basic concept behind using the gas tax to fund the HTF when it was created was that it roughly approximated a user fee. The more you drove (used roads), the more gas you used, the more tax you paid. The current taxes are 18.4 cents per gallon of gasoline and 24.4 cents per gallon of diesel fuel. The higher tax on diesel fuel reflects both the better mileage from diesel-powered vehicles and that most diesel-powered vehicles are trucks. There is a sales tax on certain large trucks and trailers. Finally, there is an annual tax on heavy trucks. In most cases, cars will pay less per year while trucks will pay more. Given that trucks (particularly heavy trucks) create more wear and tear on our roads, this seems like a fair division of payment.
Increased vehicle fuel efficiency has limited the rise in revenues from gas taxes to the HTF, failing to keep pace with increased highway use and the rising cost of construction.
Failure to raise the gas tax (and other taxes) is both leaving highway maintenance and repair underfunded as well as moving away from a (reasonably) fair way of dividing the burden of funding the HTF. Unfortunately, politics has prevented an increase in these taxes even as poll after poll has shown that large majorities of voters favor increasing these taxes as long as they go towards maintaining and repairing roads and bridges.
Thus, there is a strong argument for raising gas taxes now to fund the HTF. We are certainly not the first to make this observation.
However, this is not a good, long-term solution. With the move away from fossil fuels to power our vehicles and continued improvement in fuel efficiency, other sources of funding for the HTF need to be found.
Alternative Sources of Funds for the HTF
All states have their own per gallon fuel (excise) tax. These taxes range from $0.04 per gallon (Florida) to $0.576 per gallon (Pennsylvania). Most states impose additional fees, some of which show up in the price per gallon of fuel. The total per gallon tax on fuel by states ranges from $0.0895 (Alaska) to $0.752 per gallon (Pennsylvania). Since some states impose a sales tax based on the price per gallon, individual state per gallon taxes frequently change for those states.
Various proposals have been made, and some implemented at the state level, to supplement or replace the gas tax. One should not think of the various proposals as in competition, but how one or more might be used to provide consistent funding for the HTF as well as funding by the states for transportation projects, particularly in light of more efficient cars and trucks in addition to vehicles using alternative fuels, including non-fossil fuels.
The oldest way to pay for transportation is the imposition of tolls on users. This is clearly the most targeted user fee there is. Historians tell us that toll roads go back to over 2000 years ago. In the United States, toll roads (and canal tolls) go back to at least the early 19th century.
In modern times, post-World War II, the interstate highway system was created to be largely toll free. Instead, federal funding for the system came mostly from the HTF. States that accepted federal funding for interstate highway construction were prohibited from imposing tolls on those portions of the system. With the federal government willing to fund 90% of the cost of these highway projects, there was great incentive to accept the federal funding along with its restrictions.
In general, tolling only makes sense on limited access highways as the cost of administering tolls in other cases would be greater than the revenues collected. Advances in technology may change this calculation as cost of gathering tolls electronically falls. The one exception to not collecting tolls on local streets is using tolls to control congestion. In this case, a perimeter is established around a city center and cars and trucks are charged a fee (generally variable by time of day) for crossing beyond that perimeter into the center of the city. The revenue from these tolls can be used to support mass transit and other forms of transportation (e.g., to build bike lanes).
Public-Private Partnerships (P3s) have been successful in adding to highway infrastructure. These projects entail tolls that are given to the private partners in exchange for the private investors’ funding and, in many cases, expertise. In recent years, these projects have tended to focus on High Occupancy Toll (HOT) projects. Although not a direct addition to funding the HTF, these P3s allow more to be accomplished with less HTF (and other public) monies. Also, with the private input, along with the implicit incentive to reduce costs, some of these projects have been completed in less time and under budget compared to projections and past experience based on using public funds and expertise alone.
As previously noted, some states already have a sales tax on fuel separately or add a small percentage to their general sales tax that is devoted exclusively for transportation projects. The advantage of the fuel only sales tax is that it is clearly in the user tax universe. It has the added advantage of rising (and falling) as fuel prices increase (or decrease). Fuel taxes still have the disadvantage of not fully capturing usage by alternative fuels such as by electric-powered and hybrid vehicles. Also, they suffer from reduced revenues as gas mileage improves with newer vehicles.
The overall sales tax may seem to move out of the realm of a user tax. However, since goods are transported to retail stores or directly to consumers, to a rough extent a sales tax is partially a transportation user tax.
Some states permit localities (counties, municipalities) to enact an additional sales tax on top of the state general sales tax for the purpose of funding local transportation projects and for maintenance and repair.
A mileage tax or vehicle miles traveled tax (VMT tax) has many different possible versions. The broadest application of a VMT tax would be at the federal level. There would be a tax on total miles traveled per registered vehicle. This could be reported as part of the income tax or administered and collected separately. In the case of the latter, an electronic device could be installed on a car similar to E-ZPass or integrated into newer cars’ electronic system. Strict privacy standards (in particular not collecting location data) and security would have to be included in such a system.
Each car owner would be billed for their mileage usage.
Similar to E-ZPass, car owners could set up an account that automatically replenishes and mileage charges could be deducted regularly (e.g., weekly or monthly) with statements available online or via mail. The system could be merged with the existing E-ZPass system to pay for tolls as well as the VMT tax.
An Oregon test of the VMT tax a few years ago produced an interesting behavioral result. In the test, a group of volunteers were given a GPS device. When they filled up at a gas station, participants were charged the mileage fee (for miles traveled since their last time they purchased gas) instead of the normal gas tax (i.e., the price per gallon of gas was reduced by the amount of the state gas tax). When participants purchased gas, their receipt showed both the gas purchase plus the amount the VMT tax.
Although the test VMT tax was set to be revenue neutral relative to the gas tax, participants reduced the miles they drove—walking on short trips rather than driving and combining errands on driving trips. Since a gas tax should have the same effect since it is implicitly a tax on miles driven, this result was surprising. It suggests (but doesn’t prove) that explicitly seeing the cost of driving per mile affected behavior compared to it being “hidden” in the price of gas. This behavior might fade or disappear entirely in a world where a VMT tax is normal and widely accepted as part of the cost of driving.
Registration Fees and Property Tax on Vehicles
All states charge a registration fee with the purchase or transfer of a new or used vehicle. States also charge for registration renewal periodically (annually or every few years). Some states also collect a personal property tax on the value of vehicles annually. All, a portion, or none of these revenues may be earmarked for transportation expenses. These fees are not connected to how much a vehicle is used, although there might be higher fees for heavier vehicles, which tend to cause greater damage to roadways.
To the extent that these revenues are used for transportation projects (including maintenance), they can be seen as a fixed charge for maintaining the transportation system, similar to fixed charges by various utilities (electrical, water, etc.) to be able to use the system. The idea is that there is a cost to maintaining the transportation system that doesn’t solely depend on use.
Infrastructure includes various systems ranging from water treatment plants to airports to power grids to highways. As already noted, good infrastructure is a vital component to a well-functioning, growing economy. Various studies have indicated that there is a high return to investment in infrastructure.
But existing infrastructure must also be maintained—electrical systems repaired, potholes filled, bridges repaired or replaced. This article focused on funding for just one part of U.S. infrastructure—highways. For too long, our politicians have failed to provide adequate secured, long-term funding for the HTF despite both sides of the aisle extolling the need to invest in infrastructure.
We have identified several potential sources of funding for the HTF and the possible rational for each. The nation does not need to rely on just one source of funding, but should consider several of these revenue streams.
In looking at the question, we should consider transportation as a whole. This means widening our view to a more macro level and think about what we are trying to accomplish. For example, where there is a congestion problem, we need to think beyond just building more roads and consider how support for mass transit and other approaches (such as bike lanes) might be part of the answer.
We must think beyond just building new highways to solve our transportation problems but also include plans to maintain and improve existing highways. The first tends to be popular while the second tends to be harder to build popular support for even as the public complains about deteriorating roads. Further, when building new roads, we must consider more than the immediate cost of construction and include the cost of maintenance and repair over time. The same goes for expansions of mass transit systems.
Failure to properly invest in our infrastructure will limit the ability of the economy to grow. If we hope to increase potential economic growth, we must invest in more and better infrastructure.
Bernard M. Markstein is a Senior Advisor to ESI and President and Chief Economist of Markstein Advisors, an economic consulting company providing analysis and forecasts of the national economy and construction activity. Dr. Markstein’s experience includes analysis and research in housing, residential and nonresidential construction, real estate, financial markets, macroeconomic issues, and regional markets.