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The Future of Highway Financing



The Future of Highway Financing  Investment requirements to maintain the condition and performance of the Nation's highways, such as this one near Long Beach Harbor, CA, exceed projected revenues from current sources. Photo: Scott McKenzie, Caltrans.

 Where will the dollars come from? Concerns about the adequacy of revenues from fuel taxes and the indirect link between fuel taxes and specific improvements to highways are leading highway administrators to reexamine long-term options for highway financing. For example, efficient pricing is one solution that may reduce congestion without requiring expensive new highway capacity; however, it "rocks the boat" in terms of existing methods of doing highway business. Exploration of alternatives can raise a number of economic, technological, equity, privacy, and public policy issues.

 To discuss some of these key issues, their implications for the future, and options for highway finance, on May 21, 2004, former Federal Highway Administrator Mary E. Peters convened an informal roundtable titled "Future Highway Finance Issues and Options." The roundtable included 22 participants representing the Federal Highway Administration (FHWA), U.S. Department of Transportation (USDOT), American Association of State Highway and Transportation Officials (AASHTO), Transportation Research Board (TRB), and private consultants with expertise in highway finance. The goal was to further the dialogue on the need to explore financing alternatives, but not to come to a consensus on any of the issues or to draw conclusions concerning the most promising financing options.

 In laying the framework for the roundtable discussion, former Administrator Peters said, "States face many challenges as they examine new ways to finance their highway systems, including planning for major projects, assessing the long-term viability and stability of new revenue sources, developing implementation strategies for new financing methods, and identifying winners and losers for alternative financing strategies."

 Highway Pricing

 Much of the roundtable discussion concerned the relative merits of moving toward greater use of pricing to finance new highway capacity and manage demand. Economists have talked for many years about the benefits of more efficient highway pricing-charging more for highway use during peak periods to reduce demand when strains on highway capacity are the greatest.

 "Interest in the potential for peak period pricing to reduce highway congestion now is moving beyond the academics to highway administrators who see pricing as a way to reduce congestion without constructing costly new capacity," said FHWA Executive Director Frederick G. "Bud" Wright.

 Technological improvements such as open-road tolling now make pricing a more feasible option for addressing congestion, and motorists in highly congested urban areas, such as Washington, DC, are beginning to consider pricing as a potential alternative to relieve congestion. In the near term it is unlikely that many U.S. cities will implement areawide pricing as has been done in some European and Asian cities. More likely, only parts of the network will be priced so that motorists have the choice of paying a toll to travel on uncongested roads or not paying a toll to travel on congested roads. Roundtable participant Robert D. Atkinson, vice president of the Progressive Policy Institute, noted, "We have failed over the past 15 years to provide choices that American motorists want."

The Federal Role in Highway Finance


The Federal Role in Highway Finance  Using value pricing on selected existing or new highway facilities could provide motorists in many cities with an alternative to sitting in traffic congestion like this four-lane gridlock.

 During the roundtable, the discussion also focused on the Federal role in financing highway improvements. Participants generally were very supportive of the flexibility that was given to State and local transportation agencies to identify and fund transportation improvements that meet their unique needs. Former Administrator Peters emphasized that a strong Federal role may be necessary in certain areas, including "interstate and international commerce, safety, national defense and security, research and standards development, and provision of roads on Federal lands." She summarized, "A clear understanding of the Federal Government's interests in those program areas is necessary to evaluate its future role in highway finance."

 A trend in recent reauthorization acts is an increase in the amount of Federal funds earmarked to specific projects by members of the U.S. Congress, and the latest Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU) is no exception. This earmarking affects the ability of States to meet State and Federal priorities, and the trend has implications for future highway financing. For a number of years, some transportation policy analysts have maintained that part of the Federal highway program should be devolved to the States. However, there are constraints on the extent to which the Federal highway program can be devolved. Roundtable participants pointed out that a reduction in Federal tax rates would make it difficult politically for States to increase their tax rates to generate the same levels of revenue. Also, needs and revenue-raising capabilities differ dramatically among the States. Sparsely populated States may not be able to fund improvements to routes essential for interstate commerce and may require more funding than can be generated by motorists in those States.

 The Federal role in any transition to alternative highway revenue sources also was discussed at the roundtable. As highway agencies move toward new funding mechanisms, one option mentioned would be to have the Federal Government collect the highway taxes and then redistribute them to the States. Administratively, this could save costs and reduce evasion, but States would insist on retaining their authority to set tax rates.

Road Construction Safety  Property tax revenues could be a financial basis for local road construction around new highway interchanges like the Marquette Interchange in downtown Milwaukee, WI (shown in this artist's rendering). Increases in tax revenues from increased property values can be used to help finance highway construction.

 Another long-term model might be for one or more private-sector entities to collect taxes on behalf of Federal, State, and local government. Funds then could be credited to those units of government on the basis of their respective tax rates and the amount of travel in each jurisdiction. This option may have some of the administrative benefits of Federal tax collection but would not compromise the ability of State and local governments to independently adjust tax rates.

 The Federal role in helping to facilitate the transition from reliance on fuel taxes to greater use of direct user charges would be to promote standards for transponders and tax collection mechanisms. The roundtable participants did not suggest that the Federal Government attempt to impose a single financing mechanism on the States. FHWA Associate Administrator for Policy Charles D. "Chip" Nottingham suggested, "States could test and evaluate a variety of potential financing mechanisms and choose the one or ones that best meet their needs."

 The private sector also could play a role in developing innovative solutions to State financing requirements. Because States have quite different financing requirements and capabilities, future State financing structures may be no more uniform than current structures.

 Another potential role mentioned for the Federal Government relates to the financing of megaprojects that have national or regional benefits and often cost more than a single State can afford. Examples include the Alameda Corridor in Los Angeles, CA; Chicago Regional Environmental and Transportation Efficiency Project (CREATE); port improvements; and other projects of national significance.

Road Construction


Road Construction  Germany is famous for its high-speed freeways. These limited-access expressways, called autobahns, have a total length of about 11,000 km (6,800 mi).

 Road, path established over land for the passage of vehicles, people, and animals. Roads provide dependable pathways for moving people and goods from one place to another. They range in quality from dirt paths to concrete-paved multilane highways.

 Roads are used by various forms of transportation, such as trucks, automobiles, buses, motorcycles, and bicycles. Roads allow trucks to move goods from points of production, such as fields and factories, directly to markets and shopping centers. Private individuals rely on roads for safe and efficient automobile, motorcycle, and bicycle travel. Fire departments, medical services, and other government agencies depend on an organized system of roads to provide emergency services to the public in times of need.

 The earliest roads evolved from animal paths and served as trails for early hunters. Paths eventually grew around primitive settlements, and as trade grew, longer routes were developed to transport food and other important materials. The use of wheeled vehicles encouraged construction of better roads. The roads built by the ancient Romans were carefully planned and solidly constructed.

Road Construction  A multilane freeway system in Los Angeles, California, has several entrance and exit ramps so vehicles can enter and exit traffic smoothly. When routes cross one another, one of the routes will be elevated so that intersections are avoided.

 Modern methods of road construction were first developed in the 18th century. Innovations of the time included waterproof surfaces and better drainage systems. Modern engineers make use of a variety of materials and construction techniques to build roads that can handle the high volumes and stresses of modern automobile and truck traffic.

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