MORE SPENDING AND HIGHER TAXES?

Recognizing that a head-to-head fight over shares of the pie may leave both sides damaged, program beneficiaries are looking for ways to expand the pie, and some are advocating a fuel tax increase. The American Road and Transportation Builders Association (ARTBA) has advocated a 54 percent increase in the federal fuel tax paid by motorists by proposing tax increases of 2 cents per gallon per year for the next five years. Alternatively, state transportation officials represented by the American Association of State Highway and Transportation Officials (AASHTO) want the federal fuel tax indexed for inflation.

Until recently, elected officials have been silent on the issue of more spending and higher taxes, largely in appreciation of voters' overwhelming rejection of a series of well-funded, highly visible state and local referenda to raise state fuel and sales taxes to fund additional transportation projects. (See box, "Voters Reject Transportation Tax Increase Propositions.") Many believe that voters rejected these initiatives because they were unconvinced that the state transportation department and the proposed spending plans would do much to relieve congestion and improve mobility.⁵ In contrast to the voters' attitude on tax increases, the resistance to more spending and higher taxes is waning in Congress, and some Members are advocating substantial increases.

Indeed, despite the prospect of huge increases in the federal budget deficit, the urgent need to spend more on national defense and homeland security, and bipartisan agreement on reducing the tax burden on families to stimulate the economy, some in Congress have conceded to lobbyists' demands and have announced plans to double surface transportation spending over the next several years and raise taxes to fund the increase.

In December 2002, Chairman Don Young (R-AK) of the House Transportation and Infrastructure Committee floated key elements of his own proposal to the media and the White House. Under the Young plan--which he stressed is "not even anything on paper yet"--federal fuel taxes would be increased by adopting both the AASHTO and ARTBA proposals, which would increase the federal fuel tax by 2 cents per year over the next six years and index it to the rate of inflation. Under the Young plan, federal fuel taxes would increase by 81 percent from 18.4 cents per gallon today to about 33.4 cents by 2009. These higher taxes would be used to increase funding for existing federal transportation programs: Under the Young plan, highway spending would increase from the current $32 billion to $60 billion in 2009, and transit spending would increase from $7 billion to $12 billion.⁶

In response to early criticism of his December 2002 fuel tax increase proposal, Chairman Young has since floated a number of alternatives for consideration and comment. Most recently, in March 2003, he proposed that highway and transit spending increase to a total of $375 billion over the next six years. He has also suggested that this increased spending be financed by immediately raising the federal fuel tax by 5.45 cents per gallon and indexing it to the rate of inflation for each year thereafter.

In the Senate, a majority voted in March 2003 to amend the FY 2004 Budget Resolution to increase highway and transit spending to a total of $311.5 billion over the next six years--about $65 billion less that what Chairman Young is proposing. Future fuel tax revenues are expected to cover the Senate's proposed spending package without a tax increase.⁷

Unmoved by transit's declining market share and excessive federal subsidies, a bipartisan group of 43 Senators sent a letter to President Bush in early December 2002 stating that "Strong support for transit is essential in light of the increasing demands on our public transportation system."⁸ Also in December, the American Public Transit Association (APTA), the lobbying group for public transit systems and the major contractors that build them, quantified "strong support" as increasing total transit spending over six years from the $41 billion authorized by TEA-21 to $65.7 billion. Not to be outdone by the lobbyists, the U.S. Department of Transportation (DOT) estimates that "an average annual capital expenditure of $20.6 billion is needed to improve the conditions and performance of transit systems."⁹

Again, these enormous sums of money are for systems that carry less than 2 percent of the nation's urban passengers and none of America's freight at a time when budget deficits are exceeding $300 billion per year.

Regional Disparities

Another reauthorization-related conflict will be between donor states (those whose motorists pay more in fuel taxes than they receive back from the program) and recipient states (those that receive more than they pay). Over the past several decades, many southern and western states have found themselves donors, while states in the northeastern and central regions of the country are most often recipients.

In the year leading up to reauthorization of the Intermodal Surface Transportation Efficiency Act (ISTEA), many donor states organized themselves as STEP 21, an advocacy group that sought to ameliorate the inequity by guaranteeing each state at least a 90.5 percent return on tax revenues. Such a provision was included in TEA-21, but many argued that it would be ineffective, and this seems to have been the case as many donor states still receive returns below 90 percent.

This year, some donor states, organized as State Highway Authority Revenue Equality (SHARE), intend to seek a guaranteed 95 percent return. The potential losses this might cause recipient states could lead to heightened conflicts between regional factions. For these and other reasons, the reauthorization of the federal highway program may become so acrimonious that reauthorization may be impossible this year. Such a deadlock could be used productively to effect fundamental reform, recognizing that most of today's transportation problems are regional and local and that more transportation decision-making should be shifted to the states.

As Members of Congress, Administration officials, governors, mayors, and state legislators choose among the many proposals to replace the TEA-21, they should give priority attention to the Transportation Empowerment Act (S. 2861), introduced by Senator James Inhofe (R-OK) in the waning days of the 107th Congress. Senator Inhofe's proposal would have reduced the federal fuel tax from 18.4 cents per gallon to 2 cents per gallon and limited federal funding of roads and highways to those on federal lands and maintenance of the existing interstate highway system. All other responsibilities would devolve to the states, and states would be required to maintain current levels of transportation spending, funded by state fuel taxes increased to offset the reduced federal tax.

Other key provisions of the Empowerment Act included terminating federal transit programs and ending federal limits on the creation of state and/or regional infrastructure banks and other sources of innovative finance, including tolls. Instead, under Senator Inhofe's Empowerment Act, each state could choose to allocate its spending among the modes of transportation most appropriate to the unique needs and characteristics of its communities.

Since the completion of the interstate highway system more than 20 years ago, and with the increased urbanization of the population, America's transportation problems have become increasingly local and regional in nature. As a result, Washington officials have little to offer in the way of effective solutions to distant concerns. The Transportation Empowerment Act introduced by Senator Inhofe would better address these changing circumstances and objectives by allowing states to keep most of the fuel tax revenues raised within their borders and giving state and local officials greater responsibility and authority to set priorities and use the revenues to fulfill locally determined mobility objectives.

ORIGINS OF THE FEDERAL HIGHWAY PROGRAM

The Federal Highway Administration (FHWA) and the highway trust fund were created in 1956 to design and build the interstate highway system. Ten years later, FHWA was merged with other federal transportation programs to become part of the newly created U.S. Department of Transportation.

Federal involvement with roads and highways dates back to building the National Road (or Cumberland Road) beginning in 1811, followed by the creation of the Office of Road Inquiry in 1893 and enactment of the Federal Road Act in 1916. With the exception of some work relief highway programs under President Franklin Roosevelt's 1933 National Recovery Act, the federal role in highways and roads was relatively modest until the 1950s.

Federal involvement changed dramatically in 1956 when President Eisenhower signed the Federal Aid Highway Act, authorizing the construction of a 41,000-mile interstate highway system. At the same time, the Highway Revenue Act of 1956 established the highway trust fund to finance the interstate system and increased the federal excise tax on gasoline from 2 cents to 3 cents per gallon.¹⁰

By 1980, over 40,250 miles of the (revised) 42,500-mile interstate highway system were complete,¹¹ but the federal highway program continued to expand by adding new responsibilities and objectives--including the goal of facilitating the organization of a newly defined, 160,092-mile National Highway System.¹² Over time, Congress has added other non-highway responsibilities to the program, the largest being the federal urban mass transit program, which has been allowed to tap into the highway trust fund since 1982. At present, as much as 20 percent of the fuel taxes paid by motorists is diverted to transit subsidies.

Other programs now accessing the highway trust fund include underground storage tank removal, recreational trails, roads in national forests, the transportation component of the Appalachian Regional Commission, environmental enhancements, historic preservation, and air quality and congestion mitigation. Recently, attempts have been made to allow the financially troubled Amtrak to tap into the highway trust fund, but they have not succeeded. In 2001, Senator Paul Sarbanes (D-MD) introduced legislation (S. 1136) to divert funds to public transportation programs in National Parks.

HOW DIVERSION OF TAX REVENUES LIMITS PROGRAM EFFECTIVENESS

As a consequence of the program's expanding mandate, the federal excise tax on gasoline has risen from 3 cents when the program was created to 18.4 cents today. Although the motorists and commercial truckers provide virtually all of the revenues for the trust fund, the value of the money returned to them in usable highway spending shrinks with each new diversion as Congress earmarks ever-larger shares of transportation spending for the benefit of influential constituents.¹³ Adding to the cost of federal transportation programs is the requirement that workers receive "prevailing wages" (Davis-Bacon Act), which inflates federal highway construction and repair costs by an estimated 5 percent to 38 percent.

As Table 2 reveals, under TEA-21, motorists receive only about 60 percent of the value they pay in federal fuel taxes.

The Transit Diversion
The largest diversion from the highway trust fund is the 2.86 cents of the 18.4-cent federal fuel tax applied to the Mass Transit Account of the Highway Trust Fund. Although transit's fuel tax claim amounts to only 15.5 percent of the tax rate, the annual share of federal spending on transit exceeds the amount of dedicated revenues raised by that share. These fuel tax revenues are spent on a variety of transit projects throughout the country, including buses, light rail systems, and commuter rail. Currently authorized federal spending on transit is about $7.2 billion per year and is expected to account for a little more than 20 percent of federal highway trust fund spending in 2003.

Because transit moves only a small fraction of American travelers and none of its freight, this mandated diversion of trust fund money hinders mobility and diminishes the productivity of the U.S. transportation system because it shifts such a large share of money to a costly, inefficient, and underutilized mode of transportation (transit) at the expense of modes that receive substantially greater use (roads) and are more cost-effective. As a result, the system provides substantial subsidies to a few riders who are disproportionately concentrated in a small number of major metropolitan areas.

According to the U.S. Bureau of the Census, transit's share of work trips nationwide was only 4.5 percent in 2000, down from 5.2 percent in 1990.¹⁴ For all trips including work trips, transit's share of the urban markets is just 1.9 percent when measured per passenger mile; nationwide, it would probably be close to 1 percent. In effect, under the existing federal transportation program, 1 percent of passengers receive 20 percent of all federal transportation subsidies. This distortion in funding, and the shortfall it creates in the highway program, is one reason that roads in major metropolitan areas are so congested.

Table 3 provides information on transit's performance for work trips (commuters) between 1990 and 2000 in each of the top 50 metropolitan areas of the United States. As the table reveals, transit's share of the commuter market fell both nationally and in 39 of the 50 major metropolitan areas. In 1990, five areas had transit market shares above 10 percent; by 2000, only two metro areas--New York and Chicago--held shares above this level. In Portland, Oregon, massive transit subsidies and a commitment to transit-oriented land use during the 1990s had increased transit's share of commuters in the metropolitan area by only 0.29 percent by 2000. This misallocation of funds to transit contributed to Portland's having some of the nation's worst traffic congestion.¹⁵

Further distorting the allocation of federal money, transit is funded by national taxes levied on motorists, while transit use is concentrated in a small number of metropolitan areas. According to the Federal Transit Administration, 74 percent of all transit ridership in 2000 occurred in just seven metropolitan areas--New York, Chicago, Philadelphia, Boston, San Francisco, Los Angeles, and Washington, D.C. New York alone accounted for 42 percent of transit riders nationwide. Almost 25 percent of commuters in the New York area take transit to work, while in Detroit and Nashville, respectively, less than 2 percent and 1 percent do so.

The chief reason for public subsidies to transit systems is that passenger fares cover only a fraction of the costs needed to run the system. New York City Transit is one of the most efficient, with fares covering 63 percent of costs. In many other systems, however, fares cover less than half of the costs. Fares, for example, cover only 38 percent of costs in Philadelphia's SEPTA, 29 percent in Boston's MBTA, and 28 percent in Atlanta's MARTA.¹⁶

As one transportation expert recently noted:

There isn't a single light rail transit system in America in which fares paid by passengers cover the cost of their own rides. The aggregate deficit for 2000 (the latest year for which complete data are available) was more than a billion dollars. The average cost per passenger mile is around $1.20. These costs are far higher than the average cost per bus passenger mile of about seventy-five cents. Of course, no transit option matches the average cost of automobile transportation, which is about thirty-four cents per vehicle mile.¹⁷

Regulatory Impediments
While the federal government diverts motorists' fuel taxes to non-highway uses, the government has restricted the operation of state and local highway departments and limited the extent to which states can supplement federal money with revenues other than direct state taxes. Chief among the burdensome provisions is the application of federal prevailing wage standards (Davis-Bacon Act) to all construction funded by federal dollars. Because the prevailing wages established by the U.S. Department of Labor (DOL) are generally higher than open market wages, federally funded construction projects generally cost more than they would without such regulations. The Davis-Bacon Act adds an estimated 5 percent to 38 percent to construction costs. Table 2 errs on the conservative side, estimating the Davis-Bacon cost at 8 percent.

Under a turnback program in which a state's transportation revenues would be derived exclusively from state taxes and fee sources, Davis-Bacon requirements would no longer apply to highway and transit construction projects. As a result, highway projects would cost less, allowing states to build and repair more roads for the same amount of money. Not all states, however, would benefit from ending this federal mandate because as many as 19 states have enacted their own versions of a prevailing wage law, while another 12 have less restrictive versions of the federal prevailing wage law.¹⁸

Similarly, regional and local transit systems would be freed from the significant union-related regulatory burden that comes with federal funds. Under current law, not only must transit systems adhere to Davis-Bacon provisions during construction and renovation phases, but they also must adhere to Section 13(c) of the Federal Transit Act of 1964 once in operation. Initially enacted to protect unionized transit workers when bankrupt private transit companies were taken over by public authorities, its application has since been distorted and extended in ways that effectively lead to mandatory union contracts for transit workers.¹⁹

Specifically, Section 13(c) requires that the DOL certify that fair and equitable labor arrangements are in place before DOT can make a grant to a transit agency. To be certified, five specific issues must be addressed in the arrangements:

1. Preservation of rights, privileges, and benefits under existing collective bargaining agreements;
2. Continuation of collective bargaining rights;
3. Protection of employees against a worsening of their positions with respect to employment;
4. Assurances of employment to employees of acquired mass transportation systems and priority reemployment for employees terminated or laid off; and
5. Paid training and retraining programs.

If there are no objections that the DOL deems valid, it certifies that appropriate labor protections are in place and approves the grant. However, if unions object to a transit agency's grant request and DOL upholds the objection, the grant request is denied. Also under 13(c), displaced employees receive up to six years of full pay and benefits. This provision has effectively discouraged the introduction of cost-saving automation and technology, as well as any competitive contracting that may lead to a reduction in force. The consequences of these provisions are higher labor costs that contribute to high operating costs.

Other regulatory burdens applied to federal transportation programs include costly and time-consuming environmental impact statements that can add one to five years to the duration of a major highway project.²⁰ These include provisions of the National Environmental Policy Act, Clean Air Act, and Rare Species Habitat Protection Act and preferential set-asides for businesses owned by minorities and women.

Another new bureaucratic layer added by recent legislation is the metropolitan planning process required for major highway upgrades in metropolitan areas that do not meet federal clean air standards. This can subject every project in the area to a protracted analysis of alternatives and to public consultation. In turn, these become opportunities for well-funded activist groups to impose their agenda and force travelers from automobiles to less efficient forms of transport.

Congestion Mitigation and Air Quality Provisions
The Congestion Mitigation and Air Quality (CMAQ) provisions are one of two new sets of costly environmental set-asides in the ISTEA. The CMAQ program is intended to assist states in complying with federal air quality standards by funding projects that lower emissions.²¹ TEA-21 reauthorized these provisions of ISTEA at a total cost of $8.1 billion between FY 1998 and FY 2003. The CMAQ program annually diverts about 3.5 percent of fuel tax revenues to non-highway purposes.

Because a state's share of CMAQ money is related to population and air quality, funding is concentrated in just a few states with air pollution problems. In effect, states that pollute more get more money, and motorists in states with clean air subsidize those in polluted states. Under ISTEA, 10 states received two-thirds of the money--about 50 percent more than they paid into the trust fund.²² By law, each state is guaranteed a minimum of 0.5 percent of CMAQ money distributed each year and may use it for general transportation purposes if air quality already meets federal standards. For example, Oklahoma, which accounts for 1.6 percent of trust fund revenues in 2000, receives only a 0.5 percent share of CMAQ money.

Funds from the CMAQ program can fund projects in any of eight approved categories: public transit, traffic flow improvements, rideshare, bicycle and pedestrian projects, traffic demand management, public education, vehicle inspection, and alternative fuels. Under ISTEA, nearly half of CMAQ money went to public transit, adding to the already substantial share of federal money--now running in excess of $7 billion per year--that transit systems draw from the trust fund. For example, the heavily subsidized Virginia Railway Express system, which operates two commuter rail lines connecting Virginia suburbs to Washington, D.C., expects to receive more than $3 million in CMAQ funds in FY 2003.²³

A recent study of CMAQ spending between 1992 and 1999 reveals the mismatch between CMAQ priorities and commuter preferences, as presented in Table 4. The columns show the share of CMAQ funding received by different fuel-efficient modes, compared to the modal share of the commuter market. As is apparent, transit's share of CMAQ money vastly exceeds its market share, in comparison to the underfunding of carpooling and ride sharing.

This misallocation among modes seems all the more questionable when comparisons over time are considered: Journey to Work data from the 1990 and 2000 U.S. Censuses indicate that transit's market share has been falling faster than the market share for car and van pooling.²⁴ In effect, the CMAQ program benefits the transportation modes of the past, not the future, as revealed by consumer choice.

REGIONAL DISTORTIONS AND INEQUITIES

Another flaw that leads to diminished mobility in many states is the pattern of pervasive and systemic inequities in the federal highway program's geographic allocation of money. Although money is technically allocated to each state according to a complicated mathematical formula that attempts to adjust for miles of road, usage, number of drivers, and other factors measuring need, the static nature of the formula and the delays in changing it from one year to the next tend to penalize fast-growing states where congestion is worsening and reward slower-growing states where the congestion pressures are less. In effect, under the current formula, the more a state needs, the less it gets, and vice versa.

The Southern Governors' Association estimated that between 1992 and 1996, most of the fast-growing southern and Sunbelt states received a smaller share of the trust fund than they paid. For example, Florida received $0.79 for every dollar in taxes, South Carolina received $0.71, and Virginia received $0.83. In contrast, northeastern states, where transportation needs were not growing as fast, received more than they paid into the fund. New York received $1.14 for each tax dollar, Pennsylvania received $1.11, and Rhode Island received $2.09.³⁹ In 1997, these persistent inequities led many donor states to create an organization called STEP 21 to advocate a fairer distribution.

Table 5 and Figure 1 show apportionments by state for the most recent year available (FY 2001) and since the trust fund was created in 1956. States with a share greater than 1.00 received a larger share back than they paid, while states with shares below 1.00 paid a larger share than they received.

Although TEA-21 was supposed to ameliorate these inequities and guarantee each state a return of at least 90.5 percent of what it paid, the actual results have been disappointing. Table 5 reveals that a number of long-standing donor states--including Oklahoma, Texas, and Florida--received a return share less than 90 percent of the share of revenues they paid into the system in FY 2001. Indeed, over the history of the program, no state has done as poorly as Texas, and Oklahoma is not far behind.

Not all of the losers were southern states, however. Michigan, Ohio, California, New Jersey, and Arizona were also donors that year, and these patterns have generally held since the inception of the trust fund in July 1956.⁴⁰

Distortions in the allocation formula have resulted in more congestion than there should be for the given level of spending. Much of this worsening congestion is concentrated in the faster-growing regions, and most of the states in those regions are donor states. If nothing is changed, the congestion in these places will worsen because these distortions are not self-correcting under the current program. Partly for this reason, the urban areas of Texas and California typically have some of the nation's worst traffic congestion.

Another troubling inequity embodied in the current allocation system is the extent to which the trust fund tends to redistribute fuel tax revenues from poor states to rich states, particularly along the Atlantic seaboard. The last column of Table 5 gives each state's ranking by per capita income, from 1 to 50 with 1 as the highest.

As the table reveals, 12 of the 22 donor states are ranked in the bottom half of the national income distribution. Even more inexplicable is that 7 of the 10 most prosperous states are recipient states. One of the most perverse outcomes of this peculiar trickle-up reward system is that motorists in Mississippi, ranked 50th by income, in effect support motorists in Connecticut, ranked 1st by income.

SUMMARY OF THE PROBLEMS

Having completed construction of a 41,000-mile interstate highway system from coast to coast and border to border, the federal government has found it increasingly difficult to resolve surface transportation problems that are increasingly local in nature. As the worsening congestion suggests, this task is beyond the scope and skill of the Washington bureaucracy and congressional committees. Despite record levels of highway spending, traffic delays are worsening and roads are deteriorating.

Other than a Pavlovian embrace of the failed tax-and-spend policies of the past, many in Congress and the DOT appear to have little interest in doing much more than continuing the status quo. What passes for innovation in the Washington of today is little more than higher taxes, with perhaps a few new bells and whistles attached to appease reformers. By slogging along its present course, Congress will only perpetuate a defective system for another six years--six years characterized by worsening congestion and deteriorating roads.

The current highway program suffers from four main defects that have worsened over time:

1. The motorist pays the revenues but receives a shrinking fraction of the benefits because funds are increasingly allocated by political influence, not need;
2. The current geographic allocation formulas consistently favor some regions over others;
3. An increasing share of federal transportation spending is micromanaged by Washington officials to satisfy politically influential constituencies rather than improved mobility; and
4. Existing federal law largely prohibits and/or penalizes the implementation of most of the more promising reforms--privatization, commercialization, and public-private partnerships--that have been successfully implemented elsewhere in the world.

Discussed below are a number of potentially promising reform proposals that address some or all of these defects.

Recommended Actions in 2003

Five reforms could bring some relief if implemented at a scale greater than a series of pilot projects. The first four proposals involve alterations in the existing federal highway program, while the fifth involves a wholesale change in the system and could incorporate some or all elements of the first four.

RECOMMENDED ACTION #4:
Fund roads and bridges through the broader use of innovative finance mechanisms

With federal and state fuel tax revenues perceived as failing to keep pace with rising transportation needs, and with taxpayers increasingly reluctant to support tax increases, particularly those targeted for transportation, some transportation analysts and officials are advocating innovative finance mechanisms as an alternative source of funds for transportation projects.

Innovative finance describes a variety of funding techniques where money is borrowed to supplement existing tax revenues to build roads. Turnpikes and other toll roads and bridges--public or private--typically borrow some or all of the funds needed to construct the project and then service the debt with the toll revenues generated by the project. Most of the toll roads in operation today have been financed in this fashion.

GARVEE
More recently, many state transportation departments have used a debt instrument called a grant anticipation revenue vehicle (GARVEE) to borrow against future federal payments from the highway trust fund in order to speed up the completion of infrastructure projects in which costs may exceed the revenues available from existing tax revenue sources.

SIB
Another widely discussed, but hesitantly implemented, form of innovative finance is the state infrastructure bank (SIB). First permitted and encouraged in 1991 under the ISTEA, state infrastructure banks are established and capitalized with a payment from the federal highway trust fund or other federal source. In South Carolina, this capital was leveraged by the infrastructure bank to borrow more funds, which were then lent to fund promising projects in the state. Virginia used its SIB as a revolving fund to provide loans to promising projects, including the Pocahontas Parkway, a private toll road near Richmond.

ISTEA set no limit on the number of states that could create a SIB, but TEA-21 limited the number of states to only five, compared to the 32 states that created SIBs under ISTEA. TEA-21 also imposed many federal labor mandates, such as Davis-Bacon, on any project receiving SIB funds. As a result, TEA-21 has relegated SIBs to the status of a relatively unimportant source of financial resources for transportation projects.

TIFIA
Created in 1998 as part of TEA-21, the Transportation Infrastructure Finance and Innovation Act (TIFIA) provides states with federal direct loans, loan guarantees, and standby lines of credit to fund up to 33 percent of a large ($100 million-plus) transportation project's cost where a significant portion of the funds for the project are from non-federal sources and a dedicated revenue stream--such as taxes, user fees, or toll revenues from the project--is deemed sufficient to pay off the loans.

Because the federal credit contribution is viewed as subordinated debt, thereby offering more senior, private-sector creditors the equivalent of an equity cushion, TIFIA allows states to leverage federal support and invest in projects that they might not otherwise be able to afford. However, as of 2002, only nine states have used the TIFIA program because of a variety of state legal constraints and program preferences.

Private Activity Bonds
Another innovative finance proposal supported by some road privatization advocates is to extend the privilege of issuing tax-exempt private activity bonds to transportation projects. Like debt issued by state and local governments, the interest paid on private activity bonds is exempt from federal income taxes, making the borrowing rate lower--by about 30 percent--than the rate paid on taxable debt such as corporate bonds, commercial loans, or residential mortgages.

Under current law, this borrowing subsidy is limited to state and local governments and a few qualified private-sector borrowers engaged in federally approved investment activities, usually related to certain school and economic development projects. Supporters argue that extension of private activity privileges to road projects would encourage more private road construction by allowing private road developers to enjoy the same cost of capital available to the public sector. Without that privilege, private road developers must overcome a 30 percent cost disadvantage to be competitive with public projects.⁶¹

In 1999, then-Senator John Chafee (R-RI) introduced the Highway Innovation and Cost Savings Act (S. 470) to create a series of pilot projects to allow construction of a limited number of private toll roads using tax-exempt bonds issued by private developers. The proposal was not enacted, however, and has not been reintroduced in Congress. Nonetheless, provisions to allow a limited number of pilot projects to test the viability of the concept should be a part of any future highway legislation.

Although each of these innovative finance proposals is potentially valuable and promises more efficient use of transportation resources, none would bring more financial resources to transportation spending. As transportation expert Alan Pisarski has noted, "Innovative finance is not money," and unless these financing arrangements are structured so that they tap into new revenue streams to service the debt, all they succeed in doing--particularly the more common forms of SIBs and GARVEEs--is reshuffling and redeploying existing government transportation money from one form to another with no net gain in the total money available.

However, innovative finance mechanisms can bring more money to transportation projects if linked with tolls, higher transit fares, or special tax districts where property tax surcharges are levied on land and establishments served by new roads.

RECOMMENDED ACTION #5:
Turn the responsibility for roads and transit back to the states

Without a fundamental overhaul of the existing federal highway and transit program, the application of any or all of the above reform options would lead only to marginal improvements in surface transportation mobility and program costs. In the end, the bulk of the available financial resources would still be misallocated to low-value projects and purposes because of the many distortions (largely political) built into the current program.

For these reasons, the existing federal highway program should be terminated or dramatically revised. One promising solution to the pervasive problems that plague the system is to turn the program back to where it once belonged--the states.

With the construction of a 42,000-mile interstate highway system having been completed, responsibility for highway and transit transportation services should be returned to the states, recognizing that today's most pressing surface transportation and mobility problems are increasingly local in nature. As such, they are beyond the scope and skill of a centralized bureaucracy in Washington and congressional committees operating under intense political pressure.

States should be permitted to collect and retain the 18.4 cents per gallon federal excise tax and spend the proceeds of the tax on their transportation priorities, not Washington's. States would also be freed from following the costly and counterproductive federal regulations, mandates, and set-asides. To facilitate the transition from one system to the other, responsibilities and money could be transferred incrementally over a period of several years.

Reflecting the federal responsibility for facilitating interstate commerce, the only requirement that might be imposed on a state as part of any turnback plan would be the ongoing maintenance, repair, and rehabilitation of those segments of the interstate system within the state. Failure to meet those standards could lead to financial penalties or a re-imposition of federal regulations. Beyond this limited requirement, states would be free to spend the funds on projects of their own choosing and priorities, including highways, bridges, rail, buses, and any other opportunities related to enhanced surface mobility. After the transition period, states could reduce (or raise) the excise tax and devote their revenues to purposes other than surface transportation.

The Cost of Doing Nothing
Under the status quo, the federal fuel taxes paid by each motorist flow to Washington, where they run a gantlet of special interests before returning to highway programs, leaving the motorist with benefits worth much less than the taxes they have paid. Over time, the number of participants in this gantlet has grown, shrinking the share of money available for roads. In 1982, federal mass transit programs were entitled to tap into the trust fund. In 1991, the highway program's reauthorization was used to funnel money to environmental objectives by authorizing "enhancements" and "air quality/congestion mitigation." When the highway program was reauthorized in 1998, the Appalachian Regional Commission, parkways, refuge roads, pedestrian walkways, and roads for federal lands were given access to the highway trust fund.⁶²

The cost to society of this misallocation of resources extends well beyond its negative impact on mobility and congestion and may lead to a substantial reduction in incomes and jobs throughout the economy. As one transportation expert contends:

Taking the 35 years of "investment" in public transit of federal dollars as our starting point, we find that public transit spending since 1965 can be credited with assets and returns that currently support about one million jobs. This sounds pretty good until it is compared with the outcomes that might have been achieved if the funds poured into money-losing public transit had been used in some other ways. Since public transit has consistently had a negative return on investment, the assets acquired with the funds put into it have largely been consumed. As a result, the $193 billion in taxpayer money invested in public transit has a current estimated residual value of only $17 billion. If the $193 billion in taxes that had been spent on public transit had been "spent" on a "break even" investment, the assets would have been conserved and the economy could theoretically have supported 10 million more jobs than it currently does. If the $193 billion in taxes that has been spent on public transit had been "spent" on an investment yielding only a 5 percent return, the assets would have grown and the economy could theoretically supported 32 million more jobs than it currently does.⁶³

With the exception of the interstate highway maintenance requirement, states would also be freed of the many mandates that now encumber the federal highway and transit program. These include Davis-Bacon prevailing wages, Section 13(c), federal earmarks, demonstration and high-priority projects, minority contracting requirements, environmental impact statements, environmental enhancements, historic preservation, transit subsidies, congestion mitigation, prohibitions on tolls and privatization, roads for federal lands, buy-American provisions, and other such stipulations. All would be eliminated, and their re-implementation would be at each state's discretion.

America's Greatest Spoils System
Having largely completed its core mission of building the interstate highway system nearly two decades ago, the federal highway program has evolved into the nation's largest spoils system. As it is currently operated, issues of enhanced mobility for ordinary citizens take a back seat to efforts to accommodate the interests of politically influential constituencies and financially connected businesses and individuals.⁶⁴ Whereas all of the revenues flowing into the trust fund are derived from motorists and truck operators, more than a third of the spending is siphoned off by non-highway programs for the benefit of special interests.

Transit systems for example, which are largely concentrated in a small number of urban areas, receive nearly 20 percent of the trust fund's annual expenditure for the purpose of expanding service and keeping fares low. Elsewhere in the highway program, funds are diverted increasingly to non-transportation uses, such as hiking trails, while more and more of the money is earmarked by Congress for specific projects that would otherwise never by built by states or communities.

Because of these and other financial diversions, and despite the highest federal fuel excise tax ever levied and recent record levels of trust fund spending, America's motorists confront worsening congestion. This congestion will remain largely unrelieved for the foreseeable future as a result of financial misallocations mandated or contemplated by the current highway program as authorized by TEA-21. More to the point, America's degree of mobility will get much worse before it ever begins to improve, and those who oversee the federal highway program have no solution to reverse this trend beyond reverting to a more aggressive tax-and-spend policy.

CONCLUSION

The application of any or all of the first four preceding options to the existing federal highway program could lead to measurable improvements, depending on the degree to which they are implemented. However, experience suggests that the degree of implementation, if any, would be modest and, therefore, so would the forthcoming improvements in mobility.

In continuous operation for nearly five decades and now spending close to $40 billion per year on a variety of objectives and costly projects, the federal highway program has created a broad constituency of influential special interests who benefit financially from the program. The motorist who pays the fees that fund the system, however, is not one of these influential special interests. Consequently, the goal of enhanced mobility is not a high priority when Members of Congress, the DOT, unions, state transportation departments, construction and engineering companies, and lobbyists sit down every six years to divide the pie.

Past efforts to implement reform through the existing statutory structure have yielded only modest changes to placate reformers and have allowed the participants to pose as creative and thoughtful public officials. Innovative finance tools are circumscribed and heavily regulated and then are cut back substantially when potential users show an interest. Privatization and commercialization have fared no better, despite several presidential directives of support, and have been limited largely to hard-to-implement pilot projects. State-imposed tolls on existing interstates are still prohibited by law.

The prospect that Congress and the Administration would stop wasting money appears even more remote, as both currently seem comfortable with the status quo. Indeed, if the trends toward greater diversion of money that emerged with ISTEA and TEA-21 are any indication of future patterns, the practice of diverting money to non-road uses is likely to expand.

If meaningful reform within the existing institutional structure is unlikely this year, then the better solution is simply to scrap the program and shift both the revenues and the unencumbered authority to spend them to the states. While state officials, in general, are no more reform-minded than their federal colleagues, they are not subject to the same program-distorting political pressures. They are also closer to the problems and thus more accountable to the voters and less accountable to lobbyists and special interests that loom ever larger in Washington.

More important, it is unlikely that each of the 50 states will utilize its new freedom exactly as every other state does. As a result, some will be bolder than others in adopting reform options discussed previously and, in doing so, will serve as demonstration projects for the others. Ultimately, through a process of experimentation, trial and error, success and failure, and rejection and emulation, a new and better transportation system will emerge.

Of course, getting Congress and the federal bureaucracy to surrender this much power could be viewed by some skeptics as far more difficult than implementing meaningful reforms within the current institutional structure. But against this considerable obstacle is the fact that the current system creates perennial losers among about half the states, and at some point the elected representatives from those states are going to be compelled by their frustrated voting motorists to seek a more equitable arrangement.

While it is easy to view the inequities simply as a potential fight between donors and recipients, many recipients at the margin would be better off with less money if it was returned to them with fewer mandates, regulations, prohibitions, and micromanaging directives. If governors and state legislatures were motivated to demand such change, Congress and the President might find it difficult to resist.

At some point, for example, Senators and Representatives from a poor state like Mississippi will find it increasingly difficult to justify their support for a system that ships their money to one of the richest, like Connecticut. When that point arrives, the system will be changed.

Ronald D. Utt, Ph.D., is Herbert and Joyce Morgan Senior Research Fellow in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.