Highway finance: past, present, and future

Public Roads, Summer, 1994 by Germaine Williams, Tom Howard

Introduction

The current finance structure for highways is not producing the funds needed to meet the country's requirements for highway investment. Evidence for this is found by comparing recent trends in highway finance and the annual investment required to maintain the current level of highway system performance. Any adjustments to the existing financing structure should be based on a systematic re-evaluation of all available highway finance options.

Recent Trends in Highway Financing

In 1991, all levels of government combined spent $74.5 billion to construct, maintain, and operate the U.S. highway system. To put this into perspective, direct outlays for transportation by passenger and freight users of the transportation system were $969 billion in 1990. Of this, the direct outlays of highway users--including vehicle costs and operating expenses for private automobiles, bus and transit, taxis, and trucks--were estimated at $828 billion.

Funding for highways comes from all levels of government. In 1991, the state and local levels of government provided 78 percent of all funding for highways and 59 percent of the funding for capital outlays, with the federal government providing the remaining funds, almost exclusively for capital.

The following highlights characterize 1991 highway finance sources and trends:

* The largest source of these revenues was motor fuel and vehicle taxes; these provided $47.2 billion, which was 57 percent of total 1991 revenues.

* Tolls, the other major component of what are generally referred to as highway user charges, accounted for $3.1 billion in revenue (4 percent).

* General fund appropriations, benefit charges, and investment income together provided $25.1 billion (31 percent).

* Bond issue proceeds accounted for $6.9 billion (8 percent).

A more historical perspective is reflected in the following points:

* The share of revenues provided by the different funding sources of finance has varied little over the past 10 years as motor-fuel and vehicle taxes have maintained their position as the single largest source. Tolls, other sources, investment income, and bonds have not varied significantly during that time period.

* Since 1981, spending has been almost evenly divided between capital improvements and noncapital maintenance and operation items.

How Much Additional Funding Is Needed?

Based on estimates published in the 1993 Conditions and Performance Report, $51.6 billion must be invested annually for the next 20 years to maintain the current conditions and performance of the highway infrastructure. This, however, is only part of the picture. Investment estimates in the Conditions and Performance Report include only those capital investments related to the physical condition of roads and bridges, and it contains no estimate of noncapital spending requirements.

If it is assumed that the level of expenditure for off-road capital and noncapital highway spending should be at least comparable to their 1991 level for the next 20 years, an additional $42 billion in 1991 dollars should be added to the annual investment needed over the next 20 years. This is a conservative assumption since maintenance expenses tend to increase as the system ages, and the Conditions and Performance Report's estimated investment requirements for highway and bridge capital improvements assume that some of the demand for increased highway capacity will be met by improved management of the system, i.e., transportation demand management.

The combined total of capital and noncapital spending required to maintain conditions and performance at their 1991 level--$93.6 billion--is $19.1 billion more than was actually spent in 1991. To continue to maintain the 1991 level of support for the highway system and to provide the increase in funding needed to actually maintain the current level of performance, the current level of funding--$74.5 billion--will need to increase annually to keep up with inflation, and an additional $19.1 billion in real dollars is needed every year to raise the annual expenditure to the level needed to prevent further deterioration in system performance.

Options for Increasing Highway Revenues

The above argues that the current highway financing system is not sufficient to meet current requirements and that it is necessary to systematically examine all possible options to meet this financial shortfall. The range of possible revenue sources can be grouped as follows:

* Increase highway user revenues.

* Increase other taxes and benefit fees.

* Make full use of investment income and other receipts.

* Increase bond issue proceeds.

* Enhance private sources.

* Develop and use other financing innovations.

Increase highway user revenues

Highway user revenues comprise more than 60 percent of total highway revenues. In 1991, these fees accounted for more than $50.3 billion of the $82.4 billion raised for highways. These receipts were collected at the federal, state, and local levels. This funding is equal to about two cents per vehicle miles of travel (VMT). In 1960, this revenue source provided five cents per VMT in constant dollars.