The Facts about Transportation Spending

Separating economic myths from economic truths

Editor's Note: Reason columnist and Mercatus Center economist Veronique de Rugy appears weekly on Bloomberg TV to separate economic fact from economic myth.

The United States spends about $160 billion annually on highways, with about one-fourth of that total coming from the federal government. Federal highway spending is funded mainly through gas and other fuel taxes that are paid into the Highway Trust Fund. In recent years, however, the amount of money Congress has spent out of the general fund has exceeded the dedicated trust funds set aside for highway spending.

Myth 1: Highways and roads pay for themselves thanks to gasoline taxes and other charges to motorists.

Fact 1: They don't. Gas taxes and other highway user fees pay less today than ever before.

In 1957 about 67 percent of highway funds came from user fees. Forty years later the revenue from user fees has shrunk to just 50 percent of total highway funds. Indeed, user fee revenue as a share of total highway-related funds is now at its lowest point since the Interstate Highway System was created.

And the difference is now made up by taxes and fees not directly related to highway use. These include revenue generated by sales and property taxes, general fund appropriations, investment income, and various bond issues.

This growing proportion of non-user revenue reveals a profound shift in the nature of highway funding, and has consequently led to increasing debate about the future of America's highways. This discussion has also been fueled by the approaching expiration date this September for an important Highway Trust Fund law.

Which means that now is the time to think outside of the box and to consider privatizing America's highways.

Myth 2: Proceeds from the federal gas tax are used to build and maintain the interstate highway system.

Fact 2: That was the promise made to taxpayers in 1956. Today, however, at least 25 percent of federal gas tax funds are diverted to non-highway uses including maintaining sidewalks, funding bike paths, and creating scenic trails.

Fuel tax revenues are now insufficient to maintain the current level of highway spending. As the Congressional Budget Office noted in its discussion of the weaknesses of the fuel tax system: It does not account for the costs of congestion, it is a fixed cost per gallon (meaning it does not adjust with inflation), and it provides insufficient revenues to pay for the costs that users impose on the system. Moreover, it is clear that the diversion of gas tax funds to non-highway projects is the biggest cause of the underfunding problem.

As Reason Foundation Director of  Transportation Policy Robert Poole has explained:

The federal HTF was invented in 1956, promising motorists and truckers that all proceeds from a new federal gas tax would be spent on building the interstate system. They aren't. Congress has expanded federal highway spending beyond interstates to include all types of roadways. And since 1982, a portion of "highway user taxes" have been diverted to urban transit (non highway use). Today, the federal role in transportation includes maintaining sidewalks, funding bike paths, and creating scenic trails.

Poole estimates that some 25 percent of the gas tax goes to non-highway use. As the Federal Highway Administration's "Highway Authorizations" table indicates, Congress allocates highway money to truck parking facilities, safety incentives to prevent operation of motor vehicles by intoxicated persons, grants for anti-racial profiling programs, magnetic levitation trains, and dozens of other non-road activities. The main diversion is to rail and public transit, which leads us to the next myth.

Myth 3: Increased spending on public transit will boost ridership. Therefore we need to transfer highway dollars to transit programs and increase state and local taxes to fund transit agencies.

Fact 3: There is no visible relation between transit funding and transit ridership. Despite huge increases in public transit funding over the past two decades, ridership has barely increased.

Despite huge increases in transit funding over the past two decades, ridership has remained constant. Using American Public Transportation Administration (APTA) data, the chart above reveals that ridership has barely changed as funding has drastically increased—especially if you control for the increasing number of transit systems, and the level of population growth over time.

Although transit funding in 1995 was eight times more than it was in 1978 (17.4 billion and 2.2 billion respectively), the total increase in ridership was only about 2 percent. Total ridership in 1978 (7.8 billion trips) was actually more than ridership in 1995 (7.7 billion trips)—the only difference was in the amount of funding. Between 1989 and 1996 ridership fell by 11 percent; again, this was while funding increased by 42 percent.

These funding increases have included federal, state, and local taxpayer assistance to transit. Moreover, about a quarter of these subsidies come directly from highway user fees. Cato Institute Senior Fellow Randal O'Toole claims that "because transit produces less than 5 percent of urban transport, while autos produce more than 90 percent, it is safe to say that most of the taxes supporting transit are subsidies from auto users to transit riders."

The reasons for the shortcomings in transit ridership have less to do with the amount of available funds than with the fact that rail lines are expensive to build, maintain, and operate, and the fact that most transit systems have at some point been forced to significantly raise fares and/or curtail services, often leading to the loss of transit riders.

According to O'Toole, "Thanks in part to the high cost of rails, transit systems in Atlanta, Baltimore, Buffalo, Chicago, Cleveland, Philadelphia, Pittsburgh, St. Louis, and the San Francisco Bay Area carried fewer riders in 2005 than two decades before. Los Angeles lost 17 percent of its bus riders when it began building rail transit." The fact that transit workers are generally members of public sector unions hasn't helped either.

None of this means that transit agencies will never be able to attract new riders. But it does mean that simply throwing more money at transit isn't the answer.

Contributing Editor Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.