Economics

The Facts about Transportation Spending

Separating economic myths from economic truths

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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.

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  1. I have an idea,

    People who use roads (that includes private and government owned vehicles) should pay user fees for roads that cove the cost of the roads

    People who use airplanes should pay user fees for airports and air traffic control that cover the cost.

    People who use ships and boats should pay user fees for ports and navigation equipment that cover the costs

    People who use government owned trains and busses should pay for the cost of same.

    And we stop subsidizing forms of transportation and if it costs so much that not enough people want to use it then we don’t have it.

    1. Sounds like a lot of extra government bureaucracy for no purpose.

      1. How is it extra bureaucracy?

        They already have gas and diesel taxes on road users, they just need to stop using it to fund other things and raise where needed to fund roads

        They already have user fees on airports so just adjust them to pay for the actual airport costs.

        They already have user fees for ships and boats so adjust them to pay for what is being provided

        They already have fees for government owned buses and trains, just raise the prices to cover the costs of these buses and trains

      2. Of course, Tony is against any government bureaucracy that will actually require the users of a public good to be 100% reliable for the cost.

    2. User fees are not an excuse to permit government controlled transportation. If user fees cover the costs, it should be run in the private sector.

      1. Then the private sector should build them.

        However if the government stops subsidizing its own transportation network then this gives an opportunity for the private sector to under cost the government sector and grab the traffic. But this can’t happen if the government provides the customer with subsidized transportation since the private sector can’t compete.

  2. So it sounds like gas taxes should approximatly double to meet the cost of mainting roads.

    I imagine if gas taxes doubled that would probably also increase public transport.

    1. Doubling is not necessary. Simply stop looting the highway fund to build sidewalks, mass transit etc.

      After thats done, if the highway fund still cannot meet all highway funding needs, then bump up the gas tax to a sufficient level.

      1. Given the 1.6 trillion or so that is needed to get our infrastructre repaired, I would imagine doubling probably isn’t enough.

        http://pewresearch.org/pubs/699/look-out-below

        1. That 1.6T figure includes more than roads and bridges.

        2. I would imagine doubling probably isn’t enough.

          Seeing as it’s taken over 3 years to re-build a local bridge that was still in useable condition, it may actually be the case that the ‘costs’ associated with this infrastructure construction are inflated by a factor of 5 to 10.

          It’s not the cost of the actual repair, it’s the cost of bureaucratic bullshit..

          1. This is out and out false. The reason it takes 3 years to rebuild a bridge has nothing to do with wasting money on bureaucracy. The reason is that they have to build it in a *very* inefficient manner because they cannot shut the bridge down completely. Now, you might call that ‘bullshit’… until that bridge is now shut down for a year because they want to build it more economically, and it takes a vital transportation route out of service for that time.

            It’s (rightly) calculated that the amount of productivity lost and the other costs to society of that decision would far outweigh the increased cost of multiple phase construction.

            And whether the bridge was in ‘usable’ condition or not is almost irrelevant. If that particular bridge was inspected and reported unsafe, and this was known, there are huge liability issues for leaving it up in its current condition.

      2. When you’re done with that, stop looting my paycheck to subsidize new home mortgages. Then stop nickle-and-dimeing me to death with “fees” to cover the infrastructure required for same.

        If the government hadn’t put so much effort into fooling the American people that everyone can have the “American Dream”, we wouldn’t be in such a mess.

    2. Actually if they’d just restrict the highway funds to pay for highways instead of million dollar bike and hiking paths through the woods there would be no need for tax increases. Why is it that people agree to be taxed for X, the funds end up paying for X, Y and Z, and the answer is that the tax isn’t high enough instead of the tax is paying for far more than it was intended to pay for?

      Here in my area even the transportation funds being used are being used in ridiculous ways just to create employment. Perfectly good bridges torn down and rebuilt, We have a road running parallel to and within 5 miles of an interstate being expanded to 4 lanes, even though that road almost never has substantial traffic. What money they’re using is being used unwisely, mainly to purchase votes rather than do anything valuable.

  3. Finally some readable charts that aren’t shrunk to hell.

    Now if only Bloomberg TV would stop fucking up and showing the wrong ones.

  4. The Facts:

    1. Ninjas are mammals.
    2. Ninjas fight ALL the time.
    3. The purpose of the ninja is to flip out and kill people.

    1. Wow, this really takes me back. 2001 wasn’t it?

  5. The gas tax for the federal highway trust fund is 18 cents per gallon. 18 cents doesn’t go as far now as when TEA21 was signed. And increase fuel efficiencies have negatively impacted the use to. It has been suggested that raising the trust fund portion to something like 47 cents per gallon and indexing it to inflation would bring the funding back in line with original levels, but this still leaves the diminishing gas to user ratio to contend with.

    Currently an interstate is about $2M per lane mile for pavement alone. This will buy you 20 years of safe use without additional expenditure.

    Controlling the lifespan cost benefit profile is key, but how to do that and effeciently peg users with costs without violating their liberty is the crux of the problem.

    1. You also have to adjust the fuel tax to cover the additional damage heavy trucks do to the road or to pay for extra heavy duty roads. Cars do only a fraction of the damage.

      1. Diesel fuel is taxed at a higher rate, and the outside lanes on freeways are thicker than the inside lanes to better absorb the heavier weight from trucks.

        1. Then they need to make those lanes a lot thicker or restrict truck weights or charge more for diesel because there are lots of roads in the US where you can see the effects of heavy trucks

        2. The outside lanes on freeways might be thicker than the inside lanes where you live but they’re not in Florida.

      2. As well as pretend that there will never be technological improvement in the construction methods used that might possibly extend the lifespan of roads while reducing the maintenance expenditures.

      3. Trucks also have to pay incredibly high fees, many thousands of dollars, to every state they will might be traveling through on top of the diesel tax. They aren’t getting a free ride like many seem to think. Heavy trucks pay almost 40% of all taxes going into the highway fund, a large portion of which ends up paying for bike paths between commercial developments or forested land. Estimates from the Mackinac Center are that trucks pay around 35 times what an auto pays over a year.

        The problem isn’t that they don’t pay their share, it’s that so much of their share is diverted to wants rather than needs.

  6. As somebody who has used a variety of light rail systems in a range of cities, I strongly suspect that one of the reasons for poor ridership numbers is that light rail systems tend to go where city planners think that people should want to go, rather than where they actually do want to. Rail systems like the New York Subway or the Light Rail system in Cleveland which were in place before “City Planning” became a plague seemed (to me, anyway) to have a fair number of rides. Light rail systems like the Metro in Washington DC, which were built more recently, get fewer riders.

    I don’t know if research would back up this intuition, but it might pay somebody to check.

  7. Federal gas and diesel taxes should be more than enough to fund the interstates and federal highways. The problem is that road maintenance and repair costs have skyrocketed due to misguided federal contracting regulations, absurdly high union labor costs, make-work projects and inappropriate repairs (such as repaving roads that don’t need it), and the lack of penalties against contractors that make substandard roads, bridges, or highway repairs.

    I agree that the best solution is privatization, but that requires federal and state governments to give up some of their power and influence. Thus, the likelihood of privatization is close to zero.

  8. This sort of simplistic “analysis” does more harm than good.

    Without presupposing the result, should diversion of fuel tax funds into mass transit consider the consequences of future densification of population centers, the critical mass beyond which gridlock defeats the addition of additional individual motor vehicles within metroplexes and fuel price trends and their effect on use of individual motor vehicles.

    Without consideration of such factors, this “analysis” reads like Tea Party talking points: provocative but shallow.

    1. “the critical mass beyond which gridlock defeats the addition of additional individual motor vehicles within metroplexes”

      Pretty sure including fantasies won’t help the analysis one bit.

  9. Why not use the Obamacare model, and make everyone pay for roads even if they don’t use them?

    Oh, wait… fuck that.

  10. “Why not use the Obamacare model, and make everyone pay for roads even if they don’t use them?” Mr. IFY|6.19.11 @ 12:30PM

    Everybody pays to subsidize the highway system and public roads. Many of the subsidizing comes from indirect sources. If you buy a house, part of the cost is for the developer who built the roads to your house that are maintained (owned) by the goverment. If you rent, you pay the owner who is helping in the indirect subsidizing. It’s impossible to not help some kind of major subsidizing of roads and highways.

    In other word, YOU WILL PAY (even if you walk). The only question is how much, how often and to whom.

  11. I would love to see a situation where the entirety of the money spent on highways and associated facilities are collected from roadway fees: gas tax, tolls, registration fees. Of course, I think this should be tied to reductions of general taxes to match. We’re already paying for 100% of transportation spending in one way or another. Make it so that that funding comes directly from the users.

    Now, the question of bike trails and other facilities is probably a bit overblown. The great majority of bike and walking trails are alongside roadways, and thus are part of the highway facility. If you want to get rid of them, then tell that to your county and state roadway agencies, and be more convincing than the special biking interests that fight tooth and nail to get these facilities included. Personally I think they are an excessive use of pavement, because they sometimes add up to two full lanes of pavement (5-8′ sidewalk on one side, 8′ “hiker/biker” trail on the other, and then another 6 feet (from 11 to 14′) of bicycle compatible lanes each way on the outside lane) that doesn’t get nearly the amount of traffic that the roadway pavement does. But those are *very* vocal, and very tenacious, activist groups, good luck.

    I also wonder if those ‘non-highway’ uses include the funds used for mitigation of roadway impacts. Stormwater management, reforestation, wetland recreation, and stream restoration, among others, are included in roadway construction contracts as direct mitigation for the damages caused by the roadway. They’re not highways, but they are necessary (as deemed so by people who want cleaner water and healthier streams) for the projects to be permitted. And if those impacts are caused by the roadway, then it’s entirely proper to internalize those costs in the roadway construction, rather than leave them as another externality.

  12. The irony of paying for non-highway uses with highway generated funds is that it’s doomed to fail either way. Either money is thrown into a black hole of public transit that never produces anything usable or people switch over to public transit and there’s no one using the highway and therefore no one funding public transit.

  13. Myth #1, first paragraph: forty years after 1957 (1997), the graph still seems to show above 50 percent for user fees. Try me again, please.

  14. In the “Transit Subsidies and Ridership” graph, why does the left Y-axis fit the range of its values, while the right Y-axis covers five times the range of its values, and extends to over twice its maximum?

    Does one subsidy dollar equate to one trip?

    Or is this a tendentious graph that could be redrawn to make the opposite point?

  15. Coming from a State transportation engineer who has seen numerous projects truncated or shelved because of requirements related to “regional bike plans,” let’s do away with non-highway transportation spending altogether.

  16. “Which means that now is the time to think outside of the box and to consider privatizing America’s highways.” ….Veronique de Rugy

    ‘Privatizing the highways’ basically sounds like selling them to huge mega-corporations, who will be too-big-to-fail type mega-corporations. When corporations are too-big-to-fail (like Goverment Motors Corporation), they ARE the government.

  17. One of the things Reason failed to mention is, much of the other revenues that are used to cover the local cost of the highways is derived from the increased value of the properties because of the existence of the roads.

    An unimproved plot of ground with poor or no road access will generate little to no tax revenue compared to an improved plot of ground with good road access.

  18. The first graph is unsatisfactory. It apparently lumps spending on the Interstate Highway System with spending on state and local highways. It would be better if there were two graphs: one showing Interstate highway construction with funding source and another showing state and local highway construction with funding source.

  19. So it sounds like gas taxes should approximatly double to meet the cost of mainting roads.

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