Let States Build Their Own Highways

Congress can't pass a real transportation bill. And it shouldn't have to.

When Congress left town for the August recess, it did so without coming to an agreement on a long-term transportation bill. Instead, the president signed a three-month extension that set the stage for another showdown this fall. More than 30 such temporary extensions have passed since the last multi-year transportation bill expired in 2011.

The inability of Congress to come together to pass a transportation package has frustrated the myriad special interests whose lobbyists want assurances that the dollars will keep flowing for years, and not just months, to come. And the media, which seldom miss an opportunity to push the "crumbling infrastructure" narrative, treat the matter as just another lamentable example of congressional gridlock inhibiting progress. But the real source of the dysfunction is the fact that Washington is so involved in state and local transportation funding decisions in the first place.

In July the Senate passed a six-year, $320 billion transportation bill that the House subsequently refused to take up-primarily because it would authorize spending for six years but only provide enough revenue to pay for the first three. Another $51 billion would have to be found for the final three years.

Not only that, but almost $48 billion in additional revenues would be needed to cover the first three years' worth of spending beyond what the federal gas tax and related fuel taxes are set to provide. Under the bill, that money would come from a number of provisions that have little or nothing to do with transportation. For example, an estimated $9 billion is supposed to be raised from the sale of 101 million barrels of oil from the Strategic Petroleum Reserve, and an estimated $17.1 billion is supposed to come from lowering the interest rate on dividends that banks purchase from the Federal Reserve.

These unrelated offsets do not belong in a transportation bill, needless to say.

Most of the financing gimmicks won't actually pay for the spending that will occur in the next three years anyway. Taxpayers for Common Sense found that more than 90 percent of the offsets don't kick in until after the initial spending splurge, and two-thirds of the cash won't be collected until after the six-year life of the bill. In its July 31 Weekly Wastebasket blog post, Taxpayers for Common Sense wrote that to raise money, the bill "would extend current budget treatment of [Transportation Security Administration] fees from 2023 to 2025, worth $3.5 billion."

The federal gas tax, which has been the traditional source of revenue to pay for transportation spending, is at the heart of why Congress has been unable to pass a long-term bill. Federal gas tax revenues haven't been enough to cover the amount Congress has authorized to be spent on transportation infrastructure in recent years, forcing policy makers to transfer more than $60 billion in general funds to the Highway Trust Fund (HTF) just since 2008.

Proponents of hiking the gas tax—currently 18.4 cents a gallon—point out that it hasn't increased since the mid-1990s. They correctly note that price inflation has eroded the revenue's "purchasing power" in the intervening period.

The federal gas tax, however, was originally created in 1932 as a "temporary" deficit-reduction measure. It was used to pay the federal government's regular bills until the national interstate system was created in 1956, at which point revenues from the gas tax were redirected to the newly created HTF. The idea was that the tax would act as a "user fee," in that people who traveled the roads financed by the fund would effectively pay for the privilege when they bought fuel.

But as is often the case with government programs, the trust fund has ended up being used to cover parochial projects that do not benefit Interstate drivers in particular—or the nation as a whole. For instance, under the current Senate bill, 25 percent of the funding would go to state and local transit systems rather than highway construction or maintenance.

With those expansions in the HTF's mission came increases in the gas tax, until further hikes finally became politically untenable. Not surprisingly, the special interests who benefit from government transportation spending, including the business community, have been pushing for an increase in the tax for years. But Republicans have been reluctant to embrace one.

Opponents generally fall into two camps: First is a small contingent that favors spending only what the current gas tax (and related fuel taxes) brings in. That would be about $34 billion a year. Second is a majority that wants to find a way to spend more than $50 billion a year without raising the gas tax. That's what the Senate bill would do.

A better approach would be for Congress to devolve transportation spending to the states. There is little sense in the federal government taking money from people through the gas tax, running it through the federal bureaucracy, and then sending it back to the states via politically conceived transportation spending formulas. Those politically driven decisions ultimately produce wasteful projects like the Big Dig in Boston, Interstate 99 in Pennsylvania, and the Bridge to Nowhere in Alaska.

State and local governments are perfectly able to handle the process of funding their own transportation needs, as demonstrated by the fact that they already pay for approximately three-quarters of total highway and mass transit spending.

In 2014 testimony to the Senate Finance Committee, the Cato Institute's Chris Edwards noted that the HTF's misallocation of resources creates winner and loser states, with the losers often being those that actually need the highway funds most. Citing a study by Pengyu Zhu of Boise State University and Jeffrey Brown of Florida State University, Edwards noted that highway aid "has been biased against states that have larger highway systems and more highway use, thus biased against states with greater needs."

Transferring funding decisions away from Washington would also create better incentives for state policy makers. If they believe more money for transportation projects is needed, they should make the case to their constituents for higher taxes. Indeed, state gas taxes went up in six states on July 1, and other states have also passed increases in transportation-related taxes in recent years.

This change would also free states from the numerous mandates that come with receiving funds from the federal government, like the pro-union Davis-Bacon rules, which unnecessarily increase the cost of transportation projects by approximately 10 percent by requiring heavy use of organized labor, and the Reagan-era law that allows the federal government to withhold 10 percent of a state's highway funds if it dares to allow people under the age of 21 to legally purchase and consume alcohol. These inefficient one-size-fits-all mandates are clear abuses of federal power.

Given that members of both parties enjoy having a large federal role in transportation policy, momentum for devolving spending to the states is unlikely to originate with Congress. Still, it would be nice if even a couple of the current Republican aspirants to the White House made good on their supposed limited government values by supporting a move toward subsidiarity in transportation.

None has so far, while several are actively working to maintain the status quo. A few months ago, Sen. Rand Paul (R–Ky.) co-sponsored with Sen. Barbara Boxer (D–Calif.) the Invest in Transportation Act of 2015. That bill would reduce the U.S. corporate tax rate on foreign-source earnings from 35 percent to 6.5 percent for five years if the earnings are repatriated to the United States. All that new revenue would go to the HTF, thus avoiding, according to Paul and Boxer, the need to increase the federal gas tax.

As far as repatriation bills go, this might be the least terrible we've seen. But that's faint praise. Paul is focused not on making the case for reforming a punishing corporate income tax but on the good that would allegedly come from the federal government raising more tax dollars for infrastructure spending. There's nothing free-market about that.