Spending and Funding for Highways

January 20, 2011

The nation’s network of highways plays a vital role in the United States. In 2007, the public sector spent $146 billion to build, operate, and maintain highways in the United States. About three-quarters of that total was provided by state and local governments. One-quarter was provided by the federal government, primarily through the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU). The initial authorization for that law has expired; as the Congress considers the future role of the federal government in providing highway infrastructure, it faces three important questions discussed in a CBO brief release today: how to structure decisionmaking about highway projects, how much money to spend on highways, and how to pay for that spending.


Making Decisions About Highway Projects


In the United States, almost all highway infrastructure is provided by the public sector. Although private firms play a large role in building, operating, and maintaining highways, the federal government and state and local governments typically determine which projects to undertake and how much to spend on them. To the extent that spending on highway infrastructure contributes to improved economic performance on a wide scale, having those spending decisions made at the federal level is more efficient. However, many of the benefits of highway projects are concentrated regionally or locally, and state and local officials generally have better information about what projects are most beneficial.


Of the funds provided under SAFETEA-LU from 2005 through 2009, about 80 percent was distributed using formulas, and the remaining 20 percent was allocated through appropriations directed to special purpose programs and specific projects. Although the current formulaic approaches may address notions of fairness or equity, the formulas do not necessarily provide federal support to the most economically advantageous projects, such as those in areas of greater anticipated population growth and economic activity.


The Congress has authorized or considered alternative methods for selecting highway infrastructure projects. One approach would be to allocate federal funds to projects through a competitive process, with states and localities submitting applications for assistance to the Department of Transportation (DOT); currently, a small portion of highway funds is apportioned that way. Another approach proposed by some analysts would be to create a quasi-governmental institution, such as a so-called “infrastructure bank,” to make decisions about which projects receive federal funds.


Spending for Highway Infrastructure


Total federal spending on highway infrastructure for 2009 amounted to $41 billion, with most of that amount devoted to capital projects. Among its many possible choices for future highway spending, the Congress could extend the current program by maintaining spending at that same level, either with or without indexing the authority to spend to a measure of inflation. Alternatively, spending could be set so as to attain certain performance targets for the highway system, such as average delay time, pavement quality, or user cost. Projections by the Federal Highway Administration (FHWA) suggest that sustaining the system's current performance would require about $57 billion in federal spending per year (in 2009 dollars), assuming that the federal share of capital spending remains at about 45 percent.


The Congress could also provide enough funding to undertake all projects with benefits that exceed their costs by certain amounts. Estimates of economic returns on public spending on highway infrastructure have been positive on average, but returns for individual projects vary significantly and depend on a number of factors. FHWA estimates that the amount of public spending that could be justified on the basis of projects’ benefits outweighing their costs would be substantially higher than the amount needed to simply sustain the system’s current performance.


Paying for Highway Infrastructure


Funds to pay for highway infrastructure are ultimately drawn either from user charges or from taxpayers in general. The federal government’s programs for highway transportation are financed, for the most part, by various taxes on users and by revenues from the Treasury’s general fund that flow through the Highway Trust Fund. The largest sources of revenues for the trust fund are excise taxes on gasoline and diesel fuel (which are set to expire in 2011).


At their current levels, the taxes in effect are insufficient to fully fund the existing amount of federal highway spending. On three occasions since 2008, the Highway Trust Fund has received revenue infusions from the Treasury’s general fund. According to CBO’s estimates, if the historical spending and revenue patterns continued, the highway account of the trust fund would be unable to meet its obligations sometime during fiscal year 2012. 


The federal government and state governments also have mechanisms for borrowing funds and for obtaining financing from the private sector (including both debt and equity investments); however, those funds are provided in expectation of future returns, which must be paid later by highway users or taxpayers.


The efficiency of different sources of revenues depends on the administrative costs involved in collecting them and on the incentives they provide for using the highway system and resources throughout the economy. Economic efficiency is promoted when users of highway infrastructure are charged according to the marginal (or incremental) costs of their use, including societal costs, such as air pollution and congestion. A combination of a fuel tax—which is easy to collect but does not cover all of the costs that users impose on the system—and a mileage-based tax, like tolls on certain roads that now exist in some states and localities, could provide incentives for reducing the full range of driving’s social costs while also generating funds for federal spending. (Those social costs include pavement damage, congestion, accidents, pollution, noise, and costs related to climate change and dependence on foreign oil.) 


In addition to efficiency, policymakers may also be interested in considerations of equity. For example, because fuel tax rates are the same for all purchasers of gasoline, regardless of income, lower-income households use a larger share of their income to pay them. Mileage-based tolls could also raise concerns about individual and geographic equity.


This brief was prepared by Chad Shirley of CBO’s Microeconomic Studies Division.