CBO Testified on the Federal Role in Paying for Highways

May 17, 2011

This morning Joseph Kile, CBOs Assistant Director for Microeconomic Studies, testified before the Senate Finance Committee to discuss the federal role in paying for highways. The testimony draws on several recent CBO publications on highways and other infrastructure.

Status of the Highway Trust Fund

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 taxes on gasoline and other motor fuels that accrue to the Highway Trust Fund. In recent years, the Congress has spent more on highways than the revenues accruing to the fund for that purpose, and it has supplemented the trust funds balance with money from the general fund of the Treasury.

The law that authorizes collection of taxes for and spending from the Highway Trust Fund is set to expire on September 30, 2011. Even if the provisions of current law areextended, CBO projects that the trust fund will be unable to meet its obligations in a timely manner sometime during the second half of 2012, unless the Congress chooses to transfer money as it has done in the past, identifies other sources of revenue, or reduces spending.To shed light on that choice, the testimony focused on three questionsdiscussed belowfacing the Congress.

How Much Should the Federal Government Spend on Highways?

The Congress has a range of options for future spending on highways, including:

  • Limit spending to the amount that is collected in current taxes on fuel and other transportation activities; doing so would result in spending that would be about $13 billion per year below current capital spending of $43 billion.
  • Maintain current capital spending, adjusted for inflation.
  • Spend enough to maintain the current performance of the highway system; doing so would require about $14 billion per year more than current spending.
  • Fund projects whose benefits exceed their costs; doing so would require even more spending than maintaining current performance, up to about $50 billion more than current spending, depending on the degree to which benefits would be expected to exceed costs.

How Should the Federal Government Direct the Use of Highway Funds?

From the point of view of economic efficiency, the authority to make decisions about which highway projects to undertake is best placed with those who have the incentive and the information to weigh all of the costs and benefits of the decisions. The Congress currently directs funds for highway infrastructure through threemechanisms:

  • About 80 percent of the money the federal government spends goes to grants to state governments under formulas that allocate funds for such purposes as construction, rehabilitation of existing roads, and safety programs. The remaining 20 percent goes to specific projects identified by the Congress or by the Secretary of Transportation.
  • The federal government provides credit assistance through loans and loan guarantees that reduce the cost of borrowing by state and local governments. Those lower borrowing costs, however, impose a cost on federal taxpayers who bear the risk of default.
  • The federal government also reduces the cost of borrowing for state and local governments by offering tax preferences for bonds they issue. Tax-exempt bonds use a well-established tax preference, but generally are not considered cost-effective because the forgone federal revenues appear to be greater than the reduction in state and local borrowing costs. In recent years, the Congress has authorized tax credit bonds, which appear to be more cost-effective.

Other ideas for directing federal money have been proposed. For example, some analysts have suggested the creation of aninfrastructure bank, which might be more effective than the current system in using the results of costbenefit analyses to select projects. In addition, a federal infrastructure bank could lower the cost of borrowing by providing credit assistance and thus could attract private financing to highway projects; however, it would impose the cost of such credit assistance on federal taxpayers.

How Should the Federal Government Raise Funds for Highways?

Regardless of how projects are chosen, or how financing is structured, funding for highways ultimately comes from highway users or taxpayers. Taxes, tolls, and fees imposed on highway users now fund about half of highway spending by federal, state, and local governments; the rest comes from the Treasurys general fund and from similar state and local funds.

Estimates from several sources indicate that most highway users currently pay much less than the full cost of their travel.Highway users impose costs not only on the highway infrastructure in the form of pavement damage, but also on other users, nearby nonusers, the environment, and the economy in the form of congestion, risk of accidents, noise, pollution, and dependence on foreign oil.

A system that charged users for the full cost of travel would increase the cost to most motorists but could promote more efficient use of the highway system. Although taxes currently are charged for fuel, most of the costs ofusing a highwayespecially pavement damage and congestionare tied more closely to the number of miles traveled than to the amount of fuel consumed. Charging users based on the costs they impose would require a combination of fuel taxes and per-milecharges, sometimes called vehicle-miles traveled taxes. Imposing such prices would encourage motorists to use highways only when the benefits to them outweigh the full costs to society.

As with other decisions, concerns about fairness are important in determining where to collect the required funds. Whether increased user charges would impose relatively greater burdens on,for example, low-income and rural userswould depend on the structure of those charges.