Special Report 285: The Fuel Tax and Alternatives for

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Highway programs derive most of their funding from fuel taxes and user fees paid by

vehicle operators, including registration fees and tolls. Most of the revenues from these fees

go to highways, with a share to transit. This study assesses the prospects for continuing to

generate revenue from these fees and identifies alternative financing arrangements.

The study committee concludes that the finance system has contributed to the suc-

cess of the highway program by delivering a positive return on the national investment in

highways; moreover, user fees can remain the primary funding source for another decade

or more. Transitioning to a fee structure that charges vehicle operators directly for the use

of roads, however, could benefit the public by reducing congestion and by targeting

investment to the most valuable projects. The committee recommends that governments

expand tolling on expressways and explore techniques for charging each vehicle accord-

ing to miles traveled on all roads.

Also of Interest

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TRB Conference Proceedings 34, ISBN 0-309-09375-9,

98 pages, 8.5 x 11 paperback, 2005, $37.00

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TRB Conference Proceedings 33, ISBN 0-309-09499-2,

97 pages, 8.5 x 11 paperback, 2005, $37.00

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Transit Cooperative Research Program, Synthesis of Transit Practice 56, ISBN 0-309-07018-X,

74 pages, 8.5 x 11 paperback, 2004, $16.00

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Transportation Research Record: Journal of the Transportation Research Board, No. 1864, ISBN 0-

309-09457-7, 159 pages, 8.5 x 11 paperback, 2004, $50.00

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National Academy of Engineering, National Academies Press, ISBN 0-309-09163-2,

240 pages, 8.5 x 11 paperback, 2004, $32.00

ISBN 0-309-09419-4

The Fuel Tax

AND ALTERNATIVES FOR

TRANSPORTATION FUNDING

SPECIAL

REPORT

285

Special Report 285

The Fuel Tax

AND ALTERNATIVES FOR TRANSPORTATION FUNDING

TRANSPORTATION RESEARCH BOARD

2006 EXECUTIVE COMMITTEE*

Chair: Michael D. Meyer, Professor, School of Civil and Environmental Engineering, Georgia Institute of Technology, Atlanta

Vice Chair: Linda S. Watson, Executive Director, LYNX–Central Florida Regional Transportation Authority, Orlando

Executive Director: Robert E. Skinner, Jr., Transportation Research Board

Michael W. Behrens, Executive Director, Texas Department of Transportation, Austin

Allen D. Biehler, Secretary, Pennsylvania Department of Transportation, Harrisburg

John D. Bowe, Regional President, APL Americas, Oakland, California

Larry L. Brown, Sr., Executive Director, Mississippi Department of Transportation, Jackson

Deborah H. Butler, Vice President, Customer Service, Norfolk Southern Corporation and Subsidiaries, Atlanta, Georgia

Anne P. Canby, President, Surface Transportation Policy Project, Washington, D.C.

Douglas G. Duncan, President and CEO, FedEx Freight, Memphis, Tennessee

Nicholas J. Garber, Henry L. Kinnier Professor, Department of Civil Engineering, University of Virginia, Charlottesville

Angela Gittens, Vice President, Airport Business Services, HNTB Corporation, Miami, Florida

Genevieve Giuliano, Professor and Senior Associate Dean of Research and Technology, School of Policy, Planning, and

Development, and Director, METRANS National Center for Metropolitan Transportation Research, University of

Southern California, Los Angeles (Past Chair, 2003)

Susan Hanson, Landry University Professor of Geography, Graduate School of Geography, Clark University, Worcester,

Massachusetts

James R. Hertwig, President, CSX Intermodal, Jacksonville, Florida

Gloria J. Jeff, General Manager, City of Los Angeles Department of Transportation, California

Adib K. Kanafani, Cahill Professor of Civil Engineering, University of California, Berkeley

Harold E. Linnenkohl, Commissioner, Georgia Department of Transportation, Atlanta

Sue McNeil, Professor, Department of Civil and Environmental Engineering, University of Delaware, Newark

Debra L. Miller, Secretary, Kansas Department of Transportation, Topeka

Michael R. Morris, Director of Transportation, North Central Texas Council of Governments, Arlington

Carol A. Murray, Commissioner, New Hampshire Department of Transportation, Concord

John R. Njord, Executive Director, Utah Department of Transportation, Salt Lake City (Past Chair, 2005)

Sandra Rosenbloom, Professor of Planning, University of Arizona, Tucson

Henry Gerard Schwartz, Jr., Senior Professor, Washington University, St. Louis, Missouri

Michael S. Townes, President and CEO, Hampton Roads Transit, Virginia (Past Chair, 2004)

C. Michael Walton, Ernest H. Cockrell Centennial Chair in Engineering, University of Texas, Austin

Marion C. Blakey, Administrator, Federal Aviation Administration, U.S. Department of Transportation (ex ofﬁcio)

Joseph H. Boardman, Administrator, Federal Railroad Administration, U.S. Department of Transportation (ex ofﬁcio)

Rebecca M. Brewster, President and COO, American Transportation Research Institute, Smyrna, Georgia (ex ofﬁcio)

George Bugliarello, Chancellor, Polytechnic University of New York, Brooklyn; Foreign Secretary, National Academy of

Engineering, Washington, D.C. (ex ofﬁcio)

Sandra K. Bushue, Deputy Administrator, Federal Transit Administration, U.S. Department of Transportation (ex ofﬁcio)

J. Richard Capka, Acting Administrator, Federal Highway Administration, U.S. Department of Transportation (ex ofﬁcio)

Thomas H. Collins (Adm., U.S. Coast Guard), Commandant, U.S. Coast Guard, Washington, D.C. (ex ofﬁcio)

James J. Eberhardt, Chief Scientist, Ofﬁce of FreedomCAR and Vehicle Technologies, U.S. Department of Energy (ex ofﬁcio)

Jacqueline Glassman, Deputy Administrator, National Highway Trafﬁc Safety Administration, U.S. Department of

Transportation (ex ofﬁcio)

Edward R. Hamberger, President and CEO, Association of American Railroads, Washington, D.C. (ex ofﬁcio)

Warren E. Hoemann, Deputy Administrator, Federal Motor Carrier Safety Administration, U.S. Department of

Transportation (ex ofﬁcio)

John C. Horsley, Executive Director, American Association of State Highway and Transportation Ofﬁcials, Washington, D.C.

(ex ofﬁcio)

John E. Jamian, Acting Administrator, Maritime Administration, U.S. Department of Transportation (ex ofﬁcio)

J. Edward Johnson, Director, Applied Science Directorate, National Aeronautics and Space Administration, John C. Stennis

Space Center, Mississippi (ex ofﬁcio)

Ashok G. Kaveeshwar, Administrator, Research and Innovative Technology Administration, U.S. Department of

Transportation (ex ofﬁcio)

Brigham McCown, Deputy Administrator, Pipeline and Hazardous Materials Safety Administration, U.S. Department of

Transportation (ex ofﬁcio)

William W. Millar, President, American Public Transportation Association, Washington, D.C. (ex ofﬁcio) (Past Chair, 1992)

Suzanne Rudzinski, Director, Transportation and Regional Programs, U.S. Environmental Protection Agency (ex ofﬁcio)

Jeffrey N. Shane, Under Secretary for Policy, U.S. Department of Transportation (ex ofﬁcio)

Carl A. Strock (Maj. Gen., U.S. Army), Chief of Engineers and Commanding General, U.S. Army Corps of Engineers,

Washington, D.C. (ex ofﬁcio)

*Membership as of April 2006.

Committee for the Study of the Long-Term Viability of

Fuel Taxes for Transportation Finance

Transportation Research Board

Washington, D.C.

2006

www.TRB.org

The Fuel Tax

AND ALTERNATIVES FOR

TRANSPORTATION FUNDING

SPECIAL REPORT 285

71340_001_012.qxd 5/30/06 9:50 AM Page i

Transportation Research Board Special Report 285

Subscriber Category

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This report has been reviewed by a group other than the authors according to the pro-

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Cover and design by Tony Olivis, Studio 2.

Library of Congress Cataloging-in-Publication Data

National Research Council (U.S.). Committee for the Study of the Long-Term Viability

of Fuel Taxes for Transportation Finance.

The fuel tax and alternatives for transportation funding / Committee for the Study of

the Long-Term Viability of Fuel Taxes for Transportation Finance, Transportation

Research Board of the National Academies.

p. cm.

ISBN 0-309-09419-4

1. Transportation—United States—Finance. 2. Motor fuels—Taxation—United

States. 3. User charges—United States. 4. Infrastructure (Economics)—United States—

Finance. 5. Transportation and state—United States—Evaluation. I. Title.

HE206.2.N39 2006

336.2′7866538270913—dc22

2006040428

71340_001_012.qxd 5/30/06 9:50 AM Page ii

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71340_001_012.qxd 5/30/06 9:50 AM Page iii

71340_001_012.qxd 5/30/06 9:50 AM Page iv

Committee for the Study of the Long-Term Viability

of Fuel Taxes for Transportation Finance

Rudolph G. Penner, Urban Institute, Washington, D.C., Chair

Carol Dahl, Colorado School of Mines, Golden

Martha Derthick, Charlottesville, Virginia

David J. Forkenbrock, University of Iowa, Iowa City

David A. Galt, Montana Petroleum Association

Shama Gamkhar, University of Texas, Austin

Thomas D. Larson, Lemont, Pennsylvania

Therese J. McGuire, Northwestern University, Evanston, Illinois

Debra L. Miller, Kansas Department of Transportation

Michael Pagano, University of Illinois, Chicago

Robert W. Poole, Jr., Reason Foundation, Los Angeles, California

Daniel Sperling, University of California, Davis

James T. Taylor II, Bear, Stearns & Co., Inc., New York

Martin Wachs, RAND Corporation, Santa Monica, California

Transportation Research Board Staff

Joseph R. Morris, Study Director

71340_001_012.qxd 5/30/06 9:50 AM Page v

71340_001_012.qxd 5/30/06 9:50 AM Page vi

Preface

The Transportation Research Board (TRB) formed the Committee for the Study

of the Long-Term Viability of Fuel Taxes for Transportation Finance to respond

to concerns that present funding arrangements, especially fuel taxes, may become

less reliable revenue sources for transportation programs in the future. At the same

time, transportation agencies are interested in developments in toll collection

technology and in public–private road projects that suggest opportunities to try

fundamentally new approaches to paying for transportation facilities. The goals

of the study were to assess what recent trends imply for the future of traditional

transportation ﬁnance, identify ﬁnance alternatives and the criteria by which they

should be evaluated, and suggest ways in which barriers to acceptance of new

approaches might be overcome. The study was sponsored by the state trans-

portation departments through the National Cooperative Highway Research

Program, the Federal Highway Administration, and TRB.

The committee’s conclusions address the viability of present revenue sources,

the merits of present transportation ﬁnance arrangements, and the potential value

of various reform options. The recommendations propose immediate changes to

strengthen the existing highway and transit ﬁnance system and actions to prepare

the way for more fundamental reform in the long term. Because the impetus

for the study was concern for the continued reliability of the revenues derived

from the special fees and taxes paid by highway users, most of this report is

devoted to questions about future tax revenue, alternative forms of highway user

charges, how these charges affect highway system performance, and related aspects

of highway ﬁnance. Problems relating to ﬁnance of public transit were not con-

sidered as comprehensively. An important feature of present transportation

ﬁnance arrangements is the dedication of portions of highway user revenues to

transit. The committee considered transit funding primarily insofar as it is linked

in this way to highway user fee revenue.

The committee received briefings at its meetings from federal, state, and

local government transportation administrators and from experts in various

aspects of transportation ﬁnance. The committee thanks Tyler Duvall, Patrick

vii

71340_001_012.qxd 5/30/06 9:50 AM Page vii

DeCorla-Souza, Michael Freitas, and James March of the U.S. Department of

Transportation; Elizabeth Paris of the staff of the U.S. Senate Finance Com-

mittee; Charles Stoll of the California Department of Transportation; James

Whitty of the Oregon Department of Transportation; Ellen Burton of the

Orange County Transportation Authority; Brian Mayhew of the Metropolitan

Transportation Commission; Marlon Boarnet of the University of California at

Irvine; Helen Sramek of AAA; Darrin Roth of the American Trucking Associa-

tions; Greg Hulsizer of California Transportation Ventures, Inc.; Arlee Reno

and Gary Maring of Cambridge Systematics; Dawn Levy of Cassidy & Associ-

ates; Arthur Guzzetti of the American Public Transportation Association; Jeffrey

Parker; Alan Pisarski; and Arthur Bauer. The committee also thanks Paul Sorensen

and Brian Taylor of the University of California at Los Angeles, authors of a

resource paper prepared for the committee on road use metering systems. The

executive summary of that paper is included as Appendix C of this report. The

contents of the resource paper are the responsibility of the authors.

The report has been reviewed in draft form by individuals chosen for their

diverse perspectives and technical expertise, in accordance with procedures

approved by the National Research Council’s (NRC’s) Report Review Com-

mittee. The purpose of this independent review is to provide candid and critical

comments that assist the authors and NRC in making the published report as

sound as possible and to ensure that the report meets institutional standards for

objectivity, evidence, and responsiveness to the study charge. The review com-

ments and draft manuscript remain conﬁdential to protect the integrity of the

deliberative process. The committee thanks the following individuals for their

participation in the review of this report: David L. Greene, Oak Ridge National

Laboratory, Knoxville, Tennessee; Karen J. Hedlund, Nossaman, Guthner,

Knox, & Elliott LLP, Arlington, Virginia; Herbert S. Levinson, Herbert S.

Levinson Transportation Consultant, New Haven, Connecticut; David

Luberoff, Harvard University, Cambridge, Massachusetts; Jeff Morales, Parsons

Brinckerhoff Quade and Douglas, Inc., Sacramento, California; Ian W. H. Parry,

Resources for the Future, Washington, D.C.; Arlee T. Reno, Cambridge Sys-

tematics, Inc., Chevy Chase, Maryland; and Paul P. Skoutelas, PB Consult, Inc.,

Pittsburgh, Pennsylvania.

Although the reviewers listed above provided many constructive comments

and suggestions, they were not asked to endorse the committee’s conclusions or

recommendations, nor did they see the ﬁnal draft of the report before its release.

The review of this report was overseen by John S. Chipman, University of Min-

nesota, and C. Michael Walton, University of Texas at Austin. Appointed by

NRC, they were responsible for making certain that an independent examination

of the report was carried out in accordance with institutional procedures and that

all review comments were carefully considered. Responsibility for the ﬁnal con-

tent of this report rests entirely with the authoring committee and the institution.

THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

viii

71340_001_012.qxd 5/30/06 9:50 AM Page viii

Joseph R. Morris managed the study and drafted the ﬁnal report under the

guidance of the committee and the supervision of Stephen R. Godwin, Director

of Studies and Information Services. Suzanne Schneider, Associate Executive

Director of TRB, managed the report review process. Special appreciation is

expressed to Norman Solomon, who edited the report; Jennifer Weeks, who pre-

pared the prepublication copy; and Juanita Green, who managed the book design

and production, all under the supervision of Javy Awan, Director of Publications.

Frances Holland assisted with meeting arrangements and communications with

committee members.

PREFACE

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71340_001_012.qxd 5/30/06 9:50 AM Page x

Contents

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

Study Origin: Transportation Finance Problems . . . . . . . . . . . . . . . . . .11

Charge to the Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

Guidelines for Finance Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . .18

Outline of the Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21

2 Present Finance Arrangements . . . . . . . . . . . . . . . . . . . . . . . .23

Highway Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23

Transit Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33

Comparisons with Other Infrastructure and International Practices . . . .36

Trends in the Evolution of the Finance System . . . . . . . . . . . . . . . . . . . .40

3 Evaluating the Present Finance System . . . . . . . . . . . . . . . . .62

Criteria for Evaluating Funding Sources . . . . . . . . . . . . . . . . . . . . . . . . .64

Highway System Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68

Transit Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .81

Evaluation of Finance Program Features . . . . . . . . . . . . . . . . . . . . . . . . .83

4 Effects of Automotive Technology, Energy,

and Regulatory Developments on Finance . . . . . . . . . . . . . .95

Supply, Price, and Consumption of Petroleum Fuels . . . . . . . . . . . . . . . .96

Motor Vehicle Technology Projections and Fuel Tax Revenue . . . . . . .102

Possible Regulatory Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . .112

5 Finance Reform Proposals:

Toll Road Expansion and Road Use Metering . . . . . . . . . .121

Toll Roads and Toll Lanes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .124

Road Use Metering and Mileage Charging . . . . . . . . . . . . . . . . . . . . . .137

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .154

71340_001_012.qxd 5/30/06 9:50 AM Page xi

6 Finance Reform Proposals:

Reforms Within the Present Framework . . . . . . . . . . . . . . .158

Measures to Increase Available Resources . . . . . . . . . . . . . . . . . . . . . . .159

Measures to Improve Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .164

Measures to Direct Spending More Effectively . . . . . . . . . . . . . . . . . . .168

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .176

7 Conclusions and Recommendations . . . . . . . . . . . . . . . . . .179

Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .179

Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .192

Appendices

A Highway Beneﬁts Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .202

B Automotive Technology Projections . . . . . . . . . . . . . . . . . . . . . . . . .209

C Review and Synthesis of Road Use Metering

and Charging Systems: Executive Summary . . . . . . . . . . . . . . . . . . .217

Paul A. Sorensen and Brian D. Taylor

Study Committee Biographical Information . . . . . . . . . . . .232

71340_001_012.qxd 5/30/06 9:50 AM Page xii

Summary

Highway

programs derive most of their funding from user fees, which are

special taxes and charges incurred by vehicle operators in relation to their use of

roads. Governments dedicate most highway user fee revenue to highway spend-

ing ($85 billion out of $107 billion collected in 2004) and also devote a share

to transit ($11 billion in 2004). Fuel taxes generate most highway user fee rev-

enue (64 percent of the total in 2004); other user fee revenues are from vehicle

registration fees, excise taxes on truck sales, and tolls.

This study assesses the revenue-generating prospects of fuel taxes and other user

fees and identiﬁes alternatives to the present ﬁnance arrangement. Transportation

ofﬁcials have been concerned that the sources that provided stable and growing

revenue for their programs for many decades could become unreliable in the

future. They see two possible threats to the viability of the established arrange-

ment: that fuel consumption and fuel tax revenue could be depressed by changes

in automotive technology, rising fuel prices, or new energy or environmental reg-

ulations; and that the user fee ﬁnance principle that has been the basis of high-

way ﬁnance may be eroding in practice, as nonhighway applications of user fee

revenues proliferate and dependence on revenue from sources other than user fees

grows. The vulnerability of excise tax revenue to inﬂation in an era when tax rate

increases often seem politically infeasible magniﬁes these concerns.

In judging the merits of the present ﬁnance system and alternatives, the

Transportation Research Board study committee focused on how ﬁnance arrange-

ments affect the performance of the transportation system by inﬂuencing the deci-

sions of travelers and government investment and management decisions. This

In this report, the term “highway” refers to all public highways, roads, and streets, and “transit” refers

to all public local bus, subway, commuter rail, and trolley services, unless otherwise qualiﬁed. Intercity

public transportation is excluded from the deﬁnition of transit.

71340_013_020 5/30/06 9:51 AM Page 1

criterion led the committee to give special attention to methods of charging fees

that could be directly related to the cost of providing services—in particular, tolls

and mileage charges.

The committee did not estimate how much governments should spend on

transportation and did not interpret its task as devising revenue mechanisms to

support an increased level of spending. There is no certainty that ﬁnance reform

in the direction of improving the efﬁciency of transportation would increase rev-

enues. A reformed ﬁnance system would remain subject to many of the external

political and economic constraints that limit the revenue potential of the present

system. However, reform would help transportation agencies to manage capacity

and to target investment to projects with the greatest beneﬁt to the public. Each

dollar spent would be more effective and services would improve, and it is con-

ceivable that the public would be willing to pay more for transportation programs

that worked better.

CONCLUSIONS

The committee’s conclusions concern the two parts of its charge: to assess threats

to the viability of the present ﬁnance system and to identify directions for reform

of transportation ﬁnance.

Viability of Revenue Sources

The risk is not great that the challenges evident today will prevent the highway

ﬁnance system from maintaining its historical performance over the next 15 years;

that is, it should be able to fund growth in capacity and some service improve-

ments, although not at a rate that will reduce overall congestion.

Threat of Loss of the Tax Base

A reduction of 20 percent in average fuel consumption per vehicle mile is possible

by 2025 if fuel economy improvement is driven by regulation or sustained fuel

price increases. Offsetting the revenue effect of such a gain would not require

unprecedented increases in fuel tax rates. The willingness of legislatures to enact

increases may be in question, but the existing revenue sources will retain the capac-

ity to fund transportation programs at historical levels.

Without new regulations, fuel price increases alone probably will stimulate

only a small improvement in fuel economy in this period.

Three factors will constrain the rate of progress on fuel economy: ﬁrst, con-

sumers prefer to maintain or enhance the performance and size of the vehicles

they buy; second, new vehicles that offer performance and cost close to those of

THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

71340_013_020 5/30/06 9:51 AM Page 2

today’s vehicles with signiﬁcantly lower fuel consumption will require time to be

brought into large-scale production; and ﬁnally, the stock of vehicles on the road

turns over slowly. Energy forecasts are speculative; however, there are grounds for

expecting that, although the relatively high prices of 2004–2005 may persist, out-

put will increase sufﬁciently to moderate the long-term price trend. Supplies are

available from multiple sources that can be developed and brought to market at

lower cost than the 2005 price, and maintaining the price of oil at too high a level

is not in the long-term interest of the major producers because it encourages con-

servation and stimulates development of alternative sources.

Erosion of Established Finance Practices

Government transportation ﬁnance practices have been remarkably stable and

resilient since the creation of the present federal highway program in 1956.

However, some potential sources of stress are evident, particularly in certain states

where the local share of responsibility is high. These include pressures to expand

use of highway user fee revenue for nonhighway purposes, the growth of transit

spending as a share of local transportation spending, and the vulnerability of rev-

enues to acceleration of inﬂation.

Merits of the Present System

The ﬁnance system has contributed to the success of the highway program in

delivering a positive return on the national investment in highways because fees

modestly discourage motorists from making trips of little value, spending is lim-

ited by the revenues generated from users, and motorists can see the cost of pro-

viding roads in the fuel taxes and registration fees they pay. However, highway

programs have important failings related to ﬁnance. The system does not pro-

vide a strong check that individual projects are economically justiﬁed. Conges-

tion and pavement costs are tolerated that could be avoided if motorists were

charged prices that more closely matched the cost of their use of roads.

Directions for Reform

Although the present highway ﬁnance system can remain viable for some time, trav-

elers and the public would beneﬁt greatly from a transition to a fee structure that

more directly charged vehicle operators for their actual use of roads. The growing

cost of maintaining acceptable service under present funding and pricing prac-

tices may at some point compel reforms that would increase efﬁciency. The tran-

sition could proceed in stages, starting with closer matching of present fees to

costs and expanded use of tolling. Ultimately, in the fee system that would pro-

vide the greatest public beneﬁt, charges would depend on mileage, road and

SUMMARY

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vehicle characteristics, and trafﬁc conditions, and they would be set to reﬂect the

cost of each trip to the highway agency and the public.

The potential beneﬁts of a transition to direct charging are improved opera-

tion of the road system and better targeting of investment to the most valuable

projects. Revenues from charges set to reﬂect the cost of providing service would

provide an accurate indication of where capacity expansions would have beneﬁt.

Governments that own and operate roads could control fees and funding, so

dependence on intergovernmental aid would be reduced. Reform in this direc-

tion offers the best opportunity for increasing the cost-effectiveness of spending

and mitigating congestion.

The committee identiﬁed two complementary tracks for practical reform:

• Toll roads and toll lanes: An important opportunity exists today to create an

extensive system of tolled expressways and expressway lanes employing

existing electronic toll collection technology and variable pricing. Although

such a toll program probably would not greatly increase the funds available

for highways, it could expedite construction of critical highway improve-

ments, provide a tool for managing congestion, and help gain public accept-

ance of road pricing.

• Road use metering and mileage charging: This appears to be the most prom-

ising technique for directly assessing road users for the costs of individual

trips within a comprehensive fee scheme that will generate revenue to cover

the costs of highway programs. It uses communications and information

technology to assess charges according to miles traveled, roads used, and

other conditions related to the cost of service. Unlike conventional tolling,

which is applicable only on expressways, road use metering could be used

to manage and provide funding for all roads. Conversion to road use meter-

ing will require a sustained national effort. Governments must decide on

the goals of the effort, authorities for setting fees and controlling revenue,

the basis for determining fees, and how best to involve the private sector.

Resolution of privacy and fairness concerns will be a prerequisite.

As the ﬁnance system evolves, governments can keep it on a course leading

to the necessary improvements by adhering to the following rules:

• Maintain the practice of user fee ﬁnance, a system in which users of facil-

ities are charged fees or special taxes, rates reﬂect the costs to serve each

user, and expenditures equal the fee revenue.

• Seek opportunities where possible to apply pricing—that is, allow fees to

ration access to facilities.

• Align responsibilities so that local governments provide facilities that serve

mainly local travel, states serve regional trafﬁc, and the federal government

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retains only functions that it can perform more effectively than state and

local governments. Governments must control the resources required to

carry out these functions; therefore a goal of reform should be to allow each

jurisdiction to collect fees from all users of its facilities.

• Give full consideration to the environmental and equity consequences of

reform. Fundamental ﬁnance reform that aligned fees more closely with

costs would eventually have profound effects on the locations of house-

holds and industries. The overall economic and environmental impacts of

reform would be positive, but some individuals and communities would

suffer harm if no provisions were made for compensation.

RECOMMENDATIONS

The committee proposes immediate changes to strengthen the existing highway

and transit ﬁnance system and actions to prepare the way for fundamental reform.

1. Maintain and Reinforce the Existing User Fee Finance System

Because superior alternatives will require time to develop, the nation must con-

tinue to rely on the present framework of transportation funding for at least the

next decade. Therefore, governments must take every opportunity to reinforce

the proven features of the present system, in particular, user fee ﬁnance in the

highway program. The following actions would help to maintain the effective-

ness of the overall system:

• The federal government and the states should make adjustments to user

fee rates (for example, adjustments in registration and permit fees to bet-

ter align payments with cost responsibilities) that would provide incentives

for more cost-conscious use of highways by operators of large trucks and

other vehicles.

• Congress and the states should consider eliminating fuel tax exemptions

that are commonly abused and take other measures to reduce losses to tax

evasion.

• The states should make provision for advanced-technology vehicles in the

user fee structure so that operators of these vehicles contribute to the upkeep

of highways on a basis similar to that of other users. In particular, future

vehicles that consume fuels not currently taxed should contribute on some

basis, and incentives to promote conservation technologies should be

designed so that they reasonably apportion the cost burden of the promo-

tion among road users and the public and do not encourage inefﬁcient use

of roads.

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• Regardless of the overall scope of the federal surface transportation pro-

gram in the future, the federal government should retain certain core re-

sponsibilities, including aid to ensure that the states to not underinvest in

routes of national signiﬁcance, the setting of standards, environmental reg-

ulation and enforcement, and research and development.

2. Expand Use of Tolls and Test Road Use Metering

The Federal Role in Promoting Toll Road Development

The federal government should encourage states to experiment with arrange-

ments for tolling and private-sector participation in road development. To this

end, states should be allowed to impose tolls on existing roads that were built with

federal aid, and they should be allowed ﬂexibility in the design of toll systems.

Road Use Metering and Mileage Charging

The states and the federal government should undertake serious exploration of the

potential of road use metering and mileage charging. Creation of a structure to sup-

port individual states that decide to conduct trials or pilot implementations may

be the most practical initial arrangement. However, a program with national focus

will be required, with federal leadership and funding aid for research and testing.

The ﬁrst requirement will be technical trials to evaluate the reliability, ﬂexi-

bility, cost, security, and enforceability of alternative designs and to gain infor-

mation on proper administration of these systems and user acceptance. Once

technically proven designs are available, the federal government should support

one or more trial implementations that would be on a large scale and fully func-

tional but that would be limited in scope with respect to the region, roads, or vehi-

cles involved. The participating states would require federal technical coordination

and ﬁnancial aid. Evaluation must be integral to the design of trials and must be

provided for in schedules and budgets. Designs and pilot implementations should

be compatible with the principle that each state and local jurisdiction should con-

trol charges on and revenues generated by the roads it owns.

3. Provide Stable, Broad-Based Tax Support for Transit

Reforms of highway ﬁnance arrangements in the future will give rise to needs for

reviewing and adjusting the relationship of highway and transit funding. The

following are guidelines that should be considered:

• Transit systems at present require dedicated, broad-based tax support.

Developing such support will be necessary in order to maintain and expand

transit services.

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• Greatly increasing transfers of highway user fee revenues to fund expanded

transit services would risk a loss of travel beneﬁts through declining high-

way performance that could be greater than the transit beneﬁts gained.

This risk imposes a limit on the potential of existing highway user fees as

a source of transit funding.

• Federal and state transportation aid should be provided for the purpose of

relieving local governments of the burden of serving nonlocal needs rather

than subsidizing local services.

• Road pricing instituted in metropolitan areas should be used to increase

transit’s ﬁnancial self-sufﬁciency by eliminating subsidies to highway travel,

giving transit the market power to increase fare revenue, and improving bus

service quality.

4. Evaluate the Impact of Finance Arrangements on Transportation

System Performance

Transportation agencies must develop new capabilities for research, evaluation,

and communication with the public in order to manage ﬁnance reform success-

fully over the next few decades. If tolls and mileage charges become important

sources of highway funding, agencies will be faced with fundamentally new

kinds of management decisions and information requirements. At the same

time, the effects of the new charges will provide information never before avail-

able about the value of highway facilities. To develop the capability to fulﬁll the

new management and information requirements, an organized program will be

necessary. The institutional structure of the program must provide for a joint

federal–state effort, guarantee that scientiﬁc evaluations of alternatives are car-

ried out, and build public conﬁdence through open processes.

SUMMARY

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Introduction

Like all government agencies in the United States, those charged with pro-

viding highways and public transit

are perennially faced with the challenge of

serving growing needs with constrained resources. The past decade has been

particularly challenging as transportation agencies coped ﬁrst with rapid trafﬁc

growth during the economic boom of the 1990s and then with stagnant rev-

enues and state government ﬁscal crises in the aftermath of the 2001 recession.

The federal surface transportation aid program was debated for 2 years after its

expiration in 2003 before reauthorization in 2005, as proposals to increase spend-

ing clashed with opposition to any increase in highway user tax rates to fund

the expansion.

Recent circumstances have heightened long-standing worries of transporta-

tion ofﬁcials that funding sources, particularly fuel taxes, that provided stable

and growing revenue for transportation programs for 40 years are going to

become unreliable in the future. If petroleum price increases or government

interventions to reduce pollutant emissions or petroleum consumption lead to

widespread use of more efﬁcient automobile engines or lighter passenger vehi-

cles, maintaining revenue will require that legislatures accelerate rate increases.

In addition, there is concern that the political consensus supporting transporta-

tion taxes may be eroding as the goals of the programs become more diffuse, the

public becomes more sensitive to environmental and land use impacts of

expanding infrastructure, and increasing population density and wealth drive up

the costs of infrastructure expansion. The payers of transportation fees and taxes

may view the deterioration of performance as evidence that transportation agen-

In this report, the term “highway” refers to all public highways, roads, and streets, and “transit” refers

to all public local bus, subway, commuter rail, and trolley services, unless otherwise qualiﬁed. Intercity

public transportation is excluded from the deﬁnition of transit.

71340_021_034 5/30/06 9:52 AM Page 9

cies are not delivering their money’s worth rather than as evidence that rate

increases are called for.

Opportunities are at hand for fundamentally new approaches that could pro-

vide a sound basis for transportation ﬁnance and at the same time improve the

efﬁciency and quality of transportation services. Progress in the technologies of

toll collection and road use metering has greatly diminished the obstacles of cost

and inconvenience that have discouraged imposition of direct charges on the users

of most roads in the past. With the application of these technologies, highway

services could be paid for by metering each customer’s use and charging accord-

ingly, just as utilities such as water and electricity are paid for today. Development

of this revenue source would maintain the established practice of funding high-

ways largely through fees paid by users, allow fees to be much more closely tied

to the cost of providing service for each user, and provide information to trans-

portation agencies about which investments in capacity would yield the greatest

beneﬁts. Eliminating the connection between highway user revenues and motor

vehicle fuel economy would avoid the potential conﬂict between transportation

funding objectives and policies intended to promote energy conservation or emis-

sions reductions. In addition, facilities that generated their own revenue would

be suited to operation by private-sector franchisees, so there would be opportu-

nities to supplement public efforts with private capital and skills to carry out infra-

structure projects.

Initial steps toward these new kinds of transportation ﬁnance arrangements

are taking place today. Toll roads featuring automatic toll collection and charges

that can be varied to optimize trafﬁc ﬂow, systems to meter vehicle use over an

extensive network of roads and assess charges proportional to mileage, and roads

developed and operated by private ﬁrms receiving revenue from road user fees are

in operation in the United States or in other countries. However, before these

arrangements can become major components of the transportation ﬁnance sys-

tem, their effectiveness must be demonstrated to the public’s satisfaction and the

institutional capabilities needed to manage them on a large scale must be devel-

oped. In the meantime, it will be worthwhile to seek reﬁnements that could

improve the system’s capacity to provide the right level of funding and direct

funds to the best uses within the established structure of fees, revenue sources,

and assignment of responsibilities among governments.

The Transportation Research Board (TRB) convened the Committee for the

Study of the Long-Term Viability of Fuel Taxes for Transportation Finance to

assess what recent trends imply for the future of traditional transportation ﬁnance,

identify ﬁnance alternatives and the criteria by which they should be evaluated,

and suggest ways in which barriers to acceptance of new approaches might be over-

come. The study was sponsored by the state transportation departments through

the National Cooperative Highway Research Program, the Federal Highway

Administration, and TRB. This chapter describes the transportation ﬁnance prob-

THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

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lems that are the motivation of the study—in particular, as they are seen by state

governments, which are responsible for collecting most highway user taxes and fees

and for most highway spending—and explains the charge to the study committee.

The ﬁnal section of the chapter identiﬁes guidelines that the committee applied in

its evaluation of alternative government policies for ﬁnancing transportation.

STUDY ORIGIN: TRANSPORTATION FINANCE PROBLEMS

Several states have undertaken high-level reviews of transportation ﬁnance and

tax issues in recent years (Reno and Stowers 1995, Appendix B; CTI 1996; CRC

1996; CRC 1997; CRC 1998; Road User Fee Task Force 2003). These reports

provide examples of the states’ diagnoses of their ﬁnance problems. A Commission

on Transportation Investment was formed in 1995 by the state of California “to

investigate California’s investment in transportation infrastructure” (CTI 1996, 5).

The commission’s report deﬁnes the ﬁnance problem facing the state’s trans-

portation program as follows:

California’s transportation system has been funded from a dedicated gasoline tax

since 1923. . . . Over the last 20 years, however, several trends have occurred which

have led some to question the State’s current reliance on this revenue source.

One of these trends is the increasing fuel economy of today’s vehicles....

This creates the ironic situation of total usage of the system increasing while the

amount of revenue is not increasing at a commensurate rate.

The second trend . . . is the development of alternative fuel vehicles. These

fuels . . . are subject to tax rates that . . . are 12 to 58 percent less than the equiv-

alent tax rate for gasoline. . . . Fuel taxes were originally conceived as a direct user

fee—the more one drives, the more one pays. As alternatives and more efﬁcient

fuels and vehicles come into use, the linkage between the gas tax and the use of

transportation facilities weakens.... This result can be credited to explicit pub-

lic policies stemming from national energy crises and desires to reduce air pol-

lution.... California motorists pay fuel taxes with the assumption that these

revenues are used to maintain and expand the transportation system. But suc-

cessful implementation of the policies noted above [is] causing the fuel tax to be

an unreliable source for all of the system’s needs. (CTI 1996, 13–14)

The commission also cites “a legislative and political climate hostile to new

taxes” as a ﬁnancial reality (CTI 1996, 25). The report offers a range of options

for coping with the problems, from immediate to long term and from modest

to radical (CTI 1996, 26–28):

1. Living within our means.

2. Increasing the fuel tax.... The disadvantages are that there is little political sup-

port to raise taxes, the fuel tax is not responsive to the increasing fuel efﬁciency

INTRODUCTION

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of vehicles, and it does not capture the increasing use that non-gasoline pow-

ered vehicles are likely to be making of the state’s roads.

3. Require alternative fuels . . . to pay taxes that are equivalent on a per mile

traveled basis to the current gasoline and diesel fuel tax.

4. Vehicle Miles Traveled . . . Fee [i.e., a fee proportional to miles traveled].

5. Direct Road Pricing [i.e., a fee depending not only on miles traveled but also

on the road used and trafﬁc conditions].

Immediate actions recommended include curtailing applications of highway user

revenues to nontransportation purposes, expanding opportunities for public–

private partnerships, and introduction of high-occupancy/toll lanes. This list of

immediate and long-term options is representative of current proposals for

resolving state highway program funding problems.

Oregon’s Road User Fee Task Force was formed by the legislature in 2001

with a speciﬁc practical charge: “to develop a design for revenue collection for

Oregon’s roads and highways that will replace the current system for revenue col-

lection” (Road User Fee Task Force 2003, 1). The task force deﬁnes the state

highway ﬁnance problem in nearly the same terms as California’s Commission

on Transportation Investment (Road User Fee Task Force 2001, 1):

Fuel tax revenue constitutes the bulk of the total funding available for Oregon

roads.... New technology will soon greatly improve the average fuel efﬁciency

of the statewide passenger vehicle ﬂeet.... As a result of fuel efﬁciency improve-

ments, Oregon fuel tax revenues from the sale of gasoline are likely to level off

during the next 10 years and then drop permanently.

The task force’s proposal has three provisions (Road User Fee Task Force

2003, 25): imposition of new charges in place of existing ones, including a mileage

fee, congestion pricing (i.e., a charge for road travel that is higher at times and loca-

tions where congestion is high), and tolling of all newly constructed roads, bridges,

or lanes; a 20-year phase-in period during which the state would operate both the

mileage fee and the fuel tax; and pilot testing of hardware and administrative

arrangements for the mileage fee as the ﬁrst step toward implementation. This pro-

posal is described in more detail in Chapter 5.

With similar motivations, 15 states from all regions of the country pooled

funds to conduct the 2002 study A New Approach to Road User Charges. The

study’s report cites, in addition to the concern for revenue adequacy empha-

sized by the Oregon and California panels, other shortcomings of the present

fuel tax system, especially “a weak relationship to the relative costs of particu-

lar trips such that some vehicle operators pay user charges that exceed the costs

they impose, while others pay substantially less than their costs.” Thus, “vehicle

operators are not given signals to make them aware of the costs a particular trip

may impose on society” (Forkenbrock and Kuhl 2002, 1). The report proposes

THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

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technical and administrative arrangements of a system for metering and charg-

ing for each vehicle’s road use and recommends a ﬁeld test. This proposal also

will be described in Chapter 5.

A ﬁnal example, the report on highway ﬁnance of the nongovernmental

Citizens Research Council of Michigan, was issued at a time when Michigan was

ranked low among the states in fuel tax rates and road conditions and a debate on

raising tax rates was under way. The state increased its gasoline tax rate from 15

to 19 cents per gallon the following year. The theme of the report was that

increasing revenue would by itself be an inadequate response to the ﬁscal prob-

lem. The main proposals were the following (CRC 1996, 4–13): user tax increases

must be accompanied by management reforms in the highway program (“unless

the system is restructured both ﬁnancially and administratively, it is very likely

that any additional dollars will not purchase the improvement in transportation

services that might be expected”); jurisdictional control of roads should be

updated, with the state taking over responsibility for roads in local hands that

serve mainly through trafﬁc; an increase in truck registration fees should be con-

sidered; methods of determining priorities must be improved; contracting out

should be increased; and indexation of the fuel tax rate to compensate for inﬂa-

tion should be considered.

Three distinct justiﬁcations for considering an overhaul of transportation

ﬁnance and highway user fees emerge from these state analyses: a potentially

diminishing tax base, erosion of the user fee ﬁnance principle, and the opportu-

nity to improve efﬁciency. In summary, proponents of changing transportation

funding arrangements have claimed that developments in motor vehicle tech-

nology will threaten the revenue capacity of existing fees, that the ﬁnance system

has diverged from its founding principles with harmful consequences, and that

reform in the direction of pricing would increase the public beneﬁts of govern-

ment transportation expenditures. The study committee examined the evidence

supporting each claim.

Potentially Diminishing Tax Base

Among the foremost state concerns in the reports is that energy supply, envi-

ronmental constraints, or changes in automotive technology will reduce fuel

consumption, with reduced revenues as the consequence. The implicit assump-

tion behind this fear is that fuel tax rates will not be raised to compensate. Yet if

the transition to alternative energy sources is gradual, it is not self-evident that

the tasks of adjusting rates and incorporating new fuels into the tax base as the

need arises will necessarily entail such a threat to ﬁscal soundness. The California

report cites rising political resistance to tax rate increases; however, as Chapter 2

will describe, nationwide average constant-dollar user fee revenue per vehicle

mile has held fairly constant for the past 25 years. The fear that new revenues

INTRODUCTION

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will not come online as needed may arise from three considerations. First, subsi-

dies in the form of waivers of excises have been a popular way to promote alter-

native energy development (e.g., the fuel tax subsidy granted to gasohol). Second,

imposing new kinds of fees presents technical and administrative problems.

Third, state ofﬁcials recall the period from the mid-1970s to the early 1980s when

the combination of high inﬂation, slow economic growth, and increasing auto-

motive fuel economy reduced constant-dollar highway user fee revenue by 50 per-

cent. Tax rates were eventually adjusted, but only after a lag of nearly a decade.

Erosion of the User Fee Finance Principle

One characterization of the ﬁnance scheme of the federal-aid highway program

(whose centerpiece is a trust fund receiving revenues from user fees), and of the

similar highway ﬁnance schemes of many states, is that of a compact between

highway users and the government highway agency. Users agree to pay fees with

the understanding that the agency will spend the revenue to provide highway

services. At the creation of the Federal Highway Trust Fund in 1956, all revenue

from a speciﬁed collection of excise taxes on fuels, vehicles, and parts was dedi-

cated to the fund, to be distributed to the states for highway uses. Over time, the

revenue from these taxes has accumulated additional functions, especially at the

federal level. Since 1979, gasohol (a blend of gasoline with ethanol produced

from grain) has received preferential tax treatment to promote alternative fuels

and aid farmers (the revenue loss, after a 2004 change in federal law, is now

borne by the general fund rather than by transportation programs alone); since

1983, a portion of the fuel tax is dedicated to a fund for mass transit capital proj-

ects; since 1987, a small portion of the fuel tax has been dedicated to the Leaking

Underground Storage Tank Trust Fund; and from 1990 to 1997 a signiﬁcant

portion of the fuel tax was deposited in the general fund for deﬁcit reduction (and

the general fund continued to receive minor amounts until 2005). During the

ﬁscal crises that many states faced in the early 2000s, a number of legislatures

chose to apply user fee revenues normally devoted to transportation to general

purposes instead (e.g., AAA Mid-Atlantic 2005). Other uses of the revenues are

sometimes proposed. Meanwhile, at the state and local levels, it has become

increasingly common to dedicate revenues from particular taxes other than gaso-

line or motor vehicle excises (for example, sales taxes) as revenue sources for trans-

portation. (When the law that establishes a tax speciﬁes that revenue from the tax

is to be used for certain speciﬁed purposes, the tax is called a dedicated tax.)

The accretion of applications of highway user fee revenue to nonhighway

purposes, together with the popularity of dedicated revenue sources that cannot

be regarded as user fees, weakens the principle of linkage between the fees paid

and the cost of maintaining the highways, which has been the traditional politi-

cal rationale for the present ﬁnance scheme. Of course, there are legitimate

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grounds for arguing that transit and the other uses to which user fee revenues have

been dedicated are as reasonable uses of the revenue as is highway construction,

and there has always been controversy over the merits of the user fee–trust fund

arrangement in highway ﬁnance. However, if the present system on the whole

tends to promote public welfare, then the states are justiﬁed in searching for ways

to reinforce its core principles.

Opportunity to Improve Efﬁciency

In political discussions, the transportation ﬁnance problem traditionally has

been deﬁned as primarily a problem of revenue adequacy: how to raise revenues

sufﬁcient to maintain a desired level of spending or serve deﬁned transportation

needs in a manner that is perceived as fair by the public and highway users. This

deﬁnition of the problem is incomplete because it does not take into account the

connection between ﬁnance arrangements and the performance of the highway

system. Finance provisions affect the quality of investment decisions and the efﬁ-

ciency of operations. Growing congestion and breakthroughs in technology for

metering road use, as well as interest in exploiting new revenue sources, have

spurred public agencies to consider the use of pricing to manage congestion. It

appears to be less widely appreciated that ﬁnance reform, especially reform in

the direction of pricing, would exert a powerful inﬂuence on project selection

and overall spending levels, with the potential for improving the targeting of

investment spending to the highest-payoff projects and helping the states to

determine the optimum level of highway spending. Reforms that reduced arbi-

trary variation in tax and fee payments among highway users would make the

ﬁnance system more fair as well.

CHARGE TO THE COMMITTEE

These motivations for undertaking reform are reﬂected in TRB’s charge to the

committee (deﬁned in the task statement in Box 1-1). The committee was asked

to judge the signiﬁcance of the two hypothesized threats to the viability of rev-

enue sources and ﬁnance arrangements. The ﬁrst is that rising fuel prices, new

automotive technology, or new environmental and energy regulations will affect

revenues in the next few decades and that the ﬁnancial side effects of these forces,

in the absence of reform, will cause a decline in the performance of the highway

system. The second is that trends in the political choices being made about trans-

portation funding at the federal, state, and local levels today threaten the viabil-

ity of ﬁnance arrangements and the performance of the transportation system.

Finally, the committee was asked to identify ﬁnance alternatives that would

improve the services that transportation programs afford the public. As the term

INTRODUCTION

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is used here, a viable funding arrangement is one that will retain the capacity to

fund transportation programs at an inﬂation-adjusted rate comparable with that

of the past 20 years. In that period, revenues were sufﬁcient to fund growth in

highway spending and capacity and some improvements in service but not to

prevent growing highway congestion.

Implicit in the charge is a broad deﬁnition of the scope of the transportation

ﬁnance system. The system includes three elements: the schedule of fees or spe-

THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

BOX 1-1

Committee for the Study of the Long-Term Viability of Fuel Taxes

for Transportation Finance: Statement of Task

The study will examine current practices and trends in ﬁnance of roads and

public transit and evaluate options for a long-term transition to alternative

ﬁnance arrangements from the present system, which relies heavily on fuel

taxes whose revenues are dedicated to transportation spending. The goals

of the study are to

• Assess the future revenue-generating prospects of the present user fee

tax base, especially the gas tax, considering developments in fuel prices,

automotive technology, and environmental and energy regulation, and

the likely time frame for future technology transitions in transportation.

• Examine developments in transportation ﬁnance policies of federal,

state, and local governments.

• Assess the implications of ﬁnance trends for the performance of the

transportation system, and whether beneﬁts could be attained through

reform.

• Identify alternatives to the present ﬁnance scheme and the criteria by

which they should be judged, considering the inﬂuence of ﬁnance arrange-

ments on the performance of the transportation system. Alternatives may

include long-term prospects for road pricing and for privatization as

well as immediate measures aimed at reinforcing positive features of the

present scheme.

• Identify institutional and technical obstacles that may hinder needed

ﬁnance reforms and recommend a transition strategy to new ﬁnance

arrangements if reform appears necessary.

71340_021_034 5/30/06 9:52 AM Page 16

cial taxes that governments or other operators collect from users of highways and

public transit; the sources of funds for transportation programs (which may

include dedicated user fees, other dedicated revenues, general fund appropria-

tions, and grants from other governments); and ﬁnally, the institutional arrange-

ments and rules that determine budgets, spending priorities, and the distribution

of responsibilities among levels of government. The impetus for this study was

concern for the viability of present highway user fees as a revenue source; there-

fore, the committee has considered transit ﬁnance primarily insofar as it is linked

to highway user fees. A prominent feature of the present ﬁnance system is the ded-

ication of portions of federal and state highway user fee revenues to transit.

The committee assumed that short-term as well as long-term opportunities

for improvement in ﬁnance arrangements were within its charge. A transition to

some form of road pricing or direct mileage-based charges is viewed favorably in

the state ﬁnance studies cited above and may be gaining recognition as the desir-

able eventual outcome. However, it is important not to neglect measures aimed

at reinforcing the positive features of the present system. In the short term, depen-

dence on fuel taxes and vehicle registration and license fees as revenue sources for

transportation will continue.

Highway ﬁnance practices have consequences for environmental quality and

energy consumption, but they have not been examined in this study. As the report

will describe, one of the failings of present practices is that, although revenues

from the fees and special taxes motorists pay cover most highway agency expen-

ditures to build and operate roads, fees do not reﬂect other public costs of road

travel, such as congestion delay and automotive pollution. The result is that road

users make many trips that cost the public more to provide than they are worth

to the traveler. A system for road use metering and mileage charging (a concept

described in Chapter 5) could correct this failing, if public ofﬁcials chose, by

charging fees that approximated the actual costs of trips, taking into account the

time and place of travel.

Within the present framework of highway user fees, proposals have been

made to impose a pollution charge in the form of an increase in the fuel tax as a

way to reduce automotive pollution costs. Before enacting such a tax, governments

would have to consider the costs of overcharging vehicles that produce little pol-

lution and travel in areas where pollution costs are low. A pollution tax would

also complicate administration of the present user fee ﬁnance system, because

history suggests a tendency for the revenue from taxes paid by road users to be

devoted to road building eventually, regardless of the original intent. Finally, fun-

damental change in road user charges and the means of paying for roads would

have important impacts on land use. Governments will need to consider such

impacts as the transportation ﬁnancing system evolves.

Partially or entirely replacing fuel taxes with fees based on mileage would

reduce or eliminate the incentive that fuel taxes provide to motorists to choose

INTRODUCTION

71340_021_034 5/30/06 9:52 AM Page 17

more fuel-efﬁcient vehicles or otherwise conserve fuel. If fuel taxes are reduced in

the future, the impact on fuel consumption should be recognized and consider-

ation given to the need for offsetting actions, if the outcome appears contrary to

goals of U.S. energy policy. (Of course, a mileage-charging scheme could incor-

porate conservation incentives.) A mileage-charging scheme that incorporated

peak charges would have an important impact on energy consumption through

its inﬂuence on congestion, travel, and land use. These effects have not been

examined in this study. As will be argued in Chapter 4, the most cost-effective

taxes for promoting petroleum conservation would be broad-based taxes applied

equally to all petroleum consumers.

Lack of information makes deﬁnitive responses to all the questions raised in

the study charge impossible. Projections of technology and energy futures are

inherently highly uncertain. There is little systematic information on how the

existing structure of charges, subsidies, and grant programs affects the decisions of

users and transportation agencies. Information on the beneﬁts and costs of high-

way investments and other transportation programs is fragmentary because agen-

cies do not routinely conduct rigorous economic evaluations of their projects.

Because of this information gap and lack of experience with some of the

reform measures that have been most prominently proposed, any speciﬁc and

detailed recommendation for a new transportation ﬁnance system would be pre-

mature. Preparation for long-term reform will require basic research, planning,

the promotion of informed public discussion, and early implementation of new

approaches where circumstances permit, with the goal of learning from experi-

ence. A strength of U.S. transportation programs in this respect is the variety of

conditions, experience, and practices among the states, which provide a natural

laboratory for problem solving. The committee’s conclusions and recommenda-

tions are to point out opportunities in these directions.

GUIDELINES FOR FINANCE ARRANGEMENTS

The study charge calls for evaluating the present transportation ﬁnance system

and alternatives. This task requires criteria for comparison and an understanding

of the goals of the ﬁnance system. Chapter 3 reviews methods and criteria that

have been used to evaluate ﬁnance practices. In this introductory chapter it is

appropriate to state certain premises that the committee believes should under-

lie the evaluations:

1. Finance arrangements are central to the performance of the transportation sys-

tem. Choices about fees and taxes charged to users and about funding

sources are critical not only to the feasibility of a transportation project or

program but also to the likelihood of its success. The ﬁnance system is a

THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

71340_021_034 5/30/06 9:52 AM Page 18

major inﬂuence on decisions about which projects and services are pro-

vided and how existing facilities are utilized. Therefore, any fundamental

change in ﬁnance arrangements (e.g., replacing current user fees with fees

of a different form) would strongly affect transportation system perform-

ance. Decisions on ﬁnance also determine the distribution of the costs and

beneﬁts of transportation programs. Finance alternatives should be evalu-

ated in terms of these impacts.

2. Efﬁciency is an important test of ﬁnance options. The ﬁrst test that should be

applied to a proposed ﬁnance reform is whether it would tend to promote

efﬁcient investment and operation. That is, ﬁnance arrangements should

encourage investments in the transportation system that yield economic

beneﬁts and discourage investments that do not, and they should encour-

age operating practices on existing facilities such that service is provided to

those who value the service more highly than the cost of producing it and

is not provided to others. The cost of transportation services includes con-

gestion, environmental costs, and accident costs. Nearly any change in the

ﬁnance system—adjustments in highway user fees, changes in the dedica-

tion of particular revenues to particular uses, or changes in grant rules—

will affect efﬁciency.

3. Pricing is a means to allow users to express what they want from the trans-

portation system. Pricing means a system of imposing charges on users in

which each user recognizes a connection between decisions to use the trans-

portation system and the charges incurred and the operating agency sets

the charges on the basis of the cost of providing service to the user. The

present highway user fee scheme of fuel taxes, registration fees, and licens-

ing fees is an imperfect form of pricing. In a more reﬁned scheme, such as

the proposals for mileage charges cited above, the fee would be much more

closely matched to the cost of each trip. The intent of pricing should be to

give consumers the information they require to make efﬁcient choices,

rather than to dictate choices. In general, the price-setting process should

not set targets for mode shares, congestion or pollution levels, or land use

patterns and then adjust fees until the targets are reached. Rather, fees

should be set according to costs, and travelers should be allowed to choose

their preferred modes, congestion levels, and locations for activities. [The

relevant costs and methods of measuring them were identiﬁed in the report

of an earlier TRB committee (TRB 1996).]

4. There are advantages in aligning the responsibilities of the federal, state, and

local governments so that the lowest level of government that represents the par-

ties directly beneﬁting from a transportation facility takes responsibility that

the facility is funded and provided. If this rule is followed, then the gov-

ernment responsible for the facility is accountable to the beneﬁciaries, who

INTRODUCTION

71340_021_034 5/30/06 9:52 AM Page 19

also pay for it through their taxes and fees, and thus transportation priori-

ties are more likely to correspond to the services that beneﬁciaries value and

are willing to pay for. It does not follow from this guideline that the fed-

eral government must necessarily provide all facilities that serve national

needs. State and local governments have shown that they are willing to pro-

vide many facilities of national signiﬁcance as long as local residents do not

have to subsidize them.

Consideration of the division of responsibility among the federal, state,

and local governments for providing and funding roads and transit is an

essential element of the committee’s charge to identify alternatives to pres-

ent ﬁnance arrangements. The present division of responsibility in large

part reﬂects the character of funding sources. Lack of practical means for

local governments to charge users of their roads, and especially of means

for charging users from other jurisdictions, has been a primary reason for

involvement of the federal and state governments in local transportation,

and part of the justiﬁcation for federal aid to states has been similar limits

on state revenue-raising capacity. As governments pursue reform of trans-

portation ﬁnance, the simple substitution of new revenue sources for the

existing ones while leaving these institutional arrangements unchanged

may not be possible. In particular, adoption of systems to directly charge

motorists for road use (such as the Oregon mileage-charging proposal

described above or expanded use of other forms of tolls) would compel a

reexamination of federal, state, and local roles. State and local governments

would expect to control revenue directly generated by the roads they own

and operate and to control pricing on those roads. The new revenue-

raising capacity would diminish the rationale for intergovernmental aid.

To the extent that local and state governments have mechanisms to charge

all users of the roads they operate, rather than just their own residents, the

need for involvement of higher levels of government is lessened.

In most public discussions of transportation ﬁnance, the desire to increase

revenue in order to serve deﬁned needs is identiﬁed as the primary motivation for

searching for ﬁnance alternatives. The state transportation ﬁnance studies sum-

marized in the ﬁrst section of this chapter are examples: the studies project that

existing sources will not yield sufﬁcient revenue to maintain desired levels of

spending. Revenue adequacy is a primary federal concern as well. The Federal

Highway Administrator, explaining the need for ﬁnance reform, has stated that

“it is politically untenable to increase [fuel] taxes to the level necessary to support

today’s and tomorrow’s needs” (Orski 2004). Revenue-raising capacity is cer-

tainly a relevant criterion for evaluating tax alternatives, and it is responsible for

public ofﬁcials to view ﬁnance as the art of ﬁnding money for programs they

believe the public wants.

THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

71340_021_034 5/30/06 9:52 AM Page 20

However, the list of the committee’s evaluation guidelines above does not

refer to revenue adequacy. The committee has not interpreted its task as ﬁnding

revenue mechanisms that will support an increased level of spending for trans-

portation. Information about highway beneﬁts and costs is incomplete, and only

highly imprecise estimates of correct spending levels are now possible. More

important, there is no certainty that ﬁnance reform in the direction of improving

the efﬁciency of the transportation system would necessarily raise more revenue

than existing arrangements. The reformed system would remain subject to many

of the external political and economic constraints that limit the revenue poten-

tial of the present system, although the public might be willing to pay more for a

transportation system that worked better. Finance reform could improve per-

formance to the extent that expenditures that appear to buy little improvement

today might be more attractive.

Even though it would be difﬁcult to predict the revenue consequences of

developing new user fees to supplement or replace existing ones, it is reasonable

to expect that the performance of the system would improve over time if fees more

closely reﬂected costs. Transportation agencies would have more information

about user beneﬁts, and the pressures arising from budget constraints and user

preferences would tend to encourage better investment and operating decisions.

OUTLINE OF THE REPORT

The remainder of this report is organized as follows. Chapter 2 describes present

highway and transit ﬁnance arrangements and trends in ﬁnance practices. The

chapter considers whether the viability of the present ﬁnance system is threatened

by trends in reliance on user fees, legislative adjustments to fees, or revenue yield.

Chapter 3 summarizes available information on the performance of the ﬁnance

system for highways and transit at the federal, state, and local government levels—

whether appropriate resources are available and are being devoted to the most ben-

eﬁcial uses, and the degree to which the system incorporates incentives for prudent

use and management of facilities. The beneﬁts of reform depend on how well pres-

ent arrangements are working. Chapter 4 reviews projections of energy prices,

motor vehicle technology, and fuel economy and considers the likelihood of

future government interventions to regulate fuel consumption or pollutant emis-

sions that could affect transportation revenue sources. Thus the merits of the three

arguments for reform of the system identiﬁed above—a diminishing tax base, ero-

sion of the user fee ﬁnance principle, and the opportunity to improve efﬁciency—

are assessed in Chapters 4, 2, and 3, respectively.

Chapter 5 describes proposals for fundamental changes in revenue sources,

including mileage charges and expansion of toll roads. Chapter 6 reviews a variety

of proposals for improvements within the established framework of user fees and

INTRODUCTION

71340_021_034 5/30/06 9:52 AM Page 21

other ﬁnance practices. Finally, Chapter 7 presents the committee’s conclusions

and recommendations.

REFERENCES

Abbreviations

CRC Citizens Research Council of Michigan

CTI Commission on Transportation Investment (California)

TRB Transportation Research Board

AAA Mid-Atlantic. 2005. Maryland’s Transportation Network.

CRC. 1996. Michigan Highway Finance and Governance: In Brief. Nov.

CRC. 1997. Michigan Highway Finance and Governance. May.

CRC. 1998. Michigan Highway Finance and Governance: A One-Year Report Card.

CTI. 1996. Final Report. Jan.

Forkenbrock, D. J., and J. G. Kuhl. 2002. A New Approach to Assessing Road User Charges. Public Policy

Center, University of Iowa.

Orski, C. K. 2004. Two Senior Federal Transportation Ofﬁcials Share Their Views on the Future

Federal Role in Transportation Financing. Innovation Briefs, Vol. 15, No. 5, July–Aug.

Reno, A. T., and J. R. Stowers. 1995. NCHRP Report 377: Alternatives to Motor Fuel Taxes for Financing

Surface Transportation Improvements. Transportation Research Board, National Research Council,

Washington, D.C.

Road User Fee Task Force. 2003. Report to the 72nd Oregon Legislative Assembly on the Possible

Alternatives to the Current System of Taxing Highway Use Through Motor Vehicle Fuel Taxes. March.

TRB. 1996. Special Report 246: Paying Our Way: Estimating Marginal Social Costs of Freight

Transportation. National Research Council, Washington, D.C.

THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

71340_021_034 5/30/06 9:52 AM Page 22

Present Finance Arrangements

The ﬁrst two sections of this chapter describe features of the ﬁnance system

for highways and transit in the United States today, including the fees and use-

related taxes that users of the facilities pay; levels of spending; sources of funds;

responsibilities of federal, state, and local governments; and decision making on

budgets, project selection, and operations. As explained in Chapter 1, the con-

cern that adherence to the original principles of the ﬁnance system has eroded

over time has been one of the motivations to seek ﬁnance reforms. Therefore,

the ﬁnal section of the chapter examines developments that may affect the via-

bility of the ﬁnance system. These include trends in the share of highway user

fee revenues applied to purposes other than highways, adjustments of user tax

rates to allow for inﬂation and changes in costs, devolution of transportation

responsibilities to local governments, reliance on revenues other than user fees,

and revenue adequacy and stability.

Examination of the workings of the present ﬁnance system is a necessary ﬁrst

step toward designing improvements. If the present system is producing unsatis-

factory results, the structural sources of problems should be identiﬁed, and if the

system is performing well, it may be possible to build on its strengths. Chapter 3

will consider the problem of evaluating the performance of the ﬁnance system.

HIGHWAY FINANCE

This section presents aggregate nationwide data on spending for highways, fuel

taxes and other taxes and fees paid by highway users, and other sources of funds

for highway programs. The data and deﬁnitions are mainly from the Federal

Highway Administration’s (FHWA’s) annual compilation in the Highway Statistics

publication series. The ﬁnal two subsections brieﬂy outline administration and

71340_035_073 5/30/06 9:53 AM Page 23

decision making in the federal-aid program and state highway programs and the

historical origins of the present system.

Spending

Governments spent $136.4 billion to construct and operate highways in the

United States in 2004 (FHWA 2005a, Table HF-10). Highways are predomi-

nantly an activity of state governments: 60 percent of all spending and 72 per-

cent of all capital spending are by the states (Table 2-1). Highways accounted

for 9 percent of state and 4 percent of local general government direct expendi-

tures in 2003 (U.S. Census Bureau 2005a).

The capital spending share of total expenditures has declined since the 1960s

and 1970s. Since at least the 1980s (earlier data are not available), the fraction

of construction expenditures that is classiﬁed by the states as new construction

(that is, substantially new roads rather than reconstruction or upgrades of exist-

ing roads) has declined. For capital expenditures by state governments on roads

other than local roads, 39 percent was new construction in 1981, 33 percent in

1991, and 19 percent in 2004 (FHWA 1997, Table SF-212A; FHWA 2005a,

Table SF-12A).

Funding Sources

State and local governments dedicate, by law, certain revenues from highway

user fees and other taxes to pay for highways. They also receive federal grants

designated for highways and issue bonds with the proceeds dedicated to high-

ways. These sources of funds are described below. If they fall short of highway

spending, the difference is charged to general funds.

Identifying the sources of funds for specific government expenditures is

inherently ambiguous because revenues are fungible. To say that highway

expenditures come from a particular revenue source may be taken to mean that

THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

TABLE 2-1 Highway Spending by Level of Government and Function, 2004

(Percent Distribution) (FHWA 2005a, Table HF-10)

Federal State Local Total

Capital outlay 1 37 13 52

Maintenance and trafﬁc services – 11 16 27

Administration, research, and law enforcement 2 12 8 22

Total 3 60 37 100

NOTE: Payments of interest on debt and bond retirements are excluded. Spending does not include

grants to other levels of government for highway purposes.

71340_035_073 5/30/06 9:53 AM Page 24

when revenue from the source increases, spending increases, and that spending

falls when revenue falls, in like amounts (possibly with a time lag when there is

a trust fund, but eventually keeping spending and revenue in balance). The con-

nection between legally dedicated revenues and spending usually is imperfect

in the highway program and in similarly funded government activities. For

example, it will be seen below that when highway user fee revenues fell sharply

in the 1970s, highway spending slowed, but governments made up part of the

shortfall from other sources. The structure of transportation finance is best

understood as the result of two independent policy decisions: ﬁrst, how users

of transportation facilities should be charged; and second, what connections

should be established between the revenue raised from users and the level of

spending on facilities and services.

User Fees

Total receipts of highway user revenues as deﬁned by FHWA were $106.8 bil-

lion in 2004. FHWA deﬁnes this quantity to include revenue from any tax or

fee paid by owners or operators of vehicles that use public roads, as a con-

sequence of their use of the roads, and that is not paid by others. For example,

FHWA classiﬁes revenue from motor fuel taxes that apply only to fuel consumed

on public roads as a user revenue, but not sales tax collected on gasoline if the

state collects the tax at the same rate on all gasoline sales regardless of use. The

deﬁnition does not consider whether the revenues are dedicated to road expen-

ditures (FHWA 2004, IV-4–IV-5). In this chapter the FHWA deﬁnition is used.

Box 2-1 explains how the term “highway user fee” is used in this report.

Fuel taxes are the major user fee and account for nearly two-thirds of the total

(Table 2-2). The share of user fee revenue derived from fuel taxes has been stable

over the past 40 years except for a dip in the late 1970s to early 1980s. Most rev-

enues in the “other user taxes and fees” category in Table 2-2 are from vehicle reg-

istration and operator license fees. The majority of state and local user fee revenues

are from fuel taxes. However, 13 states, including California, Illinois, Michigan,

New Jersey, and Texas, collected more in registration and license fees than in fuel

taxes in 2004 (FHWA 2005a, Tables MV-2, MF-1). Tolls are collected on roads,

tunnels, or bridges in 33 states, although 38 percent of all tolls paid in 2003 were

collected in two states, New York and New Jersey. Nearly all toll facilities in the

United states are operated by publicly controlled special authorities.

The large discrepancies between the share of user fees collected by level of

government and spending shares by level of government (shown in Table 2-1)

reflect intergovernmental transfers and application of funds other than user

fee revenues to highway purposes. The federal government distributes nearly

all its revenues to the states and local governments through the federal-aid

highway program and federal mass transit assistance, and states distribute a

portion of their user fee revenues to local governments.

PRESENT FINANCE ARRANGEMENTS

71340_035_073 5/30/06 9:53 AM Page 25

THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

BOX 2-1

Highway User Fees

FHWA deﬁnes the term “highway user revenues,” in part, as follows

(FHWA 2004, IV-4–IV-5):

[Revenues generated by] taxes and fees imposed on the owners and oper-

ators of motor vehicles for their use of public highways are . . . highway-

user revenues.... The clearest example of a highway-user tax or fee is a

toll.... Most motor fuel taxes are classiﬁed as highway-user taxes.... For

motor fuel revenues to qualify as a highway-user revenue . . . , a motor-

fuel tax must be levied per unit of volume.... It must also apply only to

motor fuel [as] opposed to all petroleum products, . . . or provide a sepa-

rate rate for motor fuel.... Motor-vehicle registration fees, certiﬁcate-of-

title fees, driver-license fees, and other miscellaneous vehicle fees are all

highway user taxes.... Weight–distance taxes, oversize–overweight per-

mits and trip permits are even more directly related to highway use....

Those taxes and fees that target a broader base than highway users are con-

sidered to be a part of the general tax structure of the State, and are not

considered to be highway user taxes. . . . State sales taxes imposed on

motor vehicle sales typically are not highway user revenues. . . . When

motor vehicle sales are charged a separate tax rate from that imposed on

general sales transactions, the motor vehicle sales tax is considered high-

way user revenue.

Deﬁnition of highway user revenues or of highway user fees (as the pay-

ments are sometimes called) is complicated by the great diversity of fed-

eral, state, and local tax provisions that must be taken into account. The

correct definition depends on the reason that importance is placed on

motorists paying directly for their use of highways. If user fees are seen as

a means of promoting economic efﬁciency, the deﬁnition should be that

user fees are payments that function to some degree like market prices

(i.e., payments that reﬂect the cost of providing service and thus provide

an incentive to avoid wasteful use of highways). Historically, the user

fee–based highway finance system was not created with this efficiency

consideration in mind, but rather because it was seen as a stable and equi-

table mechanism for raising a desired level of revenues. Payments are

related to use of roads and to costs occasioned, but the correspondence is

very imperfect.

71340_035_073 5/30/06 9:53 AM Page 26

PRESENT FINANCE ARRANGEMENTS

Most kinds of payments listed in the FHWA deﬁnition of highway

user revenues (exceptions include tolls and trip permit fees) are taxes. It

may be objected that the term “user fee” (which is employed in this report)

is a mischaracterization of the special taxes charged to road users because

it implies a greater government obligation to road users than actually exists.

A fee is a payment in return for receipt of a service, while a tax can be

deﬁned as a mandatory payment to government for public purposes, in

return for which the government does not commit itself to provide any

speciﬁc service to the payer. By these deﬁnitions, postage stamps and tolls

on government-operated roads are fees rather than taxes. In the case of

motor fuel excise taxes, the government has no contractual obligation to

provide road services in return for tax payments, although it is commonly

argued that a commitment in the form of a political understanding at the

time of enactment does exist (Patashnik 2000, 2). Federal and state bud-

geting rules that tie highway spending to user fee revenues reinforce this

supposed commitment.

This report accepts the FHWA classiﬁcation of payments qualifying

as highway user revenues and refers to these payments as highway user fees.

By this classiﬁcation, highway user fees include all excise taxes paid on

highway fuels, vehicles, and parts that are not paid on similar purchases for

nonhighway use; highway vehicle registration and permit fees; driver’s

license fees; and tolls. For some state taxes, the FHWA classiﬁcation may

be questionable; however, the amounts involved in such cases do not

appear to be important. The classiﬁcation does not depend on whether the

revenue from the tax is dedicated to any particular use.

TABLE 2-2 Highway User Revenues by Level of Government and Source, 2004

(Percent Distribution) (FHWA 2005a, Tables HF-10, SDF, LDF, FE-10)

Federal State Local Total

Fuel taxes 31 32 1 64

Tolls – 6 2 8

Other user taxes and fees 3 24 1 28

Total 34 63 4 100

71340_035_073 5/30/06 9:53 AM Page 27

In the past 40 years (a period nearly matching the history of the federal-aid

highway program in its present form), some marked swings have occurred in

ﬁnance patterns, particularly in the late 1970s and early 1980s (Table 2-3). In

those years, constant-dollar user fee collections fell precipitously as a result of high

inﬂation, slow growth in highway travel caused by high fuel prices and recession,

and improvements in fuel economy caused by regulation and high fuel prices.

Spending fell in the same period, especially state government capital spending, at

least partially as a result of reduced revenues, although the capital spending

decline may also reﬂect the completion of major components of the Interstate sys-

tem in the period. Congress increased federal excise tax rates in the 1982 high-

way act, and many states increased rates in the same period, so by 1991 the ratio

of revenues to expenditures had returned to its level of the 1960s. Since the late

1990s the ratio has been declining.

The predominant role of state governments in highway ﬁnance and the ratio

of federal aid to total spending have not changed greatly over the period shown

in Table 2-3. The ratio of federal highway aid received by state and local govern-

ments to total highway expenditures has been 20 to 25 percent for most of the

period. The ratio of federal aid to highway expenditures (22 percent in 2004; see

Table 2-3) is smaller than the ratio of federal highway user fee revenue to total

user fee revenue (34 percent in 2004; see Table 2-2) because the federal govern-

ment devotes a larger share of its user fee revenue to transit than do state and local

governments.

Federal excise tax rates are 18.4 cents per gallon for gasoline and 24.4 cents

per gallon for diesel fuel (FHWA 2005a, Table FE-21B). Until 2005, gasohol (a

blend of gasoline and ethanol) was taxed at a rate of 13.2 to 15.4 cents per

THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

TABLE 2-3 Historical Trends in National Highway Spending, User Fee

Revenue, and Highway Travel (FHWA 2002; FHWA 2005a; FHWA 1997)

1961 1971 1981 1991 2001 2004

Expenditures ($, billions) 11 21 40 74 123 136

Expenditures (2001 $, billions) 52 75 71 90 123 128

State govt. expenditures (percent of total) 69 69 60 62 64 60

Capital outlay (percent of expenditures) 64 59 49 50 53 52

Federal aid (percent of expenditures) 25 24 27 20 23 22

Highway user fee revenues (2001 $, billions) 44 64 46 77 99 100

(User fee revenues)/expenditures (percent) 84 85 66 85 80 78

Highway travel (vehicle miles, trillions) 0.7 1.2 1.6 2.2 2.8 3.0

NOTE: Payments of interest on debt and bond retirements are excluded. Price index is gross domestic

product implicit price deﬂator (BEA 2002, 135; BEA 2005, 188–189).

71340_035_073 5/30/06 9:53 AM Page 28

gallon, depending on ethanol content. The gasohol excise is now collected at the

same rate as the gasoline tax, and gasohol producers are paid a rebate from the

general fund. In addition, federal excise taxes are collected on tires, large trucks,

and trailers, and trucks pay the annual federal heavy vehicle use tax. Sales-

weighted average state fuel tax rates in 2004 were 19.2 cents per gallon for gaso-

line and 20.0 cents per gallon for diesel fuel (FHWA 2005a, Table MF-121T).

Most states tax gasohol at the same rate as gasoline. Registration fees and miscel-

laneous other federal, state, and local taxes and fees (that is, all user fees except

fuel taxes and tolls) averaged $125 per registered vehicle in 2004 (FHWA 2005a,

Tables SDF, LDF, FE-210, VM-1).

The average of all user fees paid per vehicle mile of highway travel declined

(in 2001 dollars) from $0.06 per mile in the 1960s to $0.03 per mile by 1980

(Figure 2-1). The average fee has recovered somewhat, to $0.034 per mile today,

but remains well below the peak of the 1960s. Trends in tax rates are examined

in the ﬁnal section of this chapter.

State and federal tax and fee schedules discriminate between light and heavy

vehicles in an effort to collect revenues from different kinds of vehicles proportion-

ate to relative responsibilities for highway costs. At the federal level, a 12 percent

PRESENT FINANCE ARRANGEMENTS

0.005

0.01

0.015

0.02

0.025

0.03

0.035

0.04

0.045

0.05

0.055

0.06

0.065

0.07

1961 1966 1971 1976 1981 1986 1991 1996 2001 2006

Year

/mi (2001 dollars)

FIGURE 2-1 Average user fee, 1961–2004. (Sources: FHWA various years,

Table HF-10; FHWA 1997, Table HF-210.) Price index is gross domestic

product implicit price deﬂator (BEA 2002, 135; BEA 2005, 188–189).

71340_035_073 5/30/06 9:53 AM Page 29

excise tax on trucks over 33,000 pounds gross weight and on trailers and a per pound

excise on tires are credited to the Highway Trust Fund, and trucks over 55,000

pounds gross weight pay an annual federal fee of from $100 to $550 depending on

weight (FHWA 2005a, Table FE-21B). States also impose higher fees on trucks,

and a few states charge trucks a tax based on mileage. Large trucks pay higher aver-

age fuel tax per mile than light vehicles because they have lower fuel efﬁciency.

According to the 1997 U.S. Department of Transportation (USDOT) highway cost

allocation study, the average total user fee per mile paid to all levels of government

is six times higher for a combination truck than for an automobile. Combination

vehicles, which account for 5 percent of all vehicle miles, pay 19 percent of all user

fees in the USDOT estimates. The cost allocation study estimates did not count fed-

eral motor fuel tax revenues not credited to the Federal Highway Trust Fund as user

fees and so understate user fees according to the deﬁnition used elsewhere in this

chapter (USDOT 1997, Tables II-6, IV-8, IV-11). Proposals for better aligning

average fees with costs for automobiles and trucks are described in Chapter 6.

Other Revenue Sources

State and local governments legally dedicate the revenues from particular taxes

in addition to highway user fees to pay for transportation programs. Such taxes

are most commonly local property taxes and state and local sales taxes (Goldman

and Wachs 2003). Revenue from taxes dedicated by law to highway use, other

than highway user fees, was $15.4 billion in 2004, 11 percent of all highway

spending (FHWA 2005a, Table HF-10). This ratio has been nearly constant

over the past 40 years, although the portion derived from taxes other than prop-

erty taxes, including dedicated state sales taxes, has been growing.

In addition to the revenue of legally dedicated taxes, state and local govern-

ments appropriate funds from general revenues each year for spending on roads.

Comparing these general fund appropriations with total spending is difﬁcult,

because many jurisdictions deposit some part of their highway user revenue into

their general funds and then make appropriations for highways out of general

funds. Also, the federal government distributes about $1 billion per year from

general fund appropriations to state and local governments for highway purposes

through grant programs of various agencies (FHWA 2005a, Table FA-5). Highway

user fee revenue (whether dedicated to highways or not) equaled 78 percent of

highway spending in 2004, and revenue from dedicated taxes other than user fees

equaled 11 percent, so the net contribution from general revenue may be deﬁned

as the remaining 11 percent.

Debt Finance

Highway ﬁnance in the United States is commonly described as a pay-as-you-

go system, which is to say that debt ﬁnance is little used (except for toll roads)

THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

71340_035_073 5/30/06 9:53 AM Page 30

and spending tends to track revenues. The revenue ﬁgures in Tables 2-2 and 2-3

exclude bond issue proceeds, and the spending ﬁgures exclude interest payments

and debt retirement. State and local government bond issue proceeds for highway

uses in 2004 (excluding notes with maturities of 2 years or less) were $15.8 billion,

equal to 12 percent of spending. The volume of bonds issued for highways has

ﬂuctuated over the past 40 years, but this is a typical ratio for the period. Interest

payments and bond retirements in 2004 were $13.8 billion (FHWA 2005a,

Table HF-10). Toll facilities are major issuers of bonds.

Federal and State Highway Program Structure

The federal-aid highway program distributed $28.3 billion to the states in 2004 for

spending on highway construction, equal to 21 percent of all highway spending

that year (FHWA 2005a, Table HF-10). The rules of the program affect the total

of highway spending, the projects selected, and the performance of the highway

system. The main features of the federal-aid program are as follows (FHWA 1999):

• Periodic federal surface transportation acts provide multiyear funding

authorizations for federal highway and mass transportation capital grant

programs and set program rules and highway user taxes. Federal rules

include standards with regard to design, maintenance, and safety for proj-

ects making use of federal aid.

• The amounts authorized for each year in the surface transportation act are

distributed annually to the states. Most funds are apportioned according to

formulas speciﬁed in the act, within categorical programs. [The 2005 re-

authorization legislation—Safe, Accountable, Flexible, Efﬁcient Transporta-

tion Equity Act: A Legacy for Users (SAFETEA-LU)—funds six program

categories receiving $1 billion per year or more each and several smaller ones.]

Apportionment formulas include such factors as each state’s shares of high-

way lane miles, vehicle miles of travel, and Highway Trust Fund revenue col-

lections. The surface transportation acts provide contract authority, that is,

state spending that incurs a federal obligation may take place as soon as funds

are apportioned each year. This is in contrast to most federal programs, in

which amounts authorized may not be used until Congress enacts a second

law appropriating funds to pay for authorized spending.

• Federal-aid funds are available to the states for 4 years after they are distrib-

uted, but Congress regularly enacts annual limitations on the total amount

of federal-aid funds that may be obligated in the year, so states may not be

able to use the entire amounts authorized. The provision of contract

authority in multiyear surface transportation acts, together with the annual

obligation limitations, is regarded as granting the states greater certainty

and ﬂexibility than would reliance on annual appropriations.

PRESENT FINANCE ARRANGEMENTS

71340_035_073 5/30/06 9:53 AM Page 31

• Funds are appropriated annually to reimburse the states for the federal

share of expenditures (80 or 90 percent for most kinds of projects, speci-

ﬁed in the law) that the states have made on eligible projects.

• The highway user taxes collected by the federal government are deposited

in the Federal Highway Trust Fund (divided between a highway account

and a mass transit account), and payments to states are withdrawn from

the fund. The Highway Trust Fund is a bookkeeping device to make

apparent the relation of user fee collections to spending. Authorizations in

the surface transportation acts are limited by the balance in the fund and

the projected deposits from user tax revenues. The balance in the highway

account of the fund stood at $14.6 billion in 2004, the equivalent of about

6 months of disbursements (FHWA 2005a, Tables HF-10, FE-210).

Because the states are directly responsible for most highway spending, state

procedures with regard to programming and budgeting have great importance for

the performance of the transportation system. Most states have ﬁnance arrange-

ments analogous to those at the federal level, including trust funds and dedica-

tion of user tax revenue to highway uses. Only Alaska, Georgia, New Jersey, and

the District of Columbia credit most highway user revenues to general funds

rather than earmarking them for highways, transit, or other special purposes

(FHWA 2005a, Table DF).

Federal-aid highway program capital grants plus required matching funds

equal approximately 52 percent of all state and local government highway capital

spending. Federal-aid rules do not dictate state project selection (with the excep-

tion of certain projects speciﬁcally identiﬁed by Congress, as described below), but

they do inﬂuence the process. The mechanisms of inﬂuence include the following:

• As a practical ﬁrst priority in budgeting, states must provide sufﬁcient

matching funds, by program category, to ensure that all available federal

aid is obtained.

• The federal government imposes design standards on federal-aid projects

and oversees design and construction.

• Each federal-aid project must be listed in the State Transportation Improve-

ment Program (STIP) for the state. Federal regulations deﬁne the content

of the STIP, a multiyear capital program that lists all federal-aid highway

and transit projects by year and in priority ranking, with costs and fund-

ing sources identiﬁed. The STIP must show that the spending program for

federal-aid projects is consistent with expected sources of funds. Federal-

aid projects in metropolitan areas must be from improvement programs

approved by the local metropolitan planning organizations. Projects must

be shown to be in conformity with the State Implementation Plan for attain-

ing federal air quality standards, and the STIP must list non-federal-aid proj-

THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

71340_035_073 5/30/06 9:53 AM Page 32

ects that could affect air quality (USDOT 2003; Wisconsin Department of

Transportation 2004).

• Although only construction, reconstruction, and certain major mainte-

nance activities are eligible for federal aid, federal law requires states to

maintain roads constructed with federal aid to speciﬁed standards. States

also are required to have management systems for pavements, bridges, con-

gestion, and safety (23 USC 303). These involve systematic collection of

data on physical condition and performance and formal procedures for

planning and evaluating maintenance and construction schedules.

Despite federal requirements, a state with funds for capital spending in excess

of federal-aid matching requirements has a degree of ﬂexibility to minimize the

impact of the rules on its ability to carry out projects according to its own priori-

ties (TRB 1987, 49–64). Projects that have no federal-aid funding do not have to

comply with many federal requirements (for example, design requirements), and

the smaller the federal-aid share of total state spending is, the less importance the

division of federal aid into the various program categories has for actual state

spending priorities. The effects of the federal-aid program rules on state spending

and project selection have never been comprehensively studied. Some possible

impacts are discussed in Chapter 3.

TRANSIT FINANCE

Most transit services in the United States are operated by special-purpose author-

ities controlled by local and state governments. Transit was primarily a private-

sector industry until the 1960s, but publicly owned systems carried 50 percent

of all passengers by 1967 and 94 percent by 1980 (APTA 1981, 27). The indus-

try’s major sources of funds are passenger fares; other revenue related to trans-

portation operations (e.g., from advertising and chartered buses); revenue from

special taxes dedicated to transit; and other federal, state, and local government

aid (Table 2-4).

Federal grants are about one-sixth of all funds expended; the federal share has

declined from a high of nearly one-third in the early 1980s (Table 2-5). Most fed-

eral funding depends on revenue from the federal highway motor fuel tax, includ-

ing the $0.0286 per gallon share dedicated by Congress to the Mass Transit

Account of the Highway Trust Fund as well as funds in certain categories of the

federal-aid highway program that states and localities can transfer to transit.

Federal assistance includes formula grants for capital and operating expenditures

apportioned among urbanized areas according to population and transit service

characteristics and discretionary capital grants (in the New Starts and Bus Capital

programs) distributed to speciﬁc projects selected by Congress or the Federal

PRESENT FINANCE ARRANGEMENTS

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Transit Administration. The required state and local matching share for fed-

eral grants is 20 percent (that is, at least 1 state or local dollar for every 4 federal

dollars) for capital projects and 50 percent for operating assistance (APTA 2005,

1–4; USDOT n.d., 6-23–6-33). Eighty percent of federal assistance received in

2001–2003 was for capital expenditures (APTA 2005, Tables 55, 66).

State and local funding derives from dedicated taxes and general revenue.

Sales taxes are the most important form of state and local dedicated tax and

accounted for 16 percent of transit funding in 2000 (Table 2-4). State and local

highway user fee revenue devoted to transit was $3.2 billion in 2000, equal to

9 percent of all transit expenditures, and $4.4 billion, 11 percent of expenditures,

in 2003. The total of federal, state, and local highway user fee revenue devoted to

THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

TABLE 2-4 Public Transit Sources of Funds,

2000 (Percent of Total Funds)

Item Percentage

Fares 25

Other revenue from transport services 3

Federal grants

From dedicated federal fuel tax revenue 14

From general fund 3

State government sources

From general revenue 7

From dedicated sales tax revenue 2

From other sources 9

Local sources

From general revenue 8

From dedicated sales tax revenue 14

From other sources 16

Total 100

SOURCES: USDOT n.d., p. 6-22; FTA n.d. a, Table 1. [The

original source is the National Transit Database (NTD),

compiled by USDOT from transit agency reports. The

NTD shows that dedicated state and local fuel taxes were the

source of $500 million of transit funding in 2000. In con-

trast, reports of state and local governments to USDOT tab-

ulated in Highway Statistics (Tables SDF, LDF, HDF) show

$1.3 billion in state fuel tax revenue and $3.2 billion in total

state and local highway user fee revenue distributed to tran-

sit in 2000 (in addition to $5.1 billion in federal highway

user revenue to transit). Highway user fee revenue devoted

to transit at local ofﬁcials’ option, rather than as a matter of

law, may account for some of the discrepancy.]

71340_035_073 5/30/06 9:53 AM Page 34

transit equaled 24 percent of transit expenditures in 2000 and 25 percent in 2003

(FHWA 2001; FHWA 2005a, Table HF-10; APTA 2005, Tables 55, 66). The

section below on nonhighway uses of highway user fee revenue further describes

transit applications of these revenues.

Passenger fare revenues have equaled about one-fourth of annual expenditures

since the 1980s. Transit ridership and constant-dollar fares have been more or less

constant over the past 40 years, while total and capital expenditures per passenger

have risen (Table 2-5). These trends are in contrast to the experience of the high-

way sector: average highway user fees (per vehicle mile) have fallen over this period,

but highway use has increased substantially and average public (Table 2-3) and pri-

vate (Wilson 2002, 40) highway expenditures per vehicle mile have fallen.

The growth in transit spending without corresponding growth in fare revenue

or federal assistance has stressed state and local government transportation bud-

gets. Until the mid-1980s, revenue sources other than state and local government

covered the majority of transit expenditure. (As Table 2-5 shows, fare revenue was

sufﬁcient to cover most operating and capital expenditures until the early 1970s;

by 1981 fares had declined to 21 percent of expenditures but federal aid covered

32 percent.) However, by 2003 the share of spending covered by these sources

had declined to less than 40 percent. (Fares remained at 22 percent but the

federal-aid share had declined to 17 percent.) State and local subsidies to transit

PRESENT FINANCE ARRANGEMENTS

TABLE 2-5 Trends in Transit Expenditures, Sources of Funds, and Transit Use

1961 1971 1981 1991 2001 2003

Expenditures ($, billions) 1.5 2.2 12.7 22.1 36.7 41.3

Expenditures (2001 $, billions) 7.4 8.0 22.2 27.0 36.7 39.8

Capital expenditures (percent of total) 33 31 32

Federal grants (percent of expenditures) 0 13 32 17 19 17

Fare revenue (percent of expenditures) 88 74 21 27 24 22

Average fare per trip (2001 $) 0.72 0.87 0.57 0.85 0.92 0.93

Average expenditure per trip (2001 $) 0.83 1.17 2.68 3.14 3.80 4.22

Passenger trips (billions) 8.8 6.8 8.3 8.6 9.7 9.4

NOTE: Price index is gross domestic product implicit price deflator (BEA 2002, 135; BEA 2005,

188–189). Expenditures for 1991–2002 are the sum of capital and operating funding received from

all sources. The American Public Transportation Association does not report capital funding or

expenditures before 1988; 1961–1981 expenditures in the table were estimated on the basis of oper-

ating funding and estimates of total expenditures prepared by Wilson (2001, 8–11). Passenger trip

data before 1981 are not strictly comparable with later years’ data because of changes in the deﬁni-

tion of a trip and in data collection procedures (APTA 1992, 64).

OURCES: APTA 2005; APTA 1992; APTA 1978.

71340_035_073 5/30/06 9:53 AM Page 35

reached $25 billion in 2003, an increase of 135 percent in constant dollars since

1981 (Figure 2-2). Ridership grew 14 percent in the same period (Figure 2-3).

Transit use and spending are highly concentrated in a small number of met-

ropolitan areas. New York City Transit, the largest system, accounted for 30 per-

cent of all U.S. transit passenger trips and 18 percent of transit spending in 2002

and received 10 percent of all federal transit assistance. The ﬁve largest systems in

terms of ridership (the central systems in New York City, Chicago, Los Angeles,

Washington, D.C., and Boston) had 49 percent of passengers and 33 percent

of expenditures and received 27 percent of federal assistance. If independent

suburban and commuter services are counted, these ﬁve metropolitan areas’ com-

bined share of nationwide ridership is well over half (FTA n.d. b).

COMPARISONS WITH OTHER INFRASTRUCTURE AND

INTERNATIONAL PRACTICES

The preceding two sections described arrangements for ﬁnancing highways and

transit in the United States. In assessing alternatives to these arrangements, a

broader perspective derived from comparisons with ﬁnance arrangements for

THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

1961 1966 1971 1976 19811986 1991 1996 2001 2003

Ye ar

Dollars (2001 millions)

Expenditures (capital and operating)

Fare revenue

Federal assistance

FIGURE 2-2 Constant-dollar annual transit expenditures, fare revenue, and

federal assistance, 1961–2003. (Sources: APTA 2005; APTA 1992; APTA

1978.) Price index is gross domestic product implicit price deﬂator (BEA 2002,

135; BEA 2005, 188–189).

71340_035_073 5/30/06 9:53 AM Page 36

other U.S. public utilities and transportation systems in other countries may be

helpful. The characteristic features of these arrangements include the degree of

reliance on revenue from users and other sources, the structure of user fees, and

the spheres of involvement of the national, regional, and local governments and

of the private sector. Such comparisons can suggest options for alternative ﬁnance

arrangements. They may reveal how alternative ﬁnance arrangements have inﬂu-

enced the performance of the various public utility sectors—the quality of ser-

vices and the public return on investments. Comparisons also may provide some

insight into why U.S. highways and transit are ﬁnanced as they are—whether

ﬁnance arrangements arise from intrinsic characteristics of these industries related

to the costs of producing the services they provide or the nature or social signiﬁ-

cance of these services, or, alternatively, whether the arrangements are more the

result of the historical development of the industries or of external factors.

The comparisons summarized in Tables 2-6 and 2-7—among highways,

transit, and other government-provided infrastructure services in the United

States and among highway systems in Europe and the United States—show that

diverse ﬁnancial arrangements exist. They suggest that differences in ﬁnance prac-

tices may arise more often from historical accident than from inherent differences

among the industries. In the United States in 2002, governments spent $39 bil-

lion to construct and operate public transit, $133 billion for highways, $22 bil-

lion for airports and air trafﬁc control, $1 billion for inland waterways navigation

facilities, and $65 billion for local water and sewerage systems (Table 2-6). Local

PRESENT FINANCE ARRANGEMENTS

2000

4000

6000

8000

10000

12000

1961 1966 1971 1976 1981 1986 1991 1996 2001 2006

Year

Trips (millions)

FIGURE 2-3 Annual unlinked transit passenger trips, 1961–2003. (Sources:

APTA 2005; APTA 1992; APTA 1978.)

71340_035_073 5/30/06 9:53 AM Page 37

THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

TABLE 2-6 Sources of Funds and Expenditures for Public Water and Sewer

(2001), Transit (2002), Highway (2002), Airport and Aviation (1999), and

Inland Waterways Navigation (2002) Facilities

Water Airport and Inland

and Sewer Transit Highway Aviation Waterways

User fee revenue ($ billions) 56.6 8.6 100.5 21.1 0.1

Total expenditures ($ billions) 64.8 39.3 132.6 21.8 0.8

Capital 12.8 68.2 0.3

Operating 24.8 59.0 0.5

User fee revenue/expenditures 0.87 0.22 0.75 0.97 0.12

Federal grants and direct

spending ($ billions) 3.2 6.6 32.9 10.7 0.8

(Federal grants and direct

spending)/expenditures 0.05 0.17 0.25 0.49 1.0

NOTE: Water and sewer excludes federal water projects. Total expenditure amounts include interest

on debt. Airport and aviation includes the federal air trafﬁc control system.

OURCES: FHWA 2003, Table HF-10; U.S. Census Bureau various years, Table 1; BTS n.d., Tables

2-A, 3-A, 13-A, 14-A; CBO 2002, 7; IWR 2004; CBO 2005, 94; APTA 2004.

governments are the direct providers of most transit, water and sewer, and pub-

lic airport services; states provide the majority of highway services; the federal gov-

ernment operates air trafﬁc control and the inland waterways. Infrastructure

provided by the private sector accounts for no more than a small fraction of

expenditures in all these industries. Federal grants and direct federal spending (in

the years shown in Table 2-6) equal 25 percent of spending for highways, 17 per-

cent for transit, 49 percent for airports and air trafﬁc control, and 5 percent for

water and sewer.

No rule that determines the extent of federal involvement or the extent to

which public expenditures are covered by user fees in these industries is evident.

Substantial federal involvement in highways and in airports and air trafﬁc con-

trol and low involvement in water and sewer may be roughly consistent with the

mix of national and local services that these systems provide. Federal grants to

water and sewer were much higher in the 1970s and 1980s than today. The pur-

pose of the grants was to reduce water pollution; the grants may have reﬂected

the regional nature of pollution impacts (EPA 2003, 3). Federal involvement in

transit is high compared with water and sewer, another mainly local service, but

is declining over time.

Highways, local water and sewer, and airports and air trafﬁc control are

largely paid for by fees and taxes collected from users. (Airport revenues include

71340_035_073 5/30/06 9:53 AM Page 38

fees paid by airlines and rents paid by concessions, which are indirectly derived

from air travelers.) In contrast, in the years shown in Table 2-6, transit fare rev-

enues covered 22 percent of expenditures of government-provided transit services,

and waterway user fees (a tax on commercial towboat fuel) covered 12 percent of

inland waterways navigation expenditures. Some of this variation reﬂects the rel-

ative ease of measuring and charging for individual uses. For example, the gap

between highway user fee revenue and expenditures is in part the consequence of

local governments’ lack of practical methods of charging for use of local streets.

Road user fees and highway ﬁnance in Europe show some marked contrasts

to U.S. practices. Most notably, revenues derived from road users greatly exceed

highway spending, by 2:1 on average in western Europe and by up to 3:1 in some

countries (for example, €38 billion in revenue versus €15 billion in expenditures

in Germany and €23 billion revenue versus €8 billion expenditure in the United

Kingdom in 1994) (Table 2-7). The relative importance of various kinds of fees

PRESENT FINANCE ARRANGEMENTS

TABLE 2-7 Road User Revenues and Highway Expenditures in Europe

France Germany United Kingdom Western Europe

Sources of road user revenues

(percent of total)

Taxes related to vehicle ownership

27 22 47 33

Fuel tax 57 78 53 55

Tolls and permits 8 – – 4

Other 8 – – 8

Road user revenues

(ECU billions) 38.4

23.3

119.7

Expenditures (ECU billions) 15.0 8.3 60.0

Revenue/expenditures 2.6 2.8 2.0

Distribution of expenditures by level

of government (percent, 1990)

Central 23 39 60 48

Regional 12 15 – 12

Local 65 46 40 40

NOTE: ECU = European currency units; equal to about $1 in the period. Dash indicates negligible.

Includes vehicle purchase taxes, import duties, and registration and license fees.

Fourteen countries, about 1993.

Includes fuel taxes, annual vehicle registration fees, tolls, and permit fees.

For Germany and the United Kingdom, 1994; for Western Europe, 11 countries, various years.

Seventeen countries.

OURCE: Farrell 1999, 44–62.

71340_035_073 5/30/06 9:53 AM Page 39

is roughly similar to that in the United States: fuel taxes generate over half of rev-

enues; tolls on average generate 4 percent but up to one-eighth of the total in

some countries. The national government is directly involved in road construc-

tion and operation throughout Europe.

Most European governments credit fuel tax and vehicle fee revenues to gen-

eral funds, but Germany, Switzerland, the Netherlands, Belgium, and Greece

dedicate speciﬁc shares of these revenues to roads; and the Netherlands, Belgium

and Greece have set up infrastructure funds with dedicated revenues and with dis-

bursements limited to certain types of projects (Farrell 1999, 59–61). A high per-

centage of expressway mileage in several European countries is tolled (88 percent

in Italy and 82 percent in France in 1995), but because the expressway network

is not extensive, tolls do not account for a large share of total highway program

revenues (Farrell 1999, 62–66).

Until the past decade, with few exceptions, toll roads were operated by pub-

lic or quasi-public entities. However, Italy and Portugal privatized their major toll

road providers through public stock offerings in 1999, and Spain sold some of its

state toll road operators in 2003. France has begun to privatize its toll roads (Toll

Roads News 2005).

TRENDS IN THE EVOLUTION OF THE FINANCE SYSTEM

Chapter 1 identiﬁed three arguments that have been used to motivate trans-

portation ﬁnance reform. The ﬁrst is that future oil price increases, advances in

automotive technology, and new pollution and energy regulations will substan-

tially reduce fuel tax revenues and thereby threaten the viability of the present

ﬁnance system. The second is that the viability of the present system is threat-

ened by an accumulation of structural changes that have caused it to diverge

from the original concept of the user fee–trust fund system. The third is that,

regardless of the stability of existing arrangements, reform presents opportuni-

ties for increasing the public beneﬁts of transportation spending by improving

operations of facilities and by directing funds to the best projects.

These lines of argument obviously are not mutually exclusive, and all three

might be reasonable grounds for reform. This section examines the evidence sup-

porting the second argument, which concerns the erosion of support for the user

fee ﬁnance principle and the consequent decline in effectiveness of the present

ﬁnance system. A premise of this argument is that the historical system, which

reached its full development with the federal-aid highway act of 1956 and in the

state programs with features parallel to the federal, served the public interest well.

(Chapter 3 examines the evidence for this claim.) The basic features were that rev-

enues derived from highway users were fully dedicated to paying for highway con-

struction and operation and that these revenues covered all such costs other than

THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

71340_035_073 5/30/06 9:53 AM Page 40

those for local streets. Trust funds were established to enforce the connection

between user fee revenue and spending. The arrangement was perceived as fair by

the taxpayers, generated revenues for a substantial highway program, and served

efﬁciency to some extent since users recognized that any upgrading of highways

required increases in fees.

However, according to this argument, in the evolution of transportation

ﬁnance arrangements over the past 30 years, this original conception has been

compromised:

• Adherence to the user-pays ﬁnance principle has weakened as a result of

devolution of responsibilities to local governments (which are less capable

of collecting user fees and historically rely mainly on other revenue

sources); diversion of highway user revenue to nonhighway purposes;

resort to expedient sources of revenue in the face of pressing needs; and

growing demands for transit improvements, which are unable to cover a

major portion of their costs with fees.

• In part as a result of these changes in the structure of the program (which

have tended to undermine the basis of its political support) but also on

account of broader trends (the “taxpayer revolt” opposing growth in state

and local government spending), the public and legislators no longer sup-

port fuel tax rates and fees necessary to sustain the programs, and the merit

of the user-pays principle is no longer recognized.

• To the extent that the user fee ﬁnance system historically has had a positive

effect on program performance, divergence from the principle has been

harmful.

The subsections below describe developments in ﬁve areas of ﬁnance practices:

• Application of highway user fee revenue to nonhighway purposes and ear-

marking of federal aid,

• Legislative action to adjust user fees to keep up with inflation and cost

changes,

• Devolution of responsibilities to local governments and related trends in

reliance on user fee revenue,

• Revenue adequacy, and

• Revenue stability.

PRESENT FINANCE ARRANGEMENTS

For example, on decline in public or political support for user fee ﬁnance, see CTI 1996, Road User

Fee Task Force 2003, and Giglio and Williams 2001; on conﬂicts with the user fee ﬁnance principle in

recent trends in ﬁnance, see CBO 1998, 2–3; on growing local burdens and transit needs, see McMillan

2004 and Puentes 2004; on revenue diversions weakening the federal highway program, see Utt 2004

and Roth 2005.

71340_035_073 5/30/06 9:53 AM Page 41

Changes in these ﬁve areas of practice are indicators of the extent to which the

ﬁnance system has departed from its original conception and its effectiveness as

a funding mechanism has been altered.

Application of User Fee Revenue to Nonhighway Purposes and

Earmarking of Federal Aid

As Chapter 1 noted, the practice of dedicating highway user revenues to pur-

poses other than highways has been controversial. Highway program supporters

sometimes have claimed that the accretion of diversions is a threat to the viabil-

ity of the present ﬁnance system. Transit advocates and others argue that tran-

sit and the other uses to which highway-derived revenues have been dedicated

are as reasonable applications of the revenue as is highway construction, and they

object to the term “diversion” as implying that highway programs have a pro-

prietary claim to the revenue.

Chapter 3 will present evidence that providing subsidies to transit and rais-

ing revenues from highway users that exceed the highway agency’s cost of provid-

ing roads both can be justiﬁable practices, and that highway travelers beneﬁt from

transit’s impact on highway congestion. However, regardless of the merit of argu-

ments in favor of dedicating highway user revenues to transit or other nonhigh-

way purposes, it is reasonable to suppose that the growth of such uses could affect

the viability of the highway ﬁnance system by weakening its political support

among highway users. Constituencies that might be expected to oppose nonhigh-

way uses of revenues (or to cease to support maintaining highway user fees once

such uses become large) include trucking companies and motorists who reside in

nonmetropolitan areas.

Of $106.8 billion in highway user revenues collected in 2004 by the federal,

state, and local governments, $10.7 billion was devoted to mass transit (either

dedicated by law to transit, as the federal fuel tax revenues credited to the Mass

Transit Account of the Highway Trust Fund, or allocated to transit at the discre-

tion of local ofﬁcials, for example, through the ﬂexible fund provisions of the fed-

eral-aid highway program). In addition, $10.2 billion was credited to general

funds or dedicated to purposes other than highways and transit. The share of state

and locally collected highway user revenues that is devoted to purposes other than

highways and transit grew from 10 percent in 1991 to 13 percent in 2004 (FHWA

1997, Table HF-210; FHWA 2005a, Table HF-10). As described above, the

total spent on highways exceeds highway user fee revenue, primarily because local

governments fund most of their street and road expenditures from general or

non–user fee revenue sources. States also devote funds from nonhighway sources

to highways. In national totals, states’ revenues from highway users nearly equal

their highway spending: the sum of all state-imposed highway user fee revenues

and Federal Highway Trust Fund aid received by states was $94.7 billion in 2004

THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

71340_035_073 5/30/06 9:53 AM Page 42

and current spending by states for highways plus state grants for highways to local

governments was $95.3 billion (FHWA 2005a, Table HF-10). However, the bal-

ance between revenue and spending varies from state to state (FHWA 2005a,

Tables DF, SF-1, SF-2).

The Federal-Aid Highway Act of 1956 created the Highway Trust Fund and

dedicated to the fund all revenues from a set of excise taxes on highway fuels, vehi-

cles, and parts, as well as an annual fee paid by operators of large trucks. Since

1983, a portion of the fuel tax (presently 2.86 cents per gallon) has been dedi-

cated to mass transit. Since 1987, a small portion of the fuel tax (0.1 cents per

gallon) has been devoted to the Leaking Underground Storage Tank Trust Fund.

From 1990 until 2005, a portion of fuel taxes (2.5 cents per gallon from 1990 to

1993, 6.8 cents per gallon from 1993 to 1995, and 4.3 cents per gallon from 1995

to 1997 on all fuels, and 3.15 or 2.5 cents per gallon on gasohol only from 1997

to 2003) was credited to the general fund. The fraction of federal highway user

revenues dedicated by federal law to nonhighway uses peaked at about 30 percent

in the mid-1990s and has declined since (Figure 2-4).

PRESENT FINANCE ARRANGEMENTS

1981 1986 1991 1996 2001 2004

Year

ercent

Percent not devoted to highways

Percent not devoted to transport

FIGURE 2-4 Percentage of federal highway user revenues not devoted to high-

ways or transport, 1981–2004. (Sources: FHWA various years, Table HF-10.)

71340_035_073 5/30/06 9:53 AM Page 43

The preamble of the 1991 act reauthorizing the federal surface transporta-

tion aid program (ISTEA, the Intermodal Surface Transportation Efﬁciency

Act) declared a new emphasis on intermodalism for the program: “It is the pol-

icy of the United States to develop a National Intermodal Transportation System

[which shall consist of all forms of transportation in a uniﬁed, interconnected

manner . . .]” (P.L. 102-240). ISTEA granted limited ﬂexibility to state and local

governments to use federal aid drawn from the Highway Trust Fund for transit

and for nonhighway freight projects, and it increased the inﬂuence of local gov-

ernments in project selection. Under the terms of two grant categories intro-

duced in the 1991 act (the Surface Transportation Program and the Congestion

Mitigation and Air Quality Program), states may choose to use grants for high-

way or nonhighway transportation purposes. These two categories constituted

24 percent of federal highway authorizations from 1998 through 2003. In 2004,

states transferred $1.1 billion of federal-aid funds from highway programs to tran-

sit (FHWA 2005a, Table HF-10).

Out of $104.8 billion in spending at the state level for highways and transit

in 2004 (including grants to local governments and to transit operators but exclud-

ing direct spending of independent transit operators owned by states), $9.5 bil-

lion, or 9 percent, was for transit. Highway user revenues dedicated to state transit

programs or transit grants equaled less than half of this amount (FHWA 2005a,

Tables MT-1A, MT-1B, HF-10, DF). Distribution of state highway user fee rev-

enue for transit purposes is concentrated in a few states. In 2004, three states—

New York, Pennsylvania, and Maryland—accounted for 58 percent of such

distributions; 23 percent of highway user fee revenues collected by these three state

governments was devoted to transit. In the remaining states, 3 percent of state

highway user fee revenue was devoted to transit (FHWA 2005a, Table SDF).

Although these shares of spending are disproportionate to relative use [1.8 per-

cent of vehicular trips are by transit (Hu 2004, Table 7)], it is not evident that

state transit spending is large enough nationwide to have a major impact on state

highway programs.

The federal excise tax rate on gasohol (a blend of gasohol and ethanol) used

as a highway fuel was lower than the rate on gasoline from 1979 through 2004.

The data in Figure 2-4 reflect the crediting of part of gasohol tax revenue to

the general fund, but not the lower tax rate. Taxing gasohol at the same rate

as gasoline and depositing all revenues in the Highway Trust Fund would have

increased trust fund deposits by about $1.6 billion (5 percent) in 2002. The

General Accounting Office projected in 2002 that this forgone revenue would

grow to $2.2 billion per year by 2012 if the present tax treatment of gasohol

continued (Hecker 2002, 25). Legislation enacted in 2004 (the American Jobs

Creation Act of 2004, P.L. 108-357) contained a provision setting the gaso-

hol rate equal to the rate on gasoline and crediting all revenue from the tax to

the Highway Trust Fund as of January 1, 2005. The gasohol subsidy via the

THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

71340_035_073 5/30/06 9:53 AM Page 44

Highway Trust Fund was replaced with a subsidy representing a loss to the

revenues of the general fund in the form of tax credits that gasohol producers

earn for payment of the excise tax.

Congressional earmarking is a second practice affecting the use of federal-

aid funds that has been the subject of controversy. A small but growing pro-

portion of federal funding for highways is devoted to highway projects identiﬁed

by Congress rather than to the normal grant programs. The latter provide

funds, apportioned among the states according to formulas (taking into account

population, trafﬁc, and other state characteristics), that states and local govern-

ments can apply to projects that they select. If earmarking curtailed funding of

the highest-value highway projects, then its financial impact on the highway

program would be analogous to the impact of applying funds to nonhighway

uses. Authorizations for projects specifically designated by Congress jumped

from about 1 percent of the highway program in the 1982 and 1987 federal-

aid highway acts to 5 to 6 percent in the 1991 and 1998 acts and to over 10

percent in the 2005 surface transportation aid program reauthorization legisla-

tion (SAFETEA-LU) (Table 2-8).

The impact of this practice depends on whether the projects Congress

chooses have greater beneﬁts than the projects that the states would choose if

they received the funds through normal grants. To the extent that state and local

governments have well-developed sources of information on project beneﬁts and

formal and open processes for setting priorities, there are grounds for concern

that federal earmarking may divert some funds from higher-payoff to lower-

payoff projects. State officials report that members of Congress sometimes

solicit their state departments of transportation for nominations for projects for

earmarking from among projects that are already in state capital plans and at

PRESENT FINANCE ARRANGEMENTS

TABLE 2-8 Earmarked Projects in Federal-Aid Highway Acts

Percent of

Total Title I Authorization for

(Highways) Demonstration, High-

Amount Other Earmarks Authorization Priority, or Other

Act ($ billions) No. of Projects ($ billions) ($ billions) Earmarked Projects

STAA, 1982 0.6 11 0.1 48.2 1.4

STURAA, 1987 1.0 152 0.1 67.1 1.6

ISTEA, 1991 6.2 539 1.0 120.8 6.0

TEA-21, 1998 9.4 1,850 1.4 171.1 6.3

SAFETEA-LU, 2005 14.8 5,700 6.3 199.5 10.6

NOTE: STAA = Surface Transportation Assistance Act; STURAA = Surface Transportation and Uniform

Relocation Assistance Act; TEA-21 = Transportation Equity Act for the 21st Century.

OURCES: HUF 1983; HUF 1987; USDOT 1991; USDOT 1998; FHWA 2005b.

Demonstration, Priority, or

High-Priority Authorizations

71340_035_073 5/30/06 9:53 AM Page 45

advanced stages of preparation. These interactions may reduce the distorting

effect of earmarking on project selection.

In contrast with some other federal infrastructure grant programs (in par-

ticular, the water resources development program) in which authorized projects

frequently fail to receive appropriations of funds, in the federal-aid highway pro-

gram all earmarked projects authorized to be funded from the Highway Trust

Fund have federal funds available. Under the terms of the highway program,

authorized amounts become available for obligation without further action by

Congress. Apparently the majority of earmarked highway projects eventually are

carried out, but many are not, in part because earmarked amounts often fall well

short of project costs and projects do not correspond to states’ priorities (GAO

1995, 25–26).

Although the fraction of federal funding that is earmarked for speciﬁc proj-

ects is growing, it remains small in the highway program compared with some

other federal transportation programs. In the 5-year federal transit assistance pro-

gram authorized in 2005 (SAFETEA-LU Title III), about three-quarters of grants

to state and local governments are apportioned by formula and one-quarter are

earmarked or discretionary (FTA 2005). Substantial amounts of discretionary

funds are earmarked. Most inland waterways and ports authorizations are for

speciﬁcally identiﬁed projects.

Legislative Adjustments of User Fee Rates

Because fuel tax rates are defined in cents per gallon, state and federal legisla-

tive action is required to adjust for the effects of inflation on revenues. In con-

trast, sales taxes or income taxes automatically generate higher revenues in

nominal dollars as prices and wages rise. This dependence on regular legislative

action, coupled with allegedly increasing political resistance over time to tax

rate increases in general, is commonly cited as a principal disadvantage of

reliance on the fuel tax as the main revenue source for transportation programs.

For example, a background paper for the Transportation Research Board’s 2000

National Finance Conference cited “political barriers to raising user taxes” as one

of the “fundamental structural problems” of the current highway ﬁnance system

and observed:

Fuel taxes are regarded as just another tax, and politicians risk losing their jobs

if they raise fuel taxes to meet the full costs of the highway system. . . .

[I]ncreases in user fees have been few and far between. During the 1980s,

states raised their own fees to match inflation on a regular basis. . . . By the

1990s, the number of states increasing their gas tax had dropped. . . . Federal

taxes dedicated to transportation had not been raised since the famous nickel

increase in 1982 until the enactment of TEA-21. (Giglio and Williams 2001,

199–200)

THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

71340_035_073 5/30/06 9:53 AM Page 46

Similarly, the California and Oregon transportation ﬁnance studies summarized

in Chapter 1 both assume that future substantial increases in fuel tax rates will

not be a feasible solution to funding problems.

It has been argued that legislatures’ failure to adjust fuel tax rates arises not

simply from inattention, unpopularity of taxes in general, or competition from

other programs for resources, but from an inherent structural ﬂaw of the fuel tax.

The Federal Highway Administrator expressed this view as follows (Peters 2004):

In the 1950s and ’60s, when the interstate system was built, a gas tax made sense

because virtually every driver beneﬁted from a new, nationwide highway system.

But today, capacity and maintenance are largely urban and suburban problems

unique to the short lengths of highway used by commuters. Raising gas taxes

does little or nothing to improve commuter congestion and punishes the millions

of drivers and businesses that don’t use busy urban highways.

In other words, according to this argument, needs are concentrated (on urban

roads and transit, and primarily in a small number of highly congested urban

areas) but the revenue source is broadly based, so many voters oppose tax increases

because they see the beneﬁts going elsewhere. This argument ﬁnds support in

reports of recent state transportation ﬁnance debates indicating that rural and

small-town legislators perceive that their constituents tend to drive a lot and

hence pay high taxes, while pressures to increase spending are strongest in urban

areas (Montgomery 2004; Barnes 2005).

As the ﬁrst section of this chapter described, in spite of these potential obsta-

cles to maintaining highway user fee revenue, the average constant-dollar user fee

paid per vehicle mile of highway travel has been fairly constant since the late

1970s. The average state gasoline tax rate also shows no consistent trend over this

period (Figure 2-5). The rate is higher today than during the 1980s, although it

has declined in the past decade. The frequency of revisions of state gasoline tax

rates has slowed. About four states per year changed the rate in the past decade

compared with eight per year in the 1980s (Figure 2-6), but the decline may be

attributable, at least in part, to the slowing of inﬂation during the period. At the

end of 2004, gasoline excise tax rates in 23 states were the same as or lower than

the rates in 1994, although the rates in 11 of the 23 states remained above the

national average of $0.191 per gallon. Only ﬁve states had rates below $0.15 per

gallon (FHWA 2005a, Table MF-205).

Not all states depend on legislative action to change rates. At least nine states

(Florida, Iowa, Kentucky, Maine, Nebraska, New York, North Carolina, West

Virginia, and Wisconsin) have variable rate cents-per-gallon gasoline taxes. In ﬁve

of these states (Florida, Nebraska, New York, North Carolina, and Wisconsin),

the tax rate was adjusted nearly every year from 1998 to 2004 without legislative

action (FHWA 2003, Table MF-121T; ARTBA 2004; AASHTO Journal 2005).

Methods of indexation vary, and the effects on revenue have sometimes not been

PRESENT FINANCE ARRANGEMENTS

71340_035_073 5/30/06 9:53 AM Page 47

those intended (Ang-Olson et al. 2000). (See Chapter 6.) Wisconsin has repealed

its automatic adjustment after 2006. Several states collect sales taxes on highway

motor fuels, although revenues from these taxes are generally not dedicated to

highway use.

In assessing the willingness of state legislatures to adjust highway user taxes,

it is instructive to compare overall state government tax effort with highway user

fee revenues. In the 1960s and 1970s, revenue from all state taxes grew much

faster than state highway user fee revenue (Figure 2-7). In the 1980s and 1990s

the difference lessened, although in recent years total state tax revenues have con-

tinued to grow faster than highway-related revenues. In the period shown in

Figure 2-7, the sphere of state government responsibilities was expanding.

Consequently, highways’ share of state government total expenditures (includ-

ing transfers to local governments) fell from 23 percent in 1960 to 15 percent in

1970 and 7 percent in 2002 (U.S. Census Bureau 2005b, Table 438; U.S.

Census Bureau 1976, Table 439).

The history of changes in the rate of the federal excise tax on gasoline since

the 1956 federal-aid highway act is as follows:

THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

1981 1986 1991 1996 2001 2004

Year

Tax rate

(

2001 cents

gal

)

FIGURE 2-5 Sales-weighted constant-dollar average state gasoline tax rate,

1981–2004. (Sources: FHWA 1987; FHWA 1997; FHWA 2005a, Table MF-

205.) Price index is gross domestic product implicit price deﬂator (BEA

2002, 135; BEA 2005, 188–189).

71340_035_073 5/30/06 9:53 AM Page 48

Year Rate ($/gallon)

1956 0.03

1959 0.04

1983 0.09

1987 0.091

1993 0.184

1996 0.183

1997 0.184

In constant dollars, the rate today is about 7 percent higher than in 1956. The

diesel fuel rate increased from $0.03 per gallon in 1956 to $0.244 per gallon

since 1997. The rates for the excise tax on sales of new large trucks and trailers

and the heavy vehicle use tax (an annual federal fee for all large trucks in use)

were last increased in 1984 (FHWA 1997, Tables FE-101a, FE-101b; FHWA

2003, Table FE-21B). Changes in law in 1997 (when $0.043 per gallon that had

been credited to the general fund began to be credited to the trust fund) and in

PRESENT FINANCE ARRANGEMENTS

1979–1984 1984–1989 1989–1994 1994–1999 1999–2004

Period

FIGURE 2-6 Number of states raising cents per gallon gasoline tax rates,

5-year intervals, 1979–2004. Note: Eleven states lowered rates during some

interval in the period 1979–2004. (Sources: FHWA 1987; FHWA 1997;

FHWA 2005a, Table MF-205.)

71340_035_073 5/30/06 9:53 AM Page 49

2004 (when the revenue impact of the federal gasohol subsidy was transferred

from the trust fund to the general fund) increased contributions to the Federal

Highway Trust Fund without increasing the fuel tax rate paid by motorists.

Devolution and Reliance on User Fees

As Chapter 1 described, parallel trends in at least some jurisdictions toward

devolution of responsibilities for transportation programs from state to local gov-

ernment (that is, municipalities, counties, and special authorities districts within

a state) and decreasing reliance on user fees have been cited as threats to the con-

tinuation of historical highway ﬁnance arrangements. Whereas state government

highway programs are predominantly funded by state-imposed user fees (fuel

taxes and registration and licensing fees) and federal aid derived from federal user

fees, local governments historically have relied mainly on property and sales taxes

to pay for transportation programs. Therefore, devolution of transportation pro-

gram responsibility to local government would be likely to entail decreased

reliance on revenues from fuel taxes, registration fees, and tolls.

Devolution of responsibilities to local governments would in many circum-

stances be in the public interest, if it were accompanied by adequate ﬁnance

arrangements. When local governments provide facilities and services whose pri-

mary users are local residents, taxpayers are most likely to receive the kinds of

THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

1961–1971 1971–1981 1981–1991 1991–2001

Period

Percent/year

All state taxes State highway user fees

FIGURE 2-7 Average annual percentage growth rates, all state tax receipts

and state highway user fee receipts, 10-year periods, 1961–2001. (Sources:

FHWA various years, Table MF-121T; Baker 2003.)

71340_035_073 5/30/06 9:53 AM Page 50

services they want and are willing to pay for. However, devolution of transporta-

tion programs may lead to ﬁnance and governance problems if revenue sources

remain oriented toward state-level programs.

One popular way to fund expanded local transportation responsibilities has

been adoption of new special taxes, with revenues dedicated for a speciﬁed term

to a speciﬁed set of projects. Such taxes often require approval in statewide or local

referenda. A study by the Surface Transportation Policy Project identiﬁed 41 such

referenda on ballots in 2002: nine at the state level that would have authorized

$77 billion of spending and 32 local referenda for $40 billion. (Not all were

approved.) Most revenues were to be derived from dedicated taxes other than user

fees. Such special taxes typically fund both transit and road projects. The growth

in local dedicated taxes has been driven in part by growing local expenditures on

transit and the absence of secure funding sources for transit analogous to the state

and federal highway user fees dedicated to highways (Ernst et al. 2002, Goldman

and Wachs 2003, McMillan 2004).

Nationwide, for highways only, the local government share of spending has

averaged around 35 percent since the 1960s and shows no consistent trend

(Figure 2-8). The ratio of highway user fee revenues to highway expenditures over

the same period also shows no trend (Figures 2-9 and 2-10). Local governments

PRESENT FINANCE ARRANGEMENTS

0.1

0.2

0.3

0.4

0.5

1961 1966 1971 1976 1981 1986 1991 1996 2001 2004

Year

FIGURE 2-8 Ratio of local government highway, road, and street expenditures

to total U.S. highway, road, and street expenditures, 1961–2004. (Sources:

FHWA various years, Table HF-10.)

71340_035_073 5/30/06 9:53 AM Page 51

account for most spending not supported by user fee revenues. In 2004, local user

fee revenue plus local highway grant receipts that derived from state and federal

highway user fees equaled 32 percent of local highway spending (FHWA 2005a,

Table HF-10). As a percentage of local spending, local user fee revenue plus grants

from states has been declining slowly since the 1970s.

Local governments’ lack of reliance on user fees is the result of historical and

practical circumstances. Local jurisdictions may lack legal authority to impose fuel

taxes or vehicle fees, and motorists can easily avoid a local fuel tax if neighboring

jurisdictions have lower rates. In general, ﬁscal competition among local govern-

ments makes them more susceptible than state governments to loss of a tax base

when they try to increase revenue by increasing tax rates independently. In some

instances, a local property tax assessment dedicated to streets or infrastructure

may function essentially as a user fee—for example, in a suburban residential

community where the streets to be maintained are primarily for local access, there

is little through trafﬁc, and household characteristics are somewhat uniform. Such

taxes may be an entirely satisfactory means of paying for local streets, since replac-

ing them with a fuel tax or a mileage fee might have negligible effects on street

use or expenditures.

THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1961 1966 1971 1976 1981 1986 1991 1996 2001 2004

Year

FIGURE 2-9 Ratio of highway user fee revenues to highway expenditures,

1961–2004. (Sources: FHWA various years, Table HF-10; FHWA 1997,

Table HF-210.)

71340_035_073 5/30/06 9:53 AM Page 52

National totals obscure substantial state-to-state variation in relative local

government shares and in the trend in state and local shares. Comparison of local

government shares of transit plus highway spending in 1991 and 2002 in the

United States and in the six states with the most spending illustrate the variation

(Table 2-9).

As the two lines labeled “United States” in the table indicate, in 2002 state

governments nationwide retained responsibility for 62 percent of highway spend-

ing (100 percent minus the 38 percent local share) and 51 percent of total high-

way and transit spending. In the United States as a whole and in ﬁve of the six

states shown (all except Illinois), the local share of highway spending fell over the

decade. For the total of highway and transit spending, the local share rose slightly

nationwide (from 47 to 49 percent) and in three of the six states (California,

Illinois, and Texas).

The magnitude of local government transportation responsibilities has led to

calls for greater direct local control of revenue. For example, a 2004 paper pub-

lished by the Brookings Institution (Puentes 2004), arguing for increased direct

PRESENT FINANCE ARRANGEMENTS

20,000

40,000

60,000

80,000

100,000

120,000

140,000

1961 1966 1971 1976 1981 1986 1991 1996 2001 2006

Year

Millions of 2001 dollars

Highway expenditures

User fee revenue

FIGURE 2-10 Highway user fee revenue and highway expenditures,

1961–2004. (Sources: FHWA various years, Tables HF-10, FE-10a.) Price

index is gross domestic product implicit price deﬂator (BEA 2002, 135; BEA

2005, 188–189).

71340_035_073 5/30/06 9:53 AM Page 53

local government control of federal grants, observes: “Metropolitan areas make

decisions that dispose of only about 10 cents of every transportation dollar they

generate even though local governments within metropolitan areas own and

maintain the vast majority of the transportation infrastructure.” However, con-

sidering only highways, state governments in 2003 owned and operated roads

that carried 64 percent of all vehicle miles of travel, and state government direct

spending on highways was 64 percent of all highway spending (FHWA 2004,

Tables HM-81, VM-1, HF-10). Thus by this measure at least, state and local

resources may appear, on average, to be in line with state and local infrastructure

responsibilities. As Table 2-2 shows, state governments collect nearly all nonfed-

eral highway user revenues, but a third of these revenues are devoted by the states

to local government grants or other local purposes (FHWA 2005a, Table DF).

It is only when the state and local shares of transportation-generated revenue

THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

TABLE 2-9 Total Spending and Local Shares for Highways and All

Transportation, United States and Selected States, 1991 and 2002

1991 2002

$ billions Percent Local $ billions Percent Local

State and local spending, highways

United States 72 39 124 38

California 8 50 12 48

Florida 3 45 7 37

Illinois 3 34 6 46

New York 5 59 9 50

Pennsylvania 3 33 6 24

Texas 5 41 9 38

State and local spending, highways

plus transit

United States 88 47 157 49

California 10 59 18 63

Florida 3 51 8 45

Illinois 5 53 8 60

New York 10 77 18 75

Pennsylvania 4 34 7 34

Texas 5 45 11 48

NOTE: Amounts include capital and operating expenditures and exclude debt service. Local transit

spending includes all transit spending except direct state mass transit activities as deﬁned in FHWA

2004, Table MT-1A. Direct state mass transit spending for 1991 is estimated. Local highway spend-

ing includes expenditure of grant funds received from states.

OURCES: FHWA 1992, FHWA 1993, FHWA 1994, FHWA 2003, FHWA 2004; Tables HF-2,

LGF-2, SF-2, MT-1A, MT-2A, MT-2B.

71340_035_073 5/30/06 9:53 AM Page 54

(mainly derived from highways) are compared with their shares of total highway

and transit spending that an apparent imbalance emerges.

In summary, when nationwide aggregates of highway spending and highway

user-derived revenues are examined, neither devolution of responsibility to local

governments nor decline in the ratio of user revenue to expenditures is evident.

However, there may be a trend toward devolution of responsibility for the total

of transit and highway spending in some states.

Revenue Adequacy

To many critics of the present ﬁnance system, the culmination of its structural

ﬂaws has been failure to generate sufﬁcient revenues to keep up with growth in

trafﬁc and to replace aging facilities. Illustrating this view are two comments, the

ﬁrst by a Senate Environment and Public Works Committee staff member and

the second by the president of the Motor Freight Carriers Association: “There’s

a growing recognition that we need to begin to move to new approaches for

ﬁnancing. . . . The pay-as-you-go user fee that we’ve had in place since 1956 is

not really up to the task” (McNally 2004) and “The inability of Congress to tax

or not to tax, to toll or not to toll, makes it impossible to pay for a core program”

(Wlazlowski 2004). The AASHTO Journal (2004) reports the conclusion of the

Federal Highway Administrator in an address that the current fuel-tax-based sys-

tem of ﬁnancing highways is likely to fall short of covering identiﬁed needs, and

a Brookings Institution study of fuel tax revenues concludes that because of stag-

nant revenues, “states do not have the ﬁnancial wherewithal to address a wide

variety of transportation concerns” (Puentes and Prince 2003). To clarify the

basis for these concerns, this section describes aggregate trends in highway

spending and highway system expansion compared with highway use, and con-

trasts these trends with experience in other industries.

As Chapter 1 explained, the committee did not interpret its task as ﬁnding

revenue mechanisms that will support an increased level of spending for trans-

portation. However, if the present funding arrangement has structural features

that are causing its effectiveness as a means of raising revenue to decline, its via-

bility would be questionable.

From the late 1940s to the 1960s, constant-dollar capital expenditures for

highways grew at least as fast as did highway travel; since that time, while annual

vehicle miles have steadily grown, the long-run trend in real capital expenditures

appears nearly ﬂat (Figure 2-11). This trend has been interpreted as evidence of

chronic revenue inadequacy (e.g., CTI 1996, 16–17; Consdorf 2003). However,

a constant rate of capital expenditures can yield growth in capacity if assets are

long-lived. Economic measures of the capital stock of highways have been devel-

oped by the Bureau of Economic Analysis (BEA) (Katz and Herman 1997) and

FHWA (Fraumeni 1999). The measures are derived from data on all past capital

PRESENT FINANCE ARRANGEMENTS

71340_035_073 5/30/06 9:53 AM Page 55

expenditures on streets and highways by all levels of government (expressed in

constant dollars) and estimates of rates of depreciation (or of decline in produc-

tive capacity). The measures are intended as indices of capacity, in which differ-

ent kinds of facilities are aggregated by weighting them according to the relative

costs of providing them.

The measures from both these sources indicate that the stock of highways is

growing. The BEA measure shows an average annual growth rate of 2.1 percent

for capital stock between 1985 and 1995. The average annual growth rate for

vehicle miles in the same period was 3.2 percent. The FHWA measure, which

uses a deﬁnition somewhat different from BEA’s, indicates that net capital stock

(deﬁned as the sum of all past investment, less retirements, adjusted for efﬁciency

decline of the stock as it ages) grew at an annual rate of 1.7 percent from 1985

to 1995, 1.3 percent from 1975 to 1985, and 5.1 percent from 1955 to 1975

(Figure 2-12). Much highway capital expenditure today—for example, projects

to widen lanes, improve roadway geometry, or improve trafﬁc control—increases

capacity but is not reﬂected in gross indicators of physical capacity like road miles.

A Transportation Research Board study of freight transportation capacity

(TRB 2003, 54–55) pointed out that the pattern of an increasing ratio of output

to infrastructure capital is not unusual in U.S. industry. The ratio of output to

net capital stock of structures has been rising in the railroad industry, and another

network industry, electric utilities, shows a similar trend. In the rail and electric

utility industries, these trends are interpreted as productivity growth. Changes in

ratios of output to infrastructure capital in the three industries from 1959 to 1995

THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

100

200

300

400

1936 1941 1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006

Year

Index: 1960 = 100

Constant-dollar capital expenditures

Vehicle miles traveled

FIGURE 2-11 Highway capital expenditures and vehicle miles traveled,

1936–2004. (Sources: FHWA various years, Tables HF-10, VM-1.) Price

index is private nonresidential structures (BEA 2005, 188–189).

71340_035_073 5/30/06 9:53 AM Page 56

were as follows (Fraumeni 1999; Katz and Herman 1997; EIA 2002, Table 8.5;

Wilson 2001):

Industry and Ratio Change (%)

Highways [annual VMT/(productive capital stock)] +16

Railroads [annual ton-miles/(structures net capital stock)] +360

Electric utilities [annual electric energy consumption/(utility net capital stock)] +200

This comparison suggests that relatively lackluster productivity growth in the

highway industry may merit concern. Highway productivity could be increased

by concentrating investment in the most valuable projects; improving trafﬁc

management through better engineering or through pricing; and adopting more

cost-effective design, construction, and maintenance practices.

Trends in spending, investment, and capital stock relative to trafﬁc volume are

useful as indicators of changes in underlying economic and political factors that

drive transportation system development but cannot by themselves provide guid-

ance on appropriate levels of spending. An investment rule that called for increas-

ing capital spending, capital stock, or lane miles of roads at the rate of increase

of trafﬁc would yield poor results, since such a rule would fail to take into account

the circumstances that determine the return on highway investment. These cir-

cumstances include the capacity and condition of the highway system at the out-

set of the period under consideration (e.g., whether it was over- or underbuilt), the

possibility of economies of scale as the system expands, technological progress and

PRESENT FINANCE ARRANGEMENTS

100

150

200

250

300

350

400

1936 1941 1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996

Year

Index: 1960 = 100

Productive highway capital stock (Fraumeni 1999)

Annual vehicle miles

FIGURE 2-12 Net capital stock of highways and streets; annual vehicle

miles, 1936–1996. (Sources: FHWA various years; Fraumeni 1999.)

71340_035_073 5/30/06 9:53 AM Page 57

improvements in operating practices that allow growth in the productivity of

infrastructure, and rising costs of providing infrastructure. As the cost of incre-

mental expansion of capacity increases, providing levels of service that were

considered normal in the past may lose economic justiﬁcation. Chapter 3 will

examine the available evidence on whether highway investments that would yield

worthwhile beneﬁts are not being made for lack of funds.

Revenue Stability

The transportation ﬁnance system has also been charged with failure to provide

stable funding, because revenues depend on unpredictable external events like

petroleum market developments and automotive fuel economy trends (Giglio

and Williams 2001, 200). A more common view may be that stability and pre-

dictability are among the strengths of the user fee–trust fund mechanism com-

pared with funding dependent on annual legislative appropriations, even though

lags between changes in the external factors affecting fuel tax revenue and

legislative adjustments of rates have at times disrupted funding. Constant-dollar

highway capital spending declined severely from the mid-1970s through the early

1980s but recovered later (Figure 2-11). The same trough is evident in trends

in the rate of growth of capital stock (Figure 2-12), in constant-dollar highway

user revenues and the ratio of revenues to spending (Table 2-3), and in the aver-

age highway user fee per mile (Figure 2-1). These disturbances resulted from the

impact of high inﬂation on constant-dollar fuel tax revenue, rising motor vehi-

cle fuel efﬁciency driven by fuel economy regulations and fuel prices, and slower

growth in driving as a result of higher costs and economic recession. State legis-

latures and Congress eventually responded with increases in nominal tax rates

(Figure 2-6). Reducing the risk of unintended funding disruptions in the future

might be a worthwhile goal of reforms to the transportation ﬁnance system.

REFERENCES

Abbreviations

AASHTO American Association of State Highway and Transportation Ofﬁcials

APTA American Public Transit Association and American Public Transportation

Association

ARTBA American Road and Transportation Builders Association

BEA Bureau of Economic Analysis

BTS Bureau of Transportation Statistics

CBO Congressional Budget Ofﬁce

CTI Commission on Transportation Investment (California)

THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

71340_035_073 5/30/06 9:53 AM Page 58

EIA Energy Information Administration

EPA Environmental Protection Agency

FHWA Federal Highway Administration

FTA Federal Transit Administration

GAO General Accounting Ofﬁce

HUF Highway Users Federation

IWR Institute for Water Resources

TRB Transportation Research Board

USDOT U.S. Department of Transportation

AASHTO Journal. 2004. Peters: Demand-Based Financing for Highways Needs Consideration. Jan. 16.

AASHTO Journal. 2005. West Virginia Fuel Tax Increases. Vol. 105, No. 3, Jan. 21.

Ang-Olson, J., M. Wachs, and B. D. Taylor. 2000. Variable-Rate State Gasoline Taxes. Transportation

Quarterly, Vol. 54, No. 1, Winter, pp. 55–68.

APTA. 1978. Transit Fact Book: 1977–1978 Edition. May.

APTA. 1981. Transit Fact Book: 1981 Edition. Oct.

APTA. 1992. Transit Fact Book. Oct.

APTA. 2004. Public Transportation Fact Book (55th ed.). March.

APTA. 2005. Public Transportation Fact Book (56th ed.).

ARTBA. 2004. State Gas Tax Report. July.

Baker, B. E. 2003. Receipts and Expenditures of State Governments and of Local Governments,

1959–2001. Survey of Current Business, Vol. 83, No. 6, June, pp. 36–53.

Barnes, T. 2005. Rendell Lobbying to Rescue Transit. Pittsburgh Post-Gazette, Jan. 30, p. A-1.

BEA. 2002. GDP and Other Major NIPA Series, 1929–2002:I. Survey of Current Business, Aug.,

pp. 123–146.

BEA. 2005. Survey of Current Business, Aug.

BTS. n.d. Government Transportation Financial Statistics 2001.

CBO. 1998. Innovative Financing of Highways: An Analysis of Proposals. Jan.

CBO. 2002. Future Investment in Drinking Water and Wastewater Infrastructure. Nov.

CBO. 2005. Budget Options 2005. Feb.

Consdorf, A. 2003. America’s Congestion Crisis: The Decade Mobility Died. Better Roads, Feb.

CTI. 1996. Final Report. Jan.

EIA. 2002. Annual Energy Outlook 2001.

EPA. 2003. Water and Wastewater Pricing: An Informational Overview.

Ernst, M., J. Corless, and K. McCarty. 2002. Measuring Up: The Trend Toward Voter Approved

Transportation Funding. Surface Transportation Policy Project.

Farrell, S. 1999. Financing European Transport Infrastructure: Policies and Practice in Western Europe.

Macmillan.

FHWA. 1987. Highway Statistics Summary to 1985.

FHWA. 1992. Highway Statistics 1991.

FHWA. 1993. Highway Statistics 1992.

FHWA. 1994. Highway Statistics 1993.

PRESENT FINANCE ARRANGEMENTS

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FHWA. 1997. Highway Statistics Summary to 1995.

FHWA. 1999. Financing Federal Aid Highways. Aug.

FHWA. 2001. Highway Statistics 2000.

FHWA. 2002. Highway Statistics 2001.

FHWA. 2003. Highway Statistics 2002.

FHWA. 2004. Highway Statistics 2003.

FHWA. 2005a. Highway Statistics 2004.

FHWA. 2005b. SAFETEA-LU: Safe, Accountable, Flexible, Efﬁcient Transportation Equity Act: A

Legacy for Users. www.fhwa.dot.gov/safetealu/.

Fraumeni, B. M. 1999. Productive Highway Capital Stock Measures. Federal Highway Administration,

Jan.

FTA. 2005. SAFETEA-LU. www.fta.dot.gov/17003_ENG_HTML.htm. Revised Sept. 7.

FTA. n.d. a. Data Tables for the 2000 National Transit Database (NTD) Report Year. www.ntdprogram.

com/NTD/NTDData.nsf/DataTableInformation?OpenForm&2000.

FTA. n.d. b. 2002 Transit Profiles. www.ntdprogram.com/NTD/Profiles.nsf/ProfileInformation?

OpenForm&2002&All.

GAO. 1995. Highway Funding: Alternatives for Distributing Federal Funds. Nov.

Giglio, J. M., and J. Williams. 2001. Strategic Alternatives for Financing the Highway System. In

Conference Proceedings 24: Second National Conference on Transportation Finance, Transportation

Research Board, National Research Council, Washington, D.C., pp. 199–203.

Goldman, T., and M. Wachs. 2003. A Quiet Revolution in Transportation Finance: The Rise of Local

Option Transportation Taxes. Transportation Quarterly, Vol. 57, No. 1, Winter, pp. 19–32.

Hecker, J. Z. 2002. Testimony before the Committee on Finance, U.S. Senate: Highway Financing: Factors

Affecting Highway Trust Fund Revenues. General Accounting Ofﬁce, May 9.

Hu, P. S. 2004. Summary of Travel Trends: 2001 National Household Travel Survey. FHWA, Dec.

HUF. 1983. The Surface Transportation Assistance Act of 1982: A Summary. Jan.

HUF. 1987. The Surface Transportation and Uniform Relocation Assistance Act of 1987: A Summary.

April.

IWR. 2004. Inland Waterways Trust Fund Analysis. Feb. 5.

Katz, A., and S. Herman. 1997. Improved Estimates of Fixed Reproducible Tangible Wealth,

1929–1995. Survey of Current Business, May, pp. 69–92.

McMillan, T. W. 2004. Making Do or Finding New: Revenue Enhancement Opportunities in the San

Francisco Bay Area. Presented at 83rd Annual Meeting of the Transportation Research Board,

Washington, D.C. www.innovativeﬁnance.org/events/resources_trb.asp.

McNally, S. 2004. Trucks Don’t Pay Enough for Roads, Says Senate Aide. Transport Topics, Feb. 2, p. 28.

Montgomery, L. 2004. Ehrlich Urges Vehicle Fee Increase for Transportation. Washington Post,

Feb. 14, p. B1.

Patashnik, E. M. 2000. Putting Trust in the U.S. Budget: Federal Trust Funds and the Politics of

Commitment. Cambridge University Press, Cambridge, United Kingdom.

Peters, M. 2004. Bush Considers Better Options Than Gas Tax. (Letter to the editor.) USA Today,

June 23, p. 12A.

Puentes, R. 2004. Cement and Pork Don’t Mix. Brookings Institution, May 10.

Puentes, R., and R. Prince. 2003. Fueling Transportation Finance: A Primer on the Gas Tax. Brookings

Institution, March.

Road User Fee Task Force. 2003. Report to the 72nd Oregon Legislative Assembly on the Possible

Alternatives to the Current System of Taxing Highway Use Through Motor Vehicle Fuel Taxes. March.

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Roth, G. 2005. Liberating the Roads: Reforming U.S. Highway Policy. Cato Institute, March 17.

Toll Roads News. 2005. Vinci, Eiffage, Abertis Bids Accepted for French Gov Stake in TRs. Dec. 14.

www.tollroadsnews.com.

TRB. 1987. Special Report 214: Designing Safer Roads: Practices for Resurfacing, Restoration, and

Rehabilitation. National Research Council, Washington, D.C.

TRB. 2003. Special Report 271: Freight Capacity for the 21st Century. National Academies, Washington,

D.C.

U.S. Census Bureau. 1976. Statistical Abstract of the United States: 1976.

U.S. Census Bureau. 2005a. State and Local Government Finances by Level and Type of Government:

2002–2003. Revised May 5. www.census.gov/govs/www/estimate03.html.

U.S. Census Bureau. 2005b. Statistical Abstract of the United States: 2006.

U.S. Census Bureau. Various years. State and Local Government Finances by Level of Government

and by State. 1991–1992 to 2000–2001. www.census.gov/govs.

USDOT. 1991. A Summary: Intermodal Surface Transportation Efﬁciency Act of 1991. Dec.

USDOT. 1997. 1997 Federal Highway Cost Allocation Study. Aug.

USDOT. 1998. TEA-21: Transportation Equity Act for the 21st Century: A Summary: Rebuilding

America’s Infrastructure. July 21.

USDOT. 2003. The Metropolitan Transportation Planning Process: Key Issues.

USDOT. n.d. 2002 Status of the Nation’s Highways, Bridges and Transit: Conditions and Performance:

Report to Congress.

Utt, R. D. 2004. Yes, Mr. President, Veto the Highway Bill. Backgrounder, No. 1725, Heritage

Foundation, Feb. 13.

Wilson, R. A. 2001. Transportation in America: Statistical Analysis of Transportation in the United States:

With Historical Compendium 1939–1999 (18th ed.). Eno Foundation, Washington, D.C.

Wilson, R. A. 2002. Transportation in America: Statistical Analysis of Transportation in the United States:

With Historical Compendium 1939–1999 (19th ed.). Eno Foundation, Washington, D.C.

Wisconsin Department of Transportation. 2004. Environmental Procedures Manual. March.

Wlazlowski, T. 2004. Highway Funding System Nears Crossroads, Lynch Says. Transport Topics,

April 5, p. 31.

PRESENT FINANCE ARRANGEMENTS

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Evaluating the Present Finance System

This chapter is a summary of evidence relevant to evaluating existing highway

and transit ﬁnance arrangements. Chapter 1 observed that the ﬁnance system

ought to be judged on the basis of its effect on the performance of the transporta-

tion system. The measure of performance is the beneﬁts derived from highways

and transit in return for their costs. The elements of the ﬁnance system are the fees

users pay, sources of funds, and the rules and practices that govern spending deci-

sions. Each of these elements inﬂuences performance. User fees inﬂuence whether

facilities are used efﬁciently because they discourage trips that travelers value little

in comparison with the cost of providing them. Also, the revenue available from

user fees and other sources is a constraint on decisions to build and upgrade facil-

ities. If existing facilities are inefﬁciently operated (that is, if they are producing net

beneﬁts that are less than they could produce with better management or pricing),

if capital spending is not being reliably directed to high-payoff projects, or if low-

payoff projects are receiving funds, then the ﬁnance system is not giving travelers

and transportation agencies the feedback that a well-designed system could pro-

vide to guide decisions.

As Chapter 1 also described, in political discussions the transportation ﬁnance

problem is deﬁned primarily as a problem of revenue adequacy, and proposals for

new ﬁnance arrangements commonly take the form of packages of revenue

enhancements designed to meet a target.

The effect of ﬁnance on performance

For example, a 2004 state revenue proposal was reported as follows: “[The governor] proposed rais-

ing nearly $250 million for transportation projects throughout the state . . . by increasing fees and ﬁnes

on speeders, drunk drivers and anyone who owns a car. Under the plan, . . . vehicle registration fees

would jump from $81 to $128 every two years for most cars and from $108 to $180 for larger cars and

SUVs. Moving violations would carry a $50 surcharge. . . . And a conviction for drunken driving

would come with . . . an extra $200 fee. The plan would also dedicate taxes on rental cars entirely to

transportation projects. . . . Together with previously announced plans to increase driver’s license fees

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usually has not received explicit consideration. Public ofﬁcials have, however, gen-

erally respected certain historical principles in developing ﬁnance arrangements.

These include the practice of user fee ﬁnance (motorists pay special taxes accord-

ing to their use of roads, and revenue from these taxes covers highway spending);

trust funds to keep track of the balance between fee revenue and spending; cost

allocation rules that dictate higher charges for heavy than for light vehicles; and a

division of revenue-raising responsibility and spending authority among the fed-

eral, state, and local governments. The question this chapter addresses is whether

the principles that public ofﬁcials rely on have led to ﬁnance arrangements that

promote good performance.

Alternative sets of principles for transportation ﬁnance are in use or have been

proposed. Other U.S. transportation modes follow different practices with respect

to reliance on user fees and federal involvement in funding (see Table 2-6 in

Chapter 2). It is probable that the performance of these modes would be greatly

altered if they were to adopt ﬁnance systems more similar to the one used for high-

ways. In most other countries, no connection exists between highway spending

and the revenues generated by fuel taxes and vehicle fees, and it has been proposed

that the United States follow the more common practice internationally in this

regard. Finally, proposals for expanded use of tolling and for road use metering

and charging, which will be examined in Chapter 5, represent fundamentally dif-

ferent ﬁnance practices.

A conﬁdent evaluation of the effect of present ﬁnance arrangements on per-

formance is not possible with available information. Transportation agencies sel-

dom conduct economic evaluations of their operations or of completed capital

projects (GAO 2005). There have been few analyses of how changes in the struc-

ture of highway user fees changed users’ behavior or of how the practice of trust

fund ﬁnance in highways or other modes has inﬂuenced total spending and proj-

ect selection. Therefore, only fragmentary evidence can be cited in this chapter,

and conclusions are tentative. Better information derived from systematic evalua-

tions of ﬁnance practices will be necessary to guide successful policy reforms.

The ﬁrst section below reviews criteria that have been applied for evaluating

revenue sources for government-owned highways and transit. The next two sec-

tions review evaluations of the overall performance of the U.S. highway and tran-

sit industries from the standpoint of economic efﬁciency—that is, whether the

level of spending is justiﬁed, whether capital spending has been directed toward

the projects with the best returns, and whether existing capacity is efﬁciently

EVALUATING THE PRESENT FINANCE SYSTEM

and collect more taxes from corporations, the proposal would pump an additional $266 million into

the transportation trust fund” (Montgomery 2004). This perspective also was expressed in congressional

testimony by the Executive Director of the American Association of State Highway and Transportation

Ofﬁcials (AASHTO) on the federal-aid program: “needs continue—by anyone’s measures—to far out-

strip available . . . resources. . . . AASHTO is seeking a substantial increase in funding . . . for both high-

way and transit programs. . . . The challenge is how to fashion a funding solution that can achieve these

goals and garner the bipartisan support needed for enactment” (Horsley 2002).

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managed. These evaluations provide evidence on whether the institutions and

practices that govern ﬁnance have tended to promote prudent spending.

The fourth section examines how certain features of the existing ﬁnance sys-

tem, including user fees, the practice of dedicating revenues from users to speci-

ﬁed purposes, and the federal structure of the system, may affect government

transportation programs. These features are relevant because they inﬂuence the

cost-effectiveness of spending today and because they would require revision if new

funding sources are introduced.

CRITERIA FOR EVALUATING FUNDING SOURCES

A standard set of criteria has evolved in past evaluations of tax alternatives

and sources of funds for public infrastructure programs. Box 3-1 shows criteria

from two sources, the Oregon Road User Fee Task Force study described in

Chapter 1 and a study of funding alternatives prepared for the state departments

of transportation through the National Cooperative Highway Research Program

(NCHRP). The criteria proposed in the NCHRP study were derived from a

review of about a dozen tax studies carried out by state governments mainly in

the 1980s. The criteria in all the studies involve revenue adequacy, administra-

tive feasibility or cost, and some fairness or equity concept. All the studies seem

to accept as a premise that a dedicated revenue source is sought; that is, that trans-

portation expenditures are to be funded by revenue from identiﬁed taxes or fees.

These lists together contain all the relevant considerations, but deﬁnition and

application of some of the criteria have been difﬁcult. Equity or fairness is given

diverse and sometimes subjective deﬁnitions. As noted in Chapter 1, the concept

of efﬁciency often is vaguely deﬁned or missing. (It is missing from the Oregon

study’s list, even though the study recommends congestion pricing.) Few if any of

the original studies attempt to quantify efﬁciency impacts of alternative trans-

portation tax or fee schemes.

The difﬁculty that governments have experienced in deﬁning measures of fair-

ness and efﬁciency that provide useful direction on highway funding is illustrated

by the highway cost allocation studies. These studies have been conducted peri-

odically since at least the 1950s by the federal government and by many states to

determine the relative taxes or fees that should be charged to different classes of

vehicles—in particular, to large trucks. To establish criteria for evaluating the fed-

eral highway user fee schedule, the federal studies have sought to follow the decla-

ration of policy in the 1956 highway act, which created the Federal Highway Trust

Fund: “if it hereinafter appears . . . that the distribution of the tax burden among

the various classes of persons using the Federal-aid highways, or otherwise deriv-

ing beneﬁts from such highways, is not equitable, the Congress shall enact legisla-

tion in order to bring about . . . such equitable distribution” (Highway Revenue

Act of 1956, P.L. 627, June 29, 1956, Section 209). The federal study authors

THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

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EVALUATING THE PRESENT FINANCE SYSTEM

BOX 3-1

Examples of Criteria Used to Evaluate Highway Funding Alternatives

Oregon Road User Fee Task Force (Whitty 2003, 23)

(The task force was charged by the legislature with designing new revenue

sources to support Oregon roads and replace the existing sources.)

Criteria for new revenue sources:

• Any new revenue system should be founded on the principle that users

pay.

• Revenue sources traditionally the province of local government should

not be usurped by the state.

• New sources should generate sufﬁcient revenue to replace the fuel tax.

• Financing should be transparent: fees should be visible to payers and

the public should know how much they are paying and how rates are

calculated.

• The costs of collection and of payers’ record keeping should not be sub-

stantial ﬁnancial burdens.

• Revenue collection must be enforceable.

• The new system must support all roads of the state and local governments.

• Any new revenue source should be acceptable to the public.

NCHRP Report 377: Alternatives to Motor Fuel Taxes for Financing Surface

Transportation Improvements (Reno and Stowers 1995, 49–51)

Criteria for evaluating tax alternatives (derived from a review of tax studies

produced by 13 states):

• Adequacy:

– Yield in relation to need, uses, investment requirements

– Responsiveness to inﬂation

– Stability of revenues over time

– Potential for needed increases

• Equity:

– With respect to costs occasioned

– With respect to ability to pay and beneﬁts received

– By geographic area

– In perception as well as in fact

(continued on next page)

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have interpreted this declaration to require that the share of fee revenue generated

by each of a number of vehicle classes (i.e., cars in each of several size classes and

trucks in classes deﬁned by size and axle conﬁguration) should equal the share of

government expenditures attributable to each class’s use of the highways. The

federal studies acknowledge efﬁciency as an ideal criterion but do not apply it to

discriminate among tax alternatives

(USDOT 1997, VI-22–VI-29).

Past Transportation Research Board (TRB) committees noted that the miss-

ing analysis in the highway cost allocation studies is an evaluation of how adjust-

ments in the structure of user fees would affect the economic beneﬁts derived from

the highway system. A TRB committee studying the social costs of transportation

advised that “practical constraints on user fee policies—revenue requirements and

considerations of administrative and political feasibility—do not preclude pro-

moting efﬁciency through user fees.... For any two fee options under compari-

son, . . . one will encourage economically beneﬁcial use of the facility more than

the other. These differences ought to be weighed carefully in decisions on tax pol-

icy” (TRB 1996, 126–128). A committee on cost allocation offered step-by-step

guidelines for analyzing the effects of changes in user fees on highway performance

and beneﬁts (Committee for the Review of the Federal Highway Cost Allocation

Study 1996, 4–6).

THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

The 1997 federal study contains comparisons of estimates of marginal costs of highway travel (includ-

ing congestion costs) with user fees. This approach to assessing whether fees promote efﬁciency is insuf-

ﬁcient because it provides no basis for judging whether the correspondence between fees and costs is

“close enough.” The NCHRP study cites discussions of efﬁciency in the state transportation funding

studies, but no example of a study that used efﬁciency as a quantitative criterion for comparing alter-

natives (Reno and Stowers 1995, 103–110).

BOX 3-1 (

continued

)

Examples of Criteria Used to Evaluate Highway Funding Alternatives

• Efﬁciency:

– Bringing about better decisions on travel and investments

– Paying costs imposed on others

– Creating disincentives for undesirable activities

– Enabling economic growth

• Simplicity:

– Administrative cost

– Compliance cost

– Enforcement cost

– Evasion potential

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The elements of a comparison of user fee alternatives on the basis of their effect

on the beneﬁts derived from highways are illustrated in the Brookings Institution

study of road user charges, Road Work. The study compared the savings from

charging trucks for pavement wear through an ideal pricing scheme with savings

if a simpliﬁed tax schedule were applied (Small et al. 1989, 71–74). The ideal pric-

ing case assumes that each large truck is charged a fee per mile that depends on the

number and spacing of the truck’s axles, the load on each axle, and the road that

the truck is traveling on. The fee would equal an estimate of the actual increment

in the highway agency’s pavement maintenance cost caused by each trip of the

truck on the road. The charge would depend on the road because the wear a truck

causes depends on pavement thickness and other roadway characteristics.

In the simpliﬁed fee case, each truck is charged a fee per mile that depends on

its axle conﬁguration and axle loads but is the same for all roads and is set so as to

maximize the highway agency’s savings, less the added costs to shippers and carri-

ers (not counting fee payments). In both cases, it is assumed that the highway agency

designs pavements to minimize the sum of vehicle operating costs and agency con-

struction and maintenance costs. The following are the study’s estimates of changes

in highway agency pavement costs and in shipper and carrier costs if such charges

were imposed, compared with costs if actual user fees were continued (Small et al.

1989, Tables 4-2, 4-4) (ﬁgures are in billions of 1982 dollars):

Item Ideal Pricing Simpliﬁed Fees

Change in highway agency pavement costs −2.1 −1.8

Change in shipper and carrier costs before user fee payments 0.4 0.4

Change in user fee payments −0.6 0.8

In both scenarios, highway agency costs decrease (by $2.1 billion annually in the

ideal pricing scenario and $1.8 billion with simpliﬁed pricing), primarily because

of the change in pavement designs but also because the new fees induce truck oper-

ators or shippers to reduce axle loads, change truck conﬁgurations, shift some

freight to rail, and (in the ideal pricing scenario) change routes to travel on roads

with stronger pavements. Ideal pricing increases pavement wear savings only mod-

erately compared with the simpliﬁed fees (by $2.1 billion minus $1.8 billion, or

$300 million annually). In both scenarios, shipper and carrier costs before user fee

payments increase (by $400 million annually) because of the changes in their oper-

ating practices induced by the fee changes. In the ideal pricing scenario, user fees

paid by carriers decline and shippers and carriers realize a net gain of $600 million

annually. However, in the simpliﬁed fee scenario, user fee payments increase by

$800 million annually (because fees must be raised even on roads with low pave-

ment costs in order to attain the optimum systemwide pavement savings), and

shippers and carriers suffer a net loss.

EVALUATING THE PRESENT FINANCE SYSTEM

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Selection between the two tax schemes would be a policy choice that weighed

the trade-offs involved. The potential economic beneﬁt under ideal pricing would

be greater, and the option would have the practical attraction that both shippers

and highway agencies would gain. Potential savings from the simpliﬁed pricing

system would be only a little less, and the fee scheme would be easier to adminis-

ter, but the high fees required to gain the pavement savings might make the option

politically unattractive.

This example is presented here not for the signiﬁcance of its quantitative

results [the authors of the study acknowledge that their estimation methods are

very approximate, the data are now old, and the magnitudes of some impact esti-

mates may have been distorted by problems in the U.S. Department of Trans-

portation (USDOT) data employed)] but to illustrate the kind of comparison of

economic consequences that ought to be the basis of evaluations of all transporta-

tion user fee schemes. Projections of economic impacts will always be uncertain;

however, in practice, once an initial evaluation is made and a fee change put into

effect, the consequences can be monitored and fees readjusted on the basis of new

information.

In summary, the tax policy studies show that the criteria that the states and

Congress recognize are revenue adequacy, fairness, and administrative practicality.

Actual tax policies are driven by the objective of meeting revenue targets; however,

in enacting transportation funding arrangements, governments generally have

respected the user fee finance principle because it is seen as practical and fair.

Explicit consideration of how changes in user fees and other funding arrange-

ments will affect transportation system performance or the economic beneﬁts

derived from transportation programs seldom enters into ﬁnance or fee decisions.

Nonetheless, it would be possible to compare fee alternatives on this basis and gain

useful guidance for policy if a program were put in place to evaluate systematically

the impacts of fees on the behavior of highway users and on the costs and beneﬁts

of the highway program.

HIGHWAY SYSTEM PERFORMANCE

This section summarizes estimates of the return earned by highway investments in

recent decades. This information will help decide whether present ﬁnance arrange-

ments are promoting sound decisions on capital spending levels and project

selection. It was argued above that one mechanism by which present ﬁnance

arrangements may affect system performance is through limiting total spending.

A facility that provided a service whose value to users was less than the cost of pro-

viding the service probably could not generate enough revenue from user fees to

sustain itself in the long run. Also, because fee levels are tied to spending, users have

an incentive to oppose spending on a facility that is worth less to them than the

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fees they pay. Therefore, user fee ﬁnance, as it is practiced in the highway program,

might be expected to reduce the risk of overspending, that is, spending to provide

services that are not justiﬁed by their beneﬁts. In contrast, it might be expected

that the risk of overspending is greater in other public infrastructure programs

in which spending is not effectively limited by revenue from users, for example,

inland waterways (where user fees cover one-eighth of total expenditures; see

Table 2-6) and passenger rail (where fare revenue covers approximately half of

expenses).

In opposition to this argument, critics of user fee ﬁnance have characterized

dedicated highway user fee revenues as a cash cow providing funds regardless of

justiﬁed needs and argue that public ofﬁcials would do a better job of targeting

funds to worthwhile applications if they were unhindered by the constraints of

trust funds and dedicated taxes. Evidence concerning the economic return on

highway investments would help in judging which of these two points of view is

more accurate. If incremental investments are found to earn high rates of return,

the case for the view that user fee ﬁnance promotes overspending is weakened and

the view that present ﬁnance arrangements are a positive inﬂuence is strengthened,

However, such evidence alone would not prove the linkage between present

ﬁnance arrangements and performance.

The estimates discussed in this section include results from the latest of a bien-

nial series of federal reports to Congress (formerly called the National Highway

Needs reports and now the Conditions and Performance reports) on the perfor-

mance of the highway system and several estimates by economists of incremental

rates of return on highway investment. It has already been noted that quantitative

information on the beneﬁts of highway investment is much weaker than would be

desirable for sound policy guidance.

Results from the Conditions and Performance studies are not presented here

with the intent of arguing that highway spending should be increased.

Chapter 1 states, the committee has not considered whether the present rate of

transportation spending is too high or low, and its task does not involve ﬁnding

revenue mechanisms capable of supporting increased spending. Rather, the studies’

results are examined solely to investigate whether historical spending levels have

been economically justiﬁed.

Because users of roads are not charged market prices, the beneﬁts of road

improvements to users must be estimated from various sources of information

about the effect of road conditions on travel time, vehicle operating costs, and

other components of the total cost of transportation. The absence of market pric-

ing does not invalidate the estimates of the beneﬁts of incremental expansions of

EVALUATING THE PRESENT FINANCE SYSTEM

The studies are commonly used for this purpose, e.g., by AASHTO (AASHTO 2002) and the

Chamber of Commerce (Cambridge Systematics 2005).

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the highway system presented below; however, if prices more closely reﬂected costs,

greater beneﬁt could be derived from existing facilities and service quality could be

maintained in the future at lower total cost. Also summarized below are results of

studies that estimate savings from better pricing.

Appendix A presents the estimates from the studies summarized here in

more detail and describes the studies’ methods, including some important

shortcomings.

Federal Highway

Conditions and Performance

Studies

USDOT submits biennial reports to Congress that project the effects of alterna-

tive levels of highway capital spending (for all levels of government) on highway

performance and highway user costs (travel time, vehicle operating costs, and

accident costs). The 2002 study projections, for the period 2001–2020, indicate

that if all highway capital projects nationwide with a beneﬁt–cost ratio greater

than 1 were carried out, annual capital spending over the period would average

65 percent higher than actual 2000 spending. To maintain overall conditions and

performance at 2000 levels, annual capital spending 17 percent higher would be

required (USDOT n.d., ES-14).

The 2002 study did not report rates of return. However, the previous study

reported that if all projects with beneﬁt–cost ratio greater than 1 were carried out

over the 20-year period 1998–2017, the average beneﬁt–cost ratio would be 3.7

(USDOT 2000). In comparing the mix of kinds of projects that highway agencies

were carrying out in recent years with the mix of kinds of projects that would be

most beneﬁcial, the 2002 study concluded that beneﬁts would be increased if agen-

cies shifted spending from system preservation to capacity expansion (USDOT

n.d., iii).

The 2002 study concluded that physical conditions of highways were

unchanged or slightly improved during the 1990s. Performance was found to

have deteriorated: the fraction of all travel on freeways and principal arterial streets

that occurred under congested conditions increased. The projections show that,

although spending more would slow the rate of deterioration, at all future spend-

ing levels analyzed up to the maximum economically justiﬁed level, congestion

delay will increase or will be little improved (USDOT n.d., 9-8).

In summary, the USDOT Conditions and Performance studies indicate that

the direct beneﬁts to highway users of additional capital spending for highway

system preservation and expansion would exceed the cost to the government

and that spending would have to expand to a level substantially greater than

present spending before highway agencies ran out of worthwhile projects. This

conclusion implies a high marginal rate of return to increased spending and that

total spending historically has been constrained within economically justiﬁed

limits.

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Productivity Beneﬁts of Highway Investment

A series of economic studies has examined how highway infrastructure affects busi-

ness costs for the national economy or for industry groups. Results of four such

studies are outlined below. The ﬁrst two measured the effect of highway invest-

ment on particular costs that have an evident link to highways: trucking company

costs and industry inventory costs. The ﬁnal two take a more aggregate approach

and examine the historical contribution that expansion of the highway system has

made to productivity growth in broad industry classes.

In spite of the differences in methods among the four studies, they all are

attempts to measure approximately the same category of beneﬁts. Savings in truck

freight and the consequent savings in logistics costs (estimated in the ﬁrst two stud-

ies) are the initial steps in a chain of transfers of the beneﬁts of improved highway

transportation. This chain leads to overall productivity growth (measured in the

second pair of studies) and ultimately to lower prices for the goods and services

that consumers purchase and to higher incomes. All of these studies’ estimates

exclude, by design, major components of highway beneﬁts; in particular, they leave

out most or all of the beneﬁts of passenger travel. The ﬁndings, which are repre-

sentative of recent credible research on the national economic return to highway

investment in the United States, were as follows:

• The study of trucking (Keeler and Ying 1988) estimated the relationship of

total annual production costs in the intercity trucking industry to industry

output, the prices of inputs, and external factors that inﬂuence productivity,

including the stock of highway infrastructure, for 1950 to 1973. The results

show savings, for the total of U.S. intercity truck trafﬁc that would have

occurred without the expansion of the highway system, reaching $6 billion

to $9 billion annually by 1973 (in 1973 dollars). These savings justiﬁed

between 33 and 80 percent (depending on assumptions about interest rates)

of the capital cost and 30 to 67 percent of the total cost of intercity highways

during the period. Year-by-year estimates showed that by the early 1970s,

the incremental beneﬁts from increases in the highway capital stock were

becoming very small.

• The inventory costs study (Shirley and Winston 2004) estimated the reduc-

tion in inventory holding costs and associated logistics costs in U.S. business

caused by expansion of the highway system in the period 1973–1996.

Transportation system improvements are expected to reduce inventory hold-

ing costs by increasing the speed and reliability with which ﬁrms can replen-

ish inventory. The estimated annual rate of return on net investment in the

highway capital stock was 18 percent during the 1970s (i.e., an additional

dollar of net highway capital stock reduced costs by $0.18), 5 percent dur-

ing the 1980s, and 1 percent during the 1990s.

EVALUATING THE PRESENT FINANCE SYSTEM

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• The ﬁrst of the two studies of the link between highway capital expansion

and industry productivity growth (Fernald 1999) used data on production

and inputs for 29 industry groups for the period 1953–1989. It estimated

the relationship of growth in total factor productivity in each sector to

growth in the national highway system. The results indicate that for the

period as a whole, road expansion contributed strongly to productivity

growth and that the return on additional road investment greatly exceeded

the normal private-sector rate of return. Separate estimates for the pre- and

post-1973 periods indicated that after 1973, the estimate of rate of return

was not statistically different from the normal rate of return or from zero.

• The second industry productivity study estimated the contribution of high-

way capital to productivity in 35 industries and in the entire U.S. economy

for the period 1950–1991 (Nadiri and Mamuneas 1998). The model was

more detailed than that of the previously described study. It found annual

rates of return on additional highway capital of 54 percent for 1960–1969,

27 percent for 1970–1979, and 16 percent for 1980–1991. That is, in the

1980–1991 period, an incremental addition to the highway capital stock

produced annual cost savings in private business equal to 16 percent of the

total social cost of providing the additional capital. The authors observe

that by the end of the study period, rates of return on highway capital and

private-sector capital appear to have converged.

It is noteworthy that each of the four studies measured a decline over time in

the beneﬁts of incremental additions to the stock of highways. Interpreting the sig-

niﬁcance of this reported pattern is difﬁcult because the timing of the declines is

inconsistent among the four studies. The trucking cost study (Keeler and Ying

1988) and the ﬁrst of the industry productivity studies (Fernald 1999) report that

by the 1970s, the rate of return on highway expansion was nearing zero. However,

the inventory cost study (Shirley and Winston 2004) and the second industry pro-

ductivity study (Nadiri and Mamuneas 1998) measure 27 percent and 18 percent

rates of return, respectively, during the 1970s. Of course, the four studies are meas-

uring different components of total beneﬁts, but the beneﬁts measured are related,

so consistent trends would be expected.

The authors of the trucking cost study observe that a decline in the beneﬁts of

expansion in the 1970s would not be implausible since by the early 1970s the basic

network of Interstate highways had been completed. The authors observe also

that at this time, expansion of the capital stock slowed markedly (growth in the

stock of roads was 5 percent per year in 1955–1975 and 1 percent per year in

1975–1985; see Figure 2-12). They speculate that this brake on growth could

have been the rational response of governments to the decline in the beneﬁts of

expansion. The inconsistent results among the studies, as well as certain simpli-

fying assumptions and uncertainties embodied in the estimates (as described in

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Appendix A), suggest that the studies’ estimates of the time trends of returns may

not have great reliability.

Regardless of the signiﬁcance of the measured declines in returns over time,

the estimates in these studies are evidence of positive rates of return on investments

in incremental expansion of the U.S. highway system in the period from the 1950s

to the 1990s. The studies considered only direct beneﬁts (carrier operating costs

or production costs of industries that use highway services in their production

processes) and excluded large categories of beneﬁts (including beneﬁts of personal

travel as well as certain beneﬁts to businesses). They therefore provide additional

support for the conclusion stated at the end of the previous section that, in the

aggregate, the highway ﬁnance mechanisms that determine funding and priorities

have been effective in providing funding to worthwhile projects and in keeping

total spending within economically justiﬁable limits.

Cost of Inefﬁcient Highway Use and Beneﬁts from Improved Pricing

The preceding section presented evidence that the transportation finance sys-

tem has on the whole helped to direct resources to worthwhile applications.

Transportation programs also have several important failings that are related to the

structure of the ﬁnance system. First, because highway agencies do not practice

peak pricing, congestion is tolerated that could be avoided at relatively low cost.

Second, some road users, including operators of certain types of trucks and buses,

do not pay fees commensurate with the construction and maintenance costs that

they impose on highway agencies. This misalignment of fees with costs encourages

inefﬁcient vehicle design and operating practices and adds unnecessarily to high-

way costs. Third, the ﬁnance system does not provide a strong internal check that

individual projects are economically justiﬁed or that the most beneﬁcial projects

receive the highest priority.

Such a check would exist if projects were ﬁnanced

with funds they generated themselves (although it is likely that some road projects

that produced beneﬁts exceeding their costs could not be funded by revenue from

marginal cost–based user fees alone). Finally, less spending for capacity expansion

would be required to attain any given level of performance of the road system if

pricing were improved. Because better pricing would lead to more efﬁcient uti-

lization of existing capacity, the amount of improvement to be gained from expan-

sion would be reduced in many cases. Therefore, some highway projects that

would be carried out according to today’s practices (including projects that are fully

EVALUATING THE PRESENT FINANCE SYSTEM

The ﬁnance system does impose some constraints on project selection. Because most federal highway

aid is apportioned by formula, each federal-aid project that a state chooses to construct has an oppor-

tunity cost—by selecting the project the state eliminates some other potential project. Also, because

of federal grant matching requirements and the overall importance of state and local funding, spend-

ing tends to be directed to regions where demand is greatest.

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justiﬁed economically under present practices) would no longer appear to be worth

high priority in spending plans.

This section summarizes estimates of the costs of these shortcomings of present

road management practices and of the potential beneﬁts of extensive application of

improved road pricing. Improved pricing means more closely matching the charge

that each road user pays with the actual costs of the user’s trip to the highway agency

and the public. Under improved road pricing, charges could depend on distance,

route, time of day, degree of congestion on the road, or other conditions affecting

costs. However, pricing improvements do not have to be complex to be worthwhile.

Simple reﬁnements, such as adjusting registration fees in line with the results of cost

allocation studies or instituting a peak-period toll on a toll bridge or high-occupancy/

toll (HOT) lane, could have large beneﬁts. Proposals for practical pricing improve-

ments are described in Chapters 5 and 6.

The estimates summarized below relate to ﬁve issues:

• The costs of congestion today and the prospects for reducing costs through

conventional means,

• The potential benefits of congestion reduction brought about by peak

pricing,

• The potential contribution of reﬁned truck fees to improving freight trans-

portation efﬁciency,

• The potential revenue from road pricing, and

• How road pricing would affect perceived needs for capacity expansion.

Costs of Congestion and Prospects for Mitigation

Highway congestion causes several billion vehicle hours of delay annually, and

only modest potential exists for cost-effectively reducing delay through trafﬁc

engineering improvements or capacity expansion.

USDOT’s 2002 Conditions and Performance report (described earlier) esti-

mates that annual congestion delay in 2000 was 31 hours per driver (the difference

between total time spent on the road and time for the same travel if all trafﬁc were

free-ﬂowing), or 6 billion total vehicle hours per year. The projections of impacts

of alternative spending rates indicate that increasing annual capital spending to the

maximum economically justiﬁed level (a 65 percent increase over 2000) would

reduce annual driver delay per driver by 16 percent in 2020 and the fraction of all

travel that occurs under congested conditions would continue to rise (USDOT

n.d., 9-7).

The Texas Transportation Institute (TTI) Annual Urban Mobility Report

series contains similar estimates: 3.5 billion vehicle hours of congestion delay and

$9 billion of additional fuel consumption caused by congestion in 2001 in 75 met-

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ropolitan areas (Shrank and Lomax 2003, Tables, A-5, A-7). TTI projects that

more extensive application of three demand management techniques—trafﬁc sig-

nal coordination, freeway incident management to clear crashes quickly, and free-

way entrance ramp metering—could cost-effectively save 6 percent of estimated

total congestion delay.

Beneﬁts of Congestion Reduction Through Peak Pricing

Peak pricing on congested roads probably could bring about congestion reduction

at least as great as the most ambitious justiﬁable program of capacity expansions

and trafﬁc engineering measures in the absence of pricing.

Peak pricing or congestion pricing is any scheme that imposes charges that are

higher for travel on congested roads or during times of peak congestion than under

uncongested conditions. The charges reﬂect the delay cost that each user imposes

on other users during the peak. Peak pricing can take the form of a per-mile charge

that depends on the time of day or the actual current congestion on a road, or it

can take a simpler form such as the London congestion charging scheme under

which motorists pay a fee to enter a central city zone.

The estimates of peak pricing impacts cited here and in the following three

sections are all projections, because experience with these kinds of pricing mecha-

nisms as a means of funding a road network is extremely limited.

Existing appli-

cations whose primary function is congestion relief in center cities—for example,

the congestion charging scheme introduced in central London in 2003—demon-

strate impacts of congestion pricing but are not directly relevant to this study’s task

of examining alternative means of funding highways, because road ﬁnance was not

among their primary objectives.

The committee that authored TRB’s 1994 Curbing Gridlock study of the

prospects for congestion pricing in urban areas concluded that practical applica-

tions could reduce the average automobile commute trip in congested metropoli-

tan areas by 20 percent, or 10 to 15 minutes per round-trip, and that aggregate

time savings would be “hundreds of millions of hours” annually (TRB 1994, 4).

Such estimates assume that prices are set so as to maximize the public’s travel ben-

eﬁts, that is, the difference between the beneﬁts to those who gain from faster travel

EVALUATING THE PRESENT FINANCE SYSTEM

Chapter 6 describes the experience that does exist, including expressway segments with variable tolls

in the United States and mileage fees imposed on trucks on some European expressways, and techno-

logical advances that have greatly reduced practical barriers to road pricing.

The central London congestion charging scheme charges motorists £8 daily to drive or park in an

8-square-mile zone between 7:00 a.m. and 6:30 p.m. on weekdays. The scheme has reduced average

automobile trip times by 1 minute per mile and automobile trafﬁc by 18 percent in the zone. Net rev-

enue, £97 million in 2004, is mostly dedicated to the bus system (TfL 2005). The transport agency’s

monitoring reports do not address whether the beneﬁts from faster travel times outweigh the costs of

trips forgone or diverted to other modes.

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and the losses to those who lose mobility because they do not want to pay the

charges. Obviously, it would be possible to eliminate congestion if prices were high

enough, but such a policy would not be desirable as a rule because prices would be

so high that many trips that were worth more to the traveler than their cost to the

public would be priced off the roads.

Truck Fees and Freight Transportation Efﬁciency

Misaligned truck fees cause inefﬁciencies in road construction and maintenance

and in freight transportation costs.

Past TRB committees have estimated that coordinated changes in truck fees,

size and weight regulations, and road design could produce net savings to the pub-

lic equivalent to $4 billion to $9 billion annually at today’s prices and trafﬁc vol-

ume (TRB 1990a, 12–22; TRB 1990b, 3–14; TRB 2002, 2–11). Under some

proposed policies, both shippers’ freight costs and highway agencies’ construction

and maintenance costs would fall. Under other proposals, highway agency costs in

a state could increase or decrease, depending on the previous condition of the infra-

structure, but extra highway spending would be worth the freight savings it

allowed. In either case, charging truck operators fees closely aligned with the costs

of serving them is key to the policy. The fees would encourage operators to choose

truck speciﬁcations, operating practices, and routes that minimized the sum of

public and private costs, and they would be a revenue source to ﬁnance infra-

structure improvements needed to serve trucks. Funding the improvements from

fees would provide a check that helped to ensure that the improvements were

worthwhile.

Potential Revenue from Improved Road Pricing

An efﬁciently sized road system could pay for itself from the revenues generated

by peak charges, plus possibly an additional ﬂat per-mile fee or registration fee.

Economists have long argued that the correct size of the transportation net-

work that should be built is the size that could support itself with the revenue from

user charges, if charges equal the cost of providing service to each user. Parts of the

network that are generating surpluses should be expanded, and (with some excep-

tions) parts operating at a deﬁcit should be allowed to contract.

Results of some

empirical analyses of road economics suggest how such a road ﬁnance system could

work in practice.

THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

The appropriate charge is the short-run marginal cost of the trip, that is, the added cost of one addi-

tional trip over the network to the system operator, other users, and the public. This includes the added

congestion cost to other users. Marginal cost pricing will lead to the optimum-sized system if there are

no scale economies—that is, if the total cost of providing service grows proportionally to the size of the

network (Mohring 1965, 232–241).

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The Brookings Road Work study modeled the ﬁnances of hypothetical urban

road segments on which users are charged fees equal to marginal congestion and

road wear costs of their travel (Small et al. 1989, 108–109). The study estimated

the economically optimum designs (numbers of lanes, pavement durability, and

congestion levels), maintenance and capital costs, and user charges for expressways

and nonexpressway arterial roads carrying various volumes of automobile and heavy

truck trafﬁc. In the results, the peak-period volume–capacity ratio on the optimized

urban expressways is around 0.74. For comparison, about half of all miles of urban

expressway travel today is on roads with volume–capacity ratio over 0.8 (USDOT

n.d., 4-15). (The authors caution that the purpose of the study is not to judge

whether existing road designs are appropriate because the best design depends on

numerous speciﬁc local circumstances.)

Over a wide range of volumes, the optimized urban expressways and non-

expressway arterial roads would nearly be able to cover total capital and main-

tenance costs from the revenues of congestion and road wear charges. Estimated

deﬁcits are a few percent of total costs and depend on assumptions concerning scale

economies in road construction. Typical peak-period charges would be equivalent

to $0.30 per mile for cars and $0.60 per mile for large trucks in 2005 dollars.

Trucks would also pay a road wear charge at all times ($0.01 to $0.08 per mile in

2005 dollars, depending on road design). The authors comment that any deﬁcit

could be closed by retaining small registration fees or fuel taxes; it could also be

covered by a small ﬂat-rate off-peak mileage charge.

Recent projections of the impact of practical road pricing schemes in metro-

politan Washington, D.C., give a more detailed indication of possible conse-

quences for highway performance and ﬁnance. The study used a detailed network

model of the region’s highway and transit systems to forecast the effect of alterna-

tive road pricing policies on travel and congestion, the revenues from road charges,

and differences in impacts among income groups (Saﬁrova et al. 2004). The trans-

portation system and locations of jobs and residences are assumed to be ﬁxed. The

three policies examined are converting existing high-occupancy vehicle (HOV)

lanes into HOT lanes (which admit high-occupancy vehicles for free or any vehi-

cle that pays a toll), charging tolls on all lanes of expressways that now have HOV

lanes, and charging on all lanes of all major freeways. Only simple fee structures

are considered: fees differ among two or three road classes and two daily time

periods.

In the most comprehensive pricing option (charging on all lanes of all major

freeways), single-occupancy vehicles pay a toll of $0.22 per mile to travel on for-

mer HOV lanes, and all vehicles pay $0.07 per mile on non-HOV expressways,

during peak periods. Tolls are selected to maximize the beneﬁt of pricing, which

equals the value of net travel time savings from reduced congestion plus the ben-

eﬁts to travelers of new trips stimulated by the reduced congestion, less the losses

from trips that are no longer made. The beneﬁt of the policy is $220 million per

EVALUATING THE PRESENT FINANCE SYSTEM

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year, which is equal to 19 percent of pretolling congestion costs. Toll revenue is

$446 million per year, and the travelers in every income group gain less in time

savings than they pay in tolls. Since tolls are a transfer from travelers to the road

authority, the public as a whole gains. Remarkably, the beneﬁt from converting

all existing HOV lanes into HOT lanes is projected to be $170 million per year,

77 percent of the beneﬁt from tolling all expressways. Beneﬁts could be increased

if a more reﬁned fee structure were employed (e.g., adjusting fees according to

actual congestion and imposing fees on a larger portion of the road system). The

authors note that these estimates reﬂect only the gains from reducing recurrent

congestion (i.e., congestion not caused by accidents, construction, or other excep-

tional events) and assert that taking into account the effect of pricing in reducing

the costs of nonrecurrent congestion would result in larger estimates of beneﬁts.

The projected revenue for the policy of tolling all expressways is roughly com-

parable with current annual expenditures on expressway construction, mainte-

nance, and operation in the Washington metropolitan region (FHWA 2004,

Tables SF-12, HF-10). The absence of tolls on roads other than expressways in the

projections limits expressway revenue, because tolls must be set low enough to

avoid excessive congestion on parallel untolled roads. Under a policy of charging

peak mileage fees on expressways only, optimum tolls should not be expected to

raise revenue sufﬁcient to fund the optimum level of spending. If mileage charges

were imposed on roads other than expressways, the revenue-generating capacity of

expressways would be greater. Another recent estimate puts the potential revenue

from comprehensive road pricing in metropolitan Washington at $700 million

annually (Nelson et al. 2002).

The estimates of the revenue potential of road pricing cited here all apply to

urban road networks. Rural roads (ranging from Interstate highways to local farm

access roads) account for 40 percent of state government highway spending

(FHWA 2004, Table SF-12) and probably a comparable share of local spending.

Most rural road mileage would generate no revenue from congestion fees. If a net-

workwide system of mileage charging (such as the proposals described in Chapter

5) were to come into use, the pricing and investment rules and ﬁnancing practices

for rural roads would probably have to be different from those for the urban parts

of the system. Revenues from marginal cost–based fees would cover an important

part of the cost of rural roads, including pavement and bridge wear costs attribut-

able to trafﬁc, and congested rural roads (e.g., certain heavily traveled Interstates)

would generate congestion fee revenue to pay for capacity expansion. Rural roads

that are maintained primarily for the sake of a social interest in sustaining rural

communities and farms could appropriately be subsidized out of government gen-

eral revenue. However, investment in some rural roads may be economically jus-

tiﬁed by their direct transportation beneﬁts even though the roads could not be

funded by revenue from marginal cost–based fees (because there is a minimum

scale to which a road can be built). Such roads could be funded by ﬂat-rate mileage

THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

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charges or property tax assessments. If such roads were funded by user fees, rates

would be selected to minimize the loss caused by overcharging for roads that have

low operating costs.

Road Pricing and Capacity Expansion

Improving road pricing would alter the beneﬁts of capacity expansion projects and

therefore would be expected to affect project selection and the rate and direction

of evolution of the network.

The TRB Curbing Gridlock committee predicted that peak pricing would

“reduce the demand for new highway capacity in urban areas . . . [and] ease cap-

ital requirements for expanding highways” (TRB 1994, 46). Because better pric-

ing would lead to more efﬁcient utilization of existing capacity, the amount of

improvement to be gained from expansion would be reduced in many cases.

Therefore, some highway projects that would be carried out according to today’s

practices (including projects that are fully justiﬁed economically under present

practices) would no longer appear to be worth high priority in spending plans.

Improved road pricing would also highlight parts of the network where capac-

ity has been underfunded because these roads would be able to generate surplus

revenue.

One study examining these long-run effects used a network model to pro-

ject beneﬁts of four hypothetical expansions to the road network of the city of

Cardiff in the United Kingdom, under present practices and with congestion

charges imposed on motorists on all roads (Williams et al. 2001). The four proj-

ects were a bypass, a new road link to the city center, an expansion of a through

route across the center, and a partial bypass. The projected beneﬁts of the ﬁrst

three projects were lower if congestion pricing was in place for a wide range of

assumed rates of trafﬁc growth. For example, the travel time savings produced

by the bypass and the through route expansion are up to 30 percent less with

congestion pricing because speeds on preexisting roads are higher and because

less total travel takes place. (In the case of the fourth project, pricing diverts

much trafﬁc to the new road, rendering it more valuable.) The study illustrates

that some projects, which may produce beneﬁts that fully justify their costs in

the absence of congestion pricing, would cease to be economically attractive if

pricing were introduced.

In general, improved pricing would reduce the infrastructure cost of attaining

any speciﬁed level of service quality. However, there would be locations where

highly congested roads were yielding surplus revenues and expansion of capacity

would be economically justiﬁed and practical. Then the highway agency would

have the funds (if fee revenue were dedicated to transportation) and the justiﬁca-

tion to expand capacity and improve service. In regions where highways are under-

funded, the result of road pricing could be increased construction spending.

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Summary: Relevance of Performance Evaluations to Finance

Although the evidence is fragmentary, available estimates indicate that the invest-

ment embodied in the present highway system as a whole has been beneﬁcial, that

total spending probably has not greatly exceeded (and may be less than) the

amount that would be economically justiﬁed, and that opportunities exist for

investments in incremental expansion and upgrading of the system that would

yield worthwhile payoffs.

The paucity of data makes comparisons difﬁcult, but there appear to be pub-

lic infrastructure programs in the United States that have not had this degree of

success—that is, programs in which total spending has signiﬁcantly exceeded

justiﬁed levels and in which incremental investments are being directed to proj-

ects with low returns. It is likely that the ﬁnancial checks and balances in the

highway ﬁnance system have contributed to the relative success of the highway

program in producing a satisfactory return from the public funds invested. The

fuel taxes and vehicle fees that users pay are about 10 percent of the private cost

of operating a motor vehicle. They vary with use and have been adjusted from

time to time in accordance with changes in the cost to the government of pro-

viding highways. Therefore the fees, to a limited extent, discourage wasteful use

of the system.

More signiﬁcant, spending has been constrained by the revenues generated

from users. Reliance on user fee ﬁnance should reduce the risk of excessive spend-

ing: an overbuilt facility that produced low levels of beneﬁts for its users in rela-

tion to its costs would be unlikely to generate revenue from user fees sufﬁcient to

sustain the facility. Also, in the political process of setting highway budgets and

fees and selecting projects, users are unlikely to support fee levels in excess of those

producing beneﬁts the users consider worthwhile. And with total spending sub-

ject to a budget constraint, users will be likely to oppose projects that yield lower

returns than other available projects.

However, the present ﬁnance system has important shortcomings that reduce

the beneﬁts of transportation programs. The following conclusions are supported

by the review above of the costs of these shortcomings and the potential beneﬁts

of ﬁnance reform that incorporated improved road pricing:

• Highway congestion causes several billion vehicle hours of delay annually,

and only modest potential exists for cost-effectively reducing delay through

trafﬁc engineering improvements or capacity expansion.

• Peak pricing on congested roads could bring about congestion reduction and

public beneﬁts at least as great as justiﬁable capacity expansions and trafﬁc

engineering measures in the absence of pricing.

• Better aligning truck fees with the costs of serving trucks would yield efﬁ-

ciencies in road construction and maintenance and in freight transportation.

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• An efﬁciently sized road system (that is, a system that could not be expanded

or contracted without loss of beneﬁts) could pay for itself from the revenues

generated by peak charges at rates that maximized public beneﬁts, plus prob-

ably modest additional ﬂat per-mile or registration fees.

• Improving road pricing would alter the beneﬁts of capacity expansion proj-

ects and therefore would be expected to affect project selection and the rate

and direction of evolution of the network.

TRANSIT PERFORMANCE

The impetus for this study was concern for the viability of present highway user

fees as a revenue source. Therefore, the committee has considered transit ﬁnance

insofar as it is linked to highway user fees. A prominent feature of the present

ﬁnance system is the dedication of portions of federal and state highway user fee

revenues to transit. As Chapter 2 described, the amounts are fairly modest com-

pared with total highway spending but are important for transit, amounting to

about a quarter of transit spending.

A part of the committee’s charge (presented in Chapter 1) is to assess the impli-

cations of ﬁnance trends for the performance of the transportation system and

whether beneﬁts could be attained through reform. Therefore, it is relevant to the

charge to examine the economic performance of transit in parallel with the review

of highway system economic performance above. The examination will help in

judging whether the practice of partially funding transit with highway user fee rev-

enue is justiﬁed economically today and whether it ought to be continued if a tran-

sition to new funding sources takes place in the future.

This section addresses the ﬁrst of these questions: whether the public derives

beneﬁts from subsidies to transit (i.e., funding from sources other than fare rev-

enues from operations). In Chapter 6, highway user fee revenue and alternative

sources for such funding are compared. At least two characteristics of urban

transportation may justify subsidies to transit. Highway travelers do not pay the

full costs to the public of their trips, especially trips during congested periods.

Therefore, some road trips cost the public more than they are worth to the trav-

eler, and a subsidy to transit that diverts some trips from highways can yield a net

public beneﬁt. Second, there are scale economies in the provision of transit services

over a wide range of passenger volumes. That is, at least in some circumstances,

the long-run cost per passenger falls as volume increases (and capacity is expanded

to accommodate it). In these circumstances, additional passengers lower the costs

for all in the long run, and the public can gain from a transit subsidy that increases

trafﬁc volume. Of these two possible beneﬁts from transit subsidies, the beneﬁt

from congestion reduction is the better documented and probably the larger ben-

eﬁt in cities today. If highway subsidies were reduced or eliminated in the future

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(e.g., through mileage charges as described in Chapter 5), it might become more

important to take scale economies into account in transit ﬁnance. There also may

be scale economies in the provision of highway transportation (Gómez-Ibáñez

1999, 112–114; Small 2006; Mohring 1965, 253–254; Meyer et al. 1965,

341–344).

As in the case of highways, few estimates of the historical beneﬁts of transit pro-

grams have been carried out. USDOT’s Conditions and Performance reports con-

sider transit; however, the method differs from its analysis of highways described

above. The USDOT reports present estimates of transit spending levels required

to meet speciﬁed service criteria but not of economically justiﬁed spending

(USDOT n.d., iv). Summarized below are the results of two studies that do assess

whether the present level of subsidies is appropriate by estimating beneﬁts from

transit.

The ﬁrst study, from the Brookings Institution, used an urban transportation

demand model to estimate the value that travelers place on bus, rail transit, and

road travel (Winston and Shirley 1998, 29–47). The demand model relates trav-

elers’ choices about transportation mode and the timing of trips to measures of

transportation service quality and cost. The model was used to calculate the pay-

ment that would be required to compensate travelers for their loss if their preferred

mode was unavailable. The calculation includes the loss to automobile travelers

when elimination of transit increases highway congestion.

These estimates of the beneﬁt that travelers derive from each mode are then

compared with government subsidies to the modes. The estimated annual beneﬁt

of bus service to travelers in 1990 was $4 billion (in excess of bus fares paid, and

including the beneﬁt to automobile travelers of reduced highway congestion). The

study estimates 1990 bus subsidies to be $10 billion and concludes that the subsi-

dies were not cost-effective, since their discontinuance would have resulted in a

loss of at most $4 billion in beneﬁts. Highways are estimated to yield large net ben-

eﬁts. For rail transit, the beneﬁt to travelers, $3 billion, just equaled government

subsidies. The authors emphasize that the beneﬁts and costs of bus and rail sys-

tems vary from city to city and that with appropriate service and pricing, bus sys-

tems could generate positive beneﬁts.

The Federal Transit Administration (FTA) has evaluated the economic per-

formance of transit with a conceptually similar method (FTA 2000, 37–52). The

result is expressed as the optimal subsidy that the public ought to pay to transit to

allow it to lower its fares to attract travelers off roads. The study recognizes that the

primary economic rationale for transit subsidies is that urban highway use gener-

ally is undercharged. Because a highway traveler does not pay a price for using a

congested road that reﬂects the cost (in added travel time) the traveler imposes on

others on the road, some trips cost the public as a whole more than they are worth

to the individual traveler. If congestion charges cannot be imposed on roads, the

public can beneﬁt by subsidizing transit as long as the cost of attracting an addi-

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tional traveler from road to transit is less than the public beneﬁt of the resulting

reduction in road congestion. The FTA analysis uses an urban travel demand

model to compute this optimum annual subsidy for seven metropolitan areas and

the nation as a whole.

The resulting estimate is that the optimal nationwide annual transit subsidy

in 1999 was $19 billion ($10 billion for bus and $9 billion for rail). Actual transit

operating subsidies (i.e., operating expenses less fare revenue and other revenues

from operations) in 1999 were $13 billion and capital grants were $9 billion

(APTA 2004, 37, 44, 46; Table 2-4, Chapter 2). The study concludes that the

optimum subsidy exceeds the actual operating subsidy plus that portion of capital

spending devoted to maintaining and renovating existing capacity, and therefore

that transit subsidies for these purposes are economically justiﬁed.

Comparison of the FTA study estimates with actual subsidies suggests that,

although their total magnitude may be appropriate, present subsidies are mis-

allocated. For example, FTA’s metropolitan area estimates indicate that New

York should receive 39 percent of all subsidies, whereas New York City Transit’s

share of nationwide operating subsidies is 12 percent (FTA 2004). The FTA

study estimates that rail transit’s share of the optimum subsidy should be 46 per-

cent, but according to the Brookings study, rail in 1990 received only 23 percent

of actual subsidies.

In summary, the two studies indicate that the present nationwide total level

of rail transit subsidies and at least some part of bus subsidies are justiﬁed by the

beneﬁts to travelers, although beneﬁts probably could be increased by shifting sub-

sidies in favor of the more transit-dependent cities and rail. Transit subsidies can

be of beneﬁt because urban road users are not charged fees commensurate with

costs. Therefore, improving the pricing of roads would alter the rationale for tran-

sit subsidies.

EVALUATION OF FINANCE PROGRAM FEATURES

The conclusions of the section above on highway system performance were that,

although the quality of the evidence is weak, the highway program appears to be

relatively successful in providing beneﬁts that justify its costs and that the ﬁnance

system probably has contributed to this success because user fees function as prices

and because user fee ﬁnance tends to check excessive spending. However, the con-

nections between performance and the particular features of the ﬁnance system are

complex and not well understood. Aspects of present practices have been contro-

versial, and proposals to modify them are common.

The two defining features of the system are the practice of user fee finance,

which tends to link fee revenue to spending, and the federal structure of the

system, that is, the sharing of responsibilities among federal, state, and local

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governments. Understanding of the impacts of these two features will be necessary

to guide either improvements in present arrangements or design of a long-term

alternative. If the present system is basically sound, it will be valuable to extend its

life span by reinforcing ﬁnance practices that contribute to its success and altering

those that do not. For example, Chapter 2 described how pressures to ﬁnd expe-

dient funding are prompting some jurisdictions to decrease reliance on user fee

revenue for transportation programs. If user fee ﬁnance has historically contributed

to good performance, the risk involved in allowing the practice to erode ought

to be considered in such decisions. Similarly, if adjustments to the rules of the

federal-aid program could promote more cost-effective state and local government

spending choices, such actions would reinforce the existing federal structure of

transportation programs and extend the life of the present ﬁnance system.

If the nation eventually develops fundamentally new ﬁnance arrangements

that rely more on direct charging for highway use (for example, through expanded

use of tolls and road use metering, as Chapter 5 describes), governments will need

to reconsider both these features of the ﬁnance system (the federal structure and

the link between fee revenue and spending). With direct charging, the capability

of states and local jurisdictions to collect fees from all users of their roads would be

enhanced, so the historical justiﬁcation for intergovernmental aid would be dimin-

ished, and jurisdictions would expect to control the revenue generated by the roads

that they own. If the road user fees in the new charging scheme properly reﬂected

costs, it would be appropriate to have tighter links between revenue and spending

than exist today, because the revenue that each link in the road network generated

would be the best indicator of the value of expanding that part of the network.

Present practices with regard to government responsibilities, trust funds, and ded-

icated revenues were developed in the context of the existing scheme of funding

sources. Simply substituting new sources for the existing ones while leaving all

other ﬁnance practices untouched probably will not be practical or desirable.

The following two sections brieﬂy outline key questions concerning the impacts

of user fee ﬁnance and the federal structure of ﬁnance on the performance of gov-

ernment transportation programs. Adequate information for answering many of

the questions is not available. Chapter 6 reviews proposals from various sources for

changing certain of these features to improve performance.

User Fee Finance and Dedicated Revenues

Chapter 2 outlined federal highway ﬁnance practices. Most states’ ﬁnance prac-

tices parallel the main features of the federal program—user fees, trust funds,

and dedication of fee revenues for speciﬁc purposes. This collection of practices

inﬂuences total spending, spending priorities, the use of roads and transit, and

consequently the beneﬁts of transportation programs. That is, the outcomes of

transportation programs would be different if alternative practices were employed

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(for example, eliminating the connection between user fee revenue and spend-

ing). The following practices are the elements of user fee ﬁnance in the highway

program:

• Imposing highway user fees (principally motor fuel taxes and vehicle regis-

tration fees);

• Matching the fees, to some extent, to the government’s costs of providing

services;

• Dedicating most revenue from the fees to highways and transit, with trust

funds to enforce the connection between revenue and spending; and

• Deriving most highway funding from highway user fee revenues.

This ﬁnance arrangement is the outcome of two independent policy decisions,

each of which should be evaluated on its own merits: the decision to impose fees

related (to some extent) to costs and the decision to depend primarily on fee rev-

enue to fund highways.

User Fees

The practice of charging fees to highway users generally has not attracted criticism

(although the level and form of fees can be controversial). The federal government,

all the states, and most other developed countries impose special fees or taxes on

road users, and similar charges are imposed on users of other government-provided

transportation facilities in the United States.

Even if they are uncontroversial, user fees can be harmful if the charges that

travelers incur for many trips exceed the added cost to the public of providing those

trips. User fees can promote efﬁcient use of facilities if they bear at least a degree

of correspondence to the public’s costs of providing the facilities. Then users will

make decisions (e.g., whether to make a trip, whether to travel by car or bus, what

size of freight truck to use, whether to ship by truck or rail) that take these costs

into account. Fees set too low allow wasteful use of facilities, and fees set too high

needlessly discourage travel.

Many studies have compared highway user fees with costs. One recent eco-

nomic study that considered congestion, pollution, and the external costs of high-

way accidents concluded that, in the absence of more effective policies to address

these costs (for example, peak period charges that reduced congestion), the opti-

mal gasoline tax in the United States would be $1 per gallon (Parry 2002) (the

actual average rate is $0.38 per gallon). (A tax at this level would discourage much

travel on uncongested rural roads that was valuable to travelers and had low cost.)

Of the $1 per gallon estimate, $0.20 would serve to substitute fuel tax revenue for

some of the revenue now derived from income taxes. The public could beneﬁt

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from such a substitution because all taxes distort private economic decisions and

thus cause economic losses. For example, road user taxes in excess of the costs of

travel cause the loss of some valuable travel, and income taxes reduce employment.

The study estimated that up to $0.20 per gallon, the added loss of this kind from

the fuel tax would be less than the gain from lower income taxes.

In another study, a TRB committee compared prices with costs of freight

transportation by truck, barge, and rail. The committee considered infrastructure,

pollution, congestion, and accidents. It found that, for typical trips where the

modes compete, the mismatch between prices (including user fees for public infra-

structure) and costs for trucks usually was smaller than the mismatch for barges

and greater than for rail (TRB 1996, 6–10). Chapter 6 describes proposals from

federal highway cost allocation studies and past TRB committees for improving

the alignment between present highway user fees and costs. Introduction of road

use metering or other forms of congestion charging, as described in Chapter 5,

would be needed to allow fees to reﬂect adequately the congestion costs that road

users impose on others.

Dedicated Revenues

The other main feature of user fee ﬁnance in the highway program—the practice

of tying spending on a particular government program to revenue from a particu-

lar tax—has been controversial. Analyses of dedicated taxes have produced at least

four competing assessments:

• Dedicated taxes are harmful because any constraint that prevents government

ofﬁcials from allocating funds to the activities that will yield the greatest ben-

eﬁt will reduce public welfare. In this view, the revenue a particular tax hap-

pens to raise in a time period is a poorer guide to appropriate spending than

the judgment of ofﬁcials (Wilkinson 1994, 122; Buchanan 1963, 457).

• Dedicated taxes are justiﬁable as an expediency to gain public acceptance of

certain worthwhile taxes or programs and to provide ﬁnancial stability, even

if the practice does tend to reduce the efﬁciency of government spending by

limiting ofﬁcials’ ﬂexibility. According to this pragmatic view, citizens who

are skeptical of the beneﬁts of general tax increases are more likely to acqui-

esce to a tax that is presented as supporting a speciﬁc popular program

(Farrell 1999, 59; Wilkinson 1994, 120–122, 132). The ﬁnancial stability

provided by guaranteed revenue is viewed as necessary in an infrastructure

program that must construct and operate large, long-lived facilities.

• Dedicated taxes promote efﬁcient government by giving taxpayers more

direct control over the uses of tax revenue. In this view, the constraint that

earmarking places on the independence of government budget makers is

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likely to enhance rather than reduce the efﬁciency of public spending deci-

sions in many circumstances, because citizens know best what programs are

worth and public ofﬁcials often have biases stemming from their bureau-

cratic interests. Under general fund budgeting, the main choice for each cit-

izen is whether to support higher or lower general taxes, and each citizen

must speculate as to whether raising general taxes will sufﬁciently increase

spending on the services he or she most values to make the general tax

increase worthwhile. In contrast, dedicating tax revenues to particular uses

creates opportunities for more direct citizen input to individual program

funding decisions (Buchanan 1963).

• Dedicating taxes has little or no impact. Government ofﬁcials generally have

enough budgeting ﬂexibility, despite restrictions from dedicated taxes, that

total spending and spending allocations end up close to the amounts that

would occur under general fund ﬁnancing. In this view, it is a deception to

lead taxpayers and voters to believe that dedicating taxes controls or guaran-

tees spending choices when in reality it does not (Patashnik 2000, 188;

Wilkinson 1994, 122).

These views are hypotheses about the merits of dedicated tax ﬁnancing in gen-

eral, including such applications as school district property and sales taxes to fund

education. The highway ﬁnance system is a special case; because the dedicated taxes

are user fees, they may have consequences that differ from those of dedicated

broad-based taxes (such as a school district tax). Speciﬁcally, the willingness of

highway users to pay the fee conveys some information about the value of the high-

way facility. It was argued above that reliance on dedicated revenue from user fees

may reduce the risk of overspending, because a facility that produced little beneﬁt

would not generate fee revenue sufﬁcient to sustain it and because users will not

lobby for added spending that entails fees higher than the value to them of the

improved service. Demonstrating that transportation spending is constrained in

this way would require research, but there is some evidence in support of the asser-

tion. National highway spending has historically tracked user fee revenue fairly

closely (Table 2-3), although spending exceeds revenues and there have been peri-

ods of divergence (e.g., 1972–1982 and 1997–2003). Another sign of how ﬁnance

practice constrains spending was the 2-year delay in reauthorization of the federal

surface transportation aid program between the expiration of the previous program

in 2003 and enactment of the Safe, Accountable, Flexible, Efﬁcient Transportation

Equity Act: A Legacy for Users (SAFETEA-LU) in 2005. The obstacle to action

in that period was the gap between desired spending and projected revenue from

user fees.

Gaining the efﬁciency beneﬁts of charging fees to highway users does not

require that the revenues raised be dedicated to highways. User fees are beneﬁcial

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as long as they induce reductions in costs of highway travel (for example, conges-

tion, pollution, or road wear costs) that are greater than the value of lost travel ben-

eﬁts to highway users who forgo or alter travel because of the fees. It was noted

above that if the charge for each trip is the marginal cost of the trip (that is, the

added cost of the trip to the system operator, other users, and the public), and the

highway agency invests in expanding links of the system that are generating sur-

plus revenue, then the highway system will evolve toward the economically opti-

mum scale and the fee revenue will approximate the spending needed to support

it. However, if fees are not equal to marginal costs (for example, if a monopolist

set fees so as to maximize revenue), then, in the case of a service like highways that

users value highly and whose use is fairly insensitive to price, the fees could gener-

ate large revenues, in excess of the economically justiﬁed level of road spending.

The possibility of excess revenue has been a long-standing objection to dedi-

cated funding for highways, whether from fuel taxes or tolls.

The legitimacy of

this concern is difﬁcult to assess because of lack of evidence. If road charges were

set to maximize revenue and all revenue was then spent on expanding capacity, the

likely result would be a growing capacity surplus and low or negative returns on

investments for incremental capacity expansion. However, the evidence presented

in the section above on highway system performance suggests that historically,

incremental highway expansions have yielded good returns on average. Comparison

of tax rates and revenues in the United States with those in Europe (where the gaso-

line fuel tax rate typically is 10 times higher than in the United States and rev-

enues generally are not dedicated) suggests that U.S. rates are far below the

revenue-maximizing rates. It has been argued that dedication of revenue tends to

suppress fuel tax rates by making the fuel tax a less useful revenue-raising instru-

ment in the eyes of legislators (Pisarski 2004).

Evidence for another supposed effect of dedicating tax revenue—that it gains

public support for user fees or other taxes—is mainly anecdotal. The following are

examples:

• In debates over transportation ﬁnance in Pennsylvania, rural and small town

legislators are reported to have opposed proposals to increase highway user

fees to pay for transit but to have supported a broad-based transit tax plus

user fee increases dedicated to highways (Barnes 2005).

THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

For example: “The net result [of tying spending to revenue from road pricing] could be an inexhaustible

supply of capital for highway investment unrelated to desired levels that might otherwise be formulated

from policy planning considerations at the local or national level” (Sitton 1965); and “Originally intended

to ensure completion of the interstates [the Highway Trust Fund] is now primed to sponsor much super-

ﬂuous road construction. A bulging stream of proceeds from the trust’s ‘user fee’ (gas-tax income) is pre-

sumed to pay for each new mile of concrete and macadam. . . . Few other advanced nations have hitched

the ﬁnancing of their transportation systems to a cash cow of this sort” (Nivola 1999, 69).

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• Proponents of devolution of highway ﬁnance responsibilities from the fed-

eral government to the states regularly cite diversion of federal user fee rev-

enue from highways to other purposes as a primary argument for abolishing

the federal gas tax (e.g., Utt 2004, 2).

• A referendum calling for dedication of state highway user fee revenue

to transportation passed by a 79 percent majority in Missouri in 2004

(ARTBA 2004).

• The history of transportation funding referenda suggests that the more

speciﬁc the proposed uses of the revenue, the more likely it is that voters

will support the tax (Ernst et al. 2002, 5–11; Center for Transportation

Excellence 2004).

Experience in Europe runs counter to the claim that dedication of revenues is

necessary to gain support of fees. Taxpayers there have been willing to accept very

high fuel excise tax rates, although most revenue is not dedicated to transportation

and some toll revenues have been dedicated to nonhighway purposes. However,

the direction of European transport ﬁnance reform may be toward U.S.-style user

fee ﬁnance with dedicated taxes (Commission on Transport Infrastructure

Funding 2000).

In view of the fundamental importance of dedicated tax revenues to the ﬁnanc-

ing of transportation programs in the United States, it is unfortunate that better

information is not available for assessing the conﬂicting claims concerning the

impacts of the practice. Research could evaluate the effect of the practice on total

spending, public support for taxes, and the quality of government spending deci-

sions. Despite the uncertainties, it appears that the practice of user fee ﬁnance in

the highway program has positive consequences and that allowing the practice to

erode would risk a decline in the performance of transportation programs. User

fee ﬁnance appears in some cases to earn public support for speciﬁc programs,

although systematic evidence for this effect is lacking. It provides stability and may

promote efﬁciency through the budget constraint it imposes and through the inﬂu-

ence of fees on user decisions.

Federal, State, and Local Government Responsibilities

Chapter 2 described the division of responsibilities among the federal, state, and

local governments for ﬁnance and for operation of transportation programs, and

it outlined the rules governing the federal-aid highway program with regard to allo-

cations of grants among the states, project eligibility, project design, and con-

tracting and labor practices requirements. These two related aspects of the federal

structure of transportation ﬁnance—the division of responsibilities and federal

program rules—exert a major inﬂuence on program outcomes.

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Chapter 1 stated, as a guideline for policy, that the lowest level of government

(federal, state, or local) that represents most of the population that uses and ben-

eﬁts from a transportation facility ought to be responsible for providing and fund-

ing the facility. That is, ideally, local governments would provide local streets and

transit; states, regional facilities like intercity roads; and the federal government,

facilities whose scope genuinely demands a national perspective in planning, like

the Interstate highway system or the air trafﬁc control system. The advantage of

following this rule is that the governmental unit providing the facility is account-

able to the users and beneﬁciaries of the facility, who also pay for it through their

taxes and fees. Transportation budgets and priorities are then more likely to cor-

respond to the services that the beneﬁciaries value most and are willing to pay for.

The federal and state roles in highways and transit are greater today than this

rule would appear to require, for three reasons. First, grants to lower levels of gov-

ernment have been used as a means of redistributing resources among regions of

the country and between urban and rural areas. Second, cities and towns lack good

mechanisms for charging the users of their streets and highways. Finally, the pres-

ent federal highway program was designed with construction of the Interstate

system—a genuinely national project—as its most important objective. Since the

substantial completion of the Interstate program in the 1980s, proposals have reg-

ularly been made to reduce the federal government’s involvement in highways and

transit. At the state level, a realignment of state and local responsibilities has

occurred gradually, in part as the result of federal-aid program requirements that

states give local governments more control over priorities for spending federal-aid

funds in urban areas. Chapter 6 reviews a range of proposals for adjusting federal,

state, and local roles, within the basic framework of existing ﬁnance arrangements,

with the aim of increasing the cost-effectiveness of highway and transit spending.

Chapter 5 describes proposals for introducing direct charging for road use through

tolls or road use metering. By giving all governments the ability to raise revenues

from all users of their roads, direct charging probably would entail a major restruc-

turing of federal, state, and local responsibilities.

The following are important issues concerning the effects of program rules

in the existing federal transportation aid program:

• The impact of project eligibility rules on state project selection (federal grants

carry numerous restrictions concerning the class of road or the type of

improvement for which the state may spend the funds, including the restric-

tion of nearly all highway grants to capital projects);

• The effect of federal engineering standards and planning requirements on

the cost-effectiveness of projects and project selection;

• The signiﬁcance of the geographical transfers that the federal-aid program

accomplishes, among states and between urban and rural areas, from the

standpoint of fairness and cost-effectiveness; and

THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

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• The effect of the federal highway user taxes on state tax effort and the effect

of federal-aid matching requirements on total state transportation spending.

There is scope for reforms in federal-aid program rules that would allow the

program to produce greater transportation improvement and fulﬁll federal goals

more effectively. Studies from government and other sources have suggested

how changing speciﬁc rules could improve results. For example, Government

Accountability Ofﬁce (GAO) reports have shown that, because the state match-

ing share required in most federal-aid highway projects is small (usually 20 per-

cent), much federal highway aid is in effect paying for general state spending and

taxpayer relief rather than for expanding the highway system (GAO 2004); a

Congressional Budget Ofﬁce study noted how relaxation of federal restrictions

on debt ﬁnancing, tolling, and public–private partnerships has helped states to

increase the value of federal aid, and assessed prospects for greater improvement

in this direction (CBO 1998); and a study by a TRB committee showed how

federal design rules affect costs of projects and state project selection decisions

(TRB 1987).

Revisions to federal-aid highway program rules would be a necessary element

of any comprehensive proposal concerning reform of transportation ﬁnance at the

federal level. In the 2005 reauthorization of the federal surface transportation aid

program, Congress created two commissions to examine questions related to

ﬁnance, the National Surface Transportation Policy and Revenue Study Com-

mission [SAFETEA-LU Section 1909(b)] and the National Surface Transporta-

tion Infrastructure Financing Commission (SAFETEA-LU Section 11142). When

the provisions in the charges of these commissions were under consideration dur-

ing debate over reauthorization, GAO recommended that the mandate include

consideration of options to redesign the structure and funding formulas of the

federal-aid highway program, in order to increase the effectiveness of aid and bet-

ter promote national goals (GAO 2004, 47). The commissions’ charges do not

speciﬁcally refer to this task, but it would not be inconsistent with the broad def-

initions of the charges in the legislation.

REFERENCES

Abbreviations

AASHTO American Association of State Highway and Transportation Ofﬁcials

APTA American Public Transportation Association

ARTBA American Road and Transportation Builders Association

CBO Congressional Budget Ofﬁce

FHWA Federal Highway Administration

EVALUATING THE PRESENT FINANCE SYSTEM

71340_074_106 5/30/06 9:54 AM Page 91

FTA Federal Transit Administration

GAO Government Accountability Ofﬁce

TfL Transport for London

TRB Transportation Research Board

USDOT U.S. Department of Transportation

AASHTO. 2002. Transportation: Invest in America: The Bottom Line. Washington, D.C.

APTA. 2004. Public Transportation Fact Book (55th ed.). March.

ARTBA. 2004. Special 2004 Ballot Initiatives Report.

Barnes, T. 2005. Rendell Lobbying to Rescue Transit. Pittsburgh Post-Gazette, Jan. 30, p. A-1.

Buchanan, J. M. 1963. The Economics of Earmarked Taxes. Journal of Political Economy, Vol. 71,

No. 5, Oct., pp. 457–469.

Cambridge Systematics. 2005. Future Highway and Public Transportation Finance Phase I: Current

Outlook and Short-Term Solutions: Executive Summary. National Chamber Foundation.

CBO. 1998. Innovative Financing of Highways: An Analysis of Proposals. Jan.

Center for Transportation Excellence. 2003. Election Issues. www.cfte.org/success/elections.asp.

Commission on Transport Infrastructure Funding. 2000. Theses and Recommendations of the

Government Commission on Transport Infrastructure Funding. www.bmvbw.de/Anlage5994/

Theses-and-Recommendations-of-the-Government-Commission-on-Transport-Infrastructure-

Funding.pdf. Sept. 5.

Committee for the Review of the Federal Highway Cost Allocation Study. 1996. Letter Report.

Transportation Research Board, National Research Council, Washington, D.C., May 30.

Ernst, M., J. Corless, and K. McCarty. 2002. Measuring Up: The Trend Toward Voter Approved

Transportation Funding. Surface Transportation Policy Project.

Farrell, S. 1999. Financing European Transport Infrastructure: Policies and Practices in Western Europe.

Macmillan.

Fernald, J. G. 1999. Roads to Prosperity? Assessing the Link Between Public Capital and Productivity.

American Economic Review, Vol. 89, No. 3, June, pp. 619–638.

FHWA. 2004. Highway Statistics 2003.

FTA. 2000. Transit Beneﬁts 2000 Working Papers: A Public Choice Policy Analysis.

FTA. 2004. National Transit Database: Transit Proﬁles All Reporting Agencies for the 2002 Report Year.

GAO. 2004. Federal-Aid Highways: Trends, Effect on State Spending, and Options for Future Program

Design. Aug.

GAO. 2005. Highway and Transit Investments: Options for Improving Information on Projects’ Beneﬁts

and Costs and Increasing Accountability for Results. Jan.

Gómez-Ibáñez, J. A. 1999. Pricing. In Essays in Transportation Economics and Policy: A Handbook in

Honor of John R. Meyer (J. A. Gómez-Ibáñez, W. B. Tye, and C. Winston, eds.), Brookings

Institution, Washington, D.C.

Horsley, J. 2002. Testimony Before the Senate Finance Committee and Senate Environment and Public

Works Committee. Sept. 25.

Keeler, T. E., and J. S. Ying. 1988. Measuring the Beneﬁts of a Large Public Investment: The Case of

the U.S. Federal-Aid Highway System. Journal of Public Economics, Vol. 36, pp. 69–85.

Meyer, J., J. Kain, and M. Wohl. 1965. The Urban Transportation Problem. Harvard University Press,

Cambridge, Mass.

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Mohring, H. 1965. Urban Highway Investments. In Measuring Beneﬁts of Government Investments

(R. Dorfman, ed.), Brookings Institution, pp. 231–291.

Montgomery, L. 2004. Ehrlich Urges Vehicle Fee Increase for Transportation: Speeders, Drunk Drivers

Also Targeted, but Gas Tax Exempt. Washington Post, Feb. 14, p. B1.

Nadiri, M. I., and T. P. Mamuneas. 1998. Contribution of Highway Capital to Output and Productivity

Growth in the U.S. Economy and Industries. www.fhwa.dot.gov/policy/gro98cvr.htm. Federal

Highway Administration, Aug.

Nelson, P., I. W. H. Parry, and M. Wachs. 2002. Is Northern Virginia Voting on the Right

Transportation Tax? State Tax Notes, Oct. 28, pp. 271–275.

Nivola, P. S. 1999. Laws of the Landscape: How Policies Shape Cities in Europe and America. Brookings

Institution Press.

Parry, I. W. H. 2002. Is Gasoline Undertaxed in the United States? Resources, Issue 148, Summer,

pp. 28–33.

Patashnik, E. M. 2000. Putting Trust in the U.S. Budget: Federal Trust Funds and the Politics of Com-

mitment. Cambridge University Press, Cambridge, United Kingdom.

Pisarski, A. E. 2004. Reconsidering the FHTF. Regulation, Spring, pp. 12–13.

Reno, A. T., and J. R. Stowers. 1995. NCHRP Report 377: Alternatives to Motor Fuel Taxes for Financing

Surface Transportation Improvements. Transportation Research Board, National Research Council,

Washington, D.C.

Saﬁrova, E., K. Gillingham, I. Parry, P. Nelson, W. Harrington, and D. Mason. 2004. Welfare and

Distributional Effects of Road Pricing Schemes for Metropolitan Washington, D.C. In Road

Pricing: Theory and Evidence (G. Santos, ed.), Elsevier, Oxford, United Kingdom, pp. 179–206.

Shirley, C., and C. Winston. 2004. Firm Inventory Behavior and the Returns from Highway

Infrastructure Investments. Journal of Urban Economics, Vol. 55, March, pp. 398–415.

Shrank, D., and T. Lomax. 2003. The 2003 Annual Urban Mobility Report. Texas Transportation

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Sitton, P. 1965. Comments. In Measuring Beneﬁts of Government Investments (R. Dorfman, ed.),

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71340_074_106 5/30/06 9:54 AM Page 94

Effects of Automotive Technology,

Energy, and Regulatory

Developments on Finance

Important policy initiatives of the federal and some state governments have

the goal of reducing oil use in order to reduce dependence on foreign oil sup-

pliers and emissions of greenhouse gases and other pollutants. This chapter

examines the extent to which revenue from highway user fees might diminish

over time as the result of these policies. Reduced oil consumption will reduce

revenues if tax rates are not raised to compensate. Transportation officials’

apprehension in this regard is understandable in light of the history of tax rates

and revenues described in Chapter 2. Rapid improvement in fuel economy

and higher fuel prices were among the factors that contributed to the pro-

nounced decline in constant-dollar highway user fee revenue and highway

spending in the 1970s and early 1980s, until legislatures responded with rate

increases.

This chapter examines the likelihood that rising fuel prices, new auto-

motive technology, or new environmental and energy regulations will affect

revenues from highway user fees in the next two decades. If large improve-

ments in fuel economy or transition of the highway fleet to new energy sources

appears likely within this period, planning for adjustment or replacement of

the present fuel-tax-based finance system will be needed to avoid unintended

declines in revenue. The first two sections below review projections of world

petroleum supply, consumption, and price and of motor vehicle technology

and fuel consumption in the United States. The third section considers possi-

ble U.S. regulatory developments that may affect fuel consumption and fuel

tax revenue.

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SUPPLY, PRICE, AND CONSUMPTION OF PETROLEUM FUELS

The future path of motor fuel prices will affect the revenues derived from estab-

lished user fees because fuel prices inﬂuence travel volume, fuel economy, and

the types of fuels used. Through its effect on travel volume, the price of fuel also

will inﬂuence the cost of providing roads.

This section presents historical and projected price and consumption trends

primarily from U.S. Department of Energy (DOE) sources: the Annual Energy

Outlook 2005 (EIA 2005a), Annual Energy Outlook 2006 Early Release (EIA

2005b), and Future U.S. Highway Energy Use: A Fifty Year Perspective (Birky et al.

2001). Each edition of the Annual Energy Outlook (AEO) is a 25-year projection

of energy supply and consumption produced by DOE on the basis of its National

Energy Modeling System and System for the Analysis of Global Energy Markets.

Highway Energy Use is a more qualitative analysis of possible future developments

in petroleum and fuels markets, highway use, and motor vehicle technology.

The AEO 2006 Early Release reference case projections show a slight increase

in the U.S. retail gasoline price from its 2004 average of $1.90 per gallon to $2.13

in 2025 (in 2004 dollars) (Table 4-1, Figure 4-1). Comparison of this projection

with DOE’s 2005 and 2004 AEOs illustrates the current great uncertainty in oil

market projections after 3 years of sharp price increases. DOE’s 2006 reference

case world oil price projection for 2025 ($48 per barrel) is 54 percent above the

corresponding projection in the 2005 AEO ($31 per barrel in 2004 dollars) and

the 2025 gasoline price is 31 percent higher (Table 4-1). The 2006 AEO reference

case projections and assumptions are similar to the 2005 edition’s “High B” world

oil price case, the highest price scenario presented in that edition. DOE explains

the changes as follows: “In preparing AEO2006, EIA reevaluated its prior expec-

tations about world oil prices in light of the current circumstances in oil markets.

Since 2000, world oil prices have risen sharply as supply has tightened, ﬁrst as a

result of strong demand growth in developing economies such as China and later

as a result of supply constraints resulting from disruptions and inadequate invest-

ment to meet demand growth.... In the AEO2006 reference case, the combined

production capacity of members of the Organization of Petroleum Exporting

Countries (OPEC) does not increase as much as previously projected, and conse-

quently world oil supplies are assumed to remain tight” (EIA 2005b, 2, 4).

In the 2005 AEO edition, DOE had already raised its 2025 gasoline price pro-

jection by 12 percent in the reference case, compared with the 2004 edition, and

by 37 percent in the highest world oil price projection presented. None of the AEO

cases is intended to reﬂect consequences of petroleum supply disruptions.

DOE predicts that producers will be able to expand world oil output by nearly

40 percent and U.S. motorists will be able to increase travel by nearly 50 percent

from 2003 to 2025 while the price of gasoline is maintained near $2.00 per gal-

lon. The gasoline price will increase more slowly than the world oil price because

THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

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TABLE 4-1 Projected Growth Rates of World Oil Production, Oil and Gasoline Price, U.S. Motor Vehicle Travel, and

Fuel Consumption (EIA 2005a, Tables D3, D4, D7; EIA 2005b, Tables A1, A7, A12)

AEO 2005 AEO 2006

Reference Case High B Price Case Reference Case

2003–2025 Annual 2003–2025 Annual 2003–2025 Annual

Increase (%) Rate (%) Increase (%) Rate (%) Increase (%) Rate (%)

Gasoline price −1 0.0 26 1.0 29 1.2

World oil price 9 0.4 73 2.5 69 2.4

Annual world oil production 51 1.9 41 1.6 39 1.5

Annual U.S. vehicle miles 57 2.1 51 1.9 48 1.8

Annual U.S. highway

motor fuel consumption 51 1.9 42 1.6 39 1.5

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the gasoline price includes reﬁning and distribution costs and taxes. (DOE’s

gasoline price projections appear about equal to the price of the raw material plus

$1 per gallon for reﬁning, distribution, and tax.)

To suggest a range of possible future prices, Figure 4-1 shows the historical

gasoline price and three projections: the AEO 2006 Early Release reference case

(the only case presented in the Early Release), the AEO 2005 reference case as a low

projection, and a high case constructed by multiplying the 2006 AEO reference

case price by the ratio of the price in the 2005 AEO High B case to the 2005 AEO

reference case price in each year. The 2025 price in this upper bound case is $2.70

per gallon, corresponding to an oil price of about $75 per barrel. (DOE points out

that the oil prices in its tables until the 2006 AEO were “average reﬁner acquisi-

tion cost” for imported crude and that this price has typically been several dollars

per barrel less than the prices of premium low-sulfur crude, which are usually

reported in news stories. In the 2006 AEO, DOE has begun highlighting the pre-

mium crude prices. This chapter refers only to the average reﬁner acquisition cost.

The $48 per barrel average reﬁner acquisition price projected for 2025 in the 2006

AEO corresponds to $54 per barrel for imported low-sulfur light crude.)

THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

0.25

0.5

0.75

1.25

1.5

1.75

2.25

2.5

2.75

2021

2016

2011

2006

2001

1996

1991

1986

1981

1976

1971

1966

1961

1956

1951

Ye a r

Price (2004 dollars)

Historical, and projected AEO 2005 reference case

Projected, AEO 2006 reference case

Projected, extrapolated high price case

FIGURE 4-1 Gasoline prices, historical and projected, 2004–2025. (Sources:

EIA 2005a, Table A12; EIA 2005b, Table A12; EIA 2005c, Table 5.24. Price

deﬂator: BEA 2005, 48, 188, 189.)

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DOE calls its world oil price projections scenarios; that is, they are assump-

tions that are consistent with the available facts. Because the price of oil has been

erratic in recent decades and is strongly affected by diverse political, economic, and

technological factors, oil price forecasts have not been very successful. For exam-

ple, the 1995 AEO projection for 2005 was $22 per barrel in the reference case

and $39 per barrel (in 2005 dollars) in the high oil price case. The actual 2005

price was about $50, although the actual price during 1995–2005 usually was

between the 1995 AEO reference and high projections. DOE compared its AEO

2005 projections with nine other published projections or scenarios and observed

that the range between the 2005 AEO Low and High B cases spanned the range

of published projections. In 2025, the range of projections reviewed was $24 to

$37 per barrel (in 2003 dollars), compared with DOE’s projected range of $21 to

$48 per barrel (EIA 2005a, 114–115). Probably the most useful aspect of the AEO

projections and other projections described below is their qualitative assessments

of critical underlying factors that will inﬂuence the price of oil. In the projections

the committee reviewed, the critical factors identiﬁed are that (a) supplies are avail-

able from multiple sources that can be developed and brought to market at lower

cost than the 2005 price and (b) sustaining the price at too high a level would not

be in the interest of producers because it would stimulate enough conservation and

production from alternative sources to lower their incomes. The projections take

into account rapid growth in oil consumption in China, India, and some other

developing economies. For example, in DOE’s 2006 reference case projection, oil

consumption in China grows at over twice the world rate and China’s share of

world oil consumption increases from 8 percent in 2004 to 12 percent in 2025

(EIA 2005b, Table A20).

A review (Gately 2001; Gately 2004) of the DOE 2001 and 2002 projections

(similar in method to the projections through AEO 2005) and of two other promi-

nent forecasts (from the International Energy Agency’s World Energy Outlook

2000 and in the 2001 British study, The New Economy of Oil, by J. Mitchell et al.)

with parallel results concluded that all were based on certain implausible assump-

tions. In particular, the projections were not derived from a behavioral model of

the OPEC nations’ production decisions. Instead, OPEC oil production was pro-

jected as the residual between projected demand and non-OPEC production,

given an assumed price path.

Simulations presented in the review articles indicate that if OPEC is moder-

ately effective in controlling output in its own interests and oil price increases are

as moderate as DOE projected (before AEO 2006), then demand must be more

responsive to price than it is in the DOE projections. The author argues that main-

tenance of cartel pricing will be easier in the future, in part because expanding pro-

duction from OPEC oil ﬁelds will require substantial investment to develop new

capacity, whereas in recent decades capacity was in excess and output could be

expanded with little effort. The simulations start with ranges of assumed rates of

EFFECTS OF AUTOMOTIVE TECHNOLOGY, ENERGY, AND REGULATORY DEVELOPMENTS

71340_107_132 5/30/06 9:55 AM Page 99

OPEC’s target production growth (between 1 and 4 percent annually) or target

market share (from 32 to 52 percent of world production; today’s share is 37 per-

cent) and use plausible ranges of elasticities and non-OPEC production costs. In

the results, OPEC’s revenue is not very sensitive to its rate of output expansion.

The simulations indicate a likely oil price range of $24 to $36 per barrel (2000 dol-

lars) in 2020 (Gately 2001, Figure 7; Gately 2004, Table 3), which is hardly dif-

ferent from most of DOE’s projections before AEO 2006, but these prices

correspond to lower OPEC production than DOE projected. The implication of

this analysis is that the current price and DOE’s latest projections are above the

price that is in the long-term interest of the major producers. As DOE emphasizes

in AEO 2006, a major source of supply and price uncertainty will be the willing-

ness of producing nations to undertake investments in capacity expansion.

The DOE study Future U.S. Highway Energy Use (Birky et al. 2001) discusses

some of the technological factors underlying projections of supply and demand

elasticities. Although the report begins with disquieting observations about

depletion of petroleum reserves, it concludes that petroleum supply develop-

ments, acting solely through the market, are unlikely to have decisive impact on

U.S. automotive technology or travel behavior in the next several decades.

A ﬁgure in the report captioned “The World Oil Gap” shows a peak in “con-

ventional” oil production in 2020 and a growing gap between conventional pro-

duction and the extrapolated demand trend afterwards (Figure 4-2). The report

observes: “The gap between continuing demand growth and declining production

could be around 50 billion barrels of oil equivalent . . . by 2050, or almost twice

current conventional oil production” (Birky et al. 2001, 3). Projections of the date

THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

100

1960

Billion Barrels

1970 1980 1990 2000 2010 2020 2030 2040 2050

Oil Gap

Demand

Conventional Oil

Production

FIGURE 4-2 The world oil gap. (Source: Birky et al. 2001.)

71340_107_132 5/30/06 9:55 AM Page 100

of peak conventional oil production have received considerable exposure, for

example, in the 1998 Scientiﬁc American article “The End of Cheap Oil,” which

predicted peak world conventional oil production before 2010 (Campbell and

Laherrère 1998). Such predictions are derived by projecting future reserves and

assuming continuation of historical relationships of reserves to production. Earlier

applications of the method proved to be overly pessimistic. Projections from the

1970s were summarized in a 1979 study (Brown et al. 1979, 27):

There are of course, basic physical constraints that will ultimately determine the

level of world oil production. Projections based largely on these constraints—

the reserves-to-production ratio in particular—indicate that production can

increase somewhat further before peaking around 1990. [A 1979 U.S. Geological

Survey study] consider[s] these ultimate production limits: “Extrapolation of his-

torical trends in exploitation and production, together with an estimate of the

stock of oil in known ﬁelds, and the assumption that the crude oil reserve-to-

production ratio never drops below 10, places the date of peak world oil produc-

tion before the end of 1993.” And an early 1979 study by the International

Energy Agency concludes “that world oil production is likely to level off some-

time between 1985 and 1995.”

In reality, conventional oil production expanded throughout this period

(Figure 4-2).

As Future U.S. Highway Energy Use acknowledges, when conventional pro-

duction does begin to decline, there are strong grounds for believing that the mar-

ket will be capable of providing for the transition to unconventional sources

without supply disruptions or any dramatic discontinuity in price. Unconven-

tional resources that may be processed to produce liquid fuels include tar sands,

oil shale, heavy oil, natural gas, and coal (Birky et al. 2001, ES-1). Supplies of

unconventional resources are enormous, and production costs for some sources are

less than the present world price of oil [e.g., according to the ﬁnancial reports of

one producer, its 2004 average operating costs (including interest, depreciation,

and depletion) were CA$19.40 per barrel, or US$16.50 (Canadian Oil Sands

Trust 2005, 2, 26)], although the mining and processing operations required to

exploit some resources would face signiﬁcant environmental constraints. DOE’s

International Energy Outlook predicts gradual development of “nonconventional

production” over the next two decades, increasing from 2 percent of world oil pro-

duction in 2001 to 5 percent in 2025 in the reference case and 9 percent in the

high oil price case (EIA 2005d, 160–161).

Extensive development of unconventional oil resources would open the way

to consumption of high-carbon fuels for the indeﬁnite future, well after conven-

tional oil supplies were exhausted. Therefore, policies aimed at controlling green-

house gas emissions may eventually block or supersede development of these

resources (Grubb 1998).

EFFECTS OF AUTOMOTIVE TECHNOLOGY, ENERGY, AND REGULATORY DEVELOPMENTS

101

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The history of oil prices since the energy crisis of the 1970s has been volatile

(Figure 4-3). None of the projections reviewed explicitly considers the impact of

more volatile prices on future fuel economy. Even if the long-run track of average

oil price follows a moderate path, more frequent and extreme price spikes in the

future may stimulate purchases of high-mpg or alternative-fuel vehicles, although

the historical evidence suggests that the magnitude of this effect may not be great.

MOTOR VEHICLE TECHNOLOGY PROJECTIONS AND FUEL TAX REVENUE

Because of the importance of the fuel tax in ﬁnancing highway programs, highway

agencies are interested in projections of fuel economy and motor vehicle techno-

logical developments. Improvement in fuel economy would create pressure for the

federal government and the states to raise fuel tax rates or curtail highway spend-

ing. In addition, in the absence of changes in the user fee system, expansion of use

of vehicles that do not consume taxed liquid fuels (e.g., battery-powered electric

vehicles) would reduce revenues, and the states anticipate that lawmakers will con-

sider promoting introduction of alternative fuels and technology through highway

user tax breaks such as the break gasohol received until 2005. As an aid in assess-

THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

102

1949 1954 1959 1964 1969 1974 1979 19841989 1994 1999 2004

Year

Dollars/barrel

Nominal

Year 2000 dollars (GDP implicit price deflator)

FIGURE 4-3 Crude oil domestic ﬁrst purchase prices, 1949–2005. Point for

2005 is June price. (Sources: EIA 2004a, Table 5.18; EIA 2004b, Table 1;

EIA 2005e, Table 9.4.)

71340_107_132 5/30/06 9:55 AM Page 102

ing whether these concerns are warranted, this section summarizes technology pro-

jections from ﬁve sources:

• DOE’s Annual Energy Outlook (EIA 2005a; EIA 2005b)—the reference case

and the high technology case from AEO 2005 and the reference case from

the AEO 2006 Early Release. The fuel economy improvement by 2025 in

the AEO 2006 reference case [with 2025 gasoline price at $2.13 per gallon

(in 2004 dollars) compared with $1.63 per gallon in the earlier edition] is

similar to the improvement in the high technology case of AEO 2005. The

three cases are presented to indicate the sensitivity of DOE’s mpg projec-

tions to fuel price and technology assumptions.

• A 2002 National Research Council (NRC) study of feasibility and costs of

improvements in fuel economy for various classes of vehicles (NRC 2002).

• A National Cooperative Highway Research Program (NCHRP) study that

projected the effect of possible future fuel economy improvements and

increased use of alternative fuels on Federal Highway Trust Fund revenue

(Cambridge Systematics 2003).

• A California Air Resources Board (CARB) analysis supporting its proposal

for regulations requiring reductions in carbon dioxide emissions by vehi-

cles sold in California beginning in 2009 (CARB 2004).

• The DOE Future U.S. Highway Energy Use study described above (Birky

et al. 2001).

These studies are described in Appendix B, along with two other studies of future

automotive energy efﬁciency: a report on global automotive energy consump-

tion of the Sustainable Mobility Project by the World Business Council for

Sustainable Development (SMP 2004) and a 2004 NRC study of prospects for

hydrogen-fueled vehicles (NRC 2004).

Table 4-2 shows fuel economy projections or scenarios from the ﬁve studies.

With the exception of the AEO reference cases, the projected fuel efﬁciencies are

not technology forecasts. Rather, they specify technology exogenously, consistent

with stated criteria relating to cost, vehicle performance requirements, and tech-

nological feasibility. The mpg values are the researchers’ estimates of fuel economy

improvements that might reasonably be expected as the consequence of new reg-

ulations or increases in the price of fuel.

The NRC and CARB scenarios are intended to represent fuel economy

improvements that would be cost-free to drivers: they would not involve general

downsizing of vehicles or degrade performance, and the capital and operating costs

of the technology improvements would be paid for by fuel savings. Such assess-

ments of feasibility are controversial. For example, the motor vehicle industry

claims that the initial cost of the CARB projected technology package to new car

EFFECTS OF AUTOMOTIVE TECHNOLOGY, ENERGY, AND REGULATORY DEVELOPMENTS

103

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TABLE 4-2 Automotive Technology Projections and Scenarios

Percent

Reduction

in gpm

Projected ldv mpg Versus 2003

New

Projection Vehicle: New Vehicle: New

Source Assumptions Year EPA On-Road

Fleet Vehicle Fleet

DOE AEO 2006

Early Release

reference case

DOE AEO 2005 reference case

DOE AEO 2005 high-technology case

NRC 2002 average case

Greater sales of hybrid and diesel vehi-

cles than in 2005 reference case (14%

of 2025 sales).

19% of ldv sales in 2025 are advanced

technology (including HEV) or alterna-

tive fuels. 80% of advanced technol-

ogy sales are result of regulation. 2025

new car hp 26% above 2003.

Lower cost, greater efﬁciency gains,

and earlier introduction for advanced

technology than in reference case.

Technologies adopted would yield fuel

savings covering purchase price for

constant vehicle size and performance

and could be in production by 2015.

2025

2015

28.8

26.9

28.8

29.8

25.0

23.4

25.0

25.9

22.0

21.0

22.1

71340_107_132 5/30/06 9:55 AM Page 104

NRC 2002 low-cost/high-mpg case

NRC 2002 high-cost/low-mpg case

NCHRP (Cambridge Systematics 2003)

CARB 2004

Birky et al. 2001 enhanced

conventional vehicles strategy

Birky et al. 2001 HEV/FCV

hydrogen strategy

As in average case, but optimistic

assumptions regarding cost and effec-

tiveness of technological improvements.

As in average case, but pessimistic

assumptions.

NRC 2002 fuel economy projections

become regulatory requirements in

2015; phase-in starts 2006; vmt by

size class and model year projections

as in AEO 2002 reference case.

Technologies adopted would yield fuel

savings covering purchase price for

constant vehicle size and performance

and could be phased into production

between 2009 and 2014.

As above.

Conventional IC engines with incre-

mental technology improvements—

weight reduction, engine/transmission

enhancements, aerodynamics—as

might be driven by high fuel prices.

New vehicle market 70% hybrid elec-

tric, 30% hydrogen fuel cell by 2040.

d, e

2015

2020

2030

2050

32.1

27.4

33.7

41.0

27.9

23.8

29.3

35.6

23.2

23.4

26.4

35.6

(

continued on next page

)

71340_107_132 5/30/06 9:55 AM Page 105

On-road mpg is calculated as (EPA mpg)/1.15, on the basis of the approximate conversion factor reported in NRC 2002, Table 4-1.

The study reports mpg projections by vehicle size class, but not for the vehicle ﬂeet. The ﬂeet averages shown in the table are the average of the size class pro-

jections weighted by model year 2004 estimated market shares by size class from NHTSA 2003.

The study reports projected fuel consumption rather than mpg. The mpg values in the table are derived from projections of fuel consumption and vmt.

The study reports percentage changes in mpg but does not state the base year mpg. Mpg values in the table assume base year mpg values are values for 2000

in AEO 2002.

This scenario involves hydrogen fuel cell vehicles. The mpg values in the table are the values that would produce the equivalent reduction in fuel energy con-

sumption in a liquid fuel–powered ﬂeet.

Percentage reductions are with respect to 2003 U.S. average light-duty vehicle fuel economy according to AEO 2005: 20.0 mpg ﬂeet, 25.1 mpg new vehicle

EPA.

Abbreviations:

ldv: light-duty vehicle HEV: hybrid electric vehicle DOE: Department of Energy vmt: vehicle miles traveled

mpg: miles per gallon FCV: fuel cell vehicle NRC: National Research Council

gpm: gallons per mile IC: internal combustion AEO: Annual Energy Outlook

TABLE 4-2 (continued ) Automotive Technology Projections and Scenarios

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buyers would be three times the state’s estimate (Hall 2004). The higher the cost

(in vehicle purchase price or performance degradation) to motor vehicle owners,

the less demanding regulatory efﬁciency standards are likely to be.

Taken together, the projections suggest that fuel economy improvements of

15 to 25 percent (i.e., an average decrease of 15 to 25 percent in fuel consump-

tion per mile) for new light-duty vehicles would be practical within the next 10 to

20 years, without the need for technical breakthroughs and without downsizing

or vehicle price increases that would seriously affect the vehicle market or driving

habits. If such new-vehicle efﬁciency improvements were attained, the improve-

ment in light-duty vehicle ﬂeet fuel economy would be 10 to 20 percent by 2025,

according to the projections. As noted, these are not projections of likely outcomes,

but rather of fuel economy gains that could reasonably be expected if forced by

regulation or fuel prices.

None of the projections foresees important use of vehicles not powered by gaso-

line, diesel, or ethanol blends before 2025. For example, they do not project signif-

icant market shares for hydrogen-fueled cars or electric vehicles with batteries

charged from electric power lines. Thus, vehicles foreseen to be in use in 2025 will

be subject to existing fuel taxes.

The three studies reviewed that consider the connection between fuel price

and the motor vehicle market (EIA2005a, 62; SMP 2004, 104–105; Birky et al.

2001, 9) all conclude that no likely fuel price increase or technology development

in the period to 2025 will have a dramatic market effect on ﬂeet average fuel econ-

omy by 2025. (The NRC, CARB, and Birky et al. projections and scenarios sum-

marized in Table 4-2 are assessments of possible improvements in fuel economy

based on the assumption that the regulatory or market forces required to induce

them are present; they are not forecasts of likely outcomes.) This is partly because

present regulations elevated fuel economy above the level that would have pre-

vailed at historical fuel prices in an unregulated market. In addition, during

periods of stable fuel prices, consumers have shown a preference for taking advan-

tage of efﬁciency improvement technology by buying larger, higher-performance

vehicles rather than by reducing their dollars-per-mile operating costs. The impli-

cation of the projections in these three studies is that if fundamental changes in

fuel economy, fuel price, or engine technology occur in the next several decades,

they are more likely to be the result of government intervention than energy mar-

ket developments.

After 2025, projections are essentially speculative, but if the rate of fuel econ-

omy improvement projected to 2025 in the AEO 2006 reference case were to

continue for another 20 years, light-duty vehicle ﬂeet fuel economy would be

24.5 mpg (an 18 per cent reduction in fuel consumption per mile compared with

today). This ﬂeet fuel economy is not inconsistent with the projection in the

Enhanced Conventional Vehicles scenario in Future U.S. Highway Energy Use

of new vehicle EPA fuel economy rating of 33.7 mpg in 2050 (equivalent to

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108

new-vehicle on-road fuel economy of about 29.3 mpg) (see Table 4-2). According

to the HEV/FCV (hybrid electric vehicle/fuel cell vehicle) Hydrogen scenario in

Future U.S. Highway Energy Use, a complete conversion of new vehicle sales to a

mix of hybrid electric vehicles and vehicles powered by fuel cells consuming hydro-

gen could occur by 2040. In this scenario, vehicle energy consumption per mile

would be reduced by more than half by 2050 compared with today, and the reduc-

tion in consumption of traditional liquid fuels would be even greater (see the last

line in Table 4-2). Hybrid electric vehicles combine an internal combustion engine

with an electric motor powered by batteries (charged by the internal combustion

engine or by energy captured during braking) in order to gain energy efﬁciency. A

fuel cell is a kind of battery that consumes hydrogen or another fuel to produce an

electric current (without combustion or a mechanical generator). The current

powers an electric motor that propels the vehicle.

Truck Fuel Economy Trends

Twenty-three percent of all federal and state fuel tax revenue is from taxes on diesel

fuel, nearly all of which is consumed by large, freight-carrying trucks (FHWA

2003b, Tables MF-121T, MF-27). Therefore, truck fuel economy trends are

important for transportation program revenue. Large trucks have made substan-

tial fuel economy gains in recent decades, but more stringent emissions regulations

may retard future fuel economy improvements (DOE 2003). The 2006 AEO ref-

erence case projects a 9 percent reduction in fuel consumption per mile for the

freight truck ﬂeet by 2025 (to 6.6 mpg, from 6.0 in 2003) (EIA 2005b). The 2005

AEO also projected a 9 percent reduction in the reference case and a 10 percent

reduction in fuel consumption per mile in the high technology case (EIA 2005a,

Table A.7, p. 86).

Freight truck shares of highway vehicle miles and highway fuel consump-

tion in 2003 and the AEO 2006 projections of 2025 shares are as follows:

2003 2025

Share of vehicle miles (percent) 7.5 8.6

Share of fuel consumption (energy units, percent) 21.2 23.4

DOE projects that annual vehicle miles of freight truck travel will grow 70 percent

over the period. Freight trucks’ share of fuel consumed is projected to grow more

slowly then their share of travel because projected fuel economy improvements are

greater than for light-duty vehicles. If these projections are realized, trucking’s con-

tribution to user fee revenues relative to its share of travel will decline unless legis-

latures make larger adjustments in truck tax rates than in rates affecting light

vehicles.

71340_107_132 5/30/06 9:55 AM Page 108

Fuel Tax Revenue Implications

Developments in motor vehicle fuel economy and propulsion technology could

affect the viability of the present transportation ﬁnance scheme in three ways. First,

maintaining constant revenue per vehicle mile would require raising cents-per-

gallon fuel tax rates if average fuel economy improves. Second, some technologies

(e.g., electric and hydrogen-powered vehicles) do not consume the fuels that are

now within the highway user tax scheme. Finally, lawmakers may decide to pro-

vide incentives for adoption of new technologies in the form of lower user fee pay-

ments (for example, the lower federal excise tax rate paid on gasohol than on

gasoline before 2005).

The projections of ﬂeet fuel economy percentage improvement in the last col-

umn of Table 4-2 indicate the magnitude of fuel tax rate increases that would be

necessary to compensate for fuel economy improvements. Maintaining constant

revenue per vehicle mile is a reasonable benchmark for judging ﬁscal impact, since,

as Figure 2-1 shows, revenue has been fairly constant at around $0.035 per mile

for the past 25 years. Maintaining constant revenue per vehicle mile after a 15 per-

cent reduction in the ﬂeet average fuel consumption per mile (i.e., a midpoint pro-

jection for 2025 from among the various optimistic technology scenarios

summarized in Table 4-2) would require a 17.6 percent [100(0.15/0.85)] increase

in the constant-dollar fuel excise tax rate. With such an increase, the 2003 com-

bined federal and state tax rate on gasoline of $0.375 per gallon would rise to

$0.441 per gallon. The fuel tax produces about 65 percent of all highway user rev-

enues (see Table 2-2), about equal to half of all highway spending, so the revenue

loss from an uncompensated 15 percent fuel economy improvement (assuming

travel and vehicle sales were unaffected) would equal 10 percent of prior user fee

revenues and 8 percent of spending.

The NCHRP study (Cambridge Systematics 2003) projected the effect on

trust fund revenues of a range of alternative future tightenings of federal new-

vehicle fuel economy standards, from a modest increase in the required fuel econ-

omy of new light trucks to a 50 percent increase in the required mpg for all vehicle

classes compared with present legal standards. The projections were constructed to

be consistent with the DOE AEO projections of travel by vehicle size class. In all

cases, new-vehicle fuel economy standards are assumed to ramp up linearly from

their present values in 2006 to their maximum values in 2015. One case assumes

that the new standards are based on the estimates in the 2002 NRC study of

cost-efﬁcient improvements in fuel economy for each class of light-duty vehicle.

(Table 4-2 shows the projected average new-vehicle fuel economy from the NRC

study and the NCHRP study’s estimated ﬂeet fuel economy.) The NCHRP

authors argue that the NRC estimates or similar ones would be the most rea-

sonable guide available to Congress if it were to decide soon to enact new fuel

economy standards. The authors project that imposition of these standards

would reduce light-duty vehicle fuel consumption by 9 percent in 2020 compared

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with the AEO 2004 reference case and that Federal Highway Trust Fund revenue

in 2020 would be reduced by $3 billion (7 percent). The federal revenue reduction

in 2020 could be avoided by a $0.0125-per-gallon increase (in 2002 dollars) in the

federal fuel tax.

The NCHRP study does not project revenues beyond 2020. The impact in

later years would be greater, since the turnover of the ﬂeet to higher-efﬁciency vehi-

cles would not be complete in 2020. When turnover was complete (by 2025 or

2030), the revenue impact would be around 14 percent of trust fund revenues

compared with revenues under the assumptions of the AEO reference case.

The NCHRP study also projects the revenue impact of continuation of the

pre-2005 federal gasohol tax policy and of hypothetical additional federal meas-

ures to promote gasohol. Legislation enacted in 2004 raised the gasohol excise tax

rate to equal the gasoline rate and provided that all revenue from the tax be cred-

ited to the Highway Trust Fund. This eliminated the prior trust fund revenue loss.

However, the NCHRP study’s projections illustrate how pollution abatement and

conservation incentives could have an important effect on user fee revenue. As

Chapter 2 noted, if the federal excise tax on gasohol had been the same as for

gasoline and credited to the trust fund, trust fund revenue would have been

about $1.6 billion per year greater in 2002. Gasohol consumption was 21 bil-

lion gallons in 2002, 12.5 percent of all highway motor fuel use (FHWA 2003b,

Tables MF-21, MF-33E). The NCHRP study considered the impact of legisla-

tion, proposed in Congress in 2003 but not enacted, that would have mandated

increased production of renewable fuels and replacement of a common fuel addi-

tive (methyl tertiary butyl ether, which is added to fuel as an octane enhancer to

comply with federal air pollution regulations) with ethanol. Enactment of these

proposals would have increased the trust fund revenue loss to $3.9 billion per year

by 2010 and beyond (a 12 percent reduction) (Cambridge Systematics 2003,

Table 2).

Changes in motor vehicle technology would also affect state tax revenue. For

example, in California, where the legislature has mandated reduction of green-

house gas emissions by motor vehicles, gasoline excise tax revenues dedicated to

highways accounted for 54 percent of state-collected revenues devoted to highways

in 2002 (including revenues provided for state spending and for state grants to

local government, but excluding federal grant payments received) (FHWA 2003b,

Table SF-1). There are no local gasoline excises in the state. Gasoline sales cor-

respond approximately to the tax base that would be affected by the light-duty

vehicle CO

emissions standards proposed by CARB to meet the legislature’s man-

date (neglecting the small amounts of gasoline consumed by larger vehicles and of

diesel consumed by light vehicles) (CARB 2004). Therefore, a 25 percent reduc-

tion in light-duty vehicle fuel consumption per mile (which CARB proposes as a

target for 2030; see Table 4-2) would have reduced revenues available for high-

ways in 2002 by 13.5 percent. An increase in the state gasoline tax from the pres-

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110

71340_107_132 5/30/06 9:55 AM Page 110

ent rate of $0.18 per gallon to $0.24 per gallon (in 2002 dollars) would be neces-

sary to make up the shortfall. The state’s gasoline tax was last increased in 1994

and is below the 2002 national average of $0.191 per gallon. Thirteen states had

rates of $0.24 per gallon or higher in 2002 (FHWA 2003b, Table MF-121T).

Thus, maintaining fuel tax revenue while implementing the proposed standard

would not require tax rates of unprecedented magnitude compared with other

states (although in California, the legislature has not changed the motor fuel tax

rate since 1994).

Motor vehicle purchase price increases, operating cost decreases, or perfor-

mance degradation caused by new regulations will affect excise tax revenues by

affecting the volume of highway travel and vehicle sales as well as fuel consump-

tion per mile of travel. Changes in highway travel also would affect highway main-

tenance and construction costs and might be accompanied by changes in transit

use, fare revenue, and costs. None of the studies reviewed attempted to trace

through all these ﬁscal effects fully. In the case of fuel economy improvements

driven by regulation, the projections suggest that the dominant impact would be

the effect of improved fuel economy on fuel sales, because it is assumed (in the

NRC, CARB, and DOE projections) that the initial cost to vehicle buyers of the

changes in technology introduced are largely offset by fuel cost savings.

If fuel economy improvements are driven by higher fuel prices, the revenue

effect of reduced travel might be important. For example, in the 2005 AEO High

B oil price case (in which the 2025 world oil price is 58 percent higher than in the

reference case), 2025 motor vehicle fuel consumption is 6 percent lower than in

the reference case and travel is 4 percent lower. That is, more than half of the reduc-

tion in consumption is the result of reduced travel rather than improved fuel econ-

omy (EIA 2005a, Tables C1, C7). Contrary to this projection, most studies show

that half or more of the long-term reduction in fuel consumption that results from

a fuel price increase is the result of improvement in fuel economy rather than of

reduction in vehicle miles of travel, although the reduction in travel is not insignif-

icant (Parry 2002, 30; Hanly et al. 2002, 3).

Summary

The projections reviewed suggest that a 10 to 20 percent reduction in average gal-

lons of fuel consumed per mile by the light-duty vehicle ﬂeet is possible by 2025

if fuel economy improvement is driven by new government intervention such as

an increase in the corporate average fuel economy (CAFE) standards in federal law

or by sustained high fuel prices. In the absence of such pressures, fuel economy

improvement is likely to be no more than a few percent. Maintaining constant rev-

enue per vehicle mile after a 15 percent decrease in gallons per mile would require

a 17.6 percent increase in the combined average federal and state gasoline tax rate,

about $0.07 per gallon (in 2002 dollars), or increases in other user fees.

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If fuel price increases in this period are great enough to drive signiﬁcant fuel

economy improvements, revenue would be affected by reduced travel (compared

with future travel volume if fuel price followed the historical trend) as well as by

reduced fuel consumption per mile of travel. Reduced travel would also affect

transportation agencies’ costs.

After 2025, technology and market projections become even more specula-

tive. However, all the studies reviewed conclude that government intervention or

high fuel prices could bring about large market shares for hybrid electric and fuel

cell–powered vehicles and consequently much greater reductions in gasoline

consumption.

The assessment of the prospects for fuel economy improvement presented here

is not dependent on the realization of optimistic fuel price forecasts. In the two sets

of projections from the 2005 AEO shown in Table 4-1, the world oil price in the

High B case is 58 percent higher in 2025 than in the reference case, resulting in a

27 percent higher gasoline price and 6 percent lower motor vehicle fuel con-

sumption (i.e., a 0.1 percent reduction in 2025 fuel consumption for each 1 per-

cent increase in the 2025 world oil price). Suppose the price sensitivity implied by

these projections were doubled, and the 2025 oil price reached $76 per barrel (the

price consistent with the extrapolated high oil price case shown in Figure 4-1).

Then the projected reduction in fuel consumption would be 29 percent (i.e., a 143

percent price increase compared with the 2005 AEO 2025 reference case projec-

tion times a reduction in fuel consumption of 0.2 percent for each 1 percent

increase in oil price). This is the same order of magnitude as the mpg improve-

ment in the technology-driven or regulation-driven fuel economy improvement

scenarios shown in Table 4-2.

These two effects—mpg improvement driven by prices and improvement

driven by regulation—are not additive. If regulations require fuel economy

improvements beyond what the market would generate at a given fuel price, the

fuel price must ﬁrst rise to the level at which the market would demand the regu-

latory mpg before price can have much further effect on fuel economy. Therefore,

the conclusion that 20 percent is the likely economy improvement that can be

expected by 2025 in response to effective regulation or sustained high fuel prices

is consistent with greater price sensitivity and higher future world oil prices than

DOE’s projections show.

POSSIBLE REGULATORY DEVELOPMENTS

The studies reviewed in the previous section that projected likely or possible fuel

economy trends all concluded that regulation or other forms of government inter-

vention, rather than the world market price of petroleum, will be the main driv-

ing force toward improved motor vehicle fuel economy in the next two decades.

These conclusions were derived from two observations. First, resource stocks

THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

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appear ample to prevent more than moderate sustained petroleum price increases

in the next 20 years. Second, consumers have chosen, over the past 20 years (when

fuel prices were not rising), to take advantage of technological advances in fuel

economy by purchasing larger vehicles and vehicles with improved performance

rather than by reducing their spending on fuel. Of course, if consumers in the

next few decades are confronted with persistently rising fuel prices, they might

decide to utilize technological advances to maintain performance and fuel expen-

diture, with declining volume purchases of fuel.

Because of the potential impact of fuel economy improvement on fuel tax rev-

enue and transportation program funding, an examination of the possible forms

of future government interventions that could spur changes in motor vehicle fuel

economy, the likelihood of interventions, and the events that might motivate them

is relevant to the committee’s task. The possible actions that have received serious

public consideration can be divided into two categories: motor vehicle performance

standards (fuel economy and emissions standards) and economic incentives.

Motor Vehicle Standards

Since 1978, federal law has required that the average fuel economy of all the light-

duty vehicles sold by each vehicle manufacturer in a year not fall below speciﬁed

fuel economy standards. The standards in 2005 were 27.5 mpg for automobiles

and 21.0 mpg for light trucks (which category includes SUVs), as measured in a

test deﬁned by the Environmental Protection Agency. These EPA mpg values are

about 15 percent higher than actual on-road mpg (NRC 2002, 8). The NRC eval-

uation of CAFE standards (NRC 2002) states the apparent consensus view that

the standards contributed to the fuel economy improvement of U.S. light-duty

vehicles since 1970, reinforcing the effect of high fuel prices in the 1970s, and that

the standards prevented fuel economy from declining in the 1980s and 1990s,

when fuel prices were falling or constant (Figure 4-4).

The NCHRP study concluded that promulgation of more stringent fed-

eral fuel economy standards within a decade is a “medium-probability” event

(Cambridge Systematics 2003, 14–16, 24). In support of this conclusion, the

study cited recent action by the U.S. Department of Transportation (USDOT),

which has authority to adjust light truck CAFE standards without congressional

action, to raise the light truck fuel economy standard (to 22.2 mpg by 2007) as

well as recent interest in Congress in raising the standards for cars. From 1996 to

2001, Congress blocked USDOT from spending funds to develop new CAFE

standards. This restriction has been discontinued, and proposals to review CAFE

standards were presented during discussions of energy legislation in Congress in

2003 and 2004 (Bamberger 2004). The recent oil price increase and the California

greenhouse gas emissions control legislation might be taken as indications that

more stringent federal fuel economy standards are within the realm of possibility.

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The NCHRP study, noting the initial market success of certain high-efﬁciency

vehicles like the Toyota Prius and recent motor vehicle manufacturer announce-

ments of voluntary plans to improve the fuel economy of SUVs and light

trucks, concluded that voluntary industry action to improve fuel economy is a

high-probability event in the next decade. The industry’s involvement in the

FreedomCAR cooperative research program with DOE is a further suggestion that

it may feel pressure to produce improvements in fuel economy beyond those that

normal market considerations might dictate, perhaps in order to forestall tighten-

ing of mandatory standards.

New standards for motor vehicle pollutant emissions would also affect fuel

economy. As the CARB proposal illustrates, regulations for reducing greenhouse

gas emissions of vehicles burning petroleum-derived fuels have the same effect

THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

114

1951 1956 1961 1966 1971 1976 19811986 1991 1996 2001 2006 2011 2016 2021

Year

mpg

Historical, and projected fleet (on-road), AEO 2005 reference case

Projected fleet (on-road), AEO 2005 high-technology case

New vehicle (EPA), AEO 2005 reference case

New vehicle (EPA), AEO 2005 high-technology case

Projected fleet (on-road), AEO 2006 reference case

New vehicle (EPA), AEO 2006 reference case

FIGURE 4-4 Light-duty vehicle fuel efﬁciency, historical and projected,

2003–2025. (Sources: EIA 2005a; EIA 2005b.)

71340_107_132 5/30/06 9:55 AM Page 114

as fuel economy standards because emissions of the main greenhouse gas, CO

are proportional to fuel consumption.

Measures to reduce other motor vehicle pollutant emissions (including oxides

of nitrogen and particulates) can conﬂict with the goal of improving fuel economy.

The most important effect of this conﬂict may be to deter use of diesel engines

(which have an efﬁciency advantage over gasoline engines) in light-duty vehicles

and to slow fuel economy improvements for diesel trucks (GAO 2000, 16). Emis-

sions regulations that necessitate special fuel formulations may increase the cost of

fuel and thereby reduce consumption.

Concern about the safety of lighter, smaller vehicles may constrain enactment

of more stringent fuel economy standards, although the actual effect of actions to

improve fuel economy on safety is a subject of controversy (NRC 2002, 77,

117–124).

Eventually, the nation may decide that it is necessary to mandate conversion

to vehicles that use no petroleum fuel: battery-powered electric cars (charged by

electricity from the electric power grid), hydrogen-powered cars, or cars burning

biomass fuels. However, the technology projections presented in the preceding sec-

tion agree in predicting no early widespread introduction of hydrogen or electric

vehicles because of the costs involved. If the policy objective is to reduce green-

house gas emissions, economic considerations may argue against government

intervention to promote early introduction of these vehicles, because the initial

measures taken to reduce greenhouse gas emissions should be the cheapest.

More cost-effective measures exist, especially CO

reduction from power plants.

One study has estimated that, if a target of stabilizing the CO

atmospheric

concentration at double the preindustrial level were set, then the least-cost

schedule of technological changes would not involve substantial introduction

of non-CO

-generating vehicles before 2040 (Keith and Farrell 2003). The

study assumed that the costs of hydrogen-fueled vehicles would remain high. If

technological advances yield cost reductions, earlier introduction of hydrogen-

fueled vehicles would become cost-effective. The NRC hydrogen fuels study

described in Appendix B contains an example of such an optimistic hydrogen

scenario (NRC 2004).

An innovative approach to regulating fuel economy, the “cap and trade” pro-

gram under which vehicle manufacturers would be allocated fuel consumption

quotas or credits for their new vehicles that they could trade among themselves

(CBO 2003), has not attracted legislative interest. However, enactment of such a

program could accelerate fuel economy gains because the cost of attaining a spec-

iﬁed degree of improvement would be reduced.

Incentives

Incentives of numerous kinds are in effect or have been proposed to promote devel-

opment and sale of high-mpg, low-emission, or alternative-fuel vehicles or to

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otherwise encourage conservation or reduce driving. Such incentives may affect

transportation ﬁnance by reducing fuel tax revenue. Possibly more signiﬁcantly,

incentives that involve forgiveness of highway user fees (for example, the present tax

treatment of gasohol) or imposition of additional fees on some highway users may

entail conﬂicts that affect the viability of present transportation revenue arrange-

ments. Of course, the occurrence of a negative impact on revenue dedicated to

transportation is not in itself relevant to the merits of these policies. However, the

possible tax revenue side effects should be recognized when incentive programs are

enacted and consideration given to the need to replace lost revenue.

Existing federal incentive programs include the following:

• Tax treatment of gasohol: As an incentive to use alternative fuels and to aid

farmers and ethanol producers, the federal excise tax on gasohol is $0.053 per

gallon less than the tax on gasoline sold as motor fuel. (As of 2005, the rev-

enue impact of this subsidy affects the general fund; the Highway Trust Fund

receives revenue as if the gasohol tax were the same as the gasoline tax.)

• Tax incentives for HEVs and electric vehicles: Purchasers of electric vehicles

are entitled to a tax credit equal to 10 percent of the purchase price.

Purchasers of new HEVs in 2005 could claim a $2,000 deduction on their

federal income tax returns (Unites State Code, Title 26, Section 179a). The

deduction will be replaced by new tax credits in 2006.

• Gas guzzler tax: Buyers of new passenger cars (but not SUVs or light trucks)

that have fuel economy poorer than 22 mpg in the EPA test must pay a fed-

eral tax of $1,000 to $7,700, depending on mpg. The NRC CAFE standards

study concluded that this tax has inﬂuenced vehicle design and sales (effec-

tively establishing a ﬂoor of 22 mpg for new vehicles), although today fewer

than 1 percent of new cars are subject to the tax (NRC 2002, 21).

• CAFE credits for alternative fuels: Motor vehicle manufacturers who sell

vehicles that can be operated on ethanol or natural gas earn credits that allow

them to have an actual average mpg for the vehicles they sell that is lower

than the CAFE standard (NHTSA 2004).

At least 14 states offer incentives to ownership of HEVs or other alternative-

technology vehicles. Incentives include exemption from all or part of state sales or

excise taxes on the purchase price of the vehicle, use of high-occupancy vehicle

lanes by single-occupant vehicles, or income tax deductions or credits for some part

of the purchase price (Hybridcars.com 2004). With the exception of free parking

offered in some California localities, none of these measures appears to affect ded-

icated transportation revenues directly or to exempt vehicle owners from paying

customary user fees.

Allowing multioccupant vehicles to use toll lanes for free or at a lower toll than

single-occupant vehicles might be viewed as forgiveness of a road user fee as a con-

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servation incentive. Only four such high-occupancy/toll (HOT) lanes were in

operation in the United States in 2005. They are tolled lanes parallel to freeways

and offering free use or lower tolls to carpoolers (FHWA 2003a, 5). However, the

HOT lanes concept is attracting interest among the states, and the federal surface

transportation program reauthorization bills in Congress would promote HOT

lane projects (as will be described in Chapter 5).

Imposition of energy or carbon taxes is prominent among proposals for new

forms of incentives to reduce energy consumption or CO

emissions. A broadly

based energy tax or tax on fossil fuel could achieve a speciﬁed reduction at lower

total cost than rationing measures or consumption standards targeted at one con-

suming sector (for example, the CAFE standards) because producers and con-

sumers would have ﬂexibility to reduce consumption and emissions in ways that

had the least cost to them. A Btu tax on all fuels (coal, natural gas, petroleum,

hydropower, and nuclear power) was proposed by the Clinton administration and

passed by the House in 1993 but was not approved by the Senate (McElveen

1993). The goals were conservation as well as revenue raising. The measure that

eventually was enacted later in 1993 imposed new excise taxes on transportation

fuels only, including the $0.043 deﬁcit reduction tax on gasoline, designated for

deposit to the general fund rather than to the Highway Trust Fund. Four years

later, Congress directed that the $0.043 henceforth be deposited in the trust fund.

Imposition of new fuel taxes is sometimes proposed as a way to internalize the

costs of pollutants other than CO

(oxides of nitrogen, particulates, and hydro-

carbons). Unlike CO

emissions, which are nearly proportional to fuel use, emis-

sions of these pollutants vary greatly depending on vehicle characteristics, trafﬁc,

road conditions, and driving habits; the health impacts of emissions depend on the

location. Similarly, a fuel tax has been proposed as a way to internalize congestion

and accident costs that an individual vehicle operator imposes on other road users.

Congestion and accident costs also vary greatly depending on conditions. A fuel

tax is an imperfect instrument for these purposes since it fails to provide a strong

incentive to the worst offenders to change their behavior and at the same time

penalizes vehicle operators who are imposing relatively small costs on others.

Nonetheless, such taxes have been advocated as second-best measures that are jus-

tiﬁed in light of the cost and technical problems of real-time observation of the

emissions or congestion costs caused by an individual vehicle (Harrington and

McConnell 2003, 46–49; Parry 2002; Parry and Small 2002). There appears to

be little political interest in such taxes, and technological barriers to more effective

forms of congestion and emissions taxes are falling. Therefore, enactment of such

taxes in the near future seems unlikely.

Summary

It is impossible to forecast regulations, but the extent of recent interest in such

measures suggests that enactment of new CAFE standards over the next decade

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and new federal and state incentives to promote conservation and alternative fuels

are possibilities. Transportation agencies ought to be prepared to contribute to the

development of such programs with analyses of the revenue impacts on trans-

portation programs and proposals for measures to maintain intended revenues as

regulations are enacted. Such measures could include increasing fuel tax rates or

the rates of other dedicated user fees to compensate.

Regardless of the market share that alternative propulsion systems achieve in

the next 20 years, governments must address the question of how users of these

vehicles should be charged for road use. To ensure that users of alternative-fuel

vehicles pay an appropriate share of the cost of transportation facilities, enactment

of new taxes (for example, special excise taxes on vehicles or on components like

batteries) may be required.

Incentives and other policies to promote conservation or reduce pollutant

emissions could be made more cost-effective, and at the same time impacts on

transportation program revenues would be lessened, if they were broadly targeted.

A tax levied on all fuel consumers (or on all polluters) will attain a speciﬁed objec-

tive at a lower cost than a tax or restriction targeting only transportation. An incen-

tive that subsidizes road use by forgiving payment of highway user fees can

unnecessarily increase the cost of meeting the conservation or emissions goal by

encouraging inefﬁcient use of roads. For example, promoting the purchase of high-

mpg vehicles by a cash subsidy may have lower public cost than using free admis-

sion to toll lanes as an inducement.

The history of the 1993 Btu tax proposal suggests the conﬂicts that may

emerge between the practice of imposing fuel taxes for conservation or pollution

reduction purposes and the practice of collecting highway user fees in the form of

fuel taxes. Replacing or supplementing the fuel tax with more direct forms of user

fees like mileage charges would reduce, if not eliminate, the potential for friction

between transportation ﬁnance and programs to promote conservation and emis-

sions reductions.

REFERENCES

Abbreviations

BEA Bureau of Economic Analysis

CARB California Air Resources Board

CBO Congressional Budget Ofﬁce

DOE U.S. Department of Energy

EIA Energy Information Administration

FHWA Federal Highway Administration

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GAO General Accounting Ofﬁce

NHTSA National Highway Trafﬁc Safety Administration

NRC National Research Council

SMP Sustainable Mobility Project

Bamberger, R. 2004. Automobile and Light Truck Fuel Economy: The CAFE Standards (update).

Congressional Research Service, Aug. 27.

BEA. 2005. Survey of Current Business. Aug.

Birky, A., D. Greene, T. Gross, D. Hamilton, K. Heitner, L. Johnson, J. Maples, J. Moore, P. Patterson,

S. Plotkin, and F. Stodolsky. 2001. Future U.S. Highway Energy Use: A Fifty Year Perspective: Draft.

Ofﬁce of Transportation Technologies, U.S. Department of Energy, May 3.

Brown, L. R., C. Flavin, and C. Norman. 1979. Running on Empty: The Future of the Automobile in an

Oil Short World. Norton, New York.

Cambridge Systematics. 2003. Assessing and Mitigating Future Impacts to the Federal Highway Trust

Fund such as Alternative Fuel Consumption. Project 19-05. National Cooperative Highway

Research Program, July.

Campbell, C. J., and J. Laherrère. 1998. The End of Cheap Oil. Scientiﬁc American, March, pp. 78–83.

Canadian Oil Sands Trust. 2005. Fourth Quarter Report, Jan. 28.

CARB. 2004. Draft: Staff Proposal Regarding the Maximum Feasible and Cost-Effective Reduction of

Greenhouse Gas Emissions from Motor Vehicles. California Environmental Protection Agency, June 14.

CBO. 2003. The Economic Costs of Fuel Economy Standards Versus a Gasoline Tax. Dec.

DOE. 2003. Technology Options for the Near and Long Term. Nov.

EIA. 2004a. Annual Energy Review 2003. U.S. Department of Energy.

EIA. 2004b. Petroleum Marketing Monthly. U.S. Department of Energy, Oct.

EIA. 2005a. Annual Energy Outlook 2005. U.S. Department of Energy.

EIA. 2005b. Annual Energy Outlook 2006 Early Release. U.S. Department of Energy, Dec.

EIA. 2005c. Annual Energy Review 2004. U.S. Department of Energy.

EIA. 2005d. International Energy Outlook 2005. U.S. Department of Energy, July.

EIA. 2005e. Monthly Energy Review. U.S. Department of Energy, Aug.

FHWA. 2003a. A Guide for HOT Lane Development. U.S. Department of Transportation.

FHWA. 2003b. Highway Statistics 2002. U.S. Department of Transportation.

GAO. 2000. Automobile Fuel Economy: Potential Effects of Increasing the Corporate Average Fuel Economy

Standards. Aug.

Gately, D. 2001. How Plausible Is the Consensus Projection of Oil Below $25 and Persian Gulf Oil

Capacity and Output Doubling by 2020? Energy Journal, Vol. 22, No. 4, Fall, pp. 1–27.

Gately, D. 2004. OPEC’s Incentives for Faster Output Growth. Energy Journal, Vol. 25, No. 2, pp. 75–96.

Grubb, M. 1998. Corrupting the Climate? Economic Theory and the Politics of Kyoto. Royal Institute of

International Affairs, Oct.

Hall, C. T. 2004. Air Board’s Tough Smog Rules Defy Auto Industry. San Francisco Chronicle, Sept. 25.

Hanly, M., J. Dargay, and P. Goodwin. 2002. Review of Income and Price Elasticities in the Demand for

Road Trafﬁc. University College London Center for Transport Studies, March.

Harrington, W., and V. McConnell. 2003. Motor Vehicles and the Environment. Resources for the

Future, April.

Hybridcars.com. 2004. Tax and Other Hybrid Incentives. hybridcars.com, Oct. 7.

EFFECTS OF AUTOMOTIVE TECHNOLOGY, ENERGY, AND REGULATORY DEVELOPMENTS

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Keith, D. W., and A. E. Farrell. 2003. Rethinking Hydrogen Cars. Science, Vol. 301, July 18,

pp. 315–316.

McElveen, M. 1993. Business Helps Sink BTU Tax—Opposition to Clinton’s Energy Tax Proposal.

Nation’s Business, July.

NHTSA. 2003. Summary of Fuel Economy Performance. U.S. Department of Transportation, March.

NHTSA. 2004. Automotive Fuel Economy Manufacturing Incentives for Alternative Fueled Vehicles: Final

Rule. U.S. Department of Transportation, Oct. 1.

NRC. 2002. Effectiveness and Impact of Corporate Average Fuel Economy (CAFE) Standards. National

Academies Press, Washington, D.C.

NRC. 2004. The Hydrogen Economy: Opportunities, Costs, Barriers, and R&D Needs. National Academies

Press, Washington, D.C.

Parry, I. W. H. 2002. Comparing the Efﬁciency of Alternative Policies for Reducing Trafﬁc

Congestion. Journal of Public Economics, Vol. 85, No. 3, Sept., pp. 333–362.

Parry, I. W. H., and K. A. Small. 2002. Does Britain or the United States Have the Right Gasoline Tax?

Resources for the Future.

SMP. 2004. Mobility 2030: Meeting the Challenges to Sustainability. World Business Council for

Sustainable Development.

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Finance Reform Proposals

Toll Road Expansion and Road Use Metering

This chapter and Chapter 6 review proposals for changes in revenue sources

and other financing arrangements for highways and transit in the United

States. The proposals are diverse and from a variety of sources, and they have

been useful resources to the committee in forming its conclusions. The pro-

posals are also valuable because they shed light on the nature of the finance

problems confronting transportation agencies that have motivated calls for

reform.

The diversity of reform proposals reflects different points of view on how

the underlying problems of transportation finance should be defined. The pro-

posals all recognize, to some extent, dual goals of finance policy: to assemble

a collection of revenue flows adequate to support a desired level of spending

and to establish practices that promote investment in high-return projects and

efficient operation of existing facilities. The starting point of proposals from

government sources and transportation interest groups tends to be spending

needs (generally seen as greater than present revenues can support). Proposals

from academia and other independent sources tend to emphasize the impor-

tance of finance practices that provide incentives for better spending and oper-

ating decisions and usually avoid judgments on the proper levels of revenue

and taxes.

Each of the proposals described in the two chapters concentrates on particu-

lar aspects of the ﬁnance structure—for example, user fee collection techniques or

the deﬁnition of federal and state responsibilities—rather than on comprehensive

reform. However, decisions about changing any of these elements of the ﬁnance

scheme in the future will be unavoidably linked, and proposals sometimes over-

look these essential connections. Therefore, in comparing proposals, it will be

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helpful to keep in mind a deﬁnition of a generic, comprehensive reform package.

Such a package would have ﬁve components:

• Deﬁned goals: The proposal should deﬁne what the ﬁnance scheme is intended

to accomplish, with reference to overall transportation policy goals. Finance

system goals should not only refer to revenue adequacy but also acknowledge

that ﬁnance provisions inﬂuence transportation program outcomes, includ-

ing operating efﬁciency and the quality of investment decision making.

• Assignment of responsibilities among the federal, state, and local government

and the private sector: The appropriate assignment of responsibility will

depend in large part on revenue sources, so if new revenue sources are con-

templated, it will be necessary to think through the implications for spheres

of responsibility. For example, to the extent that local and state governments

have mechanisms to charge all users of roads within their jurisdictions rather

than just residents, the need for involvement of higher levels of government

is lessened. Changes in the control of revenue will translate into changes in

control of spending and operating decisions.

• User fee and pricing rules: The proposal should identify sources of funds and,

assuming user fees are employed, should specify how rates would be set.

Today, federal and state elected ofﬁcials directly decide the distribution of

the burden of taxes and fees supporting transportation among categories of

users (e.g., between light vehicles and large trucks) and the public. These

decisions are inﬂuenced to an extent by transportation agencies’ needs

studies and cost allocation studies. In a ﬁnance scheme that relied heavily on

revenue from tolls or mileage fees, success or failure would depend on the

rules determining the levels of tolls and fees and the fee differentials corre-

sponding to characteristics of users, trafﬁc, and the facility. Revenue and

demand management are not necessarily incompatible pricing objectives;

however, both consequences of pricing decisions would have to be taken into

account.

• Rules on disposition of revenues and on budget and project selection decision

making: Today, as a consequence of the mechanisms of dedicated taxes and

trust funds in federal and state transportation programs, transportation

program spending is constrained by revenues during the intervals between

legislative rate adjustments. Individual project selection is also inﬂuenced

through the details of federal-aid program rules, such as matching share and

project design requirements. A new ﬁnance scheme could involve different

forms of connections between revenue and spending, or it could suppress

any direct linkage. For example, if tolls or mileage charges become impor-

tant sources of revenue, the revenue-raising potential of new road projects

is likely to become a factor in project selection decisions, and components

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of the transportation system that raise surplus revenue (e.g., the roads under

control of a toll authority) may be able to claim priority in new spending

plans. Also, new ﬁnance arrangements might alter the rationale or need for

modal cross-subsidies.

• A transition strategy: Fundamental changes—for example, development of a

new base revenue source or a substantial scaling back of the present federal

role in ﬁnance—would have to be preceded by a coordinated program of

research, planning, and communication among government ofﬁcials and the

public. The transition might involve large-scale trials and progress through

a series of interim stages. A road map and schedule for the transition would

be an essential part of a complete reform proposal (although the road map

would be subject to revision throughout the process).

Given the complexity of the problem, it is not surprising that past proposals

have not attempted to specify all these aspects of a ﬁnance scheme comprehen-

sively. Nonetheless, as reforms are implemented over time, the inherent connec-

tions among the aspects will become evident. Therefore, it would be an error to

plan at the outset to alter one aspect, for example, to replace the fuel tax with

another form of user fee, while disregarding how the change might affect the other

aspects of the ﬁnance system.

The review in this chapter covers two categories of proposals: ﬁrst, substantial

expansion of toll roads of the existing design; that is, limited-access roads whose

users pay a fee, commonly upon exit and depending on the distance traveled and

possibly on time of day; and second, direct metering of use of all roads within a

geographic area [for example, by using Global Positioning System (GPS) technol-

ogy], with charging based on distance traveled and possibly varying with the road,

trafﬁc conditions, or time of day. These proposals focus on developing new basic

revenue sources and would require a period of years to implement (although toll

road development is taking place today and may be stimulated by provisions of the

2005 legislation reauthorizing federal surface transportation aid programs).

Chapter 6 describes proposed reforms that retain the basics of present arrange-

ments, in particular, reliance on dedicated revenue from fuel taxes and other exist-

ing user fees. These concentrate on more effective use of existing instruments and

could be implemented more quickly.

In its ultimate form, the road use metering concept would be a comprehen-

sive approach to road pricing and ﬁnance reform. After a certain date, all vehicles

would be required to have metering equipment, travel on all roads within the juris-

diction would be subject to charges, and the revenues would constitute the basic

funding source for the transportation program. In contrast, toll road expansion

proposals embody a more gradualist vision. The mileage of toll roads and tolled

lanes would grow over time, both supplanting and supplementing traditional

forms of funding and management. Eventually all the roads most suitable for

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tolling with today’s conventional technology (mainly urban arterial limited-access

routes and major intercity expressways) would be tolled.

These three categories of reforms certainly are not mutually exclusive; rather,

they could be complementary: reforms within the present system could be part of

a phased transition strategy to a system that relied on tolls or mileage fees. (As an

example, the Oregon road user fee proposal described below contains elements of

all three categories.) General road use metering might emerge as a natural conse-

quence of a program of expansion of conventional toll roads. The goal of examin-

ing the proposals is to assess the contribution that each of them might make to a

ﬁnance scheme that promoted efﬁcient operation and development of the trans-

portation system.

TOLL ROADS AND TOLL LANES

It was noted in Chapter 2 that highway and bridge tolls account for 8 percent of

U.S. highway user revenues (Table 2-2). This share has been nearly constant since

the 1950s. Tolling of public roads has long faced opposition; the original federal-

aid program for highways in 1916 banned tolling of roads receiving aid (P.L. 64-

155, Section 1). Consideration was given to toll ﬁnancing in the earliest stages of

planning for the Interstate highway program, but a 1939 congressionally com-

missioned study concluded that most highways on a nationwide network would

not generate sufﬁcient revenue to be self-supporting, and later ﬁnance proposals

all focused on the suite of fees and taxes in place today (Weingroff 1996). Except

in some special cases, the federal-aid highway program does not allow states to col-

lect tolls on Interstates or other roads built with federal assistance, although some

preexisting toll roads were incorporated in the Interstate system and continue to

collect tolls. In contrast with the United States, several countries, including Italy,

Spain, Portugal, and France, have relied heavily on toll ﬁnance to develop their

national expressway networks (Table 2-7).

Several recent developments have increased interest in (if not application of )

toll ﬁnance. Information technology has greatly reduced the cost and inconve-

nience of toll collection. Today nearly every major toll facility provides for elec-

tronic toll collection. Communications devices in vehicles and at tollway entrances

record the passage of a vehicle and charge the owner (for example, the E-ZPass sys-

tem in place on most toll facilities in the northeastern United States). In addition,

the search for additional revenue sources for transportation, especially in the states

experiencing the highest rates of trafﬁc growth, and hopes of attracting private

investment in highways have stimulated attention.

The ﬁrst subsection below surveys examples of proposals for expansion of the

scope of tolling in the United States. In the second, the relation of tolling to

private-sector participation in provision of roads is examined. The third describes

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proposals and recent actions to change federal highway aid program rules to pro-

mote toll road development. The ﬁnal subsection is a summary.

Proposals for Expanding Toll Roads

The four proposals described here are representative of efforts to work out a prac-

tical basis for increasing reliance on tolls in transportation ﬁnance on the basis of

present tolling technology. The ﬁrst, HOT (high-occupancy/toll) networks, is a

conceptual proposal for a scheme that might allow relatively rapid development of

a rational system of urban tolled lanes by starting with conversion of existing high-

occupancy vehicle (HOV) lanes. The second, FAST (fast and sensible toll, or free-

ing alternatives for speedy transportation) lanes, is the original version of a proposal

that was enacted in modiﬁed form on a trial basis in the 2005 federal surface trans-

portation program reauthorization legislation. The underlying concept is similar

to HOT networks, but the proposal is concerned with changes in federal law to

give impetus to toll lane development rather than with laying out how the toll sys-

tem should develop. Both proposals call for toll lanes rather than toll roads because

offering motorists a choice between tolled and free lanes is viewed as a way to mit-

igate public objections to placing a toll on previously free facilities. The third

proposal described is for development of toll lanes restricted to use by large

trucks. The ﬁnal proposal (a measure adopted by the state of Texas) is a plan to

restructure state transportation programs to allow tolls to take on a greater role

in funding.

HOT Networks

The HOT networks concept, proposed in a 2003 study of the Reason Public Policy

Institute, is an example of an incremental approach to expanded use of tolls for

ﬁnance and facilities management (Poole and Orski 2003). The authors call for

development of networks of HOT lanes on limited-access expressways in congested

urban areas. The lanes would be open toll-free to multioccupant vehicles (as are

today’s HOV lanes) and to single-occupant vehicles paying a toll. Toll collection

would be electronic, and the fare would be varied according to actual trafﬁc condi-

tions to maintain freely ﬂowing trafﬁc at all times. The lanes also would be open to

express buses to provide low-cost, high-speed public transit. Development of the

system would start with existing infrastructure by converting existing HOV lanes

to HOT lanes, and additional mileage of lanes and interchanges would be added to

create a rational network in each metropolitan area.

The proposal incorporates features aimed at broadening public acceptance.

HOT lanes would be marketed as a premium, congestion-free service option, with

drivers offered the choice of congestion-free toll lanes alongside more crowded free

lanes, and the system would improve transit as well as private auto mobility.

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To illustrate the proposal, the authors present maps, cost estimates, and rev-

enue estimates for HOT networks in eight highly congested U.S. metropolitan

areas. The networks range from 240 to 1,000 lane miles each and total 4,400 miles

in the eight cities (Washington, D.C.; Miami; Atlanta; Dallas; Houston; Seattle;

San Francisco; and Los Angeles). The estimated construction cost is $44 billion

(not including the cost of constructing the HOV lanes already in place). Toll rev-

enues are estimated to be $2.9 billion per year and to be sufﬁcient to cover two-

thirds of the debt service on the construction cost, with average peak-period tolls

around $0.26 per mile. The authors propose that the federal government take the

lead in implementing the plan by offering aid within the structures of the existing

federal highway and transit programs.

FAST Lanes

FAST lanes was a legislative proposal, originally put forth in 2003, to lift the pro-

hibition in federal law on collection of tolls on federal-aid highways for new lanes,

lanes on new highways, or existing HOV lanes that are converted to toll lanes, pro-

vided that the highway has a free lane parallel to the toll lane. A version of the pro-

posal, entitled the Express Lanes Demonstration Program, was enacted as a trial

in the 2005 federal surface transportation program reauthorization legislation

[Safe, Accountable, Flexible, Efﬁcient Transportation Equity Act: A Legacy for

Users (SAFETEA-LU), Section 1604]. The secretary of transportation is autho-

rized to permit 15 projects with the following features:

• A state or a state-authorized public or private entity may impose tolls on

an existing HOV lane or a newly constructed lane on any road, including

Interstate highways. Capital expenditures for the project will be eligible

federal-aid expenditures.

• The purpose of the tolls must be to manage congestion, reduce emissions,

or ﬁnance the lane addition. The state must set performance goals for the

project and monitor and report performance.

• Revenues are to be used ﬁrst to pay for debt service (presumably on debt

incurred to construct the facility), for a “reasonable return on investment of

any private ﬁnancing,” and for operation and maintenance of the facility.

Any surplus is to be used for any federal-aid highway or transit project.

• Former HOV lanes converted to toll lanes must have variable pricing by

time of day or by level of congestion. Newly added lanes may use variable

pricing but are not required do so.

• Toll collection must be automated, and the U.S. Department of Trans-

portation is to set standards to ensure interoperability of tolling equipment.

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Another section of the same legislation (SAFETEA-LU, Section 1121) authorizes

conversion of HOV lanes on federal-aid roads to HOT lanes. Design and operat-

ing requirements are similar to those of the Express Lanes Demonstration Program

listed above, but there is no restriction on the number of projects. How the two

provisions of the act will work together has not yet been established.

An analysis of the potential extent and feasibility of FAST lanes projects

(Poole 2003) considered a scenario in which states decided to add two FAST lanes

to all Interstate highway segments classiﬁed as severely congested by the Federal

Highway Administration (with volume–capacity ratio over 0.95 in the peak direc-

tion during the peak hour). There are 3,600 miles of such routes, nearly all in

urban areas. Estimated construction costs were $57 billion to $84 billion, and toll

revenues were estimated to be sufﬁcient to cover between 33 and 57 percent of

these costs. It was noted that FAST lanes on high-volume expressways in smaller

urban and rural areas might be better able to pay for themselves because construc-

tion costs would be much lower than in the largest urban areas, although such proj-

ects would yield lower travel beneﬁts.

The inability of HOT network or FAST lane projects in major urban areas to

pay for themselves would not be surprising and would not necessarily imply that

such projects were economically unjustiﬁed. The lanes would all be competing

with untolled and hence underpriced capacity, including the adjacent free lanes

that are part of the design of these projects as well as alternate routes over the urban

network. Also, it is likely that highway agencies would choose not to build some

of the capacity expansions that are included in the estimates of cost and revenue

described above because their construction and operating costs would be too high

in comparison with toll revenue and beneﬁts. Eliminating the least attractive proj-

ects would boost the ratio of revenue to costs.

Features of the FAST and HOT lane concepts that are aimed at increasing

public acceptance—the adjacent free lanes and the guarantee of free-ﬂowing traf-

ﬁc at all times in the premium lanes—compromise their effectiveness and ﬁnan-

cial viability. One study illustrating this difﬁculty used a travel demand model to

compare the performance of a hypothetical expressway with congestion tolls on

both lanes in one direction with performance with only one lane tolled (Parry

2002). The study estimated that the economic beneﬁt from providing both a tolled

and a free lane would be no more than a third of the beneﬁt of tolling both lanes.

(The beneﬁt is the value of travel time savings and of new trips resulting from the

increase in speed in the tolled lane, net of the loss to travelers who are displaced by

imposition of the toll.) The optimum toll on a single tolled lane would be only a

fraction of the optimum toll if both lanes paid. If the single-lane toll were increased

above its optimum level, the cost of added congestion caused by diverted trafﬁc in

the free lane would exceed the added beneﬁt of reduced congestion in the tolled

lane. Also, providing separate tolled and free lanes may add to the construction

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cost of the facility by complicating interchange design. Similarly, guaranteeing free

ﬂow in the tolled lane can reduce the public beneﬁt compared with allowing some

degree of congestion there, if diverted trafﬁc increases delay in the free lanes

enough to offset the beneﬁts to users of the tolled lane. In one simulation study

(Small and Yan 2001, 321), guaranteeing free trafﬁc ﬂow in the tolled lane harms

overall public welfare under nearly all assumptions.

Imposing a toll on a single lane will not necessarily harm users of the free lanes.

If the tolled lane had been congested to the point of stop-and-go trafﬁc ﬂow con-

ditions before tolling, then imposing a toll will increase throughput on the tolled

lane and may decrease congestion in the free lane. Also, if the tolled lane was pre-

viously an HOV lane, it may have been so lightly utilized that opening it to toll-

paying vehicles will decrease congestion in the free lanes. Regardless of prior

conditions, however, the optimum toll generally will still be lower than if all lanes

were tolled.

Truck-Only Toll Lanes

Another possible near-term application of specialized toll lanes is new lanes for

trucks only on Interstate routes with heavy truck trafﬁc. A 2002 analysis of such

facilities estimated the potential productivity gains of truck-only toll lanes on long-

distance Interstate routes and concluded that in many cases truckers would will-

ingly pay tolls in the range of 40 to 80 cents per mile to obtain the increased

payload beneﬁts (Samuel et al. 2002). That study proposed that longer combina-

tion vehicles (for example, a tractor pulling two full-sized semitrailers) be required

to use the truckways but that conventional heavy trucks, which are legal on all

Interstates, have the option of using either the truckway or the regular lanes.

The rationale for such facilities is partly ﬁscal and partly operational. On the

ﬁscal side, states see toll ﬁnancing as a means to ﬁnance widening of heavily trav-

eled Interstate highways over the next 20 years. The operational rationale is a

combination of safety and productivity. Separation of cars from heavy trucks is

expected to produce signiﬁcant safety gains. Also, if heavy trucks operate in barrier-

separated lanes, there should be fewer safety objections to longer and heavier com-

bination vehicles, which can signiﬁcantly increase the productivity of trucking by

permitting a single rig and driver to haul more payload. In urban areas, relief from

freeway congestion should further enhance productivity gains to truckers. The vol-

untary approach, with free lanes and toll lanes accessible to conventional trucks,

might have more success in gaining trucking industry support than mandatory

tolls, which the industry has opposed (McNally 2005).

Truck-only toll lanes feature in the plans of several public agencies. In 2005

the Virginia Department of Transportation was considering proposals of a private-

sector bidder for an $11 billion project to add two truck-only toll lanes in each

direction to all 325 miles of I-81 in Virginia. The possible tolling of all lanes on

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I-81 is under consideration as part of this project (Bowman 2004; VDOT 2005).

In Texas, the ﬁrst of a number of long-distance trans-Texas corridors has entered

the negotiation stage with the Texas Department of Transportation’s selection of

a winning bidder for the ﬁrst major segment of the corridor that will parallel I-35.

This $6 billion project will initially build a four-lane divided toll highway open to

all trafﬁc. When it is subsequently expanded to as many as 10 lanes, the original

four lanes will become truck-only lanes (Powers 2004). In California, the 2030

long-range transportation plan adopted in 2004 by the Southern California

Association of Governments includes a $16.5 billion system of toll truckways,

in part to serve the ports of Los Angeles and Long Beach (Southern California

Association of Governments 2004).

Texas Toll Road Authorizing Legislation

Programs created by a referendum passed in 2001 and subsequent legislation seek

to integrate use of toll roads and debt ﬁnance as components of the Texas state

transportation program. This ambitious reform package is too new to allow an

assessment of its impact, but it is being cited as a model for other states. The new

law authorized creation of county-level or multicounty toll road authorities, called

regional mobility authorities (RMAs). RMAs must work with the existing metro-

politan planning organizations, which retain authority over planning transporta-

tion development in their local areas. The goal of the RMAs is to give metropolitan

areas greater control over development of their highway systems and to accelerate

projects that would not receive high priority in the statewide program (TxDOT

2004; Orski 2004; Urban Transportation Monitor 2004).

RMAs can issue bonds backed by toll revenues, develop projects, operate toll

roads, and contract with private-sector ﬁrms to build and operate toll roads. They

also have access to regular state highway funds and federal aid to the extent allowed

under federal program rules.

The law provides for payments of per-vehicle fees, called shadow tolls or pass-

through tolls, to RMAs by the state to compensate the RMAs for the costs of roads

they provide to the state as part of the state highway system. The provision’s pur-

pose apparently is to allow the state to subsidize low-revenue toll projects with gen-

eral state highway user fee revenue or to associate a revenue stream with untolled

RMA projects for ﬁnancing purposes.

At the state level, the new laws created the Texas Mobility Fund and autho-

rized the state to sell bonds to ﬁnance new road construction. The commission has

required the state department of transportation to evaluate all new state construc-

tion for feasibility of tolling.

Three RMAs have been formed, and two more are being organized. RMA

projects involving more than 100 miles of road construction costing several billion

dollars are in early stages of development. The Texas program is noteworthy as an

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effort to mainstream tolls as an element of state transportation ﬁnance. It focuses

on metropolitan areas and gives metropolitan areas lead responsibilities since these

areas are where most of the promising toll projects will be located.

Programs similar to the Texas RMAs exist in other states. In Colorado, the

1987 Public Highway Authority Law allows cities and counties to create special

authorities with the necessary powers to construct and operate toll roads. Two

authorities operate toll roads in the Denver area under the law’s provisions, one

funded entirely by toll revenue and the other by a combination of toll revenue and

a special local vehicle registration fee (E-470 Public Highway Authority 2005;

Northwest Parkway Public Highway Authority 2004). The state also has created

the Colorado Tolling Enterprise, which is authorized by the legislature to issue

bonds and construct and operate toll roads at any location in the state, consistent

with the state and regional transportation plans (Colorado Tolling Enterprise

Board 2005). In Florida, independent regional expressway authorities in Miami,

Orlando, Kissimmee, and Tampa operate networks of toll roads.

Private-Sector Participation and Toll Finance

The possibility of increasing the resources available for expanding capacity by elic-

iting private-sector participation has begun to receive serious attention. Most such

projects and proposals have been for toll roads constructed entirely or partially with

private-sector capital and operated by a private entity.

Nearly all U.S. toll roads

today are operated by publicly controlled special-purpose authorities. Tolls are the

obvious choice for funding privately operated roads because an identiﬁable rev-

enue stream is necessary for attracting private capital and because one of the hoped-

for beneﬁts of such projects is an improvement in efﬁciency through operating

the road on business principles, including charging for use. Thus measures to

promote toll ﬁnance of U.S. roads may also increase the opportunity for private-

sector participation.

The number of such projects carried out in modern times in the United States

is small thus far; a 2004 General Accounting Ofﬁce (GAO) report identiﬁed ﬁve

private toll roads (GAO 2004). Two of the most prominent projects are located

in Southern California. The State Route (SR) 91 Express Lanes project, 10 miles

of tolled express lanes with variable time-of-day pricing, constructed in the median

of an existing freeway, opened in 1995 as a privately operated road. The facility

was later purchased by a public authority because the government wished to con-

struct parallel capacity in violation of its noncompete clause with the franchisee.

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130

The most common form of public–private partnership, as the term is used conventionally in U.S.

transportation, is a contract in which a private ﬁrm takes responsibility for design, construction, and

often operation and maintenance of a road and bears part of the risk of cost or schedule overruns or

performance failures (USDOT 2004). These arrangements and other management controls to make

available resources go further are described in Chapter 6.

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The second California project is a new 10-mile expressway, a section of SR 125,

scheduled to open as a privately operated toll road in 2006. In 2005, in the ﬁrst

privatization of a public toll road in the United States, the city of Chicago turned

over operation of the Chicago Skyway, an 8-mile expressway constructed in 1958,

to a private ﬁrm under a 99-year lease. The operator will receive all toll revenue

(which amounted to $43 million in 2002) in return for a $1.8 billion payment to

the city. The operator has instituted time-of-day pricing for trucks.

The California private toll road projects were developed through the program

created by Assembly Bill 680, 1989 California legislation that authorized the state

transportation department to enter into agreements with private entities for con-

struction and operation of four toll road projects, as demonstrations, to be car-

ried out without state funds. The statement of ﬁndings introducing the law

indicates that the program is to develop alternative funding sources “to augment

or supplement available public sources of revenue,” to “take advantage of private-

sector efﬁciencies in designing and building transportation projects,” and to

“allow for the rapid formation of capital necessary for funding transportation

projects” (Caltrans n.d.).

In a presentation to the committee, a California ofﬁcial emphasized that the

state saw the AB 680 projects primarily as a way of supplementing funding. The

law was enacted at a time of exceptional constraint in the state transportation

budget. During the 1990s, growth in state revenues and federal grants diminished

interest in recruiting private capital for road development. However, interest has

been renewed now that transportation budgets are tightening again. Similarly, the

SR 125 franchisee described the project’s funding arrangement to the committee

as a means of allowing construction of a road for which funding would otherwise

not have been available.

Enabling Legislation

Provisions in state law that set ground rules for participation in road development

are seen as critical to the prospects for these kinds of projects. For example, AB

680, the legislation governing the California projects, authorized up to four proj-

ects subject to the following provisions:

• Projects are to be constructed entirely at private-sector expense.

• Roads are to be leased by the state to the private operator for 35 years and

then revert to state operation.

• The state transportation department “may exercise any power possessed by

it” (presumably a reference to eminent domain) to facilitate projects.

• The state can provide planning and environmental certiﬁcation services,

with costs to be reimbursed by the operator.

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• The state will provide maintenance and trafﬁc law enforcement, with reim-

bursement.

• All design and environmental standards applicable to conventional state

projects apply.

• The private party’s return is capped at “a reasonable return on investment.”

As the owner of the roads, the state retains liability for their operation. The state

also provides access to certain ﬁnancing sources, for example, federal credit assis-

tance. In the SR 91 project arrangement, the state agreed not to construct com-

peting facilities.

The GAO assessment of private-sector participation in road and transit

projects found that legal authority exists in 20 states for private-sector partici-

pation in highway projects (GAO 2004, 5). The Texas toll road legislation

described in the preceding section is an example of a recent legislative charter.

Prospects for Private Participation

GAO’s assessment concluded: “While legislative proposals [during the congres-

sional debate over reauthorization of the federal surface transportation program]

could encourage greater private participation, private sponsorship seem[s] best able

to advance a small number of projects—but seems unlikely to stimulate signiﬁcant

increases in funding for highways and transit” (GAO 2004). GAO cites as obsta-

cles the absence of authorizing legislation in most states, as well as “signiﬁcant

political and cultural resistance to toll roads—the most common way that the pri-

vate sector generates revenues” (GAO 2004, 5). However, it emphasizes the impact

on toll revenue from competition between free roads and toll roads as the primary

obstacle and observes that “absent fundamental changes to current federal trans-

portation programs, states are likely to continue to devote signiﬁcant funding

including federal funds to building untolled roads.”

The perspective of GAO’s assessment, that private participation should be

judged in terms of its ability to increase total funding for transportation, seems to

parallel the perspective of the states (for example, in California’s AB 680 program

described above). However, it is not evident that the choice between private and

public ownership and operation of toll roads should be viewed primarily as a fund-

ing issue. Increasing private-sector participation will not necessarily increase the

total funds available for roads or allow accelerated road investment if the toll rev-

enues that would attract private-sector partners and backers are available to the

government acting alone. Instead, the choice to involve the private sector should

be viewed as similar to other privatization decisions that governments have faced

in regard to a variety of services and administrative functions with similar poten-

tial beneﬁts and drawbacks. For example, the private sector may have costs differ-

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ent from those of the government, and political pressures and public expectations

may affect the relative ﬂexibility of public and private toll road operators to set

prices for road use.

Pricing policy is key to gaining the potential efﬁciency beneﬁts of toll roads.

It has even been argued that privatization will be essential for effective application

of pricing and effective use of the information that pricing would provide to guide

highway management (Winston 1999). The record on the ability of public and

private operators to price ﬂexibly is mixed. Traditional public toll road authorities

have hesitated to introduce variable pricing, but some are now doing so. One

important highway congestion pricing experiment in the United States, the

California SR 91 Express Lanes, is now operated by a public authority but was

originally developed and operated by a private-sector ﬁrm. A local government

operating toll roads might be tempted to use its power over tolls to “export” traf-

ﬁc to neighboring communities (De Borger et al. 2005) or, alternatively, might

feel obliged to compete with its neighbors for commercial activity by reducing tolls

below costs.

As the cost estimates described above for the HOT network and FAST lane

proposals suggest, it will not be possible to have extensive self-supporting toll roads

and optimal trafﬁc patterns if travelers are always offered untolled or subsidized

alternatives. One response to the problem of competition from untolled roads

would be to subsidize toll roads (as the Texas toll road legislation described above

apparently would allow). If tolling parallel routes is not practical, a toll road’s fail-

ure to generate revenue sufﬁcient to cover its cost is not proof that the beneﬁts of

the road are less than its costs. In this case, a subsidy to the toll road, to reduce the

distortion of travelers’ route decisions, might be economically justiﬁed. Such sub-

sidies, paid from traditional road user fee revenues, could serve as a transitional step

toward more widespread dependence on toll revenue.

The California SR 91 and SR 125 toll projects were developed under highly

favorable circumstances for a private road: high congestion and rapid growth

ensured high demand and revenue potential; the state had already completed envi-

ronmental reviews on SR 91, which greatly reduced the risk that the project would

be stopped; and right-of-way already existed for the SR 91 Express Lanes. There

may be few projects with similar circumstances in the future, in California or else-

where. In general, where demand and revenue potential are high, environmental

and right-of-way obstacles will also be high (Boarnet et al. 2002). Expanding the

pool of attractive potential private road projects may therefore require granting

more concessions to the franchisee than California’s AB 680 allowed. More recent

laws in other states (for example, the Texas legislation described above) may prove

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133

For thorough examinations of the potential beneﬁts and limitations of privatization and of the cir-

cumstances in which it is likely (and unlikely) to be beneﬁcial, with examples from transportation, the

reader is referred to Gómez-Ibáñez and Meyer 1992 and Donahue 1989.

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134

more conducive to tolling and public–private partnerships than the California AB

680 pilot program.

Federal Policy Changes Favorable to Toll Road Development

In general, toll advocates have sought changes in law to remove restrictions on

institution of tolls on federal-aid highways, to give toll roads and roads developed

with private participation the same access to federal aid and tax-favored ﬁnancing

as conventionally developed roads, and to have government retain some of the risk

of project delays related to regulatory requirements. The 2005 federal surface trans-

portation aid reauthorization legislation (SAFETEA-LU) contained provisions to

• Classify federal-aid highway projects as eligible for tax-exempt private-

activity bond ﬁnance, with a $15 billion nationwide cap on such bonds over

the life of the bill (Section 1143). (This provision appears to apply mainly

to ﬁnancing projects with mixed public–private funding. Government-

owned airports, docks, and wharves were already eligible for tax-exempt

ﬁnancing, but highways had been excluded.)

• Allow tolls on newly constructed express lanes or former HOV lanes on

federal-aid highways through the Express Lanes Demonstration Program

and HOT lanes provisions described above (Sections 1604 and 1121).

• Authorize an Interstate System Construction Toll Pilot Program (Section

1604) limited to three projects nationwide. The program would allow tolls

on Interstate highways, bridges, or tunnels for the purpose of ﬁnancing con-

struction of the facility. This provision apparently is in addition to a previ-

ously authorized pilot program that allows up to three projects in which a

state collects tolls on an Interstate to ﬁnance reconstruction of the highway.

• Expand the Transportation Infrastructure Finance and Innovation Act

credit assistance program that was the source of part of the funding for the

California SR 125 private toll road.

The restriction of tolling to limited numbers of projects in pilot programs is a com-

promise. The states had advocated elimination of federal restrictions on tolls, while

the trucking industry had led opposition to lifting restrictions (Fischer 2004,

31–33; McNally 2005; AASHTO Journal 2004). The states have made little use

of previous federal tolling pilot programs.

A private-sector view on policy changes needed to promote toll ﬁnance is indi-

cated in a proposal from a ﬁrm active in toll road projects internationally (and the

parent of the SR 125 franchisee). The proposal (James 2003) calls for the follow-

ing changes in federal law:

• Make development phase activities (planning, environmental review, per-

mitting, and preliminary design) for privately owned or operated projects

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eligible for federal funding. The object apparently is to impose on the state

a major share of the risk that projects will fail to pass environmental and

other permitting reviews.

• Expand federal highway and transit grant programs to allow federal fund-

ing of projects that are privately constructed, owned, and operated, with

grant funds passing through the states. Presumably the concept is that if the

state were planning to construct a facility that was not expected to be self-

supporting through user fees, it could solicit proposals for private partici-

pation and select the proposal that produced the project at lowest cost to

the state.

• Mandate consideration of private ﬁnancing for highway and transit projects.

Such a mandate is seen as necessary to change conventional attitudes of gov-

ernment planners toward private participation. This requirement exists in

the United Kingdom.

• Allow tolling on Interstates.

• Facilitate private-investor access to tax-exempt ﬁnancing, in part by

expanding the deﬁnition of “exempt facilities” eligible for funding with

tax-exempt private activity bonds to include highways.

• Facilitate state sale or lease of facilities to private investors by clarifying that

such transactions involving facilities built with federal aid are permissible.

As described, the 2005 surface transportation legislation contained measures in

the direction of some of these proposals.

Summary

With the toll collection technology in use now in the United States, the two main

technical limits on the potential of tolls in highway ﬁnance are that tolls can be

applied on only a fraction of the road system and that toll roads always directly

compete with untolled roads.

State and local governments spend roughly $22 billion annually, about one-

sixth of all highway spending, on construction, reconstruction, maintenance, and

operation of urban and rural limited-access freeways (that is, the roads whose

design is suitable for tolling with conventional technology and that are not now

tolled). Revenue from existing toll roads and bridges was $7.7 billion in 2003

(FHWA 2004, Table SDF; FHWA 2005, Table LDF). The estimates summa-

rized above indicate that tolls imposed on urban HOT network or FAST lanes

might typically be expected to generate revenue sufﬁcient to cover half the capi-

tal cost of the lanes. On this basis, an ambitious program of toll conversion and

new toll road development in the United States today, following the HOT

network or FAST lanes models, might at most double annual highway toll

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revenue. Although electronic toll collection has greatly reduced the physical infra-

structure required for tolling, retroﬁtting some existing urban expressways for

tolls might prove impractical because of physical constraints or high initial costs.

Imposing tolls on all lanes of selected heavily traveled intercity routes, on the

model of the existing turnpikes, might generate substantial additional revenue,

but this measure has received consideration only in a few locations. The added

revenue from tolls probably would reduce legislatures’ willingness to raise fuel tax

and registration fee rates, so the net increase in highway budgets would be less

than the added toll revenues.

A toll program on this scale could have signiﬁcant beneﬁts even though toll

revenues would remain a small fraction of total highway spending. It would

improve trafﬁc ﬂow on the tolled facilities (provided congestion pricing was

employed) and speed construction of needed projects. If states evaluated all pro-

posed major capacity expansions for their potential for toll ﬁnance (a practice now

in force in Texas and recommended for Oregon in that state’s Road User Fee Task

Force proposal), project selection would be improved because projects with the

least direct beneﬁt and therefore the least potential for toll revenue would tend to

be deferred. Perhaps most important, an expanded toll program would allow ofﬁ-

cials and the public to gain experience with road pricing and consider whether

more extensive application would be desirable.

As the GAO review of U.S. private road projects (GAO 2004) observed, com-

petition with untolled roads will restrict the revenue toll roads can generate. Except

in some settings where before tolling the road regularly experienced stop-and-go

trafﬁc conditions, imposing tolls will divert trafﬁc to parallel lanes and roads and

increase delay and accident costs on these roads. The responsible government

authority must take care that tolls are not set so high that the net effect for all trav-

elers is negative.

The following measures probably are prerequisites for substantial expansion

of tolling and recruitment of private-sector participation in toll road development:

access to federal aid for toll roads and to tax-favored ﬁnancing for privately devel-

oped roads, mechanisms for funding toll facilities that are not expected to have toll

revenue sufﬁcient to break even (e.g., the pass-through toll mechanism in the

Texas toll road program), and continued advances in improving the convenience

and reducing the cost of electronic toll collection devices. Also, governments will

need to give consideration to the appropriate public and private shares of risk from

regulatory delays in projects.

The unpopularity of toll roads and public skepticism toward the concept of

road pricing are recognized as fundamental obstacles (Stough et al. 2004, 17–19;

McNally 2005). The following are among the objections commonly expressed:

paying tolls is inconvenient and slows travel; when a toll is placed on an existing

road the users are being forced to pay for the road twice; congestion tolling rewards

highway agency inefﬁciency, since the worse the congestion the greater the rev-

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enues; tolls inequitably burden the poor; congestion pricing in effect reserves road

use for the wealthy; road use metering technology constitutes an invasion of pri-

vacy. However, the evidence on public acceptance is mixed. For example, a recent

metropolitan Washington, D.C., opinion survey found a marked public prefer-

ence for tolls over tax increases for funding new roads (Ginsberg 2005), and some

new toll projects have gained public acceptance (FHWA 2003, 30).

The proposals described above contain features intended to help gain pub-

lic acceptance—in particular, offering users a choice of toll lanes, free lanes, and

transit, rather than forcing all travel onto the toll facility. However, these provi-

sions reduce the public economic beneﬁts that can be gained through pricing.

The opportunity to accustom a larger share of the public to the idea of road pric-

ing gradually sometimes is cited as one important beneﬁt of incremental expan-

sions of tolling and demonstrations of new kinds of toll roads (Parker 2004).

The problem of public acceptance is examined further in the next section.

ROAD USE METERING AND MILEAGE CHARGING

This section describes proposals and projects involving direct metering of use of

an extensive network of roads for the purpose of imposing charges on each road

user that depend on miles traveled. Charges also could vary with other factors

related to the cost of the user’s trip, such as the speciﬁc road used, trafﬁc condi-

tions, and time of day.

This method of charging for road use would have several advantages. If

mileage fees largely replaced fuel taxes, user fee payments would no longer depend

arbitrarily on vehicle fuel efﬁciency or the type of fuel consumed, and revenues

would not be vulnerable to shifts in vehicle technology. In addition, if all use of all

roads were monitored and charged for, local governments could readily fund their

streets and roads with revenue from user fees, as the states do now, rather than rely-

ing on general or general sales taxes. Most important, the beneﬁts of the trans-

portation system to travelers and the public could be substantially increased,

because travelers would have incentives to use roads efﬁciently and road authori-

ties would have better information to guide investment decisions.

Trucks have paid mileage fees in several U.S. states for many years. The

weight–distance tax in Oregon produces the most revenue, $178 million in 2003

(FHWA 2004, Table MV-2). Oregon rates are from $0.04 to $0.185 per mile

depending on the truck’s registered weight and number of axles (ODOT 2004).

Fuel consumed by trucks paying the weight–distance tax is exempt from the state

fuel tax. Truck operators must periodically report their trucks’ in-state and out-

of-state mileage and submit payments (Rufolo et al. 2000).

Applying a fee-charging system similar to the Oregon truck weight–distance

tax to cars and small trucks would impose impractical requirements on all vehicle

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operators to record and report their mileage. Mileage charging even for large trucks

has not gained wide acceptance, in part because of the burden of manual record-

ing and reporting. Therefore, all recent proposals for charging mileage-based fees

have involved automated data collection. Technology is available that could accu-

rately and reliably measure each vehicle’s travel and assess charges at reasonable

overhead cost and without great inconvenience for vehicle owners.

Proposals for road use metering and mileage-charging systems must address

not only technical plans but also administrative and political problems more chal-

lenging than the engineering aspects. Among these problems are the following:

• Gaining public acceptance of a system that may force some road users to pay

more or travel less and that employs technology sometimes regarded as a pri-

vacy threat,

• Managing the transition from the present transportation funding scheme to

a new one, and

• Learning how to set fees properly so that the potential economic beneﬁts

of the new charging scheme are realized.

The ﬁrst subsection below is a summary of proposals and projects for mileage

charging and other forms of road pricing. The next two subsections present exam-

ples of proposals for road use metering and charging systems in the United States

and experience with such systems applied to trucks in Europe. The ﬁnal sub-

section discusses implementation issues.

Survey of Proposals and Projects

The committee commissioned a review of projects and planning studies involving

road use metering and mileage charging and related road pricing schemes in the

United States and other countries (Sorensen and Taylor 2005). The review cov-

ered proposals for measuring or observing road use within a geographic area or on

an extensive network of roads and for imposing charges that depend directly on

miles driven, the speciﬁc roads used, time of day, or trafﬁc conditions. Cordon tolls

(i.e., schemes in which vehicles are charged for entering or traveling within an area)

and toll roads with variable rates were included, but traditional turnpikes charg-

ing ﬂat rates were not covered in the survey. Projects were included that have pur-

poses other than assessing road use fees but that demonstrate techniques that could

be applied for that purpose, for example, systems to monitor commercial vehicles

for regulatory enforcement. For each project or proposal, the review examined

• The objectives and history of the system,

• Techniques of metering road use and collecting fees,

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• Pricing policy,

• Governance (that is, control of policies and revenue),

• Experience with public acceptance, and

• Uses of revenues and sources of funds for constructing and operating the

system.

The review disclosed a high level of interest in road pricing and road use meter-

ing among road authorities worldwide, although implementation is in only the

earliest stages. Eighty-eight relevant projects were identiﬁed. Most are still in the

proposal stage, and the systems in operation are nearly all cordon tolls or variable

tolls on expressway segments. Table 5-1 shows the kinds of projects reviewed.

Appendix C is a summary of the review.

A recent proposal in the United Kingdom, which was not covered in the com-

missioned review, is worth mentioning because of its breadth. The government

has committed itself to a policy of developing a nationwide road pricing scheme

within the next 10 to 15 years that would impose charges on all road travel accord-

ing to distance traveled and congestion conditions. A conceptual plan has been

developed for a system using satellite positioning technology and metering devices

in vehicles. The concept is thus similar to the U.S. proposals and the existing

German truck tolling system described below. Regional or local pilot implemen-

tations are envisioned as a stage in development of the system. In the government’s

policy, revenue from mileage charges would be offset by reductions in the motor

vehicle fuel tax (European Commission 2005; Darling 2005; Department for

Transport 2004, Chapter 3).

The remainder of this section concentrates on proposals for road use meter-

ing and mileage charging. These schemes appear to be the most promising alter-

natives to the gasoline tax as a primary revenue source and as a means of assessing

user fees applicable to all vehicles and roads. In contrast, cordon tolling usually is

seen primarily as a trafﬁc management measure applicable in a restricted area. The

review found no proposals for application of a zone charging scheme over an exten-

sive area.

U.S. Proposals for Road Use Metering and Mileage Charging

The Oregon Road User Fee Task Force proposal and the New Approach to Road

User Charges study, which were cited in Chapter 1, are the most prominent U.S.

proposals for road use metering and charging schemes intended to replace or sub-

stantially supplement fuel taxes as a basic revenue source for transportation pro-

grams. The two proposals are similar in conception but differ in some signiﬁcant

design details. Together they suggest the range of design issues that will require

evaluation.

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In addition to these two proposals, a plan for a test of a road use metering

and mileage-charging system involving 500 vehicles in Seattle, Washington, was

announced in 2005 by the Puget Sound Regional Council. The test is receiving

funding from the federal Value Pricing Pilot Program. The technology is related

to that of the German Toll Collect truck-charging system (described below) and

is supplied by the ﬁrm that developed the German application (Inside ITS 2005).

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TABLE 5-1 Road Pricing, Road Use Metering, and Mileage-Charging

Projects and Proposals

Number of Projects Number of Projects

in Operation Planned or Proposed

Other Other

Type of Application U.S. Countries U.S. Countries

Facility congestion tolls:

Toll on a highway

segment, bridge, or tunnel that varies with

trafﬁc conditions or time of day. 7 4 28 6

Cordon congestion tolls:

Road users pay a fee

to enter or travel within a geographic zone

(e.g., a city center) during certain hours. 2 6 1 9

Road use metering and mileage charging:

Miles driven by all vehicles on a road system

are monitored and operators charged a fee

depending on mileage. 6 7

Weight–distance truck fees:

Mileage of freight-

carrying trucks is monitored and operators pay

fees depending on mileage and weight (count

includes only projects involving automated

travel monitoring). 2 5

Distance-based price variabilization:

Measures to convert ﬁxed vehicle fees

(e.g., registration and insurance) to fees

depending directly on miles driven. 5

NOTE: The counts include projects and substantial proposals that were identiﬁed through a literature

review and for which sufﬁcient documentation was available. They are not exhaustive but indicate the

extent of interest in the various types of application.

OURCE: Sorensen and Taylor 2005, Appendices B–F.

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Oregon Road User Fee Task Force Proposal

The Oregon Road User Fee Task Force was charged by the legislature with

designing a method of charging users of the state’s roads to replace the current

system. The task force’s proposal has three main provisions (Road User Fee Task

Force 2003):

1. Eventual imposition of new charges in place of existing ones:

– A mileage fee, that is, charging a fee per mile driven on the state’s roads.

– Congestion pricing, that is, charging a fee for use of certain roadways

during periods of congestion.

– New facility tolling: collecting tolls on all newly constructed roads,

bridges, or lanes, to the extent practicable, to cover the costs of con-

struction, maintenance, and operation.

The report explains that “the only broad revenue source that the task force

believes could ultimately replace the fuel tax is a mileage fee. The other . . .

revenue sources would address speciﬁc problems related to road revenue

and are designed for certain geographical areas, certain road projects, or cer-

tain road users” (p. 2).

2. A 20-year phase-in period during which the state would operate both the

mileage fee and the fuel tax. All new vehicles would be equipped with

the meters necessary to collect the mileage fee, and their owners would

receive credits or refunds of their fuel tax payments.

3. Pilot testing of alternative hardware and administrative arrangements for

the mileage fee as the ﬁrst step toward implementation.

The task force recommended pilot testing of metering and charging technology

with the following features (Figure 5-1):

• Mileage would be recorded on board the vehicle either with a system using

a GPS receiver to determine distance and location of travel or with a device

for recording miles driven from the vehicle’s odometer. Both options would

be evaluated in the pilot test. The GPS option would allow imposition of

congestion charging or charges that depended on the physical characteristics

or ownership of the road.

• Only the minimum summary data required to compute the charge would

be transmitted outside the vehicle; this information would be insufﬁcient to

allow reconstruction of the routes and times of travel of the vehicle.

• Fees would be collected by one of two alternative methods. In the ﬁrst, at

each refueling a device on the fuel pump would receive a transmission from

the vehicle’s mileage recorder, add the mileage charges accumulated since the

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THE FUEL TAX AND ALTERNATIVES FOR TRANSPORTATION FUNDING

142

Heavy vehicles only

GIS database

• Data polygons

• Road segment

coordinates

(optional)

GPS receiver

• Latitude &

longitude

coordinates

Trailer configuration

and ID code

(optional)

Onboard weighing

system

(optional)

Vehicle onboard computer

• Vehicle ID

• Per mile rate schedule

• Miles traveled per polygon

• Miles traveled by road

classification (optional)

• Odometer reading

• Vehicle weight and configuration

(heavy vehicles only)

Odometer

feed

Smart card

• Vehicle ID

• Rate schedule edition

• Total user charge due

• User charge apportionment

• Odometer reading

Collection center

• Prepares bills to users

• Directs revenue to

jurisdictions

• Maintains per mile rates for

jurisdictions

• Checks for data discrepancies

Wireless Reader

On-Vehicle Device

Central

Database

Modem

VMT fee

VMT Data

GPS Satellite

GPS

Satellite

Signals

Central Computer

Wireless Gateway

Service Station Building

Service Station POS System

Modem

(a)

(b)

FIGURE 5-1 Examples of design proposals for road use metering and

mileage charging: (a) Oregon Road User Fee Task Force proposal, GPS

option (source: Whitty and Imholt 2005); (b) New Approach to Assessing

Road User Charges proposal (source: Forkenbrock 2004).

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previous refueling to the price of the fuel purchase, and subtract the state’s

fuel excise tax from the purchase price. In the second option, the vehicle’s

mileage meter would be read at service stations or other data collection cen-

ters, and the state would periodically send the vehicle owner a bill for mileage

charges less fuel excise tax paid.

The task force estimated that the largest capital cost associated with road use

metering would be the cost of in-vehicle equipment, on the order of $250 per

vehicle for prototypes. However, it noted that the main component, the GPS nav-

igation system, probably will become standard equipment on automobiles soon,

so much of this cost will not be attributable to the charging scheme. Total initial

capital expenses for setting up central facilities and installing devices at gas sta-

tions are estimated at $33 million (Whitty and Imholt 2005, 41–42). Estimated

annual operating costs for a central data collection and billing center are $50 mil-

lion, but state administrative costs for the decentralized fee-collection option

(with the entire mileage fee transaction handled at the gas pump and no central

data collection) were estimated to be much less (Road User Fee Task Force 2003,

31). For comparison, Oregon had 3.1 million registered vehicles and collected

$640 million in state highway user fees in 2003 (FHWA 2004, Tables MV-1,

SF-1). For the United States as a whole, collection expenses for present state high-

way user fees are 5 percent of revenue collected (FHWA 2004, Table HF-10).

The state planned to conduct a 1-year pilot test of the technology involving sev-

eral hundred vehicles in Portland, Oregon, beginning in 2006. The operators will

pay mileage charges and have fuel taxes deducted at the gas pump (Whitty and

Imholt 2005).

New Approach to Road User Charges Proposal

A proposal developed with the support of 15 state departments of transportation

calls for a road use metering system that could be implemented nationwide but

that would provide ﬂexibility so that each state or substate jurisdiction could decide

independently whether to charge mileage fees and establish its own rate structure

(Forkenbrock and Kuhl 2002; Forkenbrock 2004). The 2005 federal surface trans-

portation aid reauthorization legislation (SAFETEA-LU, Sections 1919 and 1934)

authorized a 3-year, large-scale ﬁeld test of the technical approach of the New

Approach to Road User Charges proposal funded at $16.5 million. The main ele-

ments are as follows (Figure 5-1):

• Each vehicle would be equipped with an onboard computer. The computer

would receive inputs from a GPS receiver and the vehicle odometer and

would contain a data ﬁle deﬁning the boundaries of taxing jurisdictions and

tax rates.

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• In the simplest implementation, the fee schedule would be a ﬂat rate for each

mile traveled within a jurisdiction. The onboard computer would calculate

the fee and accumulate the total amount owed. The computer would read

mileage from the odometer; the GPS input would be used to determine the

jurisdiction in which the travel occurred so that the appropriate fee per mile

could be applied.

• Periodically, the vehicle operator would communicate with a fee collec-

tion center to report the amount owed. The communication would be

by a wireless connection or a smart card. Smart card readers would be

attached to motorists’ home computers or located at service stations or in

other convenient places. In the same communication, the onboard com-

puter’s data file of rate information would be updated. The collection

center would bill the operator and distribute the receipts among the par-

ticipating jurisdictions.

The system would be capable of supporting more complex fee schedules,

including charges that depended on the speciﬁc road and time of day. Such appli-

cations would be at the discretion of each jurisdiction and are seen in the proposal

as a later development, after experience was gained with the ﬂat rate mileage

charge. Trucks equipped with onboard weighing devices (which are in commer-

cial use today) could be charged fees that depended on road characteristics and

weight. Identifying the road on which travel occurred would allow the state to set

rates on state-owned roads and local governments to set rates on roads that they

owned.

If the system incorporated a means of keeping track of the revenues gener-

ated by each road segment, this information would be likely to exert a strong

inﬂuence on road capacity expansion decisions. However, applications that required

uploading data from each vehicle on travel or fees owed by road segment might be

seen as compromising privacy.

The proposal envisions a transition period of several years during which

mileage fees and fuel taxes would be collected simultaneously. After a certain date,

all new vehicles would be required to be equipped with the computer and GPS

device; however, the authors judge that retroﬁtting the ﬂeet of existing vehicles

with the required equipment would not be feasible. Two technological options for

avoiding double-charging of road user fees during the transition are suggested:

devices on fuel pumps that would recognize when a vehicle being refueled was

equipped for mileage charging and cause the fuel to be sold tax free, and an input

to the onboard computer from a sensor measuring fuel added to the gas tank so

that the computer could deduct fuel taxes paid in computing the mileage charge

owed. The transition might proceed in three stages. In the ﬁrst, all new vehicles

sold would be equipped with the metering devices but only freight-carrying trucks

and vehicles not paying traditional fuel taxes (i.e., hydrogen-fueled and electric

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vehicles) would be charged mileage fees. In the second, all meter-equipped vehi-

cles would be charged by the mile but collection of fuel taxes would be continued.

In the ﬁnal stage, all vehicles would be required to have meters and pay mileage

fees (Forkenbrock and Kuhl 2002, 93, 100–102).

Toll Collect and Other Truck Mileage-Charging Systems

Aside from conventional toll roads, the only mileage-charging systems in effect

today apply to large trucks. The truck weight–distance taxes in effect for a num-

ber of years in Oregon and other U.S. states, which rely on manual reporting of

mileage, were mentioned above. Automated truck-charging systems are in opera-

tion in Europe. Trucks have been subject to mileage charges in advance of other

vehicles for several reasons. As a commercial activity, trucking has always been reg-

ulated and monitored. For example, U.S. trucks are stopped routinely for check-

ing of weight and registration and insurance documentation. Also, infrastructure

costs directly attributable to truck trafﬁc have long been recognized and quanti-

ﬁed and, in the United States, reﬂected in user fees. These costs arise from pave-

ment wear and bridge impacts, are proportional to mileage, and vary with vehicle

and axle weights.

Some design features of the European truck systems may be applicable to gen-

eral road use monitoring and charging schemes for all vehicles. The most signif-

icant implementation is the German Toll Collect system. (Toll Collect is the

name of the private consortium of companies operating the system under con-

tract to the German government.) Simpler systems are in operation in Austria and

Switzerland.

Toll Collect measures distance traveled and collects mileage fees from trucks

of over 12 tons loaded weight using the German Autobahn motorway system, a

7,500-mile network of roads with 2,500 interchanges that is managed by the

national government. The Autobahns were conceived as a toll-free system, and the

large number of interchanges renders traditional toll collection methods imprac-

tical. Annual travel of large trucks is 15 billion vehicle miles, of which 35 percent

is by trucks operated by carriers outside Germany. Before 1995, foreign truck oper-

ators usually paid no German taxes, since they could purchase fuel in neighboring

countries with lower fuel taxes and no other fees were imposed. In 1995, Germany

began to collect permit fees from German and foreign truck operators as a mem-

ber of the six-nation cooperative Eurovignette program (Kossak 2004). Toll

Collect replaces the permit fees.

The operators of a truck using the Autobahn can equip it with an onboard

computer with input from a GPS receiver. The computer uses the GPS position

information to determine the vehicle’s route and mileage on the Autobahn net-

work and computes charges owed. The computer transmits data to a processing

center via digital cellular telephone, and vehicle operators are billed periodically.

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Eventually, 800,000 vehicles are expected to have the onboard equipment for

automatic payment installed. Truck operators have the option of manually book-

ing and paying the fee for an Autobahn trip.

Gantries spanning the motorway at various points record license plates and

communicate with the trucks’ onboard computers and the processing center to

ensure that trucks are not using the motorway without paying. Vehicles with

equipment to verify compliance are also employed for enforcement.

A consideration in selecting the toll collection technology was that it should

be extendable to roads other than the Autobahns and to vehicles other than trucks

(Kossak 2004). The system was constructed and is operated by a private ﬁrm under

contract to the government. After overcoming some technical and administrative

difﬁculties and delays, Toll Collect went into operation in January 2005.

The average toll is €0.124 per kilometer ($0.26 per mile) and varies with the

number of axles on the vehicle and a pollution rating assigned to each vehicle.

Revenue of €3 billion per year is expected (Kossak 2004). Rates varying with traf-

ﬁc volume are planned for later (CNT 2005, 2). Rates are to be set so that the

total annual revenue equals the total cost to the road authority of serving truck

trafﬁc, as determined in a cost allocation study. Limiting revenues to road author-

ity costs is in compliance with a 1999 European Union directive establishing a

common policy on road use charges for goods-carrying vehicles (Sorensen and

Taylor 2005, 99).

Revenue is dedicated to transport infrastructure: 51 percent for roads and

49 percent for railroads and inland waterways. A commission on infrastructure

funding advising the German Ministry of Transport concluded in its 2000 report

that “user charges can only be legitimized by the direct relationship between infra-

structure use and the application of funds. Revenue from user charges should

therefore normally be used in those infrastructure spheres for whose use the charges

are levied. . . . The calculation of the level of user charges should be based exclu-

sively on infrastructure costs” (Commission on Transport Infrastructure Funding

2000). The user charges recommended were mileage charges for trucks and, ini-

tially, periodic permit fees by operators of other vehicles. Although the commis-

sion was generally inﬂuential in setting government policy, the allocation of road

user fees to waterways and railroads appears inconsistent with this recommenda-

tion as long as users of these facilities do not pay fees equal to costs. The effect of

the revenue allocation also is questionable, since if the truck fee revenues actually

approximate costs, then ultimately the road authority will need to replace the funds

used for nonroad purposes (Kossak 2004).

Austria has operated a simpler system for collecting mileage fees since 2004.

An overhead gantry has been installed on each of the 420 road segments between

pairs of interchanges on the nation’s 1,200-mile motorway system. Trucks and

buses over 12 tons are subject to the toll and carry devices that communicate

with devices on the overhead gantries. They employ a communication technique

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known as DSRC (dedicated short-range communication). Vehicles passing under

the gantries at normal motorway speeds are identiﬁed and their operators assessed

charges corresponding to the road link and vehicle type. Charges are €0.13 to

€0.273 per kilometer ($0.28 to $0.58 per mile), depending on vehicle type, and

all revenues are dedicated to expenditures on the motorways (ASFiNAG n.d. a;

ASFiNAG n.d. b). The Austrian system is essentially a large installation of an

advanced version of the automated toll collection technology that has become stan-

dard on most toll roads. The design would allow toll collection to be extended to

all vehicles on the expressways but generally is regarded as impractical as a means

of assessing mileage fees on all roads because of the great number of stationary sen-

sors that would be required.

Finally, the Swiss system, in operation since 2001, employs both DSRC (that

is, short-range communications with roadside sensors) and GPS. Vehicles over

3.5 tons are assessed mileage charges for travel on all classes of roads in Switzer-

land. An onboard computer records the vehicle’s mileage from the odometer. The

computer determines mileage within Switzerland by sensing border crossings. It

uses either DSRC with overhead gantries at major border crossings or position

information from GPS to detect border crossings on minor roads. Operators must

periodically forward the data recorded in the onboard computer to the road

authority. Foreign operators who do not choose to install the onboard equipment

must record and report mileage manually. Rates are higher than in Austria and

Germany and are calculated to include a charge for environmental externalities as

well as road authority costs (Sorensen and Taylor 2005, Appendix J).

Implementation Issues

Serious and credible technical proposals have been made for road use metering and

mileage charging in the United States, and the essential components of such a sys-

tem have been demonstrated in the truck mileage-charging schemes in operation

in Europe. The U.S. proposals have been motivated by concern for the future via-

bility of present funding sources as well as recognition of the beneﬁts of pricing:

more efﬁcient operation of roads, better investment decisions, economies in the

provision of capacity improvements, and avoidance of arbitrary or unfair distri-

bution of the cost burden of road transportation. However, challenging problems

remain to be solved before mileage charging could become the basis of U.S. high-

way funding. Among them are the following:

• Gaining public acceptance: It can be anticipated that the public and elected

ofﬁcials will be skeptical of a road use metering system that could be used by

the government to track individuals’ movements and activities. Road users

who expect to pay more than they do under present charges or to be com-

pelled to curtail their travel will also object, and the public and interest

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groups will object if the new charging scheme is perceived as unfairly favor-

ing some categories of road users over others or as increasing the disadvan-

tages of the poor.

• Making the transition from present to new revenue sources: If mileage fee

revenue is to wholly or partially replace revenue from present highway user

fees, highway agencies will need to establish procedures for ﬁtting vehicles

and infrastructure with the necessary equipment, discontinuing collection

of the old fees, and commencing collection of the new fees, with minimum

disruption to revenues or inconvenience to travelers, over a transition period

that may last a decade or more.

• Setting appropriate prices: Because of inexperience, highway agencies do not

now have the competence to set mileage fees that maximize the beneﬁts of

the transportation system or to use the information provided by fee revenues

to improve the payoffs from capacity expansions. Improper pricing practices

could degrade system performance and harm the public welfare.

Appropriate technical design of metering and charging systems will be part of the

solution to problems in each of these areas. For example, technical design features

can help ensure privacy, the transition will be eased if systems allow users to choose

to pay through either the old or the new charging scheme, and a system that is ﬂex-

ible enough to allow individual jurisdictions to set their own pricing policies and

observe the results will speed the process of learning to set mileage fees. These three

categories of problems and the problem of choosing a technical design are exam-

ined in the following subsections.

Gaining Public Acceptance

The likely objections to metering among the public and politicians are the same

as those listed above with regard to toll roads: the scheme would be expensive and

a nuisance, it would create perverse incentives inﬂuencing government trans-

portation policy (e.g., increasing congestion could increase revenue), the fees

would be unfair because they would be regressive and would reserve the best trans-

portation service for the rich, and giving the government the capability to track the

daily movements of all highway travelers is unacceptable.

Several analyses of the possible distributional consequences of road congestion

pricing have indicated that the effects would be complex and would vary greatly

depending on the nature of the pricing and road ﬁnance scheme, travel patterns

and transit alternatives in the urban area, and travelers’ occupations and household

characteristics, and that a prediction that the wealthy would gain and the poor

would lose would be an oversimpliﬁcation (Santos and Rojey 2004; Saﬁrova et al.

2004; Nash 2003; Sorensen and Taylor 2005, 58–60; Appendix C of this report).

Nonetheless, there could be substantial numbers of people who found themselves

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paying more and traveling less, at least in the early period of implementation of a

congestion pricing program. Objections from this group could lead to failure of

the program (Giuliano 1994, 273–276).

Road congestion pricing, especially pricing applied to nonfreeway arterial

roads (as, for example, the Oregon road use metering proposal would allow), holds

promise as a means to greatly improve the speed, reliability, and ridership of bus

transit; reduce average costs; and generate sufﬁcient new fare box revenue to pay

for expanding transit service to meet increased demand. Transit gains would result

from reduced road congestion and higher out-of-pocket costs for peak-period

automobile travel, regardless of whether any road toll revenue was dedicated to

transit (Small 2004). In addition, carpooling would become a more attractive

travel alternative. These improvements would beneﬁt lower-income households,

and in some cities the beneﬁts to this income group could be comparable in mag-

nitude to losses suffered from being priced off roads or required to pay tolls (Kain

1994, 508–510).

Congestion pricing in urban areas would be a likely, but not essential, appli-

cation of any future general road use metering and mileage-charging installation.

Estimates have not been carried out of the distributional impacts of replacing or

supplementing existing highway user fees with a mileage charge that could vary by

jurisdiction but did not feature congestion pricing. Regardless of the exact char-

acter of impacts, planning for mileage charging should include identiﬁcation of

techniques to offset undesirable distributional effects without seriously eroding the

potential beneﬁts of the new form of charging (Nash 2003, 346). One possible

solution would be direct compensation to low-income or other disfavored house-

holds. For example, transport vouchers that could be used to pay road tolls or

transit fares could be distributed.

In defense of tolls and congestion pricing, it may be noted that present high-

way user fees may be regressive, if low-income drivers are likely to pay a larger share

of their income for fuel tax and registration fees than high-income drivers

[although the difference in shares among income groups may be small (Parry 2002,

31)]. If pricing is in effect, the motorist who chooses to pay the fee and use the

road always gains in the transaction, since the use of the road is worth at least as

much to him or her as the fee. Pricing can be regarded as fair in this sense.

The response to privacy concerns most commonly proposed is to construct

the metering system so that the central facility is incapable of tracking individuals’

travel. The Oregon and New Approach proposals both include such a design as an

option: the onboard unit in each vehicle collects all information necessary to cal-

culate the toll owed, and only this total amount need be transmitted outside the

vehicle. This approach may be acceptable but has at least two drawbacks: enforce-

ment and settlement of billing disputes might be more difﬁcult than if detailed

central records were kept, and information on the toll revenue generated by each

segment of the road network would not be directly available.

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Jurisdictions owning roads are likely to demand that mileage fee revenue be

distributed accurately according to travel on each jurisdiction’s roads. (Juris-

dictional boundaries do not correspond to road ownership.) In addition, if jurisdic-

tions had detailed information on the revenue generated by each road segment

in their networks, they would be able to predict and observe the revenue effects

of individual road improvements on their own or their neighbors’ roads. Revenue

impacts would inﬂuence investment choices and the evolution of the transporta-

tion system. This connection between demand and investment might be one of

the most signiﬁcant consequences of the metering and charging system.

The most direct and accurate way to determine travel by jurisdiction or road

segment would be to maintain a central facility that collected information from

vehicles on fee revenue generated by each road, but this practice would provide the

facility with information about individuals’ itineraries. An alternative that pre-

served privacy would be to provide the information by sampling, either by vehicle

counts conducted independently of the road use metering system or by recruiting

a sample of vehicle operators who would allow their movements to be tracked.

Ultimately, if public acceptance is attained, it will come about over time as the

result of experience with various forms of road use charges on the part of the pub-

lic and road operators. Development of conventional toll roads and applications

of variable pricing and automatic toll assessment and billing systems are expand-

ing and will be important sources of experience. Openness in the development

process and demonstrations of effectiveness in early implementation will also be

important in forming the views of motorists and the public.

Making the Transition

The Oregon Road User Fee Task Force and the New Approach proposals for con-

version from the fuel tax to mileage charges both envision the need for a prolonged

period during which fuel taxes and mileage fees would be collected simultaneously.

Most motorists would switch from paying fuel taxes to the mileage fee only when

they bought new vehicles with the necessary onboard metering equipment. In con-

trast, the German Toll Collect truck mileage-charging system appears to be on a

faster track. Operators using the Autobahns regularly are installing the new equip-

ment in their trucks, and most revenues will be derived from automatic metering

and charging almost from the outset of the program. The transition task is far sim-

pler for Toll Collect than it would be for the entire motor vehicle ﬂeet of a state or

of the United States (since Toll Collect involves only a small number of vehicles

in a regulated industry), but the experience may contain some generally applica-

ble lessons.

Two options that could speed the transition may merit exploration. First,

retroﬁtting of metering devices on existing vehicles could be subsidized by the gov-

ernment out of user fee revenue. Second, fuel taxes could be abolished early in the

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transition, after a short period during which all new vehicles sold would be

equipped with road use meters, and replaced with higher annual vehicle registra-

tion fees for unmetered vehicles. Under this option, vehicle operators would have

the choice of paying mileage charges or the ﬂat fee. The European truck mileage-

charging systems contain similar features. In Toll Collect, installation of metering

equipment is free of charge to the vehicle owner and is funded from toll revenue.

In Toll Collect and the Austrian system, trucks not equipped with the metering

devices can travel on the expressways but must pay fees in advance. Similarly, the

Oregon truck weight–distance tax provides for payment of a ﬂat fee in lieu of the

mileage charge. Transition alternatives are among the design issues that should

be evaluated in pilot studies of road use metering and mileage-charging systems.

Retroﬁtting may be a poor option for automobiles, because the added equip-

ment would be vulnerable to tampering. Equipment installed in new vehicles dur-

ing construction could be made highly tamper resistant by using techniques similar

to those that protect emissions control equipment from tampering today. The

experience of Toll Collect will reveal whether retroﬁtting is practical for commer-

cial vehicles.

The European experience also suggests that requiring operators of large trucks

to undertake early conversion to road use metering would be technically and eco-

nomically feasible as a step in the transition process. This would allow highway

agencies to gain experience in managing the system before a general conversion

occurred. The growing popularity of optional equipment in private vehicles that

utilizes GPS and cellular communications could facilitate a transition to mileage

charging. For example, General Motors has 3 million subscribers to its OnStar

GPS navigation and communication system and has announced that OnStar will

be standard equipment on all its vehicles sold in the United States by 2007

(General Motors Corporation 2005). Taking advantage of this trend may require

development of standards deﬁning the equipment capabilities necessary for the

mileage-charging application.

Consideration of the challenges that the state of Oregon would face in imple-

menting its proposal suggests that a single state would have difﬁculty adopting road

use metering and mileage charging on its own. Out-of-state trafﬁc and the high

ﬁxed cost of the onboard equipment would be problems. However, as part of a

national program with federal leadership, one state might be compensated for

start-up costs as a large-scale pilot implementation.

Setting Appropriate Prices

The Oregon proposal indicates how jurisdictions might approach pricing if given

the option of mileage charging. The Oregon task force recommended a base fee

for automobiles of $0.012 per mile (the present average state fuel tax revenue per

mile of light vehicle travel) plus a charge to cover the state’s added fee collection

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costs (which the report estimates would be small under the proposed scheme).

Higher per-mile fees would be charged during peak periods on all roads within the

boundaries of urban areas, as congestion charges. The congestion charge could vary

by hour of the day and by city, but not by road and not in response to immediate

trafﬁc conditions. Charges would be indexed to compensate for inﬂation (Road

User Fee Task Force 2003, 31–41). The report does not address how the levels of

congestion charges would be determined, but it mentions congestion reduction

and revenue raising as goals, so presumably ofﬁcials would set rates by trial and

error to achieve a desired mix of these outcomes.

As noted above, the SR 91 Express Lanes in California have rates set so as to

maintain free-ﬂowing service at all times, because the facility is marketed as a pre-

mium alternative to the untolled lanes. Proposals for new HOT lanes or FAST

lanes also incorporate this pricing practice.

Neither of these pricing rules—charging a ﬂat base rate per mile to meet a rev-

enue target or setting congestion fees so as to eliminate congestion—is likely to be

the best from the standpoint of overall performance of the transportation system.

The ﬂat mileage fee may overcharge for some highway trips and thus needlessly

discourage some worthwhile travel. Guaranteeing free ﬂow on tolled lanes may

divert so much trafﬁc to congested lanes that the net beneﬁt of the highway to all

users is less than if brief periods of degraded service were tolerated on the toll lanes.

Systematic experimentation and evaluation will be required to design fee sched-

ules that maximize the public beneﬁt from the roads.

It is not only ignorance that might lead to improper pricing. State or local gov-

ernments with control of mileage fees would ﬁnd that they had opportunities to

extract monopoly proﬁts from critical roads (Nash 2003), export trafﬁc and con-

gestion to neighboring jurisdictions (De Borger et al. 2005), or attract develop-

ment from competing jurisdictions by underpricing of roads for certain categories

of trafﬁc. Such practices may be justiﬁable in some circumstances, but balancing

competing interests affected by pricing decisions will be difﬁcult.

If mileage charging comes into general use, the state and local authorities

responsible for road construction and operation ought to control the pricing pol-

icy and revenue of the roads they own. It is unlikely that mileage charges could be

implemented without adherence to this rule. Along with local control, some safe-

guards against improper use (that is, practices such as price gouging to gain local

advantage at the expense of the general welfare) will be needed. Safeguards could

include systematic monitoring, analysis, and publication of impacts of pricing

decisions; development of national best-practice guidelines; and possibly creation

of a regulator with authority to oversee roads as public utilities. The problem of

inappropriate pricing policies could be lessened by aligning governmental respon-

sibility for roads with the nature of the trafﬁc. That is, local governments could be

given control of roads carrying predominantly local trafﬁc and states given control

of roads carrying signiﬁcant regional and interstate passenger or commercial traf-

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ﬁc. Privatization of the operation of certain kinds of roads could also help insulate

pricing decisions from narrow or short-term considerations. (For example, a pri-

vate operator would have no incentive to subsidize any class of user or exclude any

user who was willing to pay the appropriate toll.)

Designing and Testing Options

The Oregon and New Approach proposals call for trials to evaluate the reliability,

ﬂexibility, cost, security, and enforceability of alternative designs for systems to

monitor mileage and assess mileage fees. In addition to evaluating technological

options, pilot studies should ideally be designed to gain information about the

institutional requirements for administering such systems and about user accep-

tance and the cost and convenience of use. Evaluation of the behavioral impacts

of mileage charges could be an objective, with appropriate research design, but it

might be most practical to defer study of this question until after an initial stage of

technological and institutional evaluations was carried out.

These goals imply that large-scale pilot studies will be needed that simulate as

realistically as possible the important aspects of systems, including the setting of

rates, the billing and collection of fees, enforcement, and the handling of system

malfunctions. Pilot studies must follow scientiﬁc research design principles—that

is, speciﬁc objectives, hypotheses to be tested, and evaluation methods must be

deﬁned at the outset.

Alternatives to government-led development of the technology of road use

metering are conceivable. One such proposal, Certiﬁed Wide Area Road Use

Monitoring, received some consideration in Australia and New Zealand (Malick

1998; Sorensen and Taylor 2005, 19). In this approach, government would pub-

lish performance speciﬁcations for a road use metering and mileage-charging sys-

tem and allow private-sector ﬁrms to offer competing products and services to

the public that meet the government’s requirements and that might have addi-

tional utility to motorists. The ﬁrms could be made responsible for collecting

fees and transferring them to the government.

A second necessary research track will be studies with the goal of providing

guidance to highway agencies on the proper application and management of road

use metering and charging systems. The starting point for this research should be

evaluations of the growing number of road pricing systems now in operation.

Among the topics the research should address are the following two issues: ﬁrst,

how road agencies are actually using pricing (that is, the goals, performance meas-

ures, and institutional constraints that are guiding their decisions about pricing,

marketing, and other operational issues); and second, the impact of pricing on

travel behavior and the costs and beneﬁts of transportation systems. To address

questions of possible impacts and management problems beyond those directly

observable in existing road pricing implementations, modeling and simulation

studies will be needed.

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Finally, planning studies will be needed to lay out possible routes to widespread

application of road use metering and pricing. The studies should address the respon-

sibilities and relationships of federal, state, and local governments as well as the rela-

tionship of government to private-sector participants—developers of metering

technology, motor vehicle manufacturers, and highway developers and operators.

SUMMARY

This chapter has surveyed options for changing the system of charging and pay-

ing for highways in ways that would improve the delivery of transportation ser-

vices. The measures considered involve more direct means of charging road

users, through tolls on limited-access highways and through metering and charg-

ing for use of all roads.

The potential of tolls assessed by the technologies presently in use in U.S. high-

way ﬁnance is limited: such tolls can be applied on only a fraction of the road sys-

tem (i.e., to limited-access expressways), and therefore toll roads must always

compete with untolled roads. A reasonable target for an ambitious program of toll

conversion and new toll road development, following the models of the HOT net-

works and FAST lanes proposals, might be to raise additional revenue equal to the

tolls already being collected on U.S. highways (that is, about $10 billion per year

or less). Imposing tolls on all lanes of selected heavily traveled intercity routes (on

the model of the existing turnpikes) could generate additional revenue, but this

measure would be likely to face public opposition and is not receiving serious con-

sideration. The net increase in highway budgets would be less than the added toll

revenues because legislatures would be likely to adjust other fees to offset the new

revenues. The following are among the possible beneﬁts of a toll program on this

scale: it could serve to concentrate spending on meritorious highway projects, it

would improve trafﬁc ﬂow on the tolled facilities, and it might allow the public to

learn about road pricing and decide whether more extensive application would be

desirable. Attracting private-sector participation to the highway program by fran-

chising toll roads could have public beneﬁts as well.

Road use metering and charging systems offer great potential beneﬁts to the

public if the challenging obstacles to implementation can be overcome. There is a

need for rigorous evaluations of options for the technical design of road use meter-

ing systems. More fundamentally, deﬁnition of the institutional framework for

administration of mileage charges is at present undeveloped, and planning studies

are needed on basic design questions: how fees should be set, who should control

revenue and fees, the disposition of revenue, and the relation of revenue to trans-

portation investment. One strategy for introducing road use metering is to start

with a system for commercial vehicles. Some European road authorities have taken

steps in this direction.

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Abbreviations

AASHTO American Association of State Highway and Transportation Ofﬁcials

ASFiNAG Autobahn- und Schnellstrassen-Finanzierungs-Aktiengesellschaft

Caltrans California Department of Transportation

CNT Conseil Nationale des Transports

FHWA Federal Highway Administration

GAO General Accounting Ofﬁce

ODOT Oregon Department of Transportation

TxDOT Texas Department of Transportation

VDOT Virginia Department of Transportation

USDOT U.S. Department of Transportation

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ASFiNAG. n.d. b. Tollsystem for Trucks and Buses.

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De Borger, B., S. Proost, and K. Van Dender. 2005. Congestion and Tax Competition in a Parallel

Network. European Economic Review (forthcoming).

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E-470 Public Highway Authority. 2005. 2005 Fact File: Facts About the E-470 Beltway. Feb.

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Forkenbrock, D. J. 2004. Mileage-Based Road User Charge Concept. In Transportation Research

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Forkenbrock, D. J., and J. G. Kuhl. 2002. A New Approach to Assessing Road User Charges. Public Policy

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GAO. 2004. Highways and Transit: Private Sector Sponsorship of and Investment in Major Projects Has

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Vehicles (press release). www.gm.com/company/onlygm/pressrelease.html.

Ginsberg, S. 2005. New Tolls, Not Taxes, Favored for Area Roads. Washington Post, Feb. 26, p. A1.

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Giuliano, G. 1994. Equity and Fairness Considerations of Congestion Pricing. In Special Report 242:

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Kain, J. 1994. Impacts of Congestion Pricing on Transit and Carpool Demand and Supply. In Special

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Kossak, A. 2004. Tolling Heavy Goods Vehicles on Germany’s Autobahns. Presented at IDÉE Seminar

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Nash, C. 2003. Marginal Cost and Other Pricing Principles for User Charging in Transport: A

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Northwest Parkway Public Highway Authority. 2004. Media Kit. April.

ODOT. 2004. Mileage Tax Rates. July.

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Parker, J. A. 2004. Transit Futures—2010 and Beyond. Forthcoming.

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Finance Reform Proposals

Reforms Within the Present Framework

Chapters 2 and 4 examined two potential threats to the viability of present

transportation program ﬁnance arrangements: decline of the tax base because

of motor vehicle fuel economy improvements and erosion of the principles and

practices, in particular user fee finance, that have been associated with the

ﬁnance system’s stability and success. Those chapters concluded that the pres-

ent system shows signs of stress, and while it is not in immediate jeopardy of

failing, improvements in pricing and ﬁnancing practices probably will be nec-

essary to slow or reverse deterioration of transportation system performance. In

Chapter 5, examination of the prospects for tolls and mileage charges, alter-

native funding sources to replace or supplement the fuel tax, indicated that

comprehensive implementation of satisfactory alternative road user charging

mechanisms is still some years in the future. Because of the potential beneﬁts

of these alternatives, delay in developing them probably would be costly. Never-

theless, it will be necessary to continue to rely on present finance arrangements

for most of the next 20 years and to take every opportunity to reinforce the

proven features of the system, in particular, user fee finance in the highway

program.

This chapter describes several kinds of ﬁnance reform measures that do not

depend on developing major new revenue sources or on fundamentally altering

institutional arrangements:

• Measures to increase available resources:

– Reducing evasion and limiting exemptions

– Indexing tax rates

– Reforming use of debt ﬁnance

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• Measures to improve pricing:

– Reﬁning user fees

– Incorporating new vehicle technologies in the user fee structure

• Measures to direct spending more effectively:

– Improving project selection and reducing project costs

– Developing alternatives for transit ﬁnance

– Redeﬁning federal, state, and local government responsibilities

This list includes the short-term reform options in the state ﬁnance studies

reviewed in Chapter 1, as well as proposals from other sources that have gained

prominence. It was noted in the introduction to Chapter 5 that proposals from

these sources tend to concentrate on particular aspects of the ﬁnance structure

rather than on comprehensive reform. The descriptions in this chapter organize

the proposals, somewhat arbitrarily, into three categories according to their main

objectives: measures to increase available funds (including accelerating spending

with debt ﬁnancing), to improve pricing (that is, adjusting existing user fees to bet-

ter match the costs of travel), and to guide spending more effectively to the best

uses. In practice, many of the proposed actions could serve multiple purposes. For

example, reducing tax evasion increases revenue but also is necessary for fairness

and public acceptance and to maintain the integrity of the fee structure.

The subsections below describe the intent of each proposal and review avail-

able information about the possible consequences of implementing it, in order to

identify those that appear to be practical and beneﬁcial. Inclusion of a proposal in

this list is not intended as an endorsement. Committee recommendations with

regard to some of the proposals are presented in Chapter 7.

MEASURES TO INCREASE AVAILABLE RESOURCES

Reducing Evasion and Limiting Exemptions

Tax administrators have long recognized that a substantial amount of motor fuel

excise tax revenue is lost to tax evasion. In a survey (Denison et al. 2000), state tax

administrators reported their estimates that 5 percent of state gasoline tax revenues

and 10 percent of diesel revenues are lost to evasion. Common evasion techniques

reported were bootlegging fuel across state lines to take advantage of rate differ-

ences, taking advantage of the lower federal tax rate on gasohol by falsely labeling

gasoline or a blend with less than 10 percent ethanol as gasohol, counterfeiting

documentation of tax payments, and abusing tax exemptions (for example,

exemptions for off-road and agricultural use). Diversion of aviation fuel (which

pays a lower federal excise tax rate than diesel fuel for motor vehicle use) for use

in diesel trucks is also recognized as an important evasion method. It reduces

federal revenue by $900 million per year according to one estimate (Peters 2002).

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Enforcement efforts in some states and by the federal government have had

success in reducing fuel tax evasion. Methods include more intensive auditing,

improvements in record keeping, and intergovernmental cooperation. Moving

the point of tax collection upstream in the distribution chain also has been

shown to reduce evasion (Peters 2002).

The 2005 federal surface transportation program reauthorization legislation

[Safe, Accountable, Flexible, Efﬁcient Transportation Equity Act: A Legacy for

Users (SAFETEA-LU), Section 1115] increases funding for enforcement of fed-

eral excise tax collections and requires upgrades in government records systems and

other measures. The legislation includes a provision (Section 1161) intended to

stop diversion of aviation fuel by requiring tax payment at the highway motor fuel

rate for certain purchases of aviation fuel and requiring purchasers to apply for a

refund with documentation that the fuel was used for aviation. Congressional esti-

mates predicted $4 billion in additional revenue over 6 years as a result of the new

enforcement provisions (Fischer 2004, 11).

Tax exemptions are a related drain on revenue. Federal and state fuel tax laws

contain numerous provisions exempting classes of uses from liability for the fuel

tax. Common exemptions are for government-owned vehicles and school buses.

The special provisions of the federal excise tax on gasohol amounted to a partial

exemption. (After changes in the law in 2004, the Federal Highway Trust Fund

no longer loses revenue from these provisions.) Other loopholes include evapora-

tion allowances for ﬂeet purchasers. States commonly exempt fuel purchased for

agricultural uses from taxation. To the extent that this fuel is actually used off pub-

lic roads, this is not a violation of the user fee principle.

Certainly exemptions can serve legitimate functions. However, as the survey

of tax administrators revealed, abuse of exemptions is a common form of tax eva-

sion. A version of the 2005 federal surface transportation program reauthorization

legislation before enactment contained a provision tightening requirements for

documenting entitlement to exemptions. The provision was credited with signif-

icant revenue-generating potential (Fischer 2004, 12); however, it was not fully

enacted.

Indexing Tax Rates

As Chapter 1 described, one of the most serious of transportation program admin-

istrators’ complaints about present revenue provisions is that revenues are vulner-

able to erosion by inﬂation because legislatures are slow to revise rates to maintain

buying power. A few states have provisions allowing for administrative adjustment

of fuel tax rates (see Chapter 2), but the rates in the majority of states and the fed-

eral tax rates can be changed only by legislation. Consequently, although revenues

from cents-per-gallon fuel taxes and dollars-per-vehicle registration fees rise with

increasing highway use, they decline with inﬂation until the legislature acts. It was

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also shown in Chapter 2 that, although rate adjustments have been sufﬁcient to

maintain a fairly constant inﬂation-adjusted average user fee rate of $0.03 to

$0.035 per mile, the timing of adjustments has been erratic and has lagged inﬂa-

tion. (See Table 2-3 and Figure 2-1 in Chapter 2.) This situation has complicated

the administration of highway programs.

States have experimented with two mechanisms for removing this source of

uncertainty and stabilizing revenues: replacing the cents-per-gallon fuel tax with

an ad valorem tax (i.e., a tax that is a ﬁxed percentage of the sale price) and index-

ing the cents-per-gallon rate. Under the second mechanism, periodic adminis-

trative adjustments are made to the rate proportional to the change in a speciﬁed

measure of inﬂation, for example, the Consumer Price Index (CPI) or the high-

way construction cost and operating and maintenance cost indices compiled by

the Federal Highway Administration (FHWA).

The greatest ﬁnancial disruption experienced by transportation programs in

recent decades was from about 1974 to 1982. During this period, high inﬂation,

slow growth in travel, and the impact of the corporate average fuel economy stan-

dards in federal law combined to cause constant-dollar fuel tax revenue to decline

by more than 50 percent (Table 2-3 and Figure 6-1). Several states reacted by

enacting variable-rate fuel taxes. A review of this experience (Ang-Olson et al.

2000) found that the consequences were not satisfactory in several states. States

that enacted ad valorem taxes in the 1970s saw revenues plunge along with fuel

prices in the early 1980s, and states enacting such taxes in the 1980s, anticipating

FINANCE REFORM PROPOSALS: Reforms Within the Present Framework

161

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

1960 1965 1970 1975 1980 1985 1990 1995 2000

Dollars (2002 millions)

Tax computed from existing rates

Tax indexed to CPI

Tax indexed to FHWA construction index

Ad valorem tax

Tax on light vehicle mileage

FIGURE 6-1 Federal gasoline tax revenues under various indexing methods.

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a steady rise in rates, were surprised by the overall level price trend over the subse-

quent 15 years. Michigan tried an indexing formula in which the fuel tax rate was

proportional to a highway maintenance construction cost index and inversely pro-

portional to state fuel consumption. After the formula produced a 36 percent rate

increase from 1982 to 1984, it lost political support and was allowed to expire.

About 15 states tried indexing according to a variety of formulas in the 1980s, but

most such taxes were rescinded because of public reaction and unpredictable rev-

enue results. The review concluded that indexing to the CPI had proved to be the

best way to keep revenue in pace with inﬂation and that limiting annual changes,

by indexing an increment of the gas tax rather than the entire tax or by capping

the annual change in the rate, would increase public acceptance.

Figure 6-1 shows annual constant-dollar revenue of the federal excise tax on

gasoline since 1960 and estimates of annual revenues if the tax had been indexed

to the CPI or the FHWA highway construction cost index in 1960. In the ﬁgure,

revenues under the actual tax are computed as gallons of gasoline sold each year

multiplied by the constant-dollar federal excise tax rate in the year, for compara-

bility with the other curves in the graph. Also shown are revenues from an ad val-

orem tax on gasoline and from a light-duty vehicle mileage tax (at a cents-per-mile

rate that rises proportionally to the CPI). Both start at rates in 1960 that would

have yielded the same revenue as the actual tax. The revenue estimates take into

account the probable effect of the change in the tax rate on gasoline consumption

in each year.

The purpose of the estimates is not to show which tax rate scheme would

have raised the most revenue. The differences among the various schemes in the

absolute level of revenue in each year are not meaningful, because Congress would

be expected to adjust the rate from time to time to yield revenue commensurate

with its transportation spending plans. Rather than increasing total revenue, the

intent of the variable tax rate would be to smooth out irregularities such as the

decline in constant-dollar revenue from 1973 to 1980. Among the two tax index-

ing methods and the ad valorem tax, the CPI-indexed tax appears to be the most

stable over the entire period. The construction cost–indexed tax rose rapidly until

1980 and more slowly than the CPI-indexed tax since then, but it also appears sta-

ble within those periods.

For Congress or a state legislature, the goal of authorizing indexing would be

to ensure that the revenues it intended to raise were actually available, regardless

of inﬂation. However, the legislature might oppose indexing if it believed that the

practice would lessen its control over transportation programs because the state

transportation department would be less dependent on the legislature’s enactment

of rate adjustments. The legislature might also be concerned about the public reac-

tion to automatic tax increases. If indexing had the effect of insulating transporta-

tion programs from regular legislative review, the long-term consequence could be

reduced political and public understanding of and support for these programs.

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Reforming Use of Debt Finance

As Chapter 2 described, debt ﬁnance is little used in state highway programs (other

than by toll authorities), and no trend toward greater use of debt is evident. In part,

this aspect of ﬁnancing practice reﬂects the structure of the federal-aid program,

which has been the major funding source for most large highway capital projects

over the past 50 years. Congress designed a pay-as-you-go program. It enacts multi-

year authorizations to allow the states to plan, but the rate of disbursement of fed-

eral grants is governed by the rate of federal user fee collections (because the balance

in the Highway Trust Fund is usually kept to less than 1 year’s spending). On the

basis of formulas, states receive annual apportionments, which must be used within

a ﬁxed period.

Debt ﬁnancing allows state and local governments to complete a project ear-

lier rather than postponing the project’s beneﬁts while waiting to accumulate funds

or building it in increments. Borrowing also shifts some of the project’s costs from

present to future taxpayers or toll payers. Changes in the federal-aid program in

the past decade have been aimed at facilitating borrowing. States may issue debt

backed by anticipated federal grants [known as GARVEEs (Grant Anticipation

Revenue Vehicles)], and federal law provides for the creation of state infrastruc-

ture banks (SIBs), revolving funds capitalized partially with federal grants that

states and local governments can borrow from for highway construction. The

programs are small compared with total capital spending: from their inception

through mid-2004, 32 SIBs had issued loans totaling $5 billion, and 10 states had

issued $5 billion in GARVEE bonds (USDOT 2004, 22–26; CBO 1998, x–xii).

A set of proposals for creating additional opportunities for use of debt ﬁnance

was published in 2003 by the American Association of State Highway and Trans-

portation Ofﬁcials (AASHTO) (although not adopted as a policy of that organi-

zation) for consideration during debate over federal surface transportation program

reauthorization legislation. The proposals included expansion of the SIB program

and expansion of the existing Transportation Infrastructure Finance and Inno-

vation Act program, which provides federal credit assistance to large public-sector

transportation projects funded at least in part by user charges or other dedicated

revenue sources (AASHTO 2003a). As described in Chapter 5, in the 2005

federal surface transportation aid reauthorization legislation (SAFETEA-LU),

Congress did expand both of these programs, and it authorized use of tax-exempt

private activity bond ﬁnancing of toll roads.

The most ambitious proposal in the AASHTO document was for creation of

a Transportation Finance Corporation, a federally chartered, nonproﬁt corpora-

tion that would issue $60 billion in tax credit bonds. The proceeds would be allo-

cated by Congress in a manner similar to that in which federal highway and transit

aid funds are now distributed. Tax credit bonds are bonds on which the interest is

paid in the form of credits against federal income tax liabilities (CBO 2003). In

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the Transportation Finance Corporation proposal, the general fund would be

reimbursed for the tax cost of the program by transfers from the Highway Trust

Fund (AASHTO 2003b). The objective of the proposal, which was not enacted,

was to fund an immediate large increase in the federal-aid program. Proponents

presumably saw tax credit bonds as a way to allow an increase in the program with-

out immediately raising the rates of the federal fuel tax or other fees and without

overtly breaking the link between user fee revenue and spending.

Tax credit bonds for transportation ﬁnance would have a number of draw-

backs. They would allow spending before Congress had authorized highway user

fees to pay for it. The bond scheme might pose a threat to the user-pays principle:

if Congress failed to enact fees to cover debt service, then either highway spending

for other purposes would have to be curtailed or the cost of the bonds would have

to be shifted to the federal general fund. Tax credit bonds in general have been crit-

icized on the grounds that their cost to the federal government is greater than if

the funds were raised through conventional treasury borrowing. Furthermore, they

tend to obscure the cost of borrowing in the federal budget if the issuing entity is

not regarded as part of the federal government for budget purposes (CBO 1998).

MEASURES TO IMPROVE PRICING

Reﬁning User Fees

Reﬁnements within the present schedule of highway user fees or modest extensions

to the structure could improve the performance of the transportation ﬁnance sys-

tem. The objective would be to allow highway agencies to recover some costs that

current fees do not fully recover and to provide incentives for more cost-conscious

use of highways.

User fees, which were described in Chapter 2, include federal and state fuel

taxes; state registration, license, and permit fees; the federal excise taxes on tires and

on new heavy trucks and trailers; and the federal Heavy Vehicle Use Tax. These

charges are imperfect as prices for road use because they do not correspond well to

costs. For example, the fuel tax paid for operating a particular vehicle varies little

from mile to mile, but the costs imposed by that vehicle on other users and on the

highway agency vary greatly depending on the road and trafﬁc conditions. Also,

the fuel tax paid per mile depends on the vehicle’s fuel efﬁciency, but costs prob-

ably vary little with vehicle size for passenger vehicles. Consequently, the fees paid

for a particular trip can be much higher or lower than the actual cost of the trip to

the highway agency and other road users. The fees will therefore discourage some

valuable trips and fail to discourage trips that have small value to the traveler com-

pared with their costs.

Annual vehicle registration fees have been criticized as a particularly unsatis-

factory form of fee because they do not vary with miles of travel (Road User Fee

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Task Force 2003, 23–24). However, registration fees do affect highway use by

affecting vehicle ownership. Because of their simplicity and familiarity, registra-

tion fees can be a practical and worthwhile pricing mechanism. For example, many

states charge truck registration fees graduated by weight to reﬂect the higher costs

imposed by larger vehicles.

The special taxes paid by large trucks are the most important features in the

present user fee schedule for aligning fees with the costs imposed by different users.

Truck trafﬁc is a major determinant of highway construction, maintenance, and

operating costs. The characteristics of the largest trucks determine the design of

pavements and roadway foundations; the strength requirements of bridges; the

geometric design of grades, curves, and ramps; and maintenance costs for pave-

ment and roadside appurtenances. The pavement wear caused by the passage of a

vehicle axle increases proportionally to the third or fourth power of the load car-

ried by the axle. Therefore, one passage of a 20,000-pound axle on a large truck

will cause wear equal to several thousand passages of a 2,000-pound axle on a pas-

senger vehicle. A large truck in congested trafﬁc causes more delay than a car, and

truck crashes on urban expressways are major causes of delay.

The federal government and the states periodically conduct highway cost

allocation studies to determine their costs for providing roads for various kinds

of vehicles. The studies face methodological challenges, but their results give an

indication of the relative cost implications of truck and light vehicle trafﬁc. The

most recent federal study estimated that the revenue from fees paid by operators

of combination trucks (a truck or tractor pulling a trailer, the principal highway

freight vehicle) equals 80 percent of the highway agency expenditures attributed

to this class of vehicle. However, the heaviest combination trucks were esti-

mated to pay smaller shares of their costs than lighter combination trucks

(USDOT 1997, Table VI-21). As noted in Chapter 2, combination trucks

account for 5 percent of vehicle miles and pay 19 percent of all user fees.

The federal Heavy Vehicle Use Tax is intended to recover a part of the extra

costs of serving large trucks. It is an annual fee of $550 on trucks with registered

gross weight of 75,000 pounds or more and $100 to $550, depending on weight,

on trucks of 55,000 to 75,000 pounds. The revenue from the tax is dedicated to

the Highway Trust Fund. It raised $940 million in 2003, 3 percent of federal high-

way user fee revenue (FHWA 2004, Table FE-9). The rate schedule was last

changed in 1984. The 1983 federal-aid highway act, which included a provision

liberalizing federal truck size and weight limits, raised the top rate to $1,900 per

year on trucks with gross weight of 80,000 pounds or more, rising in steps from

$50 per year on 33,000-pound trucks. The adjustment corresponded to the ﬁnd-

ings of a U.S. Department of Transportation (USDOT) highway cost allocation

study. However, the next year, following industry objections, Congress rolled back

the use tax to the present rates and raised the diesel fuel tax to make up the rev-

enue. Operators of large trucks also pay a federal excise tax on purchases of trucks,

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trailers, and tires. The revenue, which is dedicated to the trust fund, was $2.1 bil-

lion in 2003, or 6 percent of federal user fee revenue. There is no federal excise tax

on light vehicles.

Three possible reﬁnements to federal and state user fee schedules merit con-

sideration:

• Graduating the federal Heavy Vehicle Use Tax and state annual truck reg-

istration fees to correspond more closely to relative cost responsibility as indi-

cated in federal and state cost allocation studies. Ideally, rates would take into

account axle conﬁguration as well as gross weight, because reducing loads

per axle reduces pavement and bridge costs.

• Introducing a federal weight–distance tax. A few states charge trucks a tax

that depends on weight and miles traveled. The Oregon tax produces the

most revenue, $178 million in 2003 (FHWA 2004, Table MV-2). Oregon

rates are from $0.04 to $0.185 per mile, depending on the truck’s registered

weight and number of axles (ODOT 2004). Fuel consumed by trucks pay-

ing the weight–distance tax is exempt from the state fuel tax. Truck oper-

ators must periodically report their miles and submit payments. A 1988

USDOT study commissioned by Congress concluded that a federal weight–

distance tax would be feasible to administer because large trucks must already

ﬁle federal tax reports to pay the Heavy Vehicle Use Tax, and reported

mileage would be auditable because operators already keep mileage records

to show compliance with state tax laws (CBO 1992, 21–23). The recent

European experience with mileage charging described in Chapter 5 suggests

that such fees may become standard there and that technology to automate

reporting and fee collection is developing rapidly.

• Introducing a mechanism to align light-duty vehicle user fee payments more

closely with costs. Larger light-duty vehicles pay higher average user fees per

mile than do small vehicles because they consume more fuel, yet the cost of

providing highways for these vehicles is not much greater than costs asso-

ciated with the smallest vehicles. The 1997 federal cost allocation study

estimated that the ratio of fees to allocated costs was 30 percent higher for

pickups and vans than for cars (USDOT 1997, Table VI-21). One way to

eliminate the discrepancy would be through adjustments in registration fees,

although the impact of such a change would require study. The question of

appropriate charges for small and large passenger vehicles is identical to the

problem of deciding how future advanced-technology vehicles should be

charged for road use, which is discussed below.

Any of these suggestions would encounter political obstacles. Truck operators

successfully opposed the previous attempt to graduate the Heavy Vehicle Use Tax

more steeply and have vigorously opposed weight–distance taxes for many years.

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They have won repeals of these taxes in several states. They object that weight–

distance taxes have high administrative costs and high rates of evasion, and they

may believe that introduction of weight–distance taxes would be an occasion for

increasing trucking’s share of highway user fee payments. Criticism could be

expected that adjustment of light-vehicle taxes would constitute a tax on energy

conservation, and the adjustment would reduce revenue if fees for other vehicles

were not increased.

None of the measures would be expected to yield large net revenues (although

the ﬁnancial impact of misalignment of truck fees with costs is growing because

the volume of large truck trafﬁc is growing faster than that of other vehicles). Their

main justiﬁcation is that they would improve the efﬁciency of the transportation

system: truckers would have an incentive to operate equipment that reduced road

wear, and highway travel by high-mpg vehicles would not be subsidized.

An evaluation of the Oregon axle-weight-distance tax (Rufolo et al. 2000)

found that since introduction of the tax, a small increase has occurred in the aver-

age number of axles per truck in each weight class, which has reduced pavement

wear costs. Because of data limitations, it was not possible to show that the tax was

the cause of the trend in axle conﬁgurations. Under the Oregon tax, the fee per

mile decreases with increasing number of axles on the truck within each weight

class. Past Transportation Research Board policy study committees have argued

that more signiﬁcant savings for highway agencies and shippers could be attained

by coupling axle-weight-distance taxes with less restrictive truck size and weight

regulations, which would give carriers ﬂexibility to optimize their equipment and

operating practices (TRB 2002, 190–191).

Road Use Charging for Advanced-Technology Vehicles

Chapter 4 described the incentives that the federal and state governments are offer-

ing to promote alternative automotive propulsion technologies and high-mpg

vehicles. Ideally, incentives would be structured to avoid accidental impacts on

transportation ﬁnance (such as, for example, the impact of the federal gasohol tax

preference). Also, because highway user fees function to an extent as prices reﬂect-

ing the cost of providing roads, exempting owners of alternative-technology

vehicles from payment of the fees discourages cost-conscious travel decisions.

Whether they receive special subsidies or not, operators of high-mpg vehicles will

pay less in user fees per mile of travel than operators of conventional vehicles as

long as cents-per-gallon fuel taxes are the main component of the fees.

An incentive that subsidizes road use by forgiving payment of highway user

fees can unnecessarily increase the cost of meeting the conservation or emissions

goal. For example, if high-mpg cars are allowed free use of high-occupancy/toll

(HOT) lanes, all other users of the highway will pay costs in the form of extra con-

gestion caused by the free access or higher congestion tolls needed to keep trafﬁc

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ﬂowing. For some trips, this cost to others (which should equal the toll the vehi-

cle would have paid to use the HOT lane) will be greater than the value of the free

access to the owner of the high-mpg vehicle. A cash subsidy—for example, a rebate

of part of the purchase price of the high-mpg car—might attain the improvement

in fuel economy at lower public cost, and the cost could be borne by all taxpayers

rather than solely by other users of the expressway.

In recognition of these problems, California’s Commission on Transportation

Investment (whose report was described in Chapter 1) recommended taxing alter-

native fuels at rates such that vehicles consuming the fuels pay the same tax per

mile as the average for gasoline vehicles (CTI 1996, 27). Excise taxes or registra-

tion fees would be other mechanisms for charging road user fees to operators of

advanced-technology vehicles. In 2002, Oregon began charging hybrid vehicles a

higher annual registration fee to make up for lost fuel tax revenue (Rufolo and

Bertini 2003, 33), but fees were again equalized in 2003.

The 2004 federal legislation that restored the revenue to the Highway Trust

Fund that had been lost on account of the federal gasohol subsidy set a precedent

for structuring alternative fuel incentives so that transportation programs do not

bear the brunt of the revenue impact.

MEASURES TO DIRECT SPENDING MORE EFFECTIVELY

Improving Project Selection and Reducing Project Costs

Avoiding spending on projects and activities that yield poor returns and econo-

mizing on project costs are means of augmenting the resources available to trans-

portation programs. The report on state highway ﬁnance of the Citizens Research

Council of Michigan described in Chapter 1 concluded that user tax increases

would be justiﬁed only if they were accompanied by management reforms in

the highway program: “Unless the system is restructured both ﬁnancially and

administratively, it is very likely that any additional dollars will not purchase

the improvement in transportation services that might be expected” (Citizens

Research Council of Michigan 1997, 5). The report’s administrative proposals

called for the following:

• Improved methods of determining priorities. “The state has no structure

for systematically determining which construction or maintenance projects

should be carried out in what order” (p. 12).

• Adoption of more durable designs and an increase in the share of funds

devoted to maintenance, which, according to available data, would increase

the cost-effectiveness of the program. The report concluded that the state

does not know whether its design standards and maintenance practices min-

imize life-cycle costs.

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• Increased contracting out and streamlined state–local cooperation to

improve administrative efﬁciency.

The council’s observations about decision making in Michigan are paralleled

by the ﬁndings of a Government Accountability Ofﬁce (GAO) review of state and

local transportation investment decisions nationwide. GAO found that govern-

ments do perform various analyses of projects. However, there is no consensus

understanding of the most useful methods, federal agencies provide only limited

guidance on methods for the analyses that federal-aid programs require, and quan-

titative comparisons of beneﬁts of alternatives play little role in decisions. The

report acknowledges that other considerations, especially the availability of federal

aid, public and political preferences, and constraints on intergovernmental coop-

eration, will exert major inﬂuence on decisions, but it concludes that the beneﬁts

of transportation investments could be increased through better use of analytical

tools (GAO 2004b, 16–17, 39–40).

The report of California’s Commission on Transportation Investment (also

described in Chapter 1) contained similar recommendations for overhauling the

state’s planning and programming practices and for changes in state law to pro-

mote contracting out of certain transportation agency functions (CTI 1996).

A form of contracting that is attracting increasing attention as a means of

reducing costs and accelerating schedules of transportation projects is the arrange-

ment in which a private ﬁrm takes responsibility for design, construction, and

often maintenance of a facility and bears part of the risk of cost or schedule over-

runs or performance failures. These contracts are commonly referred to as public–

private partnerships (USDOT 2004; CBO 1998, xii). A USDOT review cites case

studies showing that such contracts have reduced project costs by 6 to 40 percent,

reduced the time to complete projects, and reduced the risk of cost overruns

because of the performance incentives they provide to the private participants and

the efﬁciencies of concentrating responsibilities for all phases of construction and

operation (USDOT 2004, 2).

Developing Alternatives for Transit Finance

As described in Chapter 2, 10 percent of federal, state, and local highway user fee

revenue was dedicated to mass transit in 2003, an amount equal to 25 percent of

all transit spending. Highway user fee revenues devoted to transit in 2003 were as

follows (FHWA 2004, Table HF-10):

Amount

Item ($ billions)

Distributions from the mass transit account of the Highway Trust Fund 4.7

Distributions from highway account of the Highway Trust Fund and devoted to transit 1.1

State and local highway user revenue devoted to transit 4.4

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Total highway user receipts in 2003 were $104.1 billion (FHWA 2004, Table HF-

10), and total public transit spending was $40.1 billion (APTA 2005, Tables 52

and 61). In addition to the highway user fee revenues dedicated to transit by fed-

eral law (and deposited in the mass transit account of the Federal Highway Trust

Fund), transit receives funds from the highway account of the trust fund through

the ﬂexible fund program: states or local governments may use the grants they

receive in two federal-aid program categories (the Congestion Mitigation and

Air Quality Improvement Program and the Surface Transportation Assistance

Program) for transit or highway purposes. In recent years, governments have

devoted about one-sixth of the total funding available through these two programs

to transit (FTA 2004).

Because the impetus for this study was concern for the viability of present

highway user fees as a revenue source, the committee has considered transit fund-

ing only insofar as it is linked to highway user fees. Within this scope are two pol-

icy questions regarding transit ﬁnance: First, if a transition from fuel taxes to

mileage charges and tolls takes place at some time, will it be appropriate to con-

tinue present practice and dedicate a portion of the revenues from these new

sources to transit? Second, in the search for ways to cope with the threat of ero-

sion of revenues (from inﬂation, improved fuel economy, or other causes) under

present ﬁnance arrangements, should the link between highway user revenues and

transit funding be modiﬁed? Modiﬁcations might increase or decrease the share

of highway revenue available for transit. For example, increasing the ﬂexibility of

state and local governments to apply their shares of highway user fee revenues for

nonhighway purposes might be expected to increase transit funding. In the other

direction, replacing highway user fee revenue with another dedicated revenue

stream for transit and retaining highway user fee revenue for highway purposes

might be considered. Such proposals should be evaluated according to how they

would affect the ﬁscal health of transportation programs and public acceptability

of user fees.

In Chapter 3 it was argued that providing subsidies to transit can be justiﬁed

by beneﬁts conferred on highway users and that charging highway users fees that

exceed the highway agency’s cost of providing roads also can be a justiﬁable prac-

tice. However, the policy of dedicating a part of highway user revenue to transit

does not in itself enhance the efﬁciency of the transportation system, compared

with the alternative of providing transit subsidies from other dedicated sources or

the general fund. The advantage of the policy is practicality. It has two important

limitations. First, if highway user taxes are too high, the total public beneﬁts of

highway travel will be reduced. Second, if the effect of dedicating a portion of high-

way user fee revenue to transit is to decrease highway spending and increase tran-

sit spending, then the policy is beneﬁcial only if the beneﬁt of the increased transit

spending is greater than the beneﬁt that would have been derived from the lost

highway spending.

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After an evaluation of the trade-offs, one analysis of local transit funding

options (Parry 2001) concluded that a mix of sources is necessary and that the

capacity of highway user fees to support transit is limited. The possible revenue

sources evaluated were the gasoline tax or other highway user fees, transit fares,

the property tax, income taxes, and sales taxes. Raising property, sales, and

income tax rates will cause economic dislocations that have costs. Raising tran-

sit fares will increase pollution and congestion from highway travel. Increasing

the gasoline tax rate or other highway user fees would reduce pollution and con-

gestion but also would cause the loss of some beneﬁts of highway travel. The

broadly based taxes (income, sales, and property taxes) have the advantage that

relatively small increases in rates can generate large revenue relative to transit

budgets.

This conclusion suggests that a reasonable policy may be to limit taxes on high-

way users for transit to fairly modest rates and to employ dedicated, broadly based

taxes to support any expansion of transit programs. The present level of contribu-

tions at the state level—6 percent of all state highway user fee revenue devoted to

transit—seems sustainable, although the federal contribution is much higher, at

17 percent (FHWA 2004, Table HF-10).

Many U.S. transit systems already receive support from dedicated, broad-

based taxes. A 2004 report of the Metropolitan Washington (D.C.) Council of

Governments’ Metro Funding Panel concluded that a dedicated regional sales tax

would be the most desirable and practical revenue source to make up the shortfall

between existing revenue and the system’s targeted spending level. The panel

observed that the broad tax base (including visitors as well as residents) would

match the breadth of the system’s beneﬁts and that a dedicated tax would provide

needed revenue stability (Metro Funding Panel 2004, 6–8).

The practice of subsidizing a local service like transit with the revenue of a

nationwide tax like the federal fuel tax may appear in the future to be especially

difﬁcult to justify. One proposal for a more essential role for the federal govern-

ment in aiding local transportation programs would be to relieve local govern-

ments of the cost of serving nonlocal trafﬁc on their roads (Gramlich 1990,

226–228). The arrangement could be similar to the so-called pass-through tolls

that recent legislation authorizes the state of Texas to pay to the state’s Regional

Mobility Authorities—that is, payments would be made by the federal govern-

ment to each local government proportional to the volume of nonlocal trafﬁc on

its roads. In return, local governments would accept responsibility for funding

purely local transportation services. Compensation in the form of pass-through

tolls would leave the local government in possession of the roads. This arrange-

ment avoids the objection that local governments raised to Michigan’s plan

(described in the section above on federal, state, and local roles) to transfer major

commercial routes to the state—that the local governments did not want to give

up planning control over these components of their systems.

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172

In summary, the following are some guidelines worth considering as the

process of reforming highway user fees gives rise to needs for revisiting the rela-

tionship of highway and transit funding:

• The present rate of transfers of highway revenues to transit probably has

small impact on highway programs, and highway travelers beneﬁt where

transit has alleviated congestion. However, greatly increasing the rate to fund

expanded transit services would risk the loss of highway travel beneﬁts that

could be greater than the transit beneﬁts gained.

• Transit requires stable and broad-based tax support. Developing and

expanding such support will be necessary in order to expand transit services.

Most transit agencies already derive some support from dedicated broad-

based taxes. (For example, as Table 2-4 shows, 16 percent of funding in 2000

was from dedicated sales taxes.) However, these sources account for a minor-

ity of nonfare funding, and some jurisdictions make little use of them.

• Federal and state transportation aid ought to relieve local governments of the

burden of serving nonlocal needs, rather than subsidize predominantly local

services. Applying this rule would lead to some reallocation of external aid

among American cities, but this outcome would be fair, since cities that were

previously being undercompensated for the service they provided to inter-

regional trafﬁc would receive more aid.

• With effective road pricing, a substantially larger share of transit spending

could be funded from fare box revenue. If at some time in the future true

road pricing is instituted (for example, road use metering on all roads in met-

ropolitan areas, with charges varying with trafﬁc conditions), the economic

justiﬁcation for transit subsidies from highway user fees or other sources will

be diminished. If each highway trip were charged the cost that that trip

imposed on other road users and on the highway agency, highway travel

would no longer be subsidized, and adding extra charges to pay for transit

would reduce the economic beneﬁt of the transportation system. Transit

would increase ridership and would be able to charge higher fares because

travelers would have to pay road user charges if they chose automobile travel.

Redeﬁning Federal, State, and Local Government Responsibilities

The focus of the federal-aid highway program from 1956 until the 1980s was con-

struction of the Interstate highway system. Since the completion of the Interstates,

successive reauthorization acts have attempted to deﬁne new goals for the federal-

aid program, and reauthorization debates have brought forth proposals for termi-

nating or greatly scaling back the program. Support for devolution sometimes has

come from states that historically have received less in federal transportation aid

than the federal highway user fee tax revenues collected within their boundaries

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(although certainly not all donor states can be associated with this position). In

California, a state that currently receives 90 cents in federal highway aid per dol-

lar of federal highway user taxes collected within the state and deposited into the

highway account of the Highway Trust Fund (FHWA 2004, Table FE-221), the

1996 report of the Commission on Transportation Investment recommended that

the state seek to have the federal government repeal the federal gasoline tax and

return to California its share of the balance of the Federal Highway Trust Fund

(CTI 1996).

Parallel debates have occurred at the state level with regard to the balance of

responsibilities between state and local governments. For example, the highway

ﬁnance reports of the Citizens Research Council of Michigan that were described

in Chapter 1 proposed guidelines for a realignment of highway responsibilities

between the state government and local governments, including state assumption

of control of locally owned roads that were important through routes (Citizens

Research Council of Michigan 1996; Citizens Research Council of Michigan

1998).

Before a local government could successfully take on any additional responsi-

bility for transportation systems, it would need adequate funding sources and

administrative capacity. The spending trends summarized in Chapter 2 show that

nationwide, the scale of local government responsibility has not changed greatly

in recent decades. However, the extent of local government responsibilities varies

greatly. This diversity of practice suggests that alternative institutional arrange-

ments are feasible. For example, although nationwide 19 percent of all road miles

are owned by state governments, the state mileage is more than 60 percent of the

total in ﬁve states (Delaware, North Carolina, South Carolina, Virginia, and West

Virginia) and under 10 percent in 12 (including California, Florida, Michigan,

and Washington). The great majority of local mileage is secondary roads and

streets, and nearly all expressway mileage is state owned, but local governments

own one-third of the mileage of urban arterial highways other than expressways.

Toll road authorities offer an institutional model for independent manage-

ment of expressways on a metropolitan or regional level. Most toll roads in the

United States are operated by independent authorities. The major turnpike

authorities are subject to state political control, but locally controlled authorities

operate toll roads in California, Colorado, Florida, Texas, and Virginia (FHWA

2004, Tables HM-10, HM-50, LGF-3B). The organization of local toll express-

ways in California, Texas, and Colorado was described in Chapter 5. Another

institutional model is provided by the independent authorities, many of them

organized on a metropolitan basis, that operate most large U.S. public transit sys-

tems. As Chapter 2 described, federal surface transportation legislation has pro-

moted greater local government responsibility and capability for metropolitan

transportation decision making; at the end of this section a proposal for federal

action to strengthen these local capabilities is described.

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The proposals outlined below, which were taken from several sources, are

presented to illustrate the variety of conceptions of the extent of devolution that

should occur and the scope of responsibilities that the federal government should

retain.

Reorienting the Federal Program

These proposals concentrate on adjusting the rules and procedures of the federal-

aid program to improve its performance in carrying out legitimate federal respon-

sibilities. Under one reasonable deﬁnition of the scope of federal responsibility for

highways, the federal government should ensure the supply of capacity that is ben-

eﬁcial from a national perspective but that state and local governments would not

adequately supply on their own. State and local governments will have little inter-

est in providing capacity to serve through trafﬁc if it contributes little to local taxes

and local residents’ incomes.

Federal grants can fulﬁll this responsibility by paying state and local govern-

ments to supply the increment of capacity beyond their own requirements that

would be beneﬁcial for the nation as a whole. However, a long-standing criticism

of federal-aid highway grants is that their structure provides little incentive for

states to spend more on capacity than they would in the absence of the federal pro-

gram. The state or local matching share is small (20 percent for most projects), and

the total amount of federal grants for which a state is eligible is capped. Under these

rules, if a state is undertaking more capital spending from its own funds than the

minimum needed to match all available federal aid, then a large share of the fed-

eral aid probably is simply displacing state funds rather than adding to the net total

of state capital spending (GAO 2004a; Gramlich 1990; Oates 1999).

A representative proposal for measures to increase the effectiveness of fed-

eral highway grants in fulﬁlling the core federal responsibilities of the federal gov-

ernment had the following provisions (Gramlich 1990):

• Roads serving predominantly state (or local) travel should be the respon-

sibility of state (or local) governments.

• Roads with national signiﬁcance should be eligible for federal aid; these

roads could be identiﬁed according to the share of their trafﬁc that is non-

local or interstate travel.

• The federal matching share in highway grants should be reduced and the cap

on available aid eliminated. For any project that a state undertakes on a road

eligible for aid, the state should receive a federal grant representing the per-

centage share of out-of-state beneﬁts. This share could be approximated by

the percentage share of out-of-state trafﬁc on the road and often would be

small compared with the present federal contribution.

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• Restrictions on the use of federal grants for maintenance should be elimi-

nated so that decisions about the optimum mix of capital and maintenance

spending on federal-aid roads would not be biased by federal restrictions.

A grant program following these rules would maximize federal leverage over

the quantity of state spending on the eligible roads for a given total federal outlay,

since all projects would be eligible for federal aid.

Comprehensive Devolution

Legislation proposed in Congress in 1996 (the Transportation Empowerment Act,

Congressional Record, July 19, 1996: S8372), before enactment of the 1998 surface

transportation act (the Transportation Equity Act for the 21st Century), and dur-

ing debate before the 2005 legislation (SAFETEA-LU) would have phased out

most of the federal-aid program over a period of years (Utt 2003). The elements

of the 2003 bill (H.R. 3113, which was not enacted) were the following:

• The federal gasoline tax dedicated to the Highway Trust Fund would be

reduced in ﬁve steps from the present $0.183 per gallon to $0.02 per gallon

after 6 years.

• A category of essential federal highway programs would be retained:

– The Interstate Maintenance Program, a federal categorical grant program

now funded at $6 billion per year,

– Federal spending for roads on public lands and Indian reservations,

– Surface transportation research, and

– Certain highway safety and motor carrier safety programs.

• During the transition period, the difference between spending each year

on the essential federal programs and federal highway user fee revenues

would be distributed to the states proportionally to tax collections in each

state.

• Crediting of a portion of federal gasoline tax revenue to the mass transit

account of the Highway Trust Fund would end immediately. A new, smaller

federal transit grant program would continue.

Although such proposals have not progressed far, they indicate sentiment, par-

ticularly among ofﬁcials in some states that contribute more federal highway user

fee revenue than they receive in federal aid. The National Surface Transportation

Infrastructure Financing Commission created in the 2005 legislation (SAFETEA-

LU, Section 11142), is to evaluate, as part of its charge, a proposal to allow any

state not to participate in the federal-aid highway program in return for a suspen-

sion of federal highway user fee collections within the state.

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Empowering Local Governments

The underlying rationale of devolution proposals is that most highway and tran-

sit problems are primarily local in their scope and impacts and that therefore the

federal government lacks competence to solve them. A series of proposals pub-

lished by the Brookings Institution calls for devolution of decision making and

revenue raising, but with active federal engagement to realign authority in favor of

local governments relative to the states (Boarnet and Houghwout 2000; Puentes

2004). The highlights of these proposals are the following:

• The federal government should provide ﬁnancial incentives for states to

transform metropolitan planning organizations (which are creatures of fed-

eral transportation programs) into regional infrastructure authorities, with

taxation, programming, and spending power, and to tie state decisions more

closely to the priorities of metropolitan governments.

• Most federal funding should be replaced with regionally levied user fees.

• The retained federal responsibilities should be

– Preservation of portions of the network that provide truly national beneﬁts,

– Provision of assistance to poorer regions,

– Cooperation with states and metropolitan governments on standards set-

ting and research, and

– Environmental protection.

SUMMARY

This chapter has surveyed options for adjustments to the system of charging and

paying for highways and transit in ways that would improve the delivery of trans-

portation services. The measures described have been prominent in discussions of

transportation ﬁnance reform. They include a variety of adjustments to existing

charges and changes in management practices, which their proponents believe

would augment resources, better align fees with costs, or improve the effectiveness

of transportation spending, and which could be carried out without fundamen-

tally altering the existing framework of user fees and revenue sources.

Among the measures listed, several appear to hold promise for improving the

stability of transportation funding and the performance of the transportation sys-

tem. They include adjusting fees according to the cost of providing service to dif-

ferent kinds of road users, in particular, large trucks; improving tax compliance

and limiting exemptions from payment of user fees; providing additional dedi-

cated funding sources for transit; and better aligning the responsibilities of federal,

state, and local governments with the character of the transportation services pro-

vided. Committee recommendations for actions on some of these measures are

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presented in the next chapter. Individually, none of these measures would dra-

matically affect user fee revenue or system performance. Nevertheless, striving for

small gains on multiple fronts may be the most productive short-term strategy

available to governments that operate highways and transit.

REFERENCES

Abbreviations

AASHTO American Association of State Highway and Transportation Ofﬁcials

APTA American Public Transportation Association

CBO Congressional Budget Ofﬁce

CTI Commission on Transportation Investment (California)

FHWA Federal Highway Administration

FTA Federal Transit Administration

GAO Government Accountability Ofﬁce

ODOT Oregon Department of Transportation

TRB Transportation Research Board

USDOT U.S. Department of Transportation

AASHTO. 2003a. Innovative Finance: Expanding Opportunities to Advance Projects. Washington, D.C.,

March.

AASHTO. 2003b. Transportation Finance Corporation: Leveraging New Revenue to Fill the Gap.

Washington, D.C., March.

Ang-Olson, J., M. Wachs, and B. Taylor. 2000. Variable State Gasoline Taxes. Transportation Quarterly,

Vol. 54, No. 1, Winter, pp. 55–68.

APTA. 2005. 2005 Public Transportation Factbook. April.

Boarnet, M., and A. Houghwout. 2000. Do Highways Matter? Evidence and Policy Implications of

Highways’ Inﬂuence on Metropolitan Development. Brookings Center on Urban and Metropolitan

Policy, March.

CBO. 1992. Paying for Highways, Airways, and Waterways: How Can Users Be Charged? May.

CBO. 1998. Innovative Financing of Highways: An Analysis of Proposals. Jan.

CBO. 2003. A Comparison of Tax-Credit Bonds, Other Special-Purpose Bonds, and Appropriations in

Financing Federal Transportation Programs. June.

Citizens Research Council of Michigan. 1996. Michigan Highway Finance and Governance: In Brief. Nov.

Citizens Research Council of Michigan. 1997. Michigan Highway Finance and Governance.

Citizens Research Council of Michigan. 1998. Michigan Highway Finance and Governance: A One-Year

Report Card.

CTI. 1996. Final Report. Jan.

Denison, D. V., R. J. Eger III, and M. M. Hackbart. 2000. Cheating Our State Highways: Methods,

Estimates, and Policy Implications of Fuel Tax Evasion. Transportation Quarterly, Vol. 54, No. 2,

Spring, pp. 47–58.

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FHWA. 2004. Highway Statistics 2003. U.S. Department of Transportation.

Fischer, J. W. 2004. Highway and Transit Program Reauthorization Legislation in the 2nd Session, 108th

Congress. Congressional Research Service, April 21 (update).

FTA. 2004. Trends in the Flexible Funds Program: Annual Status Report 2002. U.S. Department of

Transportation.

GAO. 2004a. Federal-Aid Highways: Trends, Effect on State Spending, and Options for Future Program

Design.

GAO. 2004b. Surface Transportation: Many Factors Affect Investment Decisions. June.

Gramlich, E. 1990. How Should Public Infrastructure Be Financed? In Is There a Shortfall in Public

Capital Investment? (A. Munnell, ed.), Federal Reserve Bank of Boston, Boston, Mass.

Metro Funding Panel. 2004. Report of the Metro Funding Panel: Final Draft for Public Release and

Comment: Key Findings. Metropolitan Washington Council of Governments, Dec. 17.

Oates, W. E. 1999. An Essay on Fiscal Federalism. Journal of Economic Literature, Vol. 37, Sept.,

pp. 1120–1149.

ODOT. 2004. Mileage Tax Rates. July.

Parry, I. W. H. 2001. Finding the Funds to Pay for Our Transportation Crisis: A Look at Options for

Solving Washington, D.C.’s Trafﬁc Woes. Resources, Issue 144, Summer, pp. 17–19.

Peters, M. 2002. Statement of Mary E. Peters, Administrator, Federal Highway Administration, Before

the Committee on Finance, United States Senate: Hearing on Schemes, Scams, and Cons: Fuel

Tax Fraud. Senate Finance Committee, July 17.

Puentes, R. 2004. Cement and Pork Don’t Mix. MetroView, Brookings, May 10.

Road User Fee Task Force. 2003. Report to the 72nd Oregon Legislative Assembly on the Possible

Alternatives to the Current System of Taxing Highway Use Through Motor Vehicle Fuel Taxes. March.

Rufolo, A. M., and R. L. Bertini. 2003. Designing Alternatives to State Motor Fuel Taxes. Transportation

Quarterly, Vol. 57, No. 1, Fall, pp. 33–46.

Rufolo, A. M., L. Bronfman, and E. Kuhner. 2000. Effect of Oregon’s Axle-Weight-Distance Tax

Incentive. In Transportation Research Record: Journal of the Transportation Research Board, No.

1732, Transportation Research Board, National Research Council, Washington, D.C., pp. 63–69.

TRB. 2002. Special Report 267: Regulation of Weights, Lengths, and Widths of Commercial Motor Vehicles.

National Academies, Washington, D.C.

USDOT. 1997. 1997 Federal Highway Cost Allocation Study. Aug.

USDOT. 2004. Report to Congress on Public–Private Partnerships. Dec.

Utt, R. D. 2003. Proposal to Turn the Federal Highway Program Back to the States Would Relieve

Trafﬁc Congestion. Backgrounder, No. 1709, Heritage Foundation, Washington, D.C., Nov. 21.

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Conclusions and Recommendations

The committee has assessed the future revenue-generating prospects of present

highway user fees. It has considered possible threats to the viability of these revenue

sources from a decline in the tax base and from declining adherence to the user fee

ﬁnance practices that were basic to the system at its origin. The committee also iden-

tiﬁed reforms for the highway and transit ﬁnance systems that are worthwhile

regardless of the future revenue potential of the present system of highway user fees.

In considering options, it focused on how ﬁnance arrangements can affect the per-

formance of the transportation system through their inﬂuence on the decisions of

travelers and on government investment and management decisions. The com-

mittee gave special attention to methods of charging fees that could be directly

related to the cost of providing services, in particular, tolls and mileage charges.

The conclusions presented below address the viability of present revenue

sources, the merits of present transportation ﬁnance arrangements, and the poten-

tial value of various reform options. The committee’s main conclusions are itali-

cized. The recommendations propose immediate changes to strengthen the

existing highway and transit ﬁnance system and actions to prepare the way for

more fundamental reform in the long term.

CONCLUSIONS

1. Viability of Revenue Sources

As the term is used here, a viable funding arrangement is one that will retain the

capacity to fund transportation programs at an inﬂation-adjusted rate compara-

ble with that of the past 20 years. In that period, revenues were sufﬁcient to fund

growth in highway spending and capacity and some improvements in service but

not to prevent growing highway congestion.

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According to this deﬁnition, the failure of the arrangement to raise revenue

sufﬁcient to fund any deﬁned level of needs (for example, as identiﬁed in the high-

way needs studies of the states and the federal government) is not in itself evidence

that the arrangement is not viable. Tax rates and total revenues generally reﬂect the

judgments of legislators and voters about priorities, and the existing set of user

fees would have been suitable for generating substantially higher or lower rev-

enue in the past if legislators had chosen to do so. However, if the present fund-

ing arrangement had structural features that were causing it to become ineffective

as a revenue-raising mechanism, its viability would be questionable.

The committee considered the gravity of two kinds of possible structural prob-

lems that may pose threats to the viability of the established funding arrangement.

They are, ﬁrst, that changes in automotive technology, rising fuel prices, or new

energy or environmental regulations may greatly depress gasoline and diesel fuel

consumption and therefore revenue from fuel taxes and, second, that the user fee

ﬁnance principle that has been the basis of highway ﬁnance may be eroding in

practice, as indicated by a proliferation of new applications of user fee revenues and

growing dependence on revenue from sources other than user fees.

Loss of the Tax Base

A reduction on the order of 20 percent in average gallons of fuel consumed per vehicle

mile by the light-duty vehicle ﬂeet is possible by 2025 if fuel economy improvement is

driven by new regulations or large and sustained fuel price increases. Offsetting the rev-

enue effect of a gain of this size would not require fuel tax rate increases that were

extraordinary by historical standards, although the willingness of legislatures to enact

increases may be in question. In the absence of new regulations, fuel price increases

alone probably will stimulate only a small improvement in fuel economy in this

period. After 2025, large market shares for hybrid electric and fuel cell–powered

vehicles, and consequently greater reductions in gasoline consumption, are possi-

ble, if driven by government intervention or high fuel prices.

This assessment of prospects for fuel economy improvement may seem too

modest in light of recent circumstances. Sharply higher fuel prices in 2005 added

to concerns about energy supplies and the environmental cost of fossil fuel com-

bustion. At the same time, promising technological developments, including com-

mercially popular hybrid vehicles and progress on fuel cell power, create a potential

for a substantial reduction in gasoline consumption in the long term. (For exam-

ple, in the fuel economy projections and scenarios reviewed in Chapter 4, a 25 per-

cent improvement in ﬂeet average fuel economy is achieved sometime after 2025.)

The committee based its conclusion on its review of projections from several

sources that considered the state of automotive technology and the history of

response of consumers to fuel price changes and technological advances. Three fac-

tors will constrain the rate of progress on fuel economy. First, consumers have

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shown strong preferences for maintaining or enhancing the performance and size

of the vehicles they buy, and they take advantage of the savings afforded by fuel

economy improvements during periods of fuel price stability by buying larger,

better-performing vehicles. Second, new vehicles that offer performance and cost

close to today’s vehicles with signiﬁcantly lower fuel consumption will require time

to be brought into production. Finally, the stock of vehicles on the road turns over

slowly (about 6 percent of the ﬂeet is retired annually, although high fuel prices

may accelerate turnover). From 1971 to 1991, a period that saw the energy crisis

of the 1970s, dramatic spikes in fuel prices (e.g., a doubling in current dollars from

1978 to 1981), and the implementation of rigorous new federal fuel economy reg-

ulations (starting with 1978 model year cars), fuel consumption per mile for the

light-duty ﬂeet was reduced by 33 percent. A reduction of this magnitude was pos-

sible because the automobiles of the day were relatively inefﬁcient. Similar events

would be unlikely to provoke the same amount of saving today.

The Department of Energy projects that by 2020 world oil producers will be

able to expand output by 30 percent and that U.S. motorists will be able to increase

travel by 33 percent without forcing the price of gasoline much above the $2 per

gallon level (in 2004 dollars). This is consistent with projections of petroleum

prices from other sources. The rationale of the projections is that the rate of oil

price increase since 2003 will not continue. Large supplies are available from mul-

tiple sources that can be developed and brought to market at lower cost than the

2005 price, and maintaining the price of oil too high is not in the long-term inter-

est of the major producers since it encourages conservation and stimulates devel-

opment of alternative sources. The projections take into account rapid growth in

oil consumption in China, India, and some other developing economies. For

example, in the Department of Energy’s reference case projection, oil consump-

tion in China grows at more than twice the world rate and China’s share of world

oil consumption increases from 8 percent in 2004 to 11 percent in 2020. This out-

look does not factor in the risk that political events will disrupt supply. Energy

forecasts are speculative. However, there are grounds for expecting that, even if the

relatively high prices of 2004–2005 persist, output will increase sufﬁciently to

moderate the long-term price trend. Fundamental changes in fuel economy and

engine technology are possible in the next two decades. Nonetheless, the implica-

tion of the projections the committee reviewed is that if such changes occur, they

are more likely to be the result of government intervention than of energy market

developments.

Erosion of Established Finance Practices

Government transportation ﬁnance practices have been remarkably stable and resilient

since the creation of the present federal highway program in 1956. However, some

potential sources of stress are evident, particularly in states where the local share of

CONCLUSIONS AND RECOMMENDATIONS

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responsibility is high. Sources of stress include pressures to expand use of highway

user fee revenue for nonhighway purposes, the growth of transit spending as a share

of local transportation spending coupled with the lack of a stable basis for transit

funding, and vulnerability of revenues to acceleration of inﬂation.

In the original conception of the federal-aid highway program and the simi-

lar highway ﬁnance schemes that most states adopted, ﬁnance practice was deﬁned

by simple rules: highway users paid special fees, fee revenue was dedicated to high-

way spending, and the revenue was sufﬁcient to cover government outlays for high-

ways. This arrangement enjoyed political and public support. It was considered to

be fair because users paid the government’s cost of providing highways and was

considered to be an effective way of matching government spending to taxpayers’

preferences because users could identify the beneﬁts that they received from their

payments and because spending was limited to a level that users were willing to

support. If adherence to these practices were to decline and no new consensus prin-

ciples emerged to take their place, there would be grounds for concern that the sta-

bility and direction of transportation programs were threatened.

To assess whether adherence to traditional ﬁnance practices is declining, the

committee examined trends in the application of user fee revenue to nonhighway

purposes, reliance on revenue from sources other than user fees to fund trans-

portation, and devolution of transportation responsibilities to local governments

(since local governments usually have not had direct access to fuel taxes and other

instruments for charging highway users). The conclusions are presented below.

In summary, the examination revealed that national average user fees per vehicle

mile, fraction of highway spending covered by user fees, and fraction of highway

user fee revenue devoted to nonhighway purposes have changed little in the past

25 years, but that the average hides a diversity of experiences among the states.

Nonhighway Application of Highway User Fee Revenue Regardless of the

merit of the practice of dedicating highway user revenues to transit or other non-

highway purposes, growth in such uses of revenues would affect the viability of the

transportation ﬁnance system if it subtracted too much from highway spending or

weakened support for user fees among highway users. The question of concern is

not the intrinsic worthiness of public investment in transit and other nonhighway

applications of highway revenue, but solely whether expanding application of the

revenue for such purposes may threaten the integrity of established transportation

ﬁnance arrangements.

The funding of federal transit aid with fuel tax revenue is the most impor-

tant dedication of highway user fee revenue to nonhighway purposes. Today

about 17 percent of federal highway user revenue ($6.0 billion out of $35.1 bil-

lion in 2003) is dedicated by federal law to nonhighway uses. In addition, states

and local governments devote about 4 percent of aid funds they receive from the

highway account of the Federal Highway Trust Fund to transit ($1.1 billion out

of $30.3 billion in 2003).

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State highway user fee revenues dedicated to state transit programs or transit

grants ($3.8 billion in 2003) equal about 5 percent of state government highway

spending ($80.2 billion in 2003). In certain states, portions of highway user rev-

enues are dedicated to nontransportation purposes, but states also devote funds

from nonhighway sources to highways. In national totals, state revenues from

highway users nearly equal the states’ highway spending: the sum of all state-

imposed highway user fee revenues and federal highway aid received by states was

$93.4 billion in 2003, and current spending by states for highways plus state grants

for highways to local governments was $92.0 billion. However, the balance

between revenue and spending varies from state to state.

Reliance on User Fee Revenue and Devolution to Local Governments

The committee examined whether reliance on user fees to fund transportation has

declined and whether the local government share of ﬁnancial responsibility has

been growing. Signiﬁcantly declining reliance on user fees would be a funda-

mental departure from historical practice and would necessarily call into question

the viability of the fuel tax and the other user fees. Whereas state government high-

way programs are predominantly funded by state-imposed user fees, local govern-

ments historically have paid for their shares of transportation expenditures out of

general revenues or with dedicated broad-based taxes (e.g., dedicated sales taxes or

property taxes). Local jurisdictions may lack legal authority to impose fuel taxes or

vehicle fees, and motorists can easily avoid a local fuel tax if neighboring jurisdic-

tions have lower rates. In some instances, a local property tax assessment dedicated

to streets or to infrastructure may function much as a user fee, for example, in a

suburban residential community where the streets to be maintained are primarily

for local access, there is little through trafﬁc, and household characteristics are

somewhat uniform.

Devolution of responsibilities to local governments would in many cir-

cumstances be in the public interest if it were accompanied by adequate fund-

ing provisions. However, it will also strain traditional ﬁnance practices if local

governments do not have access to and control over user fee revenue. Many local

jurisdictions operate arterial roads that serve nonlocal trafﬁc and are subject to

congestion and that would be funded most appropriately by user fees.

When highway spending and highway user–derived revenues alone are exam-

ined, neither devolution of responsibility to local governments nor decline in the

ratio of user revenue to expenditures is evident in national totals. The local gov-

ernment share of highway spending has averaged about one-third since the 1960s

and has been fairly constant. The ratio of highway user fee revenues to highway

spending for all levels of government combined has ﬂuctuated around 80 percent

since the 1960s.

However, in the past 15 years, the local share of total government highway

and transit spending has increased, and the ratio of user fee revenue to total high-

way and transit spending has declined. The trends are not dramatic in national

CONCLUSIONS AND RECOMMENDATIONS

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totals but are pronounced in some states. These trends, where they are occurring,

are related to the growth of transit spending. Transit depends more on aid from

local sources than from the state or federal governments and covers only a minor-

ity of its expenditures with user fee revenue.

Legislative Support of User Fee Finance As the introductory chapter

explained, the committee did not estimate how much governments should spend

on highways. Legislatures and voters are competent to decide on transportation

spending levels, taking other priorities into account. Therefore, failure of legisla-

tures to set rates high enough to raise revenue sufﬁcient to satisfy some predeter-

mined level of needs is not in itself evidence that the present funding arrangements

are dysfunctional.

However, an unwillingness by legislatures to maintain revenues because of

inherent, particular characteristics of highway user fees could be viewed as bring-

ing into question the viability of the present fees. For example, the structure of fees

might come to be regarded as unfair, or fuel taxes might become especially unpop-

ular because of the rapid rise of fuel prices. Under these conditions, the fee scheme

could be regarded as structurally impaired as a revenue-raising instrument. The

impairments might be overcome by introducing new forms of fees.

The committee does not have evidence that any such structural characteristics

of highway user fees are discouraging legislatures from adjusting the rates. The fol-

lowing observations are evidence to the contrary:

1. Legislatures are adjusting rates sufﬁciently to maintain constant average rev-

enue per vehicle mile and to expand capital stock (although not sufﬁciently

to keep congestion from increasing). The frequency of state rate increases

was much greater in the 1980s than in the 1990s, but the cumulative

impacts of rate changes during the two decades were equivalent—that is,

average rates just about kept up with inﬂation. At the federal level, rates

have not changed signiﬁcantly since 1993, but Congress has acted twice

since then to increase deposits to the Highway Trust Fund. The practice of

depositing part of fuel tax revenue to the general fund was eliminated, and

the federal revenue loss caused by the gasohol subsidy was debited to the

general fund rather than the trust fund.

2. Since the 1980s, the growth rate of state highway user fee receipts has

been slower than the growth rate of all state tax revenues, but only mod-

erately so (84 percent versus 104 percent in constant dollars from 1981

to 2001). During this period the extent of state government responsibil-

ities was expanding in many domains. Thus, the funding constraints on

highway programs appear similar to constraints that all state programs

faced in this period, rather than problems inherent in the structure of

highway funding.

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It has sometimes been asserted that growing use of highway user fee revenue

for nonhighway purposes has undermined support for tax increases. In some cases

this consideration may have been decisive; however, the share of revenues at the

state level that is dedicated to nonhighway uses is small enough on average that the

practice seems unlikely to have had a major inﬂuence overall.

Resistance to raising fees may stem in part from poor performance of some

highways and a public impression that expansions buy little improvement. Reform

of ﬁnance could enhance performance and increase the visible improvement pro-

duced by system investments. This outcome might cause legislatures and voters to

adjust their spending preferences in favor of transportation.

2. Merits of the Present Finance System

The ﬁnance system probably has contributed to the success of the highway program in

delivering a positive return on the national investment in highways. User fees discour-

age motorists from making trips of little value, spending has been constrained by the

revenues generated from users, and the system allows taxpayers to see the cost of pro-

viding highway services. The system also has important shortcomings.

The viability of the ﬁnance system is of concern only if the transportation pro-

grams it supports are beneﬁcial and present ﬁnance arrangements help these pro-

grams to perform effectively. The system has inﬂuenced the behavior of users and

the agencies providing services and consequently the economic return on trans-

portation investments. The committee examined the available evidence concern-

ing whether these inﬂuences have been positive.

Available estimates are incomplete but indicate that the nation has earned a

positive return on the investment in the highway system, that historical annual

expenditure levels have been justiﬁed by the incremental beneﬁts received, and that

opportunities exist for expansions that would yield high payoffs. The ﬁnance sys-

tem probably has contributed to this success. To a limited extent, existing user fees

discourage motorists from making trips that they value little in comparison with

the cost of providing them. These fees are about 7 percent of the cost of operating

a motor vehicle and vary with use.

More signiﬁcantly, the revenues generated from users impose a constraint on

spending. Reliance on dedicated revenue from user fees reduces the risk that total

spending will greatly exceed justiﬁed levels, since it is unlikely that the revenue

would sustain a facility that produced low levels of beneﬁts for users in relation to

its costs. Also, in the political process of setting highway budgets and fees, users are

unlikely to support fee levels beyond those that beneﬁt them or to support proj-

ects that yield low returns. There is, however, a danger that interests that gain from

construction spending regardless of user beneﬁts or fee levels will lobby for fees

that are higher than justiﬁed.

The practice of dedicating the revenue from a particular tax to a particular use

also provides revenue stability (compared with reliance on annual appropriations

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from the general fund), which is valuable for a public works program that entails

long-term commitments. Stable funding eases public- and private-sector borrow-

ing to build facilities. A further pragmatic justiﬁcation for the practice may be that

it has appeared in some instances to be effective in gaining public assent to a tax

increase in support of a speciﬁc program, even during this era of antipathy to other

tax increases.

Gaining the efﬁciency beneﬁts of charging fees to highway users does not

require that the revenues raised be dedicated to highways. User fees are beneﬁcial

as long as they induce savings in the costs of highway travel (for example, conges-

tion, pollution, or road wear costs) that are greater than the value of lost travel ben-

eﬁts to highway users who forgo or alter travel because of the fees. However,

dedication of revenues appears, in practice, to have exerted a degree of discipline

that has tended to keep spending within bounds and to direct it to worthwhile

projects, and that would be absent if there were no linkage between spending and

the tax and fee revenue raised from users.

Transportation programs also have important failings related to the structure

of the ﬁnance system. The system does not provide a strong internal check that

individual projects are economically justiﬁed. Such a check would exist for proj-

ects that were ﬁnanced with funds they generated themselves. Fees do not corre-

spond well to costs. Some road users, including operators of certain types of trucks

and buses, do not pay fees commensurate with the pavement and bridge wear costs

that they impose on highway agencies, which encourages inefﬁcient use of high-

ways. Because fees do not vary with trafﬁc conditions, avoidable congestion costs

are tolerated. The present level of beneﬁts of the road system could be attained at

lower cost if pricing were improved.

3. The Value of Reform

The conclusions above indicate that the risk is not great that the challenges evident today

will prevent the highway ﬁnance system from maintaining its historical performance

over the next 15 years. That is, the system should be able to fund growth in spending

and capacity, although not at a rate that will reduce congestion. However, transporta-

tion system users and the public could beneﬁt greatly from transition to a fee structure

that directly charged for actual use of roads.

No likely developments in motor vehicle technology, energy price, or regula-

tion will have an impact on revenue in this period that could not be offset by rate

increases that are within the range of historical precedent. There could, however,

be lags in adjusting to the revenue consequences of high inﬂation or a large increase

in the price of fuel.

Transitioning to direct charging (for example, a system that charged accord-

ing to mileage and road and trafﬁc conditions) in place of present user fees would

potentially have two beneﬁts:

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1. Improved operation of the road system, including reduced congestion. By

inducing some travelers (those who place a relatively low value on traveling

during the peak) to avoid congested time periods, pricing can reduce con-

gestion and trip times for the remaining travelers. Experience with peak

charging on roads in the United States and other countries has demon-

strated its effectiveness for controlling congestion. Prices must be set so

that the beneﬁts to those who enjoy faster travel exceed the cost of incon-

venience to those who are induced to change travel habits.

2. Better targeting of investment to the most worthwhile projects. If such a

road charging scheme were in effect and highway spending depended on

revenue from the fees, expenditures would tend to be directed toward

parts of the highway network that generated revenues sufﬁcient to pay for

improvements. Pricing would affect investment decisions through several

mechanisms:

– Revenues from peak charges and the response of trafﬁc to the charges

would accurately indicate the value the public places on individual

highway facilities and would reveal the locations where capacity expan-

sions would have the greatest beneﬁts.

– Revenue impacts would inﬂuence investment decisions: projects with the

potential to generate net revenue increases sufﬁcient to pay for themselves

would be more likely to be constructed.

– Because local governments would expect to control the revenues gen-

erated by the roads they owned, growing regions with high congestion

would generate high revenue and would retain that revenue to support

regional needs.

However, highway agencies will need new technical skills to take advantage of

the information provided by pricing, and oversight may be needed to prevent

abuse of pricing powers.

There is no certainty that ﬁnance reform in the direction of improving the efﬁ-

ciency of the transportation system would raise more revenue than existing

arrangements. However, reform would make transportation dollars go further, and

it is conceivable that the public would be willing to invest more in a transporta-

tion system that worked better.

Many years of coordinated effort will be needed to develop the technical and

institutional capabilities required for reform and to demonstrate to the public

that the potential beneﬁt is genuine. Therefore, an early start is essential.

4. Principles for Reform

Reform of the finance system would have benefits now. Eventually, the dete-

riorating performance of the transportation system and the growing cost of

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maintaining acceptable service under present practices may compel reforms that

would increase efﬁciency. As the system evolves, adhering to the following rules will

help keep it on a course leading to the necessary improvements.

• Maintain the practice of user fee ﬁnance, that is, a system in which users of

facilities are charged fees or special taxes, payments reﬂect the transportation

provider’s costs to serve each user (to the extent that is allowed by the fee

structure), and expenditures to construct and operate the facilities are equal

to the fee revenue. The last condition implies dedication of user fee revenue

to transportation programs.

• Seek opportunities to apply pricing where possible. Pricing means allowing fees

to ration access to a service or facility. Pricing could signiﬁcantly lower con-

gestion and other highway operating costs. Two examples of pricing that

could be applied immediately are variable tolls on toll roads or lanes (with

higher charges imposed during peak periods) and the charging of trucks for

the pavement wear they cause. Such initial steps would yield beneﬁts in their

own right and would be an opportunity for administrators to learn to apply

pricing and for the public to observe its consequences.

• Align responsibilities of the federal, state, and local governments so that the recip-

ients of each government’s services correspond as nearly as possible to its con-

stituency. For example, local governments should have primary responsibility

for providing and funding facilities that serve mainly local travel of their own

residents, and states should be responsible for serving intercity and regional

trafﬁc. In this way the voters overseeing tax and spending decisions will be

those directly bearing the costs and receiving the beneﬁts. The organization

of transportation programs today often departs from this rule, in part

because local governments are limited in their ability to collect user fees. A

goal of reform should be to allow each jurisdiction to collect fees from all

users of its facilities.

• Undertake reforms with full awareness of environmental and equity conse-

quences. In planning for ﬁnance reform, governments should identify tech-

niques to offset undesirable distributional effects without seriously eroding

the beneﬁts of new forms of charging. Possible solutions include direct com-

pensation to low-income households or other disfavored groups (for exam-

ple, distribution of transport vouchers that could be used to pay road tolls

or transit fares) and expansion of transportation services important to these

groups. Provision of additional transit service where the service would be of

value to persons displaced by peak highway charges could mitigate the equity

consequences of ﬁnance reform involving pricing. (The distributional

impacts of improved pricing will not always be undesirable. For example,

road pricing in cities could cause gains in transit service quality and revenue,

which would beneﬁt the transit-dependent population.)

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Reform that involved partially or entirely replacing fuel taxes with other forms

of charges would reduce the price of gasoline (not necessarily by the full amount

of the tax reduction) and lessen motorists’ incentives to choose more fuel-efﬁcient

vehicles. If fuel taxes are reduced in the future, the impact on fuel consumption

should be recognized and consideration given to the need for offsetting actions, if

the outcome appears contrary to the goals of U.S. energy policy. A system of

mileage fees that incorporated congestion charges would have broad impacts on

energy consumption through its impact on congestion, travel, and land use.

Efﬁciency requires that users of the transportation system take into account

the environmental costs of their travel choices. One way of accomplishing this

would be to impose charges for pollutant emissions. However, the best results from

a pollution-charging scheme would be obtained by subjecting all emissions (from

transportation and nontransportation sources) to equivalent charges. Broad-based

taxes applied equally to all petroleum consumers would be the most cost-effective

in promoting petroleum conservation. The distributional and environmental

impacts of major changes in transportation ﬁnance practices will not be fully pre-

dictable. It will be necessary to observe consequences systematically and make

adjustments when undesirable side effects appear.

5. Reform Opportunities

The committee considered two kinds of proposals to overhaul the system for

charging highway users: an expanded network of toll roads and lanes on high-

density expressways, with variable pricing, but using present toll technology; and

a road use metering and mileage-charging system that could function on all roads,

using technology that automatically measured road use and assessed charges. These

could be complementary projects. Expansion of toll roads can begin immediately;

however, tolls assessed with conventional technology are limited in application.

Road use metering holds the greater promise, but development of technological

and institutional capabilities and resolution of privacy and fairness concerns will

be prerequisites.

Toll Roads and Toll Lanes

An important opportunity exists today to create an extensive system of tolled limited-

access highways and expressway lanes employing existing electronic toll collection

technology and variable pricing. The opportunity arises from a convergence of

circumstances: the great reduction in the cost and inconvenience of toll collection

achieved through new technology; strong interest in several states where tolling is

seen as a critical revenue supplement; the willingness of Congress to allow tolling,

at least on a trial basis, on Interstate system segments that receive capacity expan-

sions; the valuable experience provided by recent toll implementations; and the

interest of private-sector ﬁrms seeking opportunities to develop roads. Such a sys-

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tem might include networks of the major expressways in each metropolitan area

and possibly some heavily traveled intercity connections.

Development of toll roads and toll lanes would have several potential beneﬁts.

It would speed construction of some of the most valuable highway projects,

improve trafﬁc ﬂow on the tolled facilities (which could include some of the most

heavily traveled urban expressways), and allow the public to become aware of the

beneﬁts and drawbacks of road pricing and to consider whether more extensive

application would be desirable. However, even if tolling were applied to all roads

suited to conventional tolling technology, revenue from tolls on limited-access

highways and express lanes would remain a small fraction of total road spending.

Tolls would likely be beneﬁcial on some roads where toll revenue would be insuf-

ﬁcient to pay the full cost of the road. Therefore, arrangements will be needed for

funding toll roads with a combination of tolls and other highway user fee revenue.

Soliciting private-sector participation in construction and operation of toll

roads may in certain circumstances secure funding for projects that would not

otherwise be carried out. However, the toll revenue that would attract the private

ﬁrm would be available to the government as well. The private sector’s most valu-

able contribution might be in discovering good models for toll road development

and operation rather than in funding. Because a private ﬁrm in charge of a high-

way project would face incentives and constraints different from those of a public

agency, it could have more success in controlling costs and greater ﬂexibility in set-

ting prices, and it might be able to use the information that pricing would provide

more effectively in guiding highway management. There is no guarantee that pri-

vate ﬁrms would outperform public agencies in these tasks. However, in a national

effort to expand toll roads, it would make sense to give public–private partnerships

a serious trial.

Some prominent proposals for toll road expansion involve parallel toll and free

lanes on the same expressway, which would give motorists a choice of services. For

example, the 2005 federal surface transportation program reauthorization legisla-

tion allows states to convert existing high-occupancy vehicle lanes on federal-aid

roads into high-occupancy/toll lanes open to high-occupancy vehicles and toll

payers. In addition, the states may build new tolled lanes alongside free lanes on

existing expressways through a new federal Express Lanes Demonstration Program.

This design may be more acceptable to the public than full conversion of a free road

to a toll road, although it will limit the revenue from tolling.

Road Use Metering and Mileage Charging

Creation of a system to assess road users directly for the costs of individual trips offers the

best opportunity for increasing the cost-effectiveness of transportation spending and mit-

igating congestion. The prospects for signiﬁcant improvement in performance through

funding increases or technology advances are limited if reform of road pricing is not car-

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ried out. Road use metering and mileage charging appear to be the most promising

approach to this reform within a comprehensive fee scheme that will generate rev-

enue to cover the cost of an efﬁcient highway program in a fair and practical man-

ner. These systems use communications and information technology to assess

charges automatically according to miles traveled, roads used, and other conditions

related to the cost of service.

Conversion to road use metering and mileage charging will require a sustained

national effort. Governments must decide on the goals of the effort, authorities for

setting fees and controlling revenue, and how best to involve the private sector.

The institutional framework and administrative mechanisms to manage such sys-

tems must be designed. Among the challenging problems are the following:

• Gaining public acceptance. The public and elected ofﬁcials will be skeptical

of a metering system that could be used to track individuals’ movements;

therefore, privacy must be guaranteed. Opposition can be anticipated if the

new scheme is perceived as unfairly favoring some categories of road users or

to be disadvantageous to the poor, and objections can be expected from road

users who may be required to pay more or curtail travel. Development must

be open and responsive to the concerns of the public about such a funda-

mental overhaul of highway administration.

• Making the transition from present to new revenue sources. Highway author-

ities will need to establish procedures for equipping vehicles and roads, dis-

continuing old fees, and commencing collection of the new fees, with

minimum disturbance to revenues or travel, over a period of years. Motor

vehicle owners will be required to purchase added equipment with new vehi-

cles or to retroﬁt their current vehicles. The location of industries and house-

holds has been profoundly affected by the current approach to highway

ﬁnancing. A radically new approach may be disruptive (even though the ulti-

mate outcome will be positive) unless it is phased in gradually.

• Setting appropriate prices. Because of inexperience, highway agencies do not

now have the competence to set mileage fees that maximize the beneﬁts of

the transportation system or to use the information provided by fee revenues

to improve the payoffs from capacity expansions. Improper pricing practices

could degrade system performance.

The technical design of charging systems can solve some aspects of these prob-

lems. For example, design features can help ensure privacy, and the transition will

be eased if systems allow users to pay through either the old or the new charging

scheme. However, solutions will depend at least as much on the design of institu-

tional arrangements for governance, oversight, monitoring, and evaluation.

If public acceptance is attained, it will most likely come about over time as

the result of experience. Expansion of conventional toll roads and applications of

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variable pricing and automatic tolling will be important sources of experience.

Openness in the development process and demonstrations of effectiveness in early

implementation will also be critical in forming opinions.

If mileage charging comes into general use, the state and local authorities

responsible for road construction and operation will expect to control the revenue

generated by the roads they own and to control pricing decisions that will inﬂu-

ence trafﬁc ﬂow, congestion, and land use. However, governments with control of

pricing may have opportunities to extract monopoly proﬁts, export congestion to

neighboring jurisdictions, or attract development from competing jurisdictions by

underpricing. Therefore, safeguards will be needed against practices to gain local

advantage at the expense of the general welfare. The problem of inappropriate pric-

ing policies could be lessened by aligning state and local governments’ responsi-

bilities for roads with the nature of the trafﬁc. Privatization of the operation of

certain roads could also help insulate pricing decisions from narrow considerations.

The general introduction of mileage charging would have profound effects on

every aspect of the management of transportation programs. The roles of the fed-

eral, state, and local governments would be altered; new criteria would become

prominent in the selection of projects; highway managers would have new means

of regulating trafﬁc and controlling congestion, pollution, and accidents; and a

more nearly optimal balance between transit and highway use and resources in

urban areas would be attainable. The opportunity is great, but there are risks that

the potential beneﬁts of reform could be dissipated through poor management in

the new environment.

RECOMMENDATIONS

1. Maintain and Reinforce the Existing User-Fee Finance System

The nation must continue to rely on the present framework of transportation

funding for at least the next decade. Therefore, governments must take every

opportunity to reinforce the proven features of the present system, in particular,

user fee ﬁnance in the highway program. Because of the potential beneﬁts of alter-

native ﬁnance arrangements, delay in developing them probably would be costly.

Nevertheless, in the interim it will be necessary to depend on the fuel tax and other

existing fees as the primary funding source. The potential gain from reforms within

this framework, such as the actions recommended here, may be modest, but a strat-

egy of seeking multiple small improvements in the ﬁnance system would nonethe-

less be worthwhile.

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192

This recommendation parallels a recommendation of the Transportation Research Board’s Committee

for the Study of Freight Capacity for the Next Century (TRB 2003, 125).

71340_191_213 5/30/06 9:57 AM Page 192

CONCLUSIONS AND RECOMMENDATIONS

193

Reﬁning User Fee Rate Schedules

The federal government and the states should make adjustments to user fee rates

that would provide incentives for more cost-conscious use of highways by oper-

ators of large trucks and other vehicles and allow highway agencies to recover

some costs that are not fully accounted for in current fees. At least, the federal

government should consider adjustments to the Heavy Vehicle Use Tax to bet-

ter align fees with the average cost responsibilities for vehicles of different weights

and axle conﬁgurations. The federal highway cost allocation studies provide an

approximate guide to the appropriate adjustments and indicate that certain of the

heaviest trucks should pay higher fees unless their operators adopt truck designs

that reduce road and bridge wear. The states and the federal government should

begin to rely on fees rather than solely on regulations to control vehicle sizes and

weights.

Tax Evasion and Exemptions

Congress and the states should consider eliminating fuel tax exemptions that are

commonly abused (perhaps replacing them with other aid to their beneﬁciaries)

and requiring that fuel purchasers entitled to lower rates pay the highway rate and

apply for a refund.

Too little is known about the magnitude and methods of evasion of federal

and state fuel taxes and other highway user fees. However, evidence indicates that

it is a signiﬁcant problem and that better enforcement could increase revenue. A

common form of evasion scheme takes advantage of tax exemptions or differences

in the tax rates on fuel used for highways and substitutable fuels used for non-

highway purposes. The 2005 federal surface transportation program reauthoriza-

tion legislation tightened controls on assessment and collection of fuel taxes. The

effects of this legislation should be monitored and further action considered if

compliance problems persist.

Providing for Advanced-Technology Vehicles in the User Fee Structure

Operators of alternative-fuel or new-technology vehicles should contribute to the

upkeep of highways on a basis similar to that of other users. As new kinds of vehi-

cles that do not directly consume gasoline or diesel fuel come into use (for exam-

ple, hydrogen fuel cell–powered or battery-powered electric vehicles), the present

system of fuel taxes and other user fees will be incapable of ensuring that operators

of all vehicles pay appropriate shares of the cost of transportation facilities.

Adopting mileage charging as the basic user fee would allow equal treatment of all

road users regardless of the kinds of vehicles they operated. Other forms of fees (for

example, taxes on new fuels that come into use or vehicle registration fees) could

accomplish this objective if mileage charging does not become available.

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Incentives and other policies to promote conservation or reduce pollutant

emissions could be made more cost-effective, and at the same time impacts on

transportation program revenues would be lessened, if they were broadly targeted.

A tax levied on all fuel consumers (or all polluters) will attain a speciﬁed reduction

in fuel consumption (or pollution) at lower cost than an efﬁciency standard or a

tax targeting only transportation. Such a tax gives producers and consumers ﬂexi-

bility to reduce consumption (or emissions) in ways that have the least cost to

them. An incentive that subsidizes road use by forgiving payment of highway user

fees can unnecessarily increase the cost of meeting the conservation or emissions

goal by encouraging inefﬁcient use of roads. From the standpoint of transporta-

tion ﬁnance, promoting energy conservation with a broad-based energy tax rather

than a motor fuel tax would have an added advantage—it would segregate revenue

of the energy tax from revenue of fuel taxes that were intended as user fees and

devoted to covering transportation agency expenditures.

Deﬁning Federal, State, and Local Government Responsibilities

It was not within the scope of the committee’s study to develop a complete deﬁ-

nition of appropriate federal, state, and local responsibilities in surface transporta-

tion. However, federal budget constraints and demands of the states for autonomy

may create an environment in the next decade in which level or reduced federal

funding is likely, and development of a new system for direct charging for road use

would be likely to lead to a reassessment of federal responsibilities. Regardless

of the overall scope of the federal surface transportation program in the future,

the federal government should retain certain core responsibilities, including the

following:

• Providing aid to ensure that the states do not underinvest in routes of major

national signiﬁcance for commerce, travel, and public safety and security.

For example, a state may be unwilling to invest in such a route if it cannot

collect sufﬁcient user fee revenue from out-of-state vehicle operators to pay

for the cost of serving them because travelers buy fuel outside the state.

• Standards setting, in cooperation with states and local governments, to gain

efﬁciencies in construction and operation and to ensure uniformity of high-

way features needed to allow efﬁcient nationwide passenger and freight traf-

ﬁc (for example, compatibility of road design with vehicles).

• Environmental regulation and enforcement.

• Research and development, since all highway agencies share interest in inno-

vation, especially in the development of improved forms of charging.

These core federal responsibilities ought to be funded by user fees, as the federal-

aid highway program is now.

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Many states probably could improve the performance of their road programs

by periodic review and updating of program responsibilities and jurisdictional con-

trol of roads according to analogous criteria. If road use metering and charging

come into use, the appropriate spheres of federal, state, and local government

responsibility for transportation programs will be altered. State and local govern-

ments would be able to raise revenue from all users of their roads and would expect

to control revenue and pricing. The need for a federal-aid program would be

diminished. However, the core responsibilities listed above would remain. In par-

ticular, standards setting and research leadership would be vital federal functions

in the program to develop the new transportation funding mechanism. A new fed-

eral task, oversight to ensure that governments did not abuse their monopoly pric-

ing powers, might prove necessary. The future revenue source for federal activities

would not necessarily have to take the form of a mileage charge. The federal gov-

ernment could continue to rely on excise taxes (at reduced rates) to fund the

reduced scope of its activities. States and local governments would be left with pri-

mary control of the use and rates of mileage fees.

2. Expand Use of Tolls and Test Road Use Metering

The Federal Role in Promoting Toll Road Development

Good models for toll road development can only emerge from the experience of

states. Therefore, the federal government should adopt a strategy of encouraging

states to experiment with arrangements for tolling and private-sector participation

in road development. To this end, Congress should liberalize the restrictions in the

federal highway program that now prevent states from using aid to build toll roads

and instituting tolls on roads built with federal aid. In general, states should be

allowed to impose tolls on existing roads that were built with federal aid, and they

should be allowed ﬂexibility in the design of toll systems.

A common objection to imposing tolls on existing roads is that tolling would

be unfair to road users who have already paid for the roads through fuel taxes and

other fees. However, existing roads require continuous funding for maintenance

and periodic reconstruction. Moreover, congestion fees can greatly improve the

efﬁciency with which capacity is used. Funding an expansion of capacity on a heav-

ily traveled route with revenues generated by that route that are in excess of oper-

ating costs is a fair and reasonable means of accelerating improvements that directly

beneﬁt payers.

Federal tax policy ought to be neutral with respect to whether a toll road is

publicly or privately operated. Use of tax-exempt bond ﬁnance in a road project is

in effect a subsidy from the federal general fund to the highway program and so

violates the user-pays principle. However, it is unlikely that the tax treatment

of municipal bonds will be reformed to improve the highway financing sys-

tem. Therefore, removal of biases in tax law that favor government finance and

CONCLUSIONS AND RECOMMENDATIONS

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operation of toll roads probably is necessary to encourage experiments with private-

sector participation in transportation projects. The provision in the 2005 federal

surface transportation aid legislation allowing issuance of $15 billion in private

activity bonds for highways is a signiﬁcant measure in this regard. It was noted in

Conclusion 5 above that the most important reason for seeking private-sector par-

ticipation may be the value of bringing the private sector’s perspective and exper-

tise to the problems of developing and managing toll roads. If tax-exempt bond

ﬁnance is the incentive used to attract private involvement, the public subsidy this

entails must be worth the improved results that increased private participation in

the projects brings about. The subsidy will be substantial if the new private activ-

ity bond authority is fully utilized. Congress should monitor the results of the pri-

vate activity bond provision carefully and then judge whether this trade-off has

been in the public interest. It should also assess whether tax-exempt bonds are the

most cost-effective form of incentive for private participation. Finally, federal

action to reduce the duration, cost, and risks entailed in the project development

process, including regulatory reviews, would stimulate private-sector participation.

Road Use Metering

The states and the federal government should explore the potential of road use

metering and mileage charging. Creation of a structure to support individual states

that decide to conduct trials or pilot implementations may be the most practical

initial arrangement. However, a program with national focus will be required, with

federal leadership and funding aid for research and testing.

The ﬁrst steps have already been taken toward developing the capability to

meter road use and collect mileage charges. In the United States, detailed propos-

als for systems have been put forth, and tests of technology are being conducted.

In Europe, mileage-charging systems for commercial trucks on motorways are in

operation. This experience provides a basis for planning the next stages of devel-

opment.

Technical Trials Additional technical trials will be the ﬁrst requirement. The

objectives should be to evaluate the reliability, ﬂexibility, cost, security, and

enforceability of alternative designs and to gain information about institutional

requirements for administering such systems, user acceptance, and costs. Pilot

studies will be needed that simulate the important aspects of systems as realistically

as possible, including setting rates, billing and collecting fees, enforcement, and

coping with malfunctions.

A second necessary research track will be studies with the goal of providing

guidance to highway agencies on the proper application and management of road

use metering and charging systems. The starting point for this research should be

evaluations of the growing number of road pricing systems now in operation.

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Finally, planning studies will be needed to lay out possible routes to widespread

application of road use metering and pricing. The studies should address the

responsibilities and relationships of federal, state, and local governments as well as

the relationship of government to private-sector participants.

Staged Implementation After technically practical systems have been

demonstrated, several paths exist for continuing with implementation in stages,

to allow highway agencies and the traveling public to learn about new road charg-

ing systems and decide whether to proceed further.

An individual state or city that wished to proceed with mileage charging would

face enormous difﬁculties because of the high ﬁxed costs of building the ﬁrst imple-

mentations, the complications created by interstate trafﬁc, and the probable even-

tual need for national coordination of standards and policies. Therefore, once

technically proven designs for road use metering and mileage charging are avail-

able, the federal government should support one or more implementations that

would be on a large scale and fully functional but limited in scope with respect to

the region, roads, or vehicles involved. Fee collections can also be used to offset

some of the start-up costs.

A limited implementation of road use metering and mileage charging could

take one of the following forms:

• A system with participation of large trucks only (possibly starting with

metering on Interstates in one region),

• A system applying to all vehicles on the network of expressways in a region

(a state, a group of states, or a metropolitan area), or

• A system for all vehicles and roads in one or a small number of states.

These pilot implementations would still be deﬁned as experiments. The motiva-

tions would be to limit initial implementation to a simpler task than metering and

charging all vehicle travel on all roads and to conduct evaluations that would

increase the likelihood that further stages would be accepted and successful. The

German Toll Collect system is a precedent for such a staged approach. That sys-

tem was designed to be applicable to all vehicles on all roads, but implementation

was begun with trucks on motorways.

A pilot implementation involving one or a small number of states would be

similar to state pilot programs created in past federal transportation legislation

(e.g., for congestion pricing and state infrastructure banks). However, the partic-

ipating states would require federal technical coordination (to ensure eventual

nationwide compatibility) and ﬁnancial aid. Unit costs of onboard equipment and

infrastructure for small initial implementations would be high, and a federal sub-

sidy of these costs would be justiﬁed to gain the national beneﬁts of large-scale pilot

CONCLUSIONS AND RECOMMENDATIONS

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implementations. For the same reason, the federal government should share the

cost of evaluations.

Because planning and development are in only the earliest phase, it is not pos-

sible to predict which of such limited implementations would prove to be practi-

cal or worthwhile, considering the costs and potential beneﬁts from evaluation and

from the experience that would be gained. However, some intermediate steps

between purely technical trials and full-scale, fully functional implementations

must be planned. A staged implementation seems necessary because initially no

state or local transportation agency will have expertise in managing the new fund-

ing arrangement, setting prices, or deciding on the disposition of revenues. The

pilot implementations would be controlled settings in which to learn best man-

agement practices so that jurisdictions would have guidance available when the

charging facility became generally available. In addition, the willingness of certain

states to take the lead in testing road use metering and the experience of Toll

Collect in Germany suggest that pilot implementations may be an effective step

toward gaining acceptance of road use metering. As pilots were under way, com-

ponents of the metering system could be introduced nationwide. For example, new

vehicles could be equipped with the necessary devices and the system used to col-

lect tolls on existing toll roads.

Procedures for Trials and Pilot Implementations The following procedural

rules should be followed in trials and pilots:

• Evaluation is integral to the design of all trials and pilots and must be pro-

vided for in schedules and budgets. Speciﬁc objectives and evaluation cri-

teria, hypotheses to be tested, evaluation techniques, and data collection

procedures must be deﬁned at the outset.

• Designs and pilot implementations should respect the principle that each

state and local jurisdiction should control the application of charges on the

roads it owns and operates and the use of revenues generated by its roads.

Roads within the boundaries of a city or county may be owned by the city,

the county, the state government, or an independent authority. Therefore,

systems will eventually be required that have the technical capability to set

rates and record revenues for individual roads.

• Pilot implementations should employ only technically proven system

designs. It would be a setback for the concept if the ﬁrst full implementa-

tions were hindered by failures that could have been corrected in techni-

cal trials.

• Payers of mileage taxes in the pilots should receive refunds of fuel taxes and

other user fees they have paid in a way that is visible to them.

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Trials and pilot implementations should test whether metering would be

applied to all roads or only to certain components of a road system. For example,

on the one hand, excluding local streets in residential areas or uncongested rural

secondary roads could have advantages from the standpoint of costs, practicality,

or public acceptance. Such roads could continue to be funded through traditional

mechanisms, probably with little loss of the efﬁciency beneﬁts of road pricing. On

the other hand, excluding some road classes might add to complexity and cost and

so would not be worth the effort. Also, pilot implementations should test meas-

ures to accelerate the transition from existing user fees to mileage charges by the

eligible vehicles, for example, through subsidized retroﬁt of onboard equipment

or other incentives.

3. Provide Stable, Broad-Based Tax Support for Transit

Reforms to highway ﬁnance arrangements will give rise to needs for reviewing

and adjusting the relationship of highway and transit funding. The following are

guidelines that should be considered:

• Transit systems at present require stable and broad-based tax support (for

example, dedicated revenues derived from general income, sales, or property

taxes). Developing such support will be necessary in order to expand transit

services. Among the options available now (which include funding transit

out of general revenue, increasing the transit share of highway user fee rev-

enues, and increasing transit fares), such tax funding is preferable because of

its practicality and reliability and the importance of minimizing adverse side

effects.

• The present rate of transfers of highway revenues to transit does not seem

to be large enough to affect highway programs seriously, and highway users

beneﬁt where transit has alleviated highway congestion. However, greatly

increasing transfers to fund expanded transit services would risk the loss of

travel beneﬁts through declining highway performance. Such losses would

affect bus transit riders as well as private passenger and freight vehicles and

could be greater than the transit beneﬁts gained. Highway beneﬁts would

be lost if highway user charges were set too high or if worthwhile highway

improvements were not funded. This risk imposes a limit on the potential

of existing highway user fees as a transit funding source.

• Federal and state transportation aid ought to serve primarily to relieve local

governments of the burden of serving nonlocal needs rather than subsidize

local services. Applying this rule would lead to some reallocation of external

aid among American cities; cities would be compensated in proportion to

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the services they provided to interregional trafﬁc and nonresident users of

local facilities.

• If road use metering eventually is instituted on all roads in metropolitan

areas, with charges that vary with trafﬁc conditions and are set so that high-

way travel is no longer subsidized, funding a greater share of transit spend-

ing with fare box revenue will be possible. Transit would increase ridership

and be able to charge higher fares because peak-period riders would have

to pay high mileage charges if they shifted to automobile travel and because

reduced trafﬁc congestion would improve transit service quality.

4. Evaluate the Impact of Finance Arrangements on Transportation

System Performance

Transportation agencies must develop new capabilities for research, evaluation,

and public communication to manage ﬁnance reform over the next few decades

in a way that improves transportation system performance. Lack of information

hinders comparative evaluation of present ﬁnance arrangements and alternatives.

There is little systematic information on how the existing structure of charges,

subsidies, and grant programs affects the decisions of road users and transporta-

tion agencies, even though these interactions undoubtedly exert strong inﬂuence

on the beneﬁts and costs of transportation programs. Agencies almost never eval-

uate completed projects after they have been in operation to determine what the

actual returns on their investments have been.

If tolls and mileage charges become important sources of highway funding,

transportation agencies will be faced with new kinds of decisions and new infor-

mation requirements. For example, transportation program budgets will be inﬂu-

enced by the revenue impacts of decisions about project selection and operating

practices. At the same time, the response of trafﬁc to fees and the revenues gener-

ated by the fees will provide information never before available about the value the

public places on individual highway facilities. Transportation agencies will need

to develop the analytic capabilities required to exploit this new information and

manage their programs in the new ﬁnancial environment.

To fulﬁll these requirements, an organized program of research, evaluation,

planning, and public communication will be necessary. The institutional struc-

ture of this program will require careful design. Among the considerations are the

following:

• Because the states have the primary responsibility for transportation fund-

ing and changes in funding probably will entail realignment of federal and

state roles, the structure must be a genuinely cooperative federal–state effort.

• The structure must guarantee that competent, objective, and independent

scientiﬁc evaluations of alternatives are carried out.

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• The activity must earn public conﬁdence through open processes and

effective communication.

Congress has recently created the National Surface Transportation Policy and

Revenue Study Commission. Parts of its charge are to study alternative revenue

sources to fund the surface transportation system for the next 30 years and to

develop a transition strategy to move to new funding mechanisms. Although the

commission can begin evaluations, development of fundamentally new ﬁnance

arrangements and the supporting evaluations would extend well beyond its term.

Deﬁning the appropriate organization of the development program and its scope

of work would be an appropriate topic for the commission’s consideration.

REFERENCE

Abbreviation

TRB Transportation Research Board

TRB. 2003. Special Report 271: Freight Capacity for the 21st Century. National Academies, Washington,

D.C.

CONCLUSIONS AND RECOMMENDATIONS

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APPENDIX A

Highway Beneﬁts Estimates

This appendix describes the evaluations that are summarized in the section in

Chapter 3 entitled Highway System Performance. The descriptions note uncer-

tainties that arise from simplifying assumptions and data limitations in the studies.

U.S. DEPARTMENT OF TRANSPORTATION HIGHWAY

CONDITIONS

AND PERFORMANCE

STUDIES

Neither the federal government nor the states conduct systematic retrospective

evaluations of the costs and beneﬁts of projects. The U.S. Department of

Transportation (USDOT) does, however, prepare biennial reports to Congress

(the Conditions and Performance studies) that estimate the beneﬁts of alternative

future rates of capital spending for highways.

The estimates are derived from a model (the Highway Economic Require-

ments System) that uses data on trafﬁc, geometry, and state of repair of each of a

sample of road segments reported to the Federal Highway Administration by the

states. A set of cost factors allows the model to project infrastructure and user costs

for each segment for speciﬁed assumptions about future road improvements and

trafﬁc growth. Given a forecast of trafﬁc and a budget, the model selects the most

cost-effective highway improvements.

The USDOT studies present historical trends for physical measures of high-

way condition (pavement smoothness, bridge structural condition, and numbers

of bridges with obsolete designs) and performance (congestion, average speed, and

accident risks). The 2002 study concluded that physical conditions of highways

were unchanged or slightly improved during the 1990s. For example, the fraction

of all vehicle miles on main roads that were on pavements meeting an engineering

standard for minimum acceptable ride quality was nearly constant (at 90 percent)

over the decade (USDOT n.d., ES-4). Performance was found to have deterio-

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rated: the fraction of all travel on freeways and principal arterial streets that is in

congested conditions increased from 34 to 40 percent between 1987 and 2000 in

urban areas with populations exceeding 3 million and from 18 to 22 percent in

urban areas with populations under 500,000.

The 2002 study projected the effects of alternative rates of highway capital

expenditure on highway user costs (travel time, vehicle operating costs, and acci-

dent costs) over the period 2001–2020. In the projections, the future level of high-

way travel depends on the cost of travel. The projections indicated that, if all

highway capital projects nationwide with a beneﬁt–cost ratio greater than 1 were

carried out, annual capital spending would average $107 billion (in 2000 dollars).

To maintain overall conditions and performance at 2000 levels, annual capital

spending of $76 billion would be required, 17 percent above actual capital spend-

ing of $65 billion in 2000. The latter estimate suggests that the present spending

level plus normal growth in spending may be nearly sufﬁcient to maintain per-

formance to 2020. The estimated discrepancy between actual and maximum jus-

tiﬁed spending in the 2002 report was somewhat less than in the previous report

(USDOT 2000). The reduction presumably reﬂects the increased rate of highway

spending in the late 1990s.

The 2002 report did not present estimates of returns on investment. However,

the previous report estimated that if all projects with beneﬁt–cost ratio greater than

1 were carried out over the 20-year period 1998–2017, the average beneﬁt–cost

ratio would be 3.7 (USDOT 2000). The projections showed that, at all spending

levels analyzed up to the maximum economically justiﬁed level, congestion will be

little improved. The fraction of urban travel that is under congested conditions

increases by 2020, although annual hours lost to congestion per driver fall slightly

at the higher spending levels (USDOT n.d., 9-8).

The Conditions and Performance studies also compare the mix of kinds of proj-

ects that USDOT estimates would be most beneﬁcial with the mix that highway

agencies have been carrying out in recent years. The 1999 study concluded that

beneﬁts would be increased if agencies shifted spending from capacity expansion

to system preservation. The 2002 report, attributing the change in part to large

investments in preservation starting in the mid-1990s, concluded the opposite—

that the mix should now be shifted to expansion (USDOT n.d., iii).

The USDOT model used to produce these projections has been critiqued by

a Transportation Research Board committee (TRB 2003, 56–58, 127) and by

the General Accounting Ofﬁce (GAO 2000), which concluded that the studies

have value for the purposes intended. The model also was relied upon by the

Congressional Budget Ofﬁce to analyze highway spending effectiveness (CBO

1988, 4–20). CBO prioritized categories of highway investment in terms of

national average rates of return (in the 1980s) as follows: projects to maintain cur-

rent conditions, 30 to 40 percent annual rate of return; new construction in urban

areas, 10 to 20 percent; projects to ﬁx roads not meeting minimum engineering

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design standards, 3 to 7 percent; new construction in rural areas, “low” except for

bridge replacements to carry large trucks.

The USDOT model has important limitations. It does not support compar-

isons of highway expansions with demand management alternatives. It does not

incorporate a network model; consequently, the estimate of beneﬁts from expan-

sion of a highway link does not change if a decision is made to expand a substitute

or complementary link simultaneously. It cannot evaluate trade-offs between cap-

ital expenditure and maintenance. Environmental costs are not taken into account.

The model takes as given certain design standards and regulatory requirements that

strongly affect project costs. Data quality is a concern, and projections are sensi-

tive to values of elasticity parameters in the model, which are not known with a

high degree of certainty.

Finally, the model’s projections of justiﬁed spending levels assume that projects

are performed in order of their rates of return, with the highest-payoff projects given

highest priority until the budget is exhausted or the minimum acceptable rate of

return is reached. In practice, state and local highway agencies do not rank projects

exclusively according to economic returns, and there may be regional disparities in

rates of return that result from the state allocation formulas in the federal-aid pro-

gram. However, priorities in state and local capital programs certainly are inﬂuenced

by factors (including volume of trafﬁc, severity of congestion, degree of deteriora-

tion of pavement and structures, and project costs) that are related to rate of return.

PRODUCTIVITY BENEFITS OF HIGHWAY INVESTMENTS

Several economic studies in recent years have produced estimates of the return on

highway infrastructure investment by using statistical methods to examine how

infrastructure affects production costs or contributes to output, for the national

economy or for industry groups at the national or regional level (reviewed by

Shirley and Winston 2004, 399; ICF et al. 2001; Aaron 1990). This section

describes the results of the four studies that are highlighted in Chapter 4.

Keeler and Ying (1988)

This study estimated a cost function for the intercity trucking industry (that is, the

relationship of total annual production costs in the trucking industry to industry

output, the prices of inputs, and external factors that inﬂuence productivity,

including highway infrastructure). The study was based on aggregate industry data

from the Interstate Commerce Commission for each of nine regions for 1950 to

1973. Highway capital stock in each region was represented by an index similar to

that described in Chapter 2 and shown in Figure 2-12. Only state-maintained

roads (or federal-aid roads for some calculations) were included in the capital stock

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measure, as an approximation of the network of main freight-carrying intercity

roads. The authors used data only through 1973 because their data showed high-

way capital stock growing so slowly in the following decade that the later observa-

tions added nothing to their ability to estimate the effect of changes in the highway

stock on trucking costs.

The results showed savings reaching $6 billion to $9 billion annually by 1973

(in 1973 dollars) for the total of U.S. intercity truck trafﬁc that would have

occurred without the expansion of the highway system. The savings depends on

the value assumed for the elasticity of truck trafﬁc volume with respect to truck-

ing costs. The estimated annualized capital cost of the intercity highway network

during the period was $18 billion per year based on a 12 percent interest rate and

a 25-year life of new stock and $11 billion per year based on a 6 percent interest

rate. Therefore, these truck savings justiﬁed one-third to one-half of the total cap-

ital cost of the intercity highway system at the higher interest rate and 55 to 80 per-

cent of capital costs at the lower interest rate. Highway maintenance and operation

expenditures were $9.6 billion in 1973 (FHWA 1997, Table HF-210), so the esti-

mated trucking cost savings equaled between one-quarter and one-half of total cap-

ital costs plus operating expenses.

These estimates cover only part of the total beneﬁt of highways. They exclude

the beneﬁt derived from the additional truck trafﬁc stimulated by highway system

expansion during the study period as well as beneﬁts derived from business trafﬁc

other than freight trucks and from personal travel. Freight truck trafﬁc was 5 per-

cent of all vehicle miles of travel in 1973.

Year-by-year estimates showed that by the early 1970s, the marginal beneﬁts

of increases in the highway capital stock were becoming small. This is not an

implausible result since by the early 1970s a basic network of Interstate highways

had been completed. The authors noted that this is the same period during which

expansion of the system also slowed and speculated that the system may have been

responding to considerations of economic efﬁciency.

Shirley and Winston (2004)

A model of the inventory holding costs in U.S. industry was developed. Trans-

portation system improvements are expected to reduce inventory holding costs by

increasing the speed and reliability with which ﬁrms can replenish inventory. Firms

are willing to bear the capital and operating costs of holding inventories of pro-

duction inputs in order to avoid the costs of lost sales and production disruption

if they run out. Also, if transportation is expensive, ﬁrms will tend to order replace-

ments in large quantities to gain bulk shipment economies. If transportation

becomes cheaper, quicker, and more reliable, the cost of running out of stock is

reduced because inventory can be replenished quickly, replacement orders will be

smaller and more frequent, and inventory size and cost will decline.

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The study estimated the reduction in inventory costs caused by expansion of

the highway system in the period 1973–1996. The authors estimated the param-

eters of an econometric model relating a plant’s inventory to variables represent-

ing the ﬁrm’s expected demand for its product, highway infrastructure, and the

interest rate and other variables representing inventory holding and stockout costs.

Annual establishment-level inventory data were from a Census Bureau survey.

Highway infrastructure was represented by capital stock measures for the nation

and for the state in which each establishment was located. The results showed that

at all times during the study period, additional investment in the highway capital

stock caused plants to reduce their inventories. Finally, inventory savings were

scaled to an estimate of total economywide logistics cost savings by multiplying by

a constant factor.

The authors estimated that the annual rate of return on net investment in the

highway capital stock from these savings was 18 percent during the 1970s (i.e., an

additional $1 of net highway capital stock reduced costs by $0.18), 5 percent dur-

ing the 1980s, and 1 percent during the 1990s.

The authors speculated that the decline in the rate of return over time was the

result of ﬁnance- and management-related factors, including the growth in proj-

ect earmarking in the federal-aid program, misdirection of spending for expan-

sions, and lack of congestion pricing. However, they had little evidence that these

shortcomings were more severe in recent years than in the 1970s. Both the truck-

ing cost study and the inventory cost study found steep declines in rates of return

over the periods studied, but the former found a low rate of return in the 1970s

and the latter found a relatively high return during that period.

Fernald (1999)

This study took a more aggregate approach than those described above. It exam-

ined the link between highway capital expansion and industry productivity

growth. The study used data on production and inputs for 29 industry groups

(covering the entire U.S. private economy except agriculture and mining) for the

period 1953–1989. It estimated the relationship of growth in total factor produc-

tivity in each sector to growth in the national highway system and to the stock of

motor vehicles that each industry owns, as a share of its total capital stock. The

premise of this model was that if expansion of the highway system contributes to

productivity growth, industries that make more intensive use of motor vehicles will

beneﬁt more from highway expansion. An estimate of the rate of return earned by

highway investment was derived from the observed “excess” productivity growth

in the motor vehicle–intensive industries.

The results indicated that for the period as a whole, road expansion con-

tributed strongly to productivity growth and that the return on additional road

investment greatly exceeded the normal private-sector rate of return. The estimates

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implied rates of return exceeding 100 percent, at least in the ﬁrst part of the study

period—that is, the addition of $1 worth of roads reduced business costs by more

than $1 per year. Separate estimates for the pre- and post-1973 periods indicated

that after 1973 the rate of return was somewhat lower and that the difference

between it and the normal rate of return was not statistically signiﬁcant. The

author emphasized a qualitative interpretation of the results: “roads appear strongly

productive before 1973. After 1973, the productivity of roads is statistically sig-

niﬁcantly smaller, and we cannot reject that roads have a normal (or even zero)

return” (Fernald 1999, 632). The uncertainty in the estimate of the post-1973 rate

of return is very large, because there is little variability in road growth after that

date (in fact, the stock of roads nearly stopped growing in the period 1973–1989).

These ﬁndings—large overall returns but an apparent sharp decline in the early

1970s—closely parallel those of Keeler and Ying.

Nadiri and Mamuneas (1998)

The ﬁnal study, sponsored by the Federal Highway Administration, estimated the

contribution of highway capital to productivity in 35 industries and in the entire

U.S. economy for the period 1950–1991. Demand and cost functions were esti-

mated for each industry. Highway capital stock and the stock of other publicly pro-

vided infrastructure were explanatory variables in the cost functions. The marginal

beneﬁts of highway capital for each industry were calculated from the parameters

of the demand and cost equations. The study found annual rates of return on high-

way capital of 54 percent for 1960–1969, 27 percent for 1970–1979, and 16 per-

cent for 1980–1991 (Nadiri and Mamuneas 1998, Table 12). That is, in the

1980–1991 period, an additional $1 of highway capital stock produced annual

cost savings in private business equal to 16 percent of the total social cost of pro-

viding the additional capital. (The social cost of an added $1 in capital spending

may be a little more than $1 because of economic distortions in the private sector

caused by taxation.) The authors observed that by the end of the period, rates of

return on highway and private-sector capital appear to have converged.

REFERENCES

Abbreviations

CBO Congressional Budget Ofﬁce

FHWA Federal Highway Administration

GAO General Accounting Ofﬁce

TRB Transportation Research Board

USDOT U.S. Department of Transportation

HIGHWAY BENEFITS ESTIMATES

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Aaron, H. J. 1990. Discussion. In Is There a Shortfall in Public Capital Investment: Proceedings of a

Conference Held in June 1990 (Alicia H. Munnell, ed.), Federal Reserve Bank of Boston, Boston,

Mass., pp. 50–63.

CBO. 1988. New Directions for the Nation’s Public Works. Sept.

Fernald, J. G. 1999. Roads to Prosperity? Assessing the Link Between Public Capital and Productivity.

American Economic Review, Vol. 89, No. 3, June, pp. 619–638.

FHWA. 1997. Highway Statistics Summary to 1995.

GAO. 2000. Highway Infrastructure: FHWA’s Model for Estimating Highway Needs Is Generally

Reasonable, Despite Limitations. June.

ICF Consulting, HLB Decision Economics, and Louis Berger Group. 2001. Freight Beneﬁt/Cost Study:

Compilation of the Literature (Final Report). Federal Highway Administration, Feb. 9.

Keeler, T. E., and J. S. Ying. 1988. Measuring the Beneﬁts of a Large Public Investment: The Case of

the U.S. Federal-Aid Highway System. Journal of Public Economics, Vol. 36, pp. 69–85.

Nadiri, M. I., and T. P. Mamuneas. 1998. Contribution of Highway Capital to Output and Productivity

Growth in the U.S. Economy and Industries. www.fhwa.dot.gov/policy/gro98cvr.htm. Federal

Highway Administration, Aug.

Shirley, C., and C. Winston. 2004. Firm Inventory Behavior and the Returns from Highway

Infrastructure Investments. Journal of Urban Economics, Vol. 55, March, pp. 398–415.

TRB. 2003. Special Report 271: Freight Capacity for the 21st Century. National Academies, Washington,

D.C.

USDOT. 2000. 1999 Status of the Nation’s Highways, Bridges, and Transit: Conditions and Performance.

USDOT. n.d. 2002 Status of the Nation’s Highways, Bridges, and Transit: Conditions and Performance:

Report to Congress.

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APPENDIX B

Automotive Technology Projections

This appendix explains the assumptions and methods of the fuel economy

projections summarized in Table 4-2 and presents results of two additional stud-

ies (SMP 2004; NRC 2004).

ANNUAL ENERGY OUTLOOK

Table 4-2 and Figure 4-4 show the Department of Energy’s (DOE’s) 2005 Annual

Energy Outlook (AEO) projections of light-duty vehicle fuel economy to 2025 in

the reference case and the “high technology” case (EIA 2005a). Figure 4-4 also

shows the reference case fuel economy projections from the 2006 Annual Energy

Outlook Early Release (EIA 2005b). DOE explains its 2005 vehicle technology pro-

jections as follows (EIA 2005a, 82, 83, 86):

Fuel efﬁciency is projected to improve more rapidly from 2003 to 2025 [in the ref-

erence case] than it did during the 1990s. . . . No changes are assumed in currently

promulgated fuel efﬁciency standards for cars and light trucks. Low fuel prices and

higher personal incomes are expected to increase the demand for larger, more pow-

erful vehicles, with average horsepower for new cars projected to be 26 percent

above the 2003 average in 2025.... Advanced technologies and materials are

expected to provide increased performance and size while improving new vehicle

fuel economy.... Advanced technology vehicles . . . are expected to reach 3.8 mil-

lion vehicle sales per year and make up 19.1 percent of total light duty vehicle sales

in 2025. Alcohol ﬂexible-fueled vehicles are expected to continue to lead advanced

technology vehicle sales. . . . Hybrid electric vehicles . . . are expected to sell well,

increasing to 1.1 million vehicles [sold] in 2025. . . . About 80 percent of advanced

technology sales are as a result of Federal and State mandates for fuel economy

standards, emissions programs, or other energy regulations. . . . The high tech-

nology case assumes lower costs and higher efﬁciencies for new transportation

technologies.

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DOE also acknowledges numerous sources of uncertainty related to fuel price,

consumer preferences, and regulation (EIA 2005a, 54, 55):

Recent introductions of more efﬁcient crossover vehicles . . . , increasing consumer

interest in environmentally friendly vehicles, the possibility of sustained high fuel

prices, and increasing consumer demand for improvements in vehicle performance

and luxury all will inﬂuence the future of light-duty vehicle sales and fuel econ-

omy. In addition, carbon emission regulations for light-duty vehicles that have

been issued in eight U.S. States and Canada would require improvements in vehi-

cle fuel economy starting in 2009 that go beyond those required by current U.S.

CAFE standards. (AEO2005 does not include the impact of these carbon emission

regulations, because their future is uncertain. . . .) NHTSA is also considering

modiﬁcation of the light truck CAFE standards.... In summary, considerable

uncertainty surrounds the future of light-duty fuel economy.

As Figure 4-4 shows, light-duty ﬂeet on-road fuel economy improves only slightly

in the AEO 2005 cases, reaching 21.0 mpg in 2025 (compared with 20.2 in

2003) in the reference case and 22.1 mpg in the high technology case. New light-

duty vehicle miles per gallon is projected to rise from 25.0 in 2003 to 26.6 in the

reference case to 28.2 in the high technology case in 2025, according to the

Environmental Protection Agency (EPA) fuel-economy deﬁnition. (These can-

not be directly compared with the ﬂeet projections because on-road fuel economy

is about 15 percent poorer than EPA-deﬁnition fuel economy.)

Gasoline consumption is 4 percent less, and total energy consumption in

transportation 5 percent less, in the high technology case in 2025 than in the ref-

erence case. In the AEO 2005 “high B” oil price case (not shown in Figure 4-4),

the price of gasoline in 2025 is 27 percent higher than in the reference case, light-

duty ﬂeet fuel economy reaches 21.7 mpg in 2025, and gasoline consumption is

7 percent less in 2025 than in the reference case. In summary, DOE projected that

no likely developments in automotive technology, regulation, or world energy

prices would have more than a modest effect on fuel economy or highway fuel con-

sumption by 2025.

In the AEO 2006 Early Release reference case projections, which assume future

world oil prices similar to those of the AEO 2005 high B oil price case, in 2025

light-duty ﬂeet fuel economy reaches 22.0 mpg and new light-duty vehicle (EPA)

mpg is 28.8.

NATIONAL RESEARCH COUNCIL’S CORPORATE AVERAGE

FUEL ECONOMY STANDARDS STUDY

This 2002 report of a National Research Council (NRC) committee examined the

historical effects of the federal corporate average fuel economy (CAFE) standards

and the prospects for future fuel economy improvements characterized as “cost-

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efﬁcient,” for various classes of vehicles. The report deﬁnes cost-efﬁcient technol-

ogy as “combinations of existing and emerging technologies that would result in

fuel economy improvements sufﬁcient to cover the purchase price increases they

would require, holding constant the size, weight, and performance characteristics

of the vehicle(s)” (NRC 2002, 64). The technologies considered are those that

could be in production by 2015. The cost-efﬁcient increases in miles per gallon

range from 12 percent for subcompact automobiles to 42 percent for large SUVs.

The hypothetical vehicles with improved fuel economy were designed by adding

increments of technology improvements in order of cost-effectiveness until no fur-

ther cost-effective improvements were available. Consequently, according to the

NRC estimates, the total savings to the vehicle owner would exceed the purchase

price of the new technology. The study does not consider the market response to

the availability of such vehicles; that is, it does not consider the extent to which

consumers would buy them if they were offered as an option or whether consumers

would take advantage of cost savings by buying larger or better-performing

vehicles.

The study estimates cost-effective fuel economy improvements under two

alternative assumptions about the rate of return on expenditures for fuel savings

that consumers would require: that consumers would discount fuel cost savings at

a 12 percent discount rate over the entire 14-year average life of a vehicle, or that

they would require a 3-year payback period. The fuel economy projections from

the study that are described in Chapter 4 are those that assume the 12 percent dis-

count rate over 14 years.

NATIONAL COOPERATIVE HIGHWAY RESEARCH PROGRAM STUDY

OF HIGHWAY TRUST FUND IMPACTS

The National Cooperative Highway Research Program (NCHRP) study was

speciﬁcally concerned with the effects of possible vehicle technology and regula-

tory developments on Federal Highway Trust Fund revenues to 2020, under the

assumption that tax rates are unchanged. The ﬂeet mpg projections shown in

Table 4-2 are for a scenario in which the government adopts new CAFE standards

paralleling the new-vehicle mpg values by size that the NRC 2002 study estimated

to be cost-efﬁcient. The NCHRP study also independently reviewed prospects for

six technologies for light-duty vehicle power:

• Hybrid internal combustion–electric vehicles. These are on the market

now; the Honda Insight and Toyota Prius have EPA-rated fuel efﬁciencies

of 75 and 57 mpg, respectively.

• Purely electric vehicles with rechargeable batteries.

• Fuel cell–powered vehicles running on either hydrogen or gasoline.

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• Hydrogen-fueled internal combustion engine–powered vehicles.

• Internal combustion engine vehicles fueled by compressed or liquefied

natural gas.

• Diesel engine power for light-duty vehicles. The report notes that diesel is

popular in Europe, with 40 percent of the light-duty vehicle market, mainly

because it has a 40 percent efﬁciency advantage (in gpm) over gasoline.

Diesel is also of interest because technology is available (the Fischer–Tropsch

process) to manufacture diesel fuel from natural gas or coal.

The judgment of the authors was that, of these technologies, only hybrid vehi-

cles have a high probability of attaining a large enough market share by 2020 to

have an appreciable effect on trust fund revenues, while a substantial shift to diesel

is a low- to medium-probability event. Adoption of any of the other technologies

in this period was judged to be a low- or very-low-probability event (Cambridge

Systematics 2004, Table 6). The authors cite in support the 15 percent market

share projection for hybrid vehicles by 2020 in DOE’s Annual Energy Outlook.

That forecast is driven in part by DOE’s expectation of continued future tighten-

ing of fuel economy or emissions standards by the federal and state governments.

FUTURE U.S. HIGHWAY ENERGY USE

The DOE Future U.S. Highway Energy Use study constructs six strategies for the

directed evolution of the automotive travel system to 2050 that are judged to be

feasible or conceivable and compares their outcomes with a base case forecast that

assumes the absence of new government interventions. The strategies involve

adoption of new-vehicle technologies, changes in travel habits, and development

of new fuel sources. The outcomes of the strategies are judged in terms of their

impacts on carbon emissions and oil imports and are estimated to be capable of

producing large reductions in both measures (Birky et al. 2001, 17–26). The base

case forecast appears to be generally consistent with the DOE Annual Energy

Outlook.

CALIFORNIA CO

EMISSIONS STANDARDS PROPOSAL

According to California law enacted in 2002 (Assembly Bill 1493), by 2005 the

state is to “develop and adopt regulations that achieve the maximum feasible and

cost-effective reduction of greenhouse gas emissions from motor vehicles.” The law

speciﬁes that the regulations are to be “economical to the owner or operator of a

vehicle.” The regulations affect model year 2009 and later vehicles. The law stip-

ulates that regulations are not to require imposition of additional fees on vehicles,

fuels, or miles traveled; banning of any type of vehicle; reduction in weight; limits

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on speed; or limits on miles traveled. The state’s proposal on emissions standards

to implement the law is relevant as a current technical analysis of practical fuel

economy improvements and as an indicator of the form that future regulations

affecting fuel economy may take (CARB 2004).

In the proposal, the regulations take the form of an addition to the state’s exist-

ing new-vehicle emissions standards. Each motor vehicle manufacturer would be

required to meet standards for the average emissions per mile of carbon dioxide (or

other pollutants equivalent in greenhouse warming effect) for its new vehicles sold

in California, beginning in 2009 and with more stringent standards applied annu-

ally through 2014. The 2014 standard for cars and smaller light trucks would rep-

resent a 34 percent average reduction from 2002 emissions (and up to 39 percent

for some manufacturers); the standard for larger light-duty pickups would repre-

sent a 30 percent reduction compared with 2002 emissions (CARB 2004, iii, 95).

The regulation would also include a credit for vehicles burning alternative fuels to

allow for differences in net greenhouse gas (GHG) emissions in production of

alternative and conventional fuels.

As the basis of its proposal, the California Air Resources Board (CARB) con-

ducted a review to determine fuel economy technologies that would be available

to meet the proposed implementation schedule and would satisfy the legislative

requirement that the standards be economical to vehicle operators. The promis-

ing technologies identiﬁed include engine and drivetrain improvements that are

now available or in development and expected to be available. They include tur-

bocharging combined with engine downsizing, automated manual transmissions,

and engine design changes to allow optimized valve timing (CARB 2004, ii,

54–57). The emissions standards are derived from the estimates of fuel economy

improvements that these technologies could yield but leave the selection of tech-

nologies up to manufacturers. The standards are estimated to increase the average

purchase prices of new vehicles by amounts ranging from $500 for a sedan to

$1,000 for a large pickup or SUV but to reduce life-cycle costs to owners in all

vehicle classes. The payback period would be 3 to 5 years for typical drivers (CARB

2004, 150–152).

The technology review does not project that compliance with the 2014 stan-

dard will entail a substantial market share for hybrid electric vehicles (HEVs), pre-

sumably because this technology appeared less cost-effective or practical as a

near-term measure than the engine and drivetrain improvements that are the basis

of the proposed emissions standard. HEV is identiﬁed as a long-term technology

with large-scale implementation appropriate after 2014 (perhaps in response to a

future tightening of emissions standards, although the report does not explicitly

state this possibility). Advanced HEV systems are credited with the potential to

reduce CO

emissions (and fuel consumption) by half. Similarly, certain diesel

engine designs are identiﬁed as promising in the long term (after 2014) (CARB

2004, 54–57).

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The standards are projected to reduce fuel-related operating costs (and pre-

sumably fuel consumption per mile) by 31 percent for 2014 new cars and smaller

light trucks and by 21 to 26 percent for larger light-duty trucks (CARB 2004,

151). GHG emissions from motor vehicle operation (that is, excluding the effect

of the regulation on emissions from fuel production) are projected to be reduced

by 17 percent in 2020 and 25 percent in 2030 (in terms of equivalent tons of CO

)

compared with projected emissions without the regulations (Figure B-1). The

reductions are almost entirely in CO

emissions. Approximately the same per-

centage reductions would occur in gallons of motor fuels consumed. The state’s

evaluation of the proposed regulation considered the effect of increased purchase

price on new-vehicle sales and total vehicle registrations and of lower operating

cost on vehicle miles of travel. It concluded that both effects would be small: essen-

tially no effect on ﬂeet size and less than a 1 percent effect on vehicle miles (CARB

2004, 152–161).

MOBILITY 2030

This report, the product of the World Business Council for Sustainable Develop-

ment, an international business group, presents projections of technology for the

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214

100

200

300

400

500

600

700

2000 2005 2010 2015 2020 2025 2030

Year

Tons/day

GHG emissions without regulation

GHG emissions with regulation

FIGURE B-1 California proposed CO

emissions regulations: projected

effect on GHG emissions from motor vehicle operation. (Source: CARB

2004.)

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world motor vehicle ﬂeet, but not for the United States alone. The purpose was

“to obtain a better sense of the potential impact of various technologies and fuels

in reducing transport-related GHG emissions.” The report explains that “our

exercise did not examine the technical or economic feasibility of any of the actions

being simulated” (SMP 2004, 113). However, the study did consider feasibility

and cost and reviewed estimates of the cost and retail price impact of motor vehi-

cle technologies.

One projection scenario is driven by the objective of reducing motor vehicle

emissions by half by 2050 from the level projected to occur in a reference case

in which historical trends continue (SMP 2004, 115–117). In the projection, by

2030, half of worldwide light-duty vehicle sales are hybrid vehicles and 45 percent

use diesel fuel (these could be hybrids or conventional diesel vehicles). Fuel

cell–powered light-duty vehicle sales start in 2020 and are 50 percent of sales by

2050.

NRC HYDROGEN FUELS STUDY

In a DOE-sponsored study, an NRC committee examined the prospects for a con-

version to hydrogen as a major fuel in the U.S. economy, and it recommended

research and development priorities. The study includes a projection of the feasi-

ble rate of conversion to hydrogen fuel cells for motor vehicle propulsion, charac-

terized as a “plausible, but optimistic vision” (NRC 2004, 65), which suggests the

possibility of much earlier conversion to new propulsion technologies than the

other projections reviewed in this chapter. In the projection, conventional inter-

nal combustion engines make up 27 percent of new-vehicle sales and 50 percent

of vehicle miles of travel by 2025; hybrid and fuel cell vehicles are 75 percent of

sales and 50 percent of vehicle miles of travel. By 2030, hybrid and fuel cell vehi-

cles are 90 percent of sales and 75 percent of vehicle miles of travel. Highway

gasoline consumption grows only 17 percent from 2000 to 2025 (compared

with 63 percent growth in DOE’s Annual Energy Outlook 2003 reference case pro-

jection) and declines after 2015. It falls below 2000 consumption after 2030.

It is not clear what probability the committee placed on this projection. The

committee explains that “this vision is not a prediction. . . . However, it is offered

to allow some speciﬁcity in the analysis of the possible implications for the U.S.

energy system of a transition to hydrogen” (NRC 2004, 64). The report also

describes the projection as an “upper-bound market penetration case for fuel-cell

vehicles” (NRC 2004, 117) and explains it depends on the assumption that by

2015 to 2020 technology progresses to the point that fuel cell vehicles “have the

same functionality, reliability, and cost associated with their gasoline fueled com-

petitors.” The committee did not conduct its own analysis of vehicle costs. In

contrast, the CARB and NRC CAFE standards studies, for example, included

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component-by-component projections of costs and development schedules. The

report does not discuss the driving forces that would be necessary to bring about

the projected conversion, but presumably the committee postulated the carrying

out of a large-scale and successful industry research and development program,

with strong government ﬁnancial or regulatory incentives for research and sales.

One of the study’s major ﬁndings is that “these impacts [of hydrogen-fueled

light-duty vehicles] are likely to be minor for the next 25 years” (NRC 2004). If the

projection is taken as an upper bound, it indicates that the highest plausible mar-

ket share of fuel cell vehicles in 2030 will be 20 percent of vehicle miles of travel.

However, the projection suggests that rapid growth after 2030 is conceivable.

REFERENCES

Abbreviations

CARB California Air Resources Board

EIA Energy Information Administration

NRC National Research Council

SMP Sustainable Mobility Project

Birky, A., D. Greene, T. Gross, D. Hamilton, K. Heitner, L. Johnson, J. Maples, J. Moore, P. Patterson,

S. Plotkin, and F. Stodolsky. 2001. Future U.S. Highway Energy Use: A Fifty Year Perspective: Draft.

Ofﬁce of Transportation Technologies, U.S. Department of Energy, May 3.

Cambridge Systematics. 2004. Assessing and Mitigating Future Impacts to the Federal Highway Trust

Fund such as Alternative Fuel Consumption. National Cooperative Highway Research Program.

CARB. 2004. Draft: Staff Proposal Regarding the Maximum Feasible and Cost-Effective Reduction of

Greenhouse Gas Emissions from Motor Vehicles. California Environmental Protection Agency, June 14.

EIA. 2005a. Annual Energy Outlook 2005 with Projections to 2025. U.S. Department of Energy, Feb.

EIA. 2005b. Annual Energy Outlook 2006 Early Release. U.S. Department of Energy, Dec.

NRC. 2002. Effectiveness and Impact of Corporate Average Fuel Economy (CAFE) Standards. National

Academies Press, Washington, D.C.

NRC. 2004. The Hydrogen Economy: Opportunities, Costs, Barriers, and R&D Needs. National Academies

Press, Washington, D.C.

SMP. 2004. Mobility 2030: Meeting the Challenges to Sustainability. World Business Council for

Sustainable Development.

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APPENDIX C

Review and Synthesis of Road Use

Metering and Charging Systems

Executive Summary

Paul A. Sorensen and Brian D. Taylor

Institute of Transportation Studies, University of California at Los Angeles

Many public ofﬁcials and transportation analysts are concerned with what they

perceive to be the waning buying power of the motor fuels tax. Because the tax is

levied on a per-gallon basis, revenues do not rise and fall with ﬂuctuations in inﬂa-

tion or vehicle fuel economy. Given the partisan political climate in which it has

grown increasingly contentious to propose increased taxes, many are pessimistic

about the prospects for signiﬁcant increases in state or federal motor fuels tax levies

in the years to come. Indeed, the occasional increases in state and federal motor

fuels taxes in recent decades have fallen far short of keeping pace with the com-

bined effects of inﬂation and gains in fuel economy over the same period. On the

other hand, annual vehicle miles traveled in the United States have continued to

skyrocket for a wide variety of reasons, including population growth, increased

afﬂuence and vehicle ownership, greater participation of women in the workforce,

and increasingly decentralized metropolitan land use patterns, among others.

These increases in vehicle travel have exacerbated both congestion of and wear

and tear on roads, leading to calls for increased spending on the construction of

new roads as well as on the maintenance of existing roads. The result has been a

217

* This paper was commissioned by the committee in support of its study. The contents are the respon-

sibility of the authors and the views expressed do not necessarily correspond to those of the commit-

tee. The complete paper may be found at www.trb.org/publications/news/university/SRFuelTaxRoad-

MeterPaper.pdf.

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widening gap in many parts of the country between highway spending needs and

available revenues. In the absence of signiﬁcant fuels tax increases in the coming

years this gap is likely to widen further, a trend that may accelerate in coming years

with the gradual introduction of alternative-fuel vehicles that pay less, or even no,

motor fuels taxes.

In response to these challenges, the Transportation Research Board convened

a special Committee for the Study of the Long-Term Viability of Fuel Taxes for

Transportation Finance. One of the many charges to the committee was to

investigate the potential for a system of distance-based user fees [using recently

developed electronic tolling technologies such as on-board computers, Global

Positioning Systems (GPS), digital jurisdiction and road network maps, and wire-

less communications] to eventually replace fuels taxes. To inform their delibera-

tions, the committee commissioned the authors of this report to perform an

extensive review of innovative electronic tolling applications around the world.

This review included projects already in operation as well as those that have been

proposed or are in the advanced stages of planning; each was evaluated in terms

of policy, technology, and political acceptance issues. This report summarizes the

results of this research.

SCOPE AND METHODOLOGY

In selecting case studies to review for this research, we focused on applications that

involve networkwide road use metering and tolling, as we judged these to be the

most relevant to the concept of distance-based user fees. As a secondary focus, we

reviewed facility congestion toll projects and cordon toll projects that might be rel-

evant from a political or technical perspective. We did not examine standard (time-

invariant) toll projects that incorporate simple electronic tolling devices (such as

in-vehicle transponders), given that such projects would likely offer little techni-

cal or political guidance in the design of a comprehensive distance-based user fee

system.

Within the context of the study, the goal was to address three principal ques-

tions. First, where in the world have such innovative systems been proposed,

planned, or developed? Second, how have these projects and proposals been struc-

tured in terms of technical design, institutional issues, and political considerations?

Third, what is the current status of the projects and proposals, and what factors

have aided or impeded their implementation?

In terms of methodology, possible case studies were identiﬁed and investigated

for inclusion. The scan was based on a review of the literature, a comprehensive

search for documents on the World Wide Web, and several phone interviews with

experts in the ﬁeld. The next step was to compile a set of detailed case studies for

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those projects deemed politically and technically relevant to the question at hand.

Each detailed case study considered the following topics:

• Stated and implicit objectives of the system;

• Techniques of metering road use and collecting fees;

• Pricing policies;

• Governance;

• History and political setting;

• Experience with public acceptance or rejection;

• Financial structure; and

• Summary of any evaluations that have been conducted for the project or

views of those involved with the project, or both.

Once the case studies were compiled, the ﬁnal step was to compare and con-

trast the different projects in order to provide perspective on the prospects for

implementing a comprehensive distance-based user fee system, including the

advantages and the likely obstacles to such an approach. The synthetic analysis was

divided into ﬁve main sections:

• Policy and pricing issues,

• Technical issues,

• Institutional governance issues,

• Implementation issues, and

• Public and political acceptance issues.

SUMMARY OF CASE STUDIES

Given the motivations for the study discussed above, the review focused on ﬁve

distinct types of pricing applications. These included single-facility congestion

tolls, cordon (or area) congestion tolls, weight-distance truck tolls, distance-based

user fee proposals, and distance-based price-variabilization (e.g., insurance-by-the-

mile) studies. In total, 88 different pricing schemes—either operational or in the

advanced stages of research or planning—around the world were identiﬁed that

fell into one of these categories. Of these, 20 were selected for detailed review—

speciﬁcally, those that were considered to be technically and politically relevant to

the question of distance-based user fees.

Ultimately, none of the facility or cordon congestion tolls identiﬁed in the ini-

tial survey (such as the central London program) were selected for the set of

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detailed case studies, because none of these uses a technology platform that poten-

tially could be extended to implement a distance-based user fee program. On the

other hand, many of these applications are already operational, and they certainly

entail innovative pricing schemes in transportation ﬁnance. For this reason, there

are occasional references made to relevant ﬁndings from such projects within the

policy and political acceptance sections of the synthetic review. Most of these

observations are drawn from the following projects, all of which have been opera-

tional for at least two years:

• Facility congestion tolls: I-15 HOT lanes, SR-91 HOT lanes, Katy HOT

lanes; and

• Cordon congestion tolls: London, Singapore, Norway (Trondheim, Oslo).

For weight-distance truck tolls, distance-based user fee proposals, and distance-

based price variabilization studies, most of the projects identiﬁed were included

as detailed case studies. Although many of the truck tolls are already opera-

tional, most projects within the other two categories are still in the planning or

demonstration trial phases. The speciﬁc set of case studies reviewed includes the

following:

Weight-distance truck tolls (international)

• Australian “Austroads” truck monitoring proposal (planning phase),

• Austrian “GO” truck toll (operational 2004),

• Bristol truck toll/cordon toll (trial completed),

• German “Toll Collect” truck toll (operational 2005),

• Swiss “HVF” truck toll (operational 2001), and

• U.K. truck toll (planning phase).

Distance-based user fee proposals (United States)

• CWARUM, a conceptual proposal by Daniel Malick;

• University of Iowa study (trial pending);

• Oregon Department of Transportation study (trial pending); and

• Puget Sound Regional Council study (trial ongoing).

Distance-based user fee proposals (international)

• ARMAS Pan European Tolling Project (trial ongoing),

• Copenhagen demonstration project (trial completed),

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• Gothenburg demonstration project (trial completed),

• Helsinki modeling study (study completed),

• Netherlands “Mobimiles” proposal (canceled 2002), and

• Newcastle on Tyne research project (study completed).

Distance-based cost variabilization studies (United States)

• Atlanta variable insurance study (study ongoing),

• Minnesota “PAYD” study (study ongoing), and

• Progressive Insurance study (study ongoing).

POLICY AND PRICING OBJECTIVES

Collectively, the pricing projects that were examined incorporate a wide range of

policy objectives, though the speciﬁc goals tend to vary depending on the type of

application. Table 1 provides a list of the most common stated and implicit objec-

tives and indicates the most relevant policy goals for each category of projects. Note

that an entry of “primary” indicates that the objective is one of the driving moti-

vations behind most or all of the projects within a given category, while an entry

of “secondary” indicates that the goal was identiﬁed explicitly in only a minority

of the projects reviewed. Note also that under the category of distance-based road

user fees, several of the objectives (such as reducing demand for travel by increas-

ing its marginal cost or encouraging the adoption of lower emission vehicles

REVIEW AND SYNTHESIS OF ROAD USE METERING AND CHARGING SYSTEMS: Executive Summary

221

TABLE 1 Policy Objective Summary

Weight–Distance Distance-Based Cost

Policy/Pricing Objective Truck Tolls User Fees Variabilization

Preserve revenue Primary Secondary

Charge equitable costs Primary Primary Primary

Charge external users Primary Secondary

Enforcement Secondary

Efﬁcient regulation Secondary

Reduce road wear Secondary

Improve safety Secondary Secondary

Optimize capacity Primary (Intl) Secondary

Reduce demand Secondary Primary (Intl) Primary

Improve environment Secondary Primary (Intl)

NOTE: Intl = international.

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through appropriate fee offsets) are considered by the project developers to be of

primary importance for the international projects but only of secondary impor-

tance for those in the United States.

In addition to policy objectives, the projects studied also exhibit considerable

variation in terms of the travel characteristics to be metered and priced. At the

highest level, these characteristics can be divided into four separate categories. First,

each of the projects includes, at a minimum, a measure of total distance traveled

(which is not surprising, given the selection criteria through which the projects

were chosen). Second, a number of the projects also consider the time of travel,

either for the application of congestion toll surcharges during hours of peak travel

or for the enforcement of operating regulations (in the case of trucks only). Third,

most of the projects also incorporate some determination of the location of travel.

In the simplest case, this might be limited to geographic area, for the basic identi-

ﬁcation of separate charging zones (e.g., determining whether the user is traveling

in California or Oregon). At ﬁner levels of detail, the pricing schemes seek to dis-

tinguish between different road classes (e.g., to vary truck tolls based on highway

versus nonhighway use), between speciﬁc links in the road network (e.g., to layer

on additional fees for traveling on pre-existing toll facilities), or even between dif-

ferent lanes on a given link [e.g., for the hypothetical implementation of virtual

high-occupancy toll (HOT) lanes]. Fourth, some of the projects also include the

characteristics of the vehicle in determining fee levels. The most common examples

of this fee structure include weight and axle conﬁguration (for trucks) and vehicle

emissions categories (to provide incentive for purchasing cleaner and more efﬁ-

cient vehicles).

The ﬁnal major consideration in the area of policy and pricing pertained to

the distribution of revenues. For most of the projects evaluated, the majority of the

funds are dedicated to road maintenance and expansion. In several cases, however,

a considerable portion of the revenue has been set aside to subsidize alternate

modes such as transit or rail freight.

TECHNOLOGY APPROACHES

The in-vehicle equipment used within the various projects studied incorporates a

wide array of technologies. In all cases, the equipment includes an on-board unit

(OBU), essentially a computer that serves to integrate the other components, store

data, and calculate charges owed. In addition, each conﬁguration relies on one or

more technologies to determine vehicle location or distance traveled, or both.

Here, the range of possible options includes dedicated short-range communica-

tions (DSRC) devices, GPS receivers, geographic information systems (GIS)

loaded with digital jurisdiction or road network maps (or both), odometer feeds,

and dead-reckoning systems. Finally, each design also must include a means of

transferring billing data to the collection agency. The three primary technology

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choices for this component include DSRC, global system for mobile (GSM) com-

munications (satellite-based cellular), and removable smart cards.

Collectively, the set of technologies incorporated within the OBU must

facilitate four important functions: (1) measuring usage to determine fees owed;

(2) communicating usage and billing information; (3) maintaining user privacy

for passenger vehicles (this is less relevant for commercial trucks); and (4) pre-

venting toll evasion.

To meter road usage, several different technology conﬁgurations have been

proposed, studied, or employed:

• DSRC communicating with readers along the roadway: This is typically

applicable for weight-distance truck tolls that apply only on highway links,

where it is relatively easy and cost-effective to mount transponders on over-

head gantries. Given the impracticality of installing DSRC transponders

throughout the entire road system, this option has not been proposed for

full, networkwide pricing schemes.

• Odometer with DSRC on/off toggle: In this option, DSRC transponders

are mounted at the entrances to a jurisdiction (e.g., where a highway crosses

from one country to another). When a vehicle enters a charging jurisdiction,

the DSRC signal sets the on-board unit status to “on.” From that point, the

odometer is used to measure distance traveled within the jurisdiction. When

the vehicle exits once again, another signal from the DSRC transponder sets

the on-board unit back into the “off” status.

• Odometer with GPS on/off toggle: This is similar to the DSRC toggle

option. Instead of relying on transponders mounted at border crossings,

however, the on-board unit relies upon a GPS signal (combined with a dig-

ital jurisdiction boundary map) to determine whether the vehicle is within

a particular charging zone or not.

• GPS standalone: In this case, the GPS is used to determine both position

and distance traveled. Unfortunately, the GPS signal may at times be lost

temporarily (especially in urban or mountainous regions), making this

approach impractical for full-scale implementation.

• GPS with odometer backup: To account for periods when the GPS signal

is not available, the odometer can be used as a backup measure for distance

traveled until the signal is available once again. Regrettably, the odometer is

not capable of providing location information, making it difﬁcult to deter-

mine whether the vehicle has remained within the same charging zone.

• GPS with odometer and dead-reckoning backup: To help determine

location (and thus applicable charging zone) while a GPS signal is down,

the unit also can be equipped with dead-reckoning equipment in addition

to the odometer feed.

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As noted, there are three primary approaches for communicating usage and

billing data:

• GSM: This is the most costly option but also the most ﬂexible. Because it

allows for real-time communication from anywhere within the network, it

also can be used to facilitate value-added capabilities such as way-ﬁnding,

ﬂeet management, and emergency distress signals.

• DSRC: Although this technology is robust, well tested, and inexpensive, it

can be used only for communicating at ﬁxed points throughout the network

(speciﬁcally, where transponders have been mounted, such as on overhead

gantries or at fueling stations). Though adequate for many applications, it

does not provide the opportunity for value-added services, as does GSM.

• Smart cards: These are essentially small data-carrying devices that can be

removed from the OBU and inserted into card readers (for example, at gas

stations or on a home computer) to send billing data to the collections

authority. With this option, the end user has full control in determining

when the data are transferred; on the other hand, smart cards do not facil-

itate a fully automated billing process because some manual intervention is

required.

Most of the systems studied devoted considerable attention to protecting user

privacy. The primary concern has been to ensure that governments do not have

unrestricted access to detailed travel records for individual drivers (this has been

more of a concern for private passenger vehicles than for commercial trucking

operations). To achieve this aim, two primary approaches have been proposed:

• On-board aggregation: The ﬁrst approach, which is more prevalent for full-

scale operational proposals, is to aggregate all travel information and deter-

mine the total bill owed on the on-board unit itself. With this strategy, the

government never sees any of the details of the travel history for any indi-

vidual, just the total amount of the bill.

• Third-party privacy agreements: In this second approach, the on-board

unit communicates detailed travel information to a third-party billing agent,

which in turn aggregates the data and submits only the total bill to the gov-

ernment. As with phone companies, the third party is legally obligated to

keep these data private except in the case of a court subpoena. Consumers

appear to be more wary of this approach, however, and to date it has been

employed only within truck tolling projects or in research trial projects.

To help prevent toll evasion, two potentially complementary strategies have

been discussed:

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• Tamper-proof OBUs: Here the goal is to ensure that users are unable to

turn off or temporarily disable the on-board units during periods of travel.

Some of the alternatives suggested include tamper-proof seals on the OBU

itself, disabling the engine if the OBU is not functional, and checking the

OBU against the odometer to ensure that the mileage records are consistent.

• External veriﬁcation: Under this strategy, DSRC transponders are mounted

at various locations throughout the network, sending signals to passing

cars to ensure that the on-board equipment is activated and functioning

properly.

INSTITUTIONAL ISSUES

In reviewing the case studies, two major institutional issues of importance were

identiﬁed. First, is the system designed to handle a single jurisdiction or multi-

ple jurisdictions? Second, what are the respective public and private roles for

oversight, operations, and the provision of technology?

About two-thirds of the case studies identiﬁed, including all of the weight-

distance truck tolls and several of the distance-based user fee proposals, were

designed, at least initially, to be implemented for single jurisdictions. Over the

longer term, however, there appears to be a high probability that many single-juris-

diction programs will evolve to include multiple jurisdictions. For example, the

distance-based user fee proposal in Oregon is currently structured to measure

mileage within that state alone. However, if California or Washington elected to

pursue a similar pricing scheme at some point in the future, then they might very

well seek to leverage the same technology that Oregon already has developed.

Fortunately, from a technical standpoint, it is relatively trivial to structure the on-

board unit to record data and calculate fees for single or multiple jurisdictions. On

the other hand, once peer-level jurisdictions (e.g., multiple states or countries) join

together in a road pricing project, it may be necessary to develop new institutional

capabilities for collecting the revenues and distributing the appropriate amounts

to the different parties involved.

In terms of public and private roles, oversight responsibilities for most of the

programs reviewed (with the exception of some of the distance-based insurance

pricing studies) fell primarily within the public realm. For operations, in contrast,

there was a roughly even split between public and private responsibility; most of

the multiple-jurisdiction programs relied on private contractors for routine admin-

istration duties, whereas a larger percentage of the single-jurisdiction programs

opted for public administration. Finally, all of the cases studies tapped the private

sector for the provision of the on-board equipment and supporting technology. In

most of the cases, especially those for which user participation is mandatory, sin-

gle ﬁrms (or consortia) were contracted to be the sole providers of the technology.

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However, for a few of the intended applications in which participation would be

optional, the proposals have been structured to allow multiple vendors to compete

for users on the basis of price as well as additional value-added services (such as

navigational aids or ﬂeet management).

IMPLEMENTATION ISSUES

Two principal implementation issues were identiﬁed: whether user participation

is required or optional and whether the rollout is immediate or phased in over

time. For most of the user fee programs, participation is mandatory, particularly

for “internal” users (i.e., those who live or work within the charging jurisdiction).

In contrast, participation is usually optional for travel monitoring (as opposed to

pricing) programs (as in the case of the Australian “Austroads” program), variabi-

lized insurance pricing, or “external” users (e.g., foreign truckers operating within

a country with weight-distance truck tolls).

The mandatory participation programs must determine in advance whether

the equipment rollout will be staged simultaneously or phased in over time (for

optional programs, in contrast, the rollout is phased in by deﬁnition). Most of the

weight-distance truck tolls, for example, have opted to require internal users to

install the on-board equipment at the onset of the charging program. In contrast,

most of the distance-based user fees that involve private passenger vehicles have

envisioned some strategy for phasing in the equipment over time (for instance,

with the purchase of new vehicles). It is important to note that for programs in

which the rollout occurs gradually, it is necessary to develop a strategy for operat-

ing multiple charging schemes in parallel throughout the transition phase (for

example, newer cars with on-board equipment installed might pay mileage-based

fees while older cars continued to pay the fuels tax).

POLITICAL AND PUBLIC ACCEPTANCE ISSUES

In reviewing the various factors that inﬂuence the prospects for political and pub-

lic acceptance of new pricing schemes, two issues stood out most prominently:

equity concerns and privacy concerns. With respect to equity, proposals for new

pricing mechanisms invariably are subjected to higher levels of scrutiny than exist-

ing transportation ﬁnance programs. For example, equity concerns rarely are raised

over the increasingly common dedication of sales taxes, despite the fact that such

taxes are recognized widely to be regressive with respect to both income and high-

way system use. On the other hand, equity concerns almost always loom large for

electronic tolling proposals, especially congestion tolls. This likely is due to the fact

that they usually represent a “new” form of pricing (as opposed to a distance fee,

which essentially would replace the existing gas tax), and because they place the

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correlation between ability to pay and beneﬁts received into especially sharp relief.

For the various projects that incorporated some form of congestion tolling, we

observed the following:

• Equity concerns have contributed to the demise of many congestion pric-

ing proposals.

• Actual equity outcomes can vary considerably from one project to the next,

depending on user demographics and program design.

• Despite frequent equity concerns, congestion tolling is on the rise.

• Many congestion tolling programs have mitigated equity concerns through

the dedication of revenues (for instance, to subsidize transit).

In contrast to congestion toll proposals, equity issues are not usually raised

with regard to weight-distance truck tolls, distance-based user fees, or variabilized

insurance.

As with the question of equity, the level of concern over privacy issues depends

on the nature of the pricing program. Generally speaking, privacy issues are less

relevant for weight-distance truck tolls, given their commercial nature, or for con-

gestion tolls, which don’t typically track vehicles continuously through time and

space. In contrast, privacy can be perceived as a significant issue for general-

purpose distance-based user fees, as such programs involve private citizens and use

equipment that, at least theoretically, allows for extensive vehicle tracking and

monitoring. From the review of the various case studies, the following observa-

tions were made:

• Privacy concerns do not appear to pose legal issues.

• Public concern over privacy issues may not in fact be particularly widespread,

given the prevalence of credit cards and cell phones, two other devices that

provide a wealth of detailed information about individual behavior.

• Where privacy is a signiﬁcant concern, it has been addressed at the techni-

cal level (through on-board aggregation of data) or at the programmatic level

(with third-party billing and conﬁdentiality agreements).

In addition to equity and privacy concerns, several other factors that may play

a strong role in the level of public and political acceptance of new pricing schemes

were identiﬁed. These include the following:

• Severity of the problem and effectiveness of the solution: New pricing

schemes appear more likely to be accepted if the problem is considered severe,

if other solution strategies have already failed, and if the proposed pricing

scheme is deemed likely (or has been demonstrated elsewhere) to be effective.

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• Integration with complementary policies: New road pricing schemes that

integrate complementary policies—such as the improvement of transit

options—appear to have increased the likelihood of implementation.

• Size and scope of the project: Projects of larger size and scope—with more

users affected and more aspects of road use priced—appear to face more dif-

ﬁcult prospects for political success given that they may engender resistance

from a larger and more diverse array of stakeholders.

• Dedication of revenues: From the cases reviewed, it appears that the pub-

lic is more willing to accept pricing programs when revenues are dedicated

to transportation improvement projects rather than allocated into general

funds.

• Manner in which stakeholders are compensated: In most of the programs

investigated, one or more stakeholder groups will be affected adversely by

the new pricing scheme. To counter or mitigate potential political resistance,

many of the successful programs developed some way to compensate such

groups. For instance, the weight-distance user fee in Switzerland raised the

overall level of user fees for truckers (so as to encourage mode shift to rail)

but also allowed for higher weight limits on the highway network in order

to facilitate greater operating efﬁciencies among trucking ﬁrms.

• Degree of choice offered, or precluded, by the program: Findings show

that programs seeking to expand the choices available to travelers (such as

HOT lanes or cordon congestion tolls integrated with improved transit facil-

ities) have tended to enjoy greater prospects for success than programs that

limit or preclude the level of choice (such as all-lanes congestion tolls or cor-

don toll proposals in cities not well served by transit).

• Transparency and user-friendliness of the system: Developing fare

structures that are readily understood and payment collection technolo-

gies that are seamless from the user’s perspective appears, from the case

studies reviewed, to be critical to establishing a high level of public and

political acceptance.

• Effectiveness of the enforcement strategy: In many of the case studies

reviewed, the effectiveness of the enforcement strategy was cited as a major

issue for public acceptance; more speciﬁcally, users appear more likely to

resent a new pricing scheme if they perceive that others may be able to cheat

the system and evade payment.

CLOSING OBSERVATIONS

Of the many types of issues involved in our case studies of electronic tolling, three

appear to exert the greatest inﬂuence on the prospects for the success of distance-

based user fees: (1) the embedded policy objectives, (2) the technical strategy, and

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(3) the factors that inﬂuence political and public acceptance. Institutional and

technical implementation issues are also important, of course, but these details

appear less likely to affect the technical and political feasibility of electronically

based pricing programs.

With respect to policy objectives, distance-based user fees can be designed to

accomplish a wide array of goals, depending on the characteristics of travel that are

metered or priced.

• Revenue enhancement or preservation: A distance-based user fee can read-

ily serve as a replacement to the standard fuels tax, and its effectiveness would

not be compromised by increasing vehicle fuel efﬁciency (or even the intro-

duction of alternative-fuel vehicles) in the years ahead. Given the substantial

price tags associated with transitioning to these types of systems, however, it

is not clear whether this approach would be superior to simply increasing

current fuels taxes over the short term (though, as noted above, such increases

face increasingly difﬁcult political odds). Conversely, a distance-based user

fee may very well prove necessary within several decades with the antici-

pated widespread introduction of alternative-fuel vehicles.

• Optimizing road capacity, managing demand: By using the technology

base for a distance-based user fee system, it is relatively straightforward (from

a technical standpoint) to layer on congestion tolls that would apply along

speciﬁc corridors or within crowded urban areas during periods of peak

travel for the purposes of optimizing road capacity or managing demand and

encouraging mode shift.

• Reducing road damage, improving the environment: It is also possible to

build in offsets to the standard distance fee based on axle weight or emissions

class in order to encourage users to purchase and operate vehicles that impose

less damage on roadways or the environment.

On the technology front, the most signiﬁcant ﬁnding is that it is technically

feasible and increasingly cost-effective to develop a system for distance-based user

fees. In terms of speciﬁc technologies and general technical strategies:

• GPS: GPS by itself is not sufficiently reliable to measure location and

distance traveled, given that the signal often may go down during travel

between tall buildings or in mountainous areas. For this reason, such systems

need to be supplemented by an odometer feed (as a backup for distance trav-

eled) and possibly a dead-reckoning system (as a backup for location). The

question of accuracy may be another important issue. For applications where

it is necessary only to determine whether or not a vehicle is within a partic-

ular jurisdiction (e.g., a country or a state), GPS and existing digital maps

provide a sufﬁcient level of accuracy. However, for applications in which

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it is necessary to distinguish between different road links on the network,

differential GPS signal correction and highly accurate (and expensive-to-

create) road network maps will be required.

• Communications strategies: DSRC, GSM, and smart cards all represent

viable communications options; the appropriate choice depends on price

(GSM is the most expensive by far) as well as desired functionality (GSM is

also the most ﬂexible).

• Enforcement strategies: To prevent toll evasion, tamper-proof OBU strate-

gies appear to offer the most promise, though external roadside checks using

DSRC transponders may add a useful level of redundancy.

• Simple system designs: Generally speaking, and not surprisingly, appli-

cations that have relied on relatively simple technical conﬁgurations (lever-

aging, as often as possible, off-the-shelf technologies) have experienced the

greatest implementation and budgetary success. Increasingly, electronic

tolling programs are starting with simple systems that are upgraded to a

greater level of complexity later.

• Conservative implementation schedules: For many projects, the process

of development, integration, and planning has taken far longer than origi-

nally anticipated. This underscores the importance of providing sufﬁcient

ﬂexibility within the implementation timelines to account for unanticipated

technical difﬁculties.

• Backup plans: As a corollary to the above, program designers (in most,

though not all, cases studied) have designed system redundancy and backup

plans for levying user fees should technical difﬁculties lead to delays in the

implementation of the electronic tolling system.

Finally, in terms of the factors that inﬂuence the prospects for political and

public acceptance of distance-based user fees, the following issues are the most

relevant:

• Equity concerns: In general, equity is raised as a concern more for conges-

tion tolls than for distance-based charging schemes. In distance-based user

fee proposals not involving congestion surcharges, equity concerns have been

far less of a political barrier. But since one of the ultimate goals of many dis-

tance-based electronic tolling programs is to develop systems that eventually

include both distance fees and congestion tolls, equity concerns may be

raised subsequently for already established tolling programs.

• Privacy concerns: In contrast to equity, concerns over privacy are most

common in distance-based user fee programs, given that the combination of

technologies employed within on-board equipment can be used to record

and disseminate detailed information on the travel patterns of individual

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REVIEW AND SYNTHESIS OF ROAD USE METERING AND CHARGING SYSTEMS: Executive Summary

231

drivers. Fortunately, it is possible to ensure the privacy of user data, both

at the technical and institutional levels. On the other hand, many press

accounts continue to highlight concerns over privacy, despite the fact that

this issue has been addressed satisfactorily in many of the cases studied. For

this reason, efforts to implement distance-based charging schemes often

include coordinated public education campaigns to address and diffuse pop-

ular and political objections to tolling proposals on privacy grounds.

• Other factors inﬂuencing public and political acceptance: Along with

equity and privacy, a number of other issues appear to be important with

respect to building public and political support for new pricing programs

such as distance-based user fees. Most notably, these include the severity of

the problem to be addressed and the inadequacy of other solution strate-

gies, the degree of integration with other related policies (such as the pro-

vision of improved transit service), the degree to which “losers” under the

new pricing regime can be compensated in some manner, perceptions over

the adequacy of the proposed enforcement scheme, and the expansion or

contraction of travel options created by the program.

• Keys to building public and political support: In addition to the pro-

grammatic factors that can influence the level of public and political

acceptance, experience from the various cases studied indicates that there

are a variety of strategies that pricing program proponents have pursued to

enhance the prospects for political success. These include establishing the

technical details of the program early on (so as to build conﬁdence in the

feasibility of the project), engaging in sophisticated marketing efforts

(including focus groups, targeted messaging, and coordinated framing of

the debate), reaching out to key stakeholder groups early in the process,

cultivating political champions, actively courting the media, and provid-

ing positive testimonials from other successful projects of a similar nature.

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Study Committee

Biographical Information

Rudolph G. Penner, Chair, is a Senior Fellow at the Urban Institute and holds

the Arjay and Frances Miller Chair in Public Policy. Previously, he was a Managing

Director of the Barents Group, a KPMG Company. He was Director of the

Congressional Budget Ofﬁce from 1983 to 1987. From 1977 to 1983, he was a

Resident Scholar at the American Enterprise Institute. Previous posts in govern-

ment include Assistant Director for Economic Policy at the Ofﬁce of Management

and Budget, Deputy Assistant Secretary for Economic Affairs at the Department

of Housing and Urban Development, and Senior Staff Economist at the Council

of Economic Advisors. Before 1975, Dr. Penner was Professor of Economics at the

University of Rochester. His undergraduate degree is from the University of

Toronto, and he holds a PhD in economics from the Johns Hopkins University.

Carol Dahl is Professor in the Division of Economics and Business and Director

of the Joint International Degree Program in Petroleum Economics and Manage-

ment at the Colorado School of Mines. Her research centers on international

energy markets, government energy policy, and energy market modeling and

forecasting techniques. She received a PhD in economics from the University of

Minnesota and a BA from the University of Wisconsin.

Martha Derthick retired in 1999 from the Department of Government and

Foreign Affairs at the University of Virginia, where she was the Julia Allen Cooper

Professor. Among her numerous works on American government are Dilemmas of

Scale in America’s Federal Democracy (editor, 1999) and The Politics of Deregulation

(with Paul J. Quirk, 1985). Before going to the University of Virginia, she was a

member of the Governmental Studies Program of the Brookings Institution and

was the program’s director between 1978 and 1983. She has taught at Dartmouth

College, Stanford University, Harvard University, and Boston College. She is a

recipient of the Gaus Award of the American Political Science Association for con-

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tributions to the study of public administration. She received a PhD from Radcliffe

College.

David J. Forkenbrock is Director of the Public Policy Center and Professor of

Urban and Regional Planning and of Civil and Environmental Engineering at the

University of Iowa. His research is in transportation ﬁnance and policy issues

related to the pricing of and investment in transportation facilities. He recently

completed a multiyear research project sponsored by a consortium of 15 state

transportation departments and the Federal Highway Administration on new

approaches to assessing road user charges. Professor Forkenbrock was the Chair of

the Transportation Research Board (TRB) Committee to Review the Highway

Cost Allocation Study and is a former Chair of the TRB Committee on Trans-

portation Economics. He holds a PhD from the University of Michigan.

David A. Galt was Director of the Montana Department of Transportation

from 2001 until December 2004. In 2005 he became Executive Director of the

Montana Petroleum Association. Formerly he was Executive Director of the

Montana Motor Carriers Association (2000) and Motor Carrier Services

Administrator of Montana (1990 to 2000), overseeing regulation and permit-

ting of truck operators in the state. He has been a leader in efforts to develop and

apply information technology to motor carrier regulatory enforcement. He

received a BA in business administration from Carroll College.

Shama Gamkhar is Associate Professor of Public Affairs at the Lyndon B.

Johnson School of Public Affairs of the University of Texas, where she teaches

courses in government ﬁnancial management and environmental economics. Her

research is on the effects of federal grant programs on state and local government

ﬁnance, including highway ﬁnance. She has been on the faculty at the LBJ School

since 1996. She received a doctorate in economics from the University of

Maryland and master’s degrees from the Delhi School of Economics and the

University of Bombay.

Thomas D. Larson is a transportation consultant and former Administrator of

the Federal Highway Administration (1989 to 1993). He served as Secretary of

Transportation for the Commonwealth of Pennsylvania from 1979 to 1987.

Before entering government, he was Institute Professor of Civil Engineering at

Pennsylvania State University and Director of the Pennsylvania Transportation

Institute. Dr. Larson is a Past Chair of the TRB Executive Committee and of the

National Research Council’s Strategic Highway Research Program Executive

Committee and served as President of the American Association of State Highway

and Transportation Ofﬁcials. He is a member of the National Academy of

Engineering.

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Therese J. McGuire is Professor of Management and Strategy at the Kellogg

School of Management and Faculty Fellow, Institute for Policy Research,

Northwestern University. Her areas of expertise include state and local public

ﬁnance, ﬁscal decentralization, and regional economic development. She received

a PhD in economics from Princeton University and a BA from the University of

Nebraska.

Debra L. Miller is the Secretary of Transportation for Kansas. Earlier, she was

Director of the Division of Planning and Development of the Kansas Department

of Transportation. She was a member of the committee that produced the 1996

TRB policy study Special Report 246: Paying Our Way: Estimating Marginal Social

Costs of Freight Transportation. She received a bachelor’s degree from Kansas State

University.

Michael Pagano is Professor of Public Administration and Director of the

Graduate Program in Public Administration at the University of Illinois,

Chicago. His research and publications focus on state and local taxation and

budgeting practices, the relationship between politics and ﬁscal policy in state and

local government, and infrastructure budgeting and ﬁnance. He was a member

of the TRB Committee for the National Conference on Transportation Finance.

He received a PhD from the University of Texas and a BA from Pennsylvania

State University.

Robert W. Poole, Jr., is Director of Transportation Studies at the Reason

Foundation, a private, nonproﬁt policy research organization. His research and

writing have addressed privatization of government services, including evaluation

of the potential for development of private toll roads, and pricing of public facili-

ties. He has served as a member of the California Department of Transportation

Privatization Advisory Steering Committee, the California Commission on

Transportation Investment, and the Vice President’s Space Policy Advisory Board.

Mr. Poole was the founder of the Reason Foundation in 1978. He received bach-

elor’s and master’s degrees in engineering from the Massachusetts Institute of

Technology.

Daniel Sperling is Professor of Civil Engineering and Environmental Science and

Policy and Director of the Institute of Transportation Studies at the University of

California, Davis, where he has been a member of the faculty since 1982. He is an

expert on the public policy aspects of alternative automotive propulsion systems.

Dr. Sperling is the Chair of TRB’s Sustainability and Transportation Committee

and a former Chair of the TRB Alternative Transportation Fuels Committee. He

is a National Associate of the National Academies. He received a PhD in trans-

portation engineering from the University of California, Berkeley, and a BS from

Cornell University.

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James T. Taylor II is a Managing Director in the Public Finance Department of

Bear, Stearns & Co., Inc. He has developed ﬁnancing strategies for major public

and public–private transportation infrastructure projects. He was a member of the

TRB Committee for the National Conference on Transportation Finance and the

author of a resource paper on the role of the private sector in U.S. transportation

ﬁnance for that committee. He received a BS from the Massachusetts Institute of

Technology and a master’s degree in public policy from Harvard University.

Martin Wachs is Director of the Transportation, Space and Technology Program

at the RAND Corporation in Santa Monica, California. From 1996 to 2005 he

was Director of the Institute of Transportation Studies and Professor of City and

Regional Planning and of Civil and Environmental Engineering at the University

of California, Berkeley. His research is in transportation planning and policy,

including public transit systems and evaluation of alternative transportation proj-

ects. Recently, his writings have dealt with transportation ﬁnance and with the rela-

tionships among transportation, air quality, and land use. Professor Wachs is a Past

Chair of the TRB Executive Committee. From 1971 to 1996 he was on the fac-

ulty of the University of California, Los Angeles. He holds master’s and doctorate

degrees in transportation planning from Northwestern University and a bachelor’s

degree in civil engineering from the City University of New York.

STUDY COMMITTEE BIOGRAPHICAL INFORMATION

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