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The Elephant in the Room in Highway Reauthorization

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State DOT’s are planning cutbacks in various projects as the Federal Highway Administration begins reducing reimbursement payments next month to a level that can be sustained by existing federal highway funding sources. Just to cover existing contractual obligations through Dec. 31st of this year would require an additional $8 billion, based on projections from the Congressional Budget Office. And the outlook for the full FY 2015 fiscal year is much grimmer.

Based (as CBO’s projections must be) on assuming that all existing programs continue at the previous year’s budgeted levels plus inflation, and with revenues based on current law, FHWA could not take on any new funding commitments for the entire fiscal year, after which subsequent years through FY 2024 would vary from 50% to 100% of a business-as-usual projection.

But why is nearly all the discussion in Washington about finding additional sources of revenue? In nearly all other enterprises facing this kind of situation, the prudent thing to do—especially at a time like this—is to look hard at what the money is being spent on, prioritize that spending, and reduce or eliminate the programs with the weakest business cases. Before we get into that, let’s take a quick look at how dependent state highway programs are on federal funding.

For a Reason Foundation webinar on issues facing the federal program earlier this month, I drew on figures compiled by the American Road & Transportation Builders Association showing that the average state gets 52% of its highway and bridge capital outlays from the feds. But that average conceals huge variations, from a low of 35% in New Jersey to a high of just over 100% in Rhode Island. As you might expect, states with toll roads averaged just over 50% federal support, compared with 64% for states without toll roads. By region, New England has the highest dependency (70%) and the Northeast the least (46%), primarily due to a high fraction of Northeast highway travel being on toll roads and bridges. I also compared the 50 states and the District of Columbia on their state/local fuel tax rates. These varied all over the map, but the 10 states with the lowest federal-aid dependence have modestly higher average gas taxes (31.4¢/gal.) than the 10 most-dependent states (28.8¢/gal.), showing that self-help works. Incidentally, Alaska and Hawaii provide a sharp contrast. Although both are highly dependent on federal aid (at 93% and79%, respectively), Alaska has by far the lowest gas tax (12.4¢/gal.), while Hawaii is fourth-highest, at 48.05¢/gal. (Note: all gas tax numbers come from a June 3rd report from the Tax Foundation.)

When the federal program was created by Congress in 1956 solely to build the Interstate Highway System, had anyone then suggested that more than 30 years after that program was proclaimed completed in 1982 the average state would depend on Congress for more than half its highway capital budget, that person would have been dismissed out of hand. Yet here we are today with a federal highway and transit program that tries to do something about just about anything you can imagine that relates to surface transportation. Thanks to Congress’s relentless expansion, the program’s cost today so exceeds its user-tax revenue that the legislators since 2008 have repeatedly appropriated general-fund bailouts to keep the spending going.

The most straightforward (but not painless) reform would be to scale back the program to the best available estimates of federal user-tax revenue, while prioritizing it to focus on what is judged critically important for the federal, as opposed to state and local, government to be funding and regulating. A little-known white paper by former FHWA official Steve Lockwood, “Exploring the Implications of Limits” (January 13, 2012), was an attempt to do just that. Its centerpiece was a more-limited strategic national highways program (the Interstates plus carefully selected additions), as also recommended in a 2011 RAND Corporation study; there would be no separate urban or rural programs and no funding distribution by formula, as at present. There would continue to be modest support for safety programs and for transportation research. The new program would be constrained to an estimated $30 billion annual highway program budget (which also assumed continuation of the Mass Transit Account in the Highway Trust Fund at $5 billion per year). This is conceptually similar to the approach set forth in Reason Foundation’s 2010 policy study, “Restoring Trust in the Highway Trust Fund,” except that we proposed shifting transit either to state and local governments or to the federal general fund (which is how it was funded when the agency was called UMTA and located within HUD).

This kind of prioritization, leading to targeted cuts and eliminations of poorly justified federal programs, is especially important given projections of the overall federal budget going forward. For example, last year’s 10-year Ryan-Murray budget framework keeps non-defense discretionary spending over the next decade flat, in 2013 dollars. But the source of funding for Highway Trust Fund bailouts is precisely this category, which is paid for out of general federal revenues. The best way to protect the highway program from general budget cuts is to support it solely from dedicated user-tax revenues.

The federal surface transportation program is at a critical turning point. Without fundamental change to make it sustainable from its highway user customers, it will continue to spend increasingly limited dollars on far too many programs, most of which are properly the responsibility of state or local governments. Let’s hope the new Congress that takes office in January will have the courage to face up to this.

(This article first ran in Surface Transportation Innovations, July 2014)

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