He will therefore have to use what knowledge he can achieve, not to shape the results as the craftsman shapes his handiwork, but rather to cultivate a growth by providing the appropriate environment, in the manner in which the gardener does this for his plants.” — Friedrich August von Hayek.
In my most recent blog I touched on the fact that our lawmakers are changing the way we finance our highway infrastructure and damaging the once sacrosanct Highway Trust Fund by adding many non-highway elements such as mass transit and environmental issues to their funding bills. This is a subject near and dear to me due to my involvement with highway engineering during my long career as a highway engineer and a land surveyor.
When Congress passed and President Eisenhower signed the Federal Aid Highway Act of 1956 this nation embarked on one of the greatest highway building programs in the world. Not since the building of the Transcontinental Railroad (1864-1869) and the Manhattan Project during World War II had Congress allocated so much money to one specific project. The original concept of the Federal Aid Highway Act (FAHA) was to build about 20,000 miles of four-lane divided super highway at a cost of $25 billion dollars in 12 years. When the system was deemed completed in 1991 over 47,000 miles had been built at a cost of $114 billion (adjusted for inflation, $425 billion in 2006 dollars).
Most of the money to build this system came from the Highway Trust Fund that obtained its money from taxes collected from fuel and other vehicle sources and considered as “user taxes.” Prior to the 1956 Highway Revenue Act and the establishment of the Highway Trust Fund roads were financed directly from the General Fund of the U.S. Treasury. The 1956 Act directed federal fuel tax to the fund to be used exclusively for highway construction and maintenance. The Highway Revenue Act mandated a tax of three cents per gallon. The original Highway Revenue Act was set to expire at the end of fiscal year 1972. In the 1950s the gas tax was increased to four cents. The 1982 Surface Transportation Assistance Act, approved by President Ronald Reagan in January 1983, increased the tax to nine cents with one cent going into a new Mass Transit Account to support public transport. In 1990 the gas tax was increased by President George H. W. Bush with the Omnibus Budget Reconciliation Act of 1990 to 14 cents - with 2.5 cents of the increase going to the Highway Fund and the other 2.5 cents going towards deficit reduction. In 1993 President Clinton increased the gas tax to 18.4 cents with the Omnibus Budget Reconciliation Act of 1993 with all of the increase going towards deficit reduction. The Taxpayer Relief Act of 1997 redirected the 1993 increase to the Fund. During the Vietnam War President Johnson dipped into the fund to “borrow” money so he could finance his “guns and butter” programs without raising taxes. Most of his “borrowed” funds were never repaid.
Over the ensuing years from 1956 the once sacrosanct Highway Trust Fund has been raided and pillaged to finance other than its original intended purpose — to finance our nation’s Interstate Highway System. This has also been the case with many of the states, such as California, with their dedicated highway trust programs.
Today much of our Interstate System is approaching 50-years old. These roadways usually had a design life of 20 years, with bridges having a longer design life up to 50 years. Every year the American Society of Civil Engineers (ASCE) releases a report card on our crumbling infrastructure and each year our highways and bridges receive a grade of “D-“ and “C” respectively. It does not take a civil engineer to realize the extent of our crumbling highway infrastructure. All you need to do is drive the Interstates. Some states like Utah, Nebraska, and Nevada do a better job than others in maintain their highway infrastructure by using their fuel tax appropriately while others such as California, New York, New Jersey, and Illinois have allowed the highway infrastructure to deteriorate.
Over the years Congress has passed many highway funding bills with fancy names like ISTEA, T-21, and SAFETEA with all of them diverting more and more monies to non-highway purposes such as intermodal transportation, rail, and environmental purposes. This contrary to the original intent of the highway trust fund and these monies get allocated through earmarks and lobbying by special interest groups, mainly cities and counties.
Not since the building of the Transcontinental Railroad has one single project added so much to our economy. The construction of the Interstate Highway System created millions of job and added trillions of dollars to our national economy. It created jobs for construction workers, engineers, construction material suppliers, long-haul truckers, construction equipment manufactures, and roadside businesses.
The Case For Highway User Fees
How should we pay for highways in America? Relatively unique among developed countries, the United States from the beginning has employed the user-pays principle. This means for the most part the users of the highway system pay for it with fees that are more or less directly related to their use. The idea is that those who benefit directly from the highway system are also the ones who pay for it.
In the 19th century, prior to motorized transportation, most inter-city roads were toll roads, usually developed and operated by private companies under state charters. When the automobile led to a demand for paved roads in the early 20th century, Oregon legislators enacted a tax on motor fuel in 1919. In the following decade, the remaining 47 states and the District of Columbia all enacted motor fuel taxes. In order to ensure that the revenue would be used solely to benefit those paying these taxes, most states created dedicated highway funds, many of which were given constitutional status and often called “trust funds.” Toll roads, like the Pennsylvania Turnpike, and bridges, like the Golden Gate Bridge, proliferated in the first half of the 20th century, generally in cases where the large size of the investment needed made toll finance the best way to fund such large “lumpy” investments. Toward the end of the 20th century and the first decade of the 21st, a new generation of toll roads and toll lanes has been emerging.
There are many advantages to the users-pay/users-benefit principle. Among them are the following:
Fairness: Those who pay the user fees are the ones who receive most of the benefits, and those who benefit are the ones who pay. This is the same general principle America employs with respect to other network utilities, such as electricity, water, gas and telecommunications.
Proportionality: Those who use more highway services pay more, while those who use less pay less (and those who use none pay nothing). And cost allocation studies can determine which users are responsible for which portion of costs, so that rates can be set accordingly.
Self-limiting: The imposition of a user tax whose proceeds may only be used for the specified purpose imposes a de-facto limit on how high the tax can be: only enough to fund an agreed-upon need for investment. In contrast, Europe’s motor fuel taxes are a general revenue source, and hence tend to be three to five times as high as those in the United States (though highway investment in Europe is the same or less than in this country).
Predictability: A user fee produces a revenue stream that can and should be independent of the vagaries of government budgets.
Investment signal: The user-pays mechanism provides a way to answer the question of how much infrastructure to build, assuming that the customers have some degree of say. With respect to toll roads, the value of the facility can be judged by how many choose to use it and what level of tolls they are willing to pay. This mechanism is less direct with fuel taxes, though there does appear to be a connection between motorist/taxpayer confidence in a government’s highway program and their willingness to support increases in fuel taxes. Prof. Eric Patashnik, in his book on federal trust funds, notes that “Taxpayers will only demand an increase in services if they perceive the benefits of the service increment to exceed the cost.”
These points about the advantages of user fees hold true regardless of the details of the user-fee mechanism. In highways, America has used tolls, fuel taxes, excise taxes on tires, weight-distance taxes (for trucks) and several other minor sources, and is considering a shift from fuel taxes to a charge or tax per vehicle mile traveled.
In deciding whether any such mechanism is essentially a user fee or essentially a tax, the critical question is the use of the revenues. If the revenues from a charge are strictly spent on services and infrastructure for the users/payers, it is a user fee. If the proceeds can be spent on beneficiaries other than those who generated the funds by making use of the infrastructure, then the mechanism is more of a tax. In the case of utility bills, the charge that is based on services the customer has used is a fee, paid to the infrastructure provider to cover the costs of building, operating and maintaining the infrastructure. (This is true regardless of whether that infrastructure is provided by a public-sector or private-sector utility.) If government seeks to make those utility customers fund other beneficiaries, it may impose a tax for that purpose on utility bills (e.g., the tax that is used to fund rural telephone services).
Historically, therefore, highway advocates were correct in calling motor fuel taxes highway user fees, since most state fuel taxes were dedicated to the state highway system. The federal fuel tax, when the Interstate highway program was launched in 1956, was likewise dedicated to building that nationwide system, via the newly created federal Highway Trust Fund. This was a fair and equitable deal.
History of the Highway Trust Fund
Early proposals for funding of the Interstate Highway System included the issuance of long-term bonds, based in some version on toll revenues (modeled after mid-century superhighways such as the Pennsylvania Turnpike and the New York Thruway) and in others on federal taxes. There was strong opposition in Congress both to bonding and to the large federal tax increases that were estimated to be necessary to fund the system. Neither alternative prevailed in 1955.
Hence, the following year, “The object was to find a way to finance the system that more stakeholders thought was fair, and to reassure stakeholders and legislators that the receipts of the increased taxes would be dedicated towards highways. The proposed solution was a set of federal highway user taxes (largely on motor fuel) whose proceeds would be deposited into a new Highway Trust Fund. The Republican members of the House committee that recommended this approach wrote that “The existence of this fund will insure that receipts from the taxes levied to finance this program will not be diverted to other purposes.” The final bill embodying these provisions was passed by both houses of Congress and signed by President Eisenhower on June 29, 1956.
The pure users-pay/users-benefit principle was not breached until 1970, when PL 91-605 allowed federal highway monies to be used for bus lanes, bus facilities and park-and-ride lots. Many urban and transit advocates wanted to open up the Highway Trust Fund much further, being dissatisfied with the extent of funding available from the Urban Mass Transportation Administration (UMTA), created by 1964 legislation. (UMTA was originally located within the Department of Housing & Urban Development—HUD—but was shifted to the Department of Transportation when the latter agency was created.) Several years later, in 1973, Congress enacted PL 93-87, which allowed Highway Trust Fund monies to be used for capital expenditures for buses and fixed rail facilities and permitted a state to petition the U.S. DOT for permission to withdraw a planned urban Interstate project and build a public transit system instead, using federal general fund monies up to the amount that the Interstate segment would have cost.
President Carter proposed consolidation of the highway and transit programs, merging the Federal Highway Administration (FHWA) and UMTA, as part of the 1978 highway bill. But that bill ended up making only minor program changes. And that status quo prevailed until the early years of the Reagan administration. DOT Secretary Drew Lewis accepted the need for increased federal highway investment, but had difficulty persuading President Reagan to support the corresponding federal fuel tax increase. To build transit groups’ support for the measure, “He promised to create a mass transit account in the Highway Trust Fund that would receive 20 percent of the revenue from a five cent per gallon tax hike (the ‘transit penny’). This convinced many big city Democrats and liberals to support the measure, despite their concern over the effects of the tax on the poor.” After first promising to veto the bill, after the 1982 elections Reagan changed his mind, and signed the bill after it finally passed, in January 1983.
That bill, the Surface Transportation Assistance Act of 1982 (PL 97-424), established the Mass Transit Account within the Highway Trust Fund, to receive “one-ninth of the amounts appropriated to the Highway Trust Fund” from all federal motor fuels taxes. These changes from 1973 through 1982 represented a shift away from the ‘benefit taxation’ model whereby user fees are levied on system users in proportions that are as close as feasible to the direct benefit that the users get out of the system, Although the votes brought to the table by the transit lobby were the key to getting the biggest ever increase in the ‘user fee’ on drivers and truckers, the addition of mass transit to the Trust Fund made the gas and diesel taxes resemble true ‘user fees’ much less.
Since the 1982 legislation, every subsequent reauthorization of the federal program has led to further departure from the users-pay/users-benefit principle. The most sweeping change occurred with enactment of the Intermodal Surface Transportation Efficiency Act (ISTEA) in 1991. It created two new programs within the Highway Trust Fund, both of which were to be “flexible,” allowing states and metro areas to switch funds from highway to non-highway uses. The Surface Transportation Program (STP, funded at $23.9 billion over six years) allowed highway funds to be spent not merely on transit projects but on bike paths, sidewalks, recreational trails, landscaping and historic preservation—all under the rubric of “transportation enhancements.” The Congestion Mitigation and Air Quality Program (CMAQ, funded at $6 billion) funded a wide variety of projects intended in some manner to reduce emissions and/or reduce congestion. All of these acts drew monies away from out Interstate Highway System to pet projects of environmentalists and progressive politicians.
ISTEA also imposed extensive new transportation planning requirements on Metropolitan Planning Organizations (MPOs). This increased complexity of planning infrastructure investments reflects so many goals (air quality, promoting public transit, historic preservation, wetlands protection, environmental justice) that moving people in automobiles effectively and efficiently got lost in the shuffle.
Subsequent reauthorization measures—TEA-21 in 1998 and SAFETEA-LU in 2005—have expanded the extent of “flexibility,” and increased both the number of specific transportation programs and the complexity of transportation planning requirements. As of this writing, the only draft reauthorization bill—the Senate’s 1,500-page 2-year Senate Highway Bill (MAP 21, S. 1813) that will be combined with the student loan extension would complete the transformation of what used to be called the highway program into an overall transportation program, and convert the former highway user taxes into general transportation taxes. The Congressional Research Service’s impartial analysis notes that the bill “reflect[s] policies that favor alternatives to the automobile, such as transit, bicycles, and walking. The CRS analysis notes that “MAP-21 would allow for a major expansion of funding transferability between highway and transit programs and a broadening of direct project funding eligibilities to allow an increase in direct highway funding of transit projects or direct transit funding of highway projects.” Although as of June 2012 MAP-21 was still in conference CRS interprets the wording of the bill to imply that it “could be substantially expanded in dollar terms.” Moreover, it would shift several of the non-highway programs (including Safe Routes to Schools, Transportation Enhancements, Recreational Trails, Scenic Byways and the U.S. Bicycle Route System) into a new FHWA Office of Livability. It would also “specifically require that a portion of funds must be obligated for Transportation Enhancement activities and college student loan interest forgiveness.
Even this is not enough for some opponents of highways and automobiles. The Smart Growth Partnership is promoting a measure called the Complete Streets Act, which would require state DOTs and MPOs to adopt new traffic-calming street designs with full sidewalks and bikeways, if necessary at the expense of traffic lanes. The two before-and-after photos on the Complete Streets website both show four-lane urban streets reduced to two lanes to permit the addition of raised medians, bike lanes and traffic-calming bulb-outs. The “Policy Elements” discussion on the coalition website says the bill would apply to “all agencies and all roads,” though it would allow for exceptions such as Interstate highways. And it would apply to all new roads and road improvement projects. As of June 28th the Complete Streets option has been chopped from the pending Senate Bill in conference committee, but rest assured they will be back.
All of this perfectly exemplifies the loss of national purpose and focus in the federal transportation program. When legislation in 1956 expanded the federal government’s role in transportation in order to create the Interstate System, the Interstates were a clear national project with national benefits. Traffic calming in Tampa or Boise, or bike paths in Buffalo or Phoenix, do not provide national benefits and should not be federally funded. Paying for them with highway user fees also increasingly abolishes the users-pay/users-benefit principle and increasingly transforms fuel taxes from user fees to transportation taxes paid by one group to provide for benefits for other groups.
The federal transportation program needs to refocus on the national transportation system and leave local projects with local benefits to local governments. At the same time, state and local governments need to quit seeking federal funding for their local projects that are not critical parts of national networks. A crucial part of this is restoring the users-pay/users-benefit principle. If there are non-highway transportation projects with national benefits and scope, they should be paid for with general fund tax revenue, not highway user fees
Over the ensuing years, after the passage of the first Federal Aid Highway Act, a straight forward, simple, and fair means of funding the greatest transportation project in the history of the world, politicians of all stripes have turned our transportation funding into a pork-barrel means of financing their favorite projects and building a massive bureaucracy that has added thousands of public sector union employees to the roosters of federal, state and municipal payrolls.
In the next part of this blog I will cover the need for highway investment and how we can return to the original purpose of the Highway Trust Fund.