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Saturday, June 30, 2012

The Need for Increased Highway Investment

“To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm.” — Friedrich August von Hayek.

In the last part of my blog on our Interstate Highway System I covered the Highway Trust Fund and the way it has devolved into pork-barrel program for politicians of all stripes and state and local officials to finance their pet projects and thusly turning the fund into a tax rather than its original concept as a user fee.

In this blog I want to detail the reasons we need to invest in our highway infrastructure, but without the pork-barrel non-highway projects.

Some of those supporting expanded diversion of highway user revenues, or even the termination of the users-pay/users-benefit principle, argue that since the Interstate system is long-since completed, the federal government should shift its focus to other priorities, such as promoting intermodal transportation, reducing Americans’ “dependence” on automobiles, and shifting as much freight as possible from truck to rail. They see the current reauthorization effort, coming as it does at a time of distress over greenhouse gases and concern over petroleum imports, as a historic opportunity to make such a shift.

But the age of highways, automobiles and trucks is far from being over. Trucks haul the large majority (by value) of all goods moved in America—and FHWA projections show that this truck volume will increase 2.5-fold by 2035. All responsible projections, based on continued growth in both population and GDP, show continued growth in driving, as measured by vehicle miles of travel (VMT), in coming decades—even though the rate of increase in VMT has been slowing down. Decades of spending far more per transit rider than per highway user in our major metropolitan areas has not halted the decline in transit’s market share of travel. People expect, and our economy depends on, improving mobility. We need a system that makes it easier for more people to connect to more places, and it remains roads and personal vehicles and trucks that provide that mobility. Consequently, the need for highway investment will continue.

There are five fundamental reasons why America must continue large-scale capital investments in its highway system.

  • First, highways and bridges wear out over time; yet limited preservation investment in recent decades has allowed the accumulation of huge backlogs of deferred maintenance and rehabilitation, leading to faster deterioration.
  • Second, when highways and bridges do wear out they must be replaced; much of the Interstate System will be in this situation in the next two decades. And the cost of replacement, 50 years after original construction, is many times that original cost.
  • Third, the places where Americans live and work have changed dramatically since the Interstate System was planned in the 1940s; hence, some new highways are needed to connect places that scarcely existed 70 years ago (e.g., the missing Interstate link between Phoenix and Las Vegas).
  • Fourth, given the enormous growth in both population and affluence since the 1950s, significant portions of our major highways are under-sized for current, let alone future, travel demand. Improved performance (e.g., reduced congestion) therefore requires additional capacity. A perfect example of this is the Santa Monica Freeway (I-10) from East Los Angeles to Santa Monica. When I worked on this project for the California Division of Highways in 1962-65 it had a design Average Daily Traffic (ADT) rate of 20,000 cars per day. Today it far exceeds that ADT. This also applies to I-405, a bypass freeway around Los Angeles.
  • Fifth, Americans continue to consume more, and goods move in this country mainly by roads. Almost 70% (by weight) of domestic freight moves by truck. And a great deal of the freight moved primarily by rail also moves by truck for part of its journey. Continuing to move more goods more quickly will require better performing roads. Just look out your door for the UPS or FedEx truck. As an anecdotal example during a recent road trip from Southern California to Montana alone I-15 I saw numerous UPS semi tractors pulling not one, not two, but three trailers along at 70 miles per hour. I also passed on of Wal-Mart’s giant distribution centers north of St. George Utah where there were hundreds of Wal-Mart tractor trailers being loaded from their giant railhead warehouse.

A number of organizations have made serious estimates of highway capital investment needs in recent years. They include the American Association of State Highway and Transportation Officials (AASHTO) the National Surface Transportation Policy and Revenue Study Commission, the National Surface Transportation Infrastructure Financing Commission, and the Federal Highway Administration (FHWA). All four use the same underlying database, but make somewhat different assumptions for their analysis.

Congress requires the FHWA to make estimates, every two years, of the capital costs needed to “maintain” and “improve” the existing highway and transit infrastructure of the United States, accounting for federal, state and local funding sources. Their biennial report is called the Conditions and Performance (C&P) Report. The 2008 edition was released early in 2010.

For the 2008 C&P report, the FHWA devised a number of different investment scenarios, using three different benefit/cost ratio thresholds for investment, and some scenarios which assumed that congestion pricing is applied to all congested highway segments. To begin with, in the reference year of 2006, federal, state and local governments invested $78.7 billion in the nation’s highways, bridges and streets. This capital investment was for both preservation/rehabilitation of existing infrastructure and for additions to current capacity. Over the next 20 years, to sustain current conditions (of bridges and pavements) and performance (especially congestion), FHWA’s model found that annual investment should be $105.6 billion—nearly $27 billion more than in the reference year.

To improve conditions and performance over the next 20 years, FHWA91-57 Interchange modelers analyzed scenarios in which all funded projects would have to pass a benefit/cost ratio hurdle of at least 1.0, 1.2 or 1.5. With the minimal requirement that benefits must at least equal costs (i.e., B/C = 1.0 or higher), the required annual investment would be $174.6 billion—more than double the current annual total of $78.7 billion. That number drops to $157.1 billion with a 1.2 B/C hurdle, and declines further to $137.4 billion with a 1.5 B/C hurdle. Given the enormity of the challenge involved in significantly increasing highway investment, we will use an investment threshold of a B/C ratio of at least 1.5 in this report.

FHWA also ran the same scenarios under the assumption that variable tolls (congestion pricing) would be used in conjunction with increased investment. Rather than devising an arbitrary rate at which pricing would be phased in, the modeling assumed that all congested highway segments would be priced immediately. While obviously unrealistic, these scenarios give us a lower bound on the annual investment levels needed for the various scenarios. Thus, to sustain current conditions and performance, annual investment with pricing would be only $71.3 billion, slightly less than the current total. For the nearly unconstrained “improve” scenario, widespread pricing would reduce the annual investment from (unpriced) $174.6 billion to $131.6 billion. And for our preferred B/C hurdle of 1.5, pricing would reduce the annual investment needed from the previous $137.4 billion to just $101.8 billion. That’s still a significant increase from the current $78.7 billion, even though the assumption of immediate and widespread congestion pricing is highly unrealistic.

The bottom line of this analysis is that assuming the use of a realistic 1.5 B/C threshold for highway capital investment projects, the annual amount needed to improve highway conditions and performance nationwide is between $102 billion and $137 billion. Any number within that range would be a large increase over the reference year total of $78.7 billion.

There is some uncertainty in all this. For example, the level of need to replace worn-out highways and bridges is in dispute. A recent National Cooperative Highway Research Program (NCHRP) study included a Task 14, which concluded that current Interstate reconstruction needs are not adequately reflected in the C&P and related reports. The most recent AASHTO Bottom Line report summarizes this finding:

“Today large parts of the Interstate system are reaching the age where major reconstruction will be required. This work has already begun around the country and reconstruction costs have been dramatic. It is not possible at this time to estimate the costs involved in a complete reconstruction of the system. A special analysis conducted to assess how to obtain reconstruction cost estimates recommends that the states conduct a complete systematic nationwide inventory of the Interstate system to determine the future investment requirements.”

But all of these reports take as given the current system for funding transportation and, more importantly, the current level of efficiency and priorities. Given the large gap between estimated needs and estimated revenue, the smart thing to do is think about how to tackle the gap from every direction. Therefore, it is crucial to note several caveats to the estimates from AASHTO, the Policy and Revenue Commission, the Infrastructure Financing Commission and the FHWA.

First, because they are the sum of federal, state and local capital spending on highways, these totals imply no specific shortfall amount at the federal level. Most recent reports (such as those from AASHTO and the two national commissions) assumed that the federal government should cover its “historic” share of 45% of the total. But what share should come out of federal funding depends critically on how the federal role is defined, which is one of the subjects of this paper. Current federal revenues are probably enough to maintain the current Interstate system and some other crucial national highways. The vast majority of the unmet needs for new roads and the unfunded maintenance are on road systems of more state and local importance and should not be federal priorities. So there may be little or no “gap” in federal funding vs. needs.

Secondly, most of the totals in highway groups’ needs estimates implicitly assume that all of the highway projects involved would be un-priced, such that they appear “free” at the point of use. But economists understand that pricing can significantly affect how much of a good or service will be used, and provide better information for making decisions about what investments are needed. Hence, as in the 2008 C&P report, alternative scenarios that involve various degrees of pricing would produce lower total capital investment needs.

Third, many estimates of highway and transit needs are derived not from a performance-based prioritization process, but from a highly politicized process where projects are moved to the top based on preferences of legislators on key state or congressional committees, or to chase after “free” federal funding. Likewise, a significant portion of current transportation funds is spent on projects with popular or political appeal but little mobility benefits. The many metro areas that spend 30-50% of all transportation funds on transit, bicycle and walking paths that account for less than 10% of travel (and thus are spending only 50-70% on the road system that carries at least 90% of travel) will continue to have vast unmet “needs.” Proper prioritization of the use of transportation funds will do much to close the needs gap.

Fourth, these estimates assume costs based on the current way of doing projects, rather than examining ways to reduce project costs. State and local governments could do much to reduce the costs of building new transportation projects and maintaining existing ones. Wider use of design-build project approaches would reduce project costs by 5 to 10%. Many projects that could be priced could be built with at least some of the cost from private capital in public-private partnerships (PPPs) that can reduce the costs of the project. Even PPPs that don’t involve private capital, such as availability payment structures, can reduce project costs. State and local governments that contract out road maintenance typically save 10 to 20%, and that could be much more widely practiced.

So how does this all add up? We would say that there is a great deal that can be done to close the needs gap with current revenue. But even if we did all that, at least for the next decade or so there is a clear case for increasing highway investment in America. The current reauthorization will be a failure if it does not address this critically important need.

Highway Funding Beyond the Fuel Tax

In 2006 a special committee of the Transportation Research Board concluded that although the fuel tax had served the nation well as the 20th century’s primary source of highway funding, it was not up to the task of doing so in the 21st century.26 This conclusion was based on plausible projections of increased motor vehicle fuel economy, a likely evolution to nonpetroleum sources for vehicle propulsion, and other factors. While recommending that the nation retain the principle of users-pay funding, the TRB committee urged expanded use of tolling and a gradual transition to a more direct form of paying for highway use, based on miles traveled. (It also called for developing broad-based tax support for transit, rather than increasing the extent of transfers from highway user revenues.) Finally, it called for further research on the impact of finance arrangements on transportation system performance.

Those concerns and recommendations set the stage for Congress to create the National Surface Transportation Infrastructure Financing Commission. Its 2009 final report recommended that the nation begin planning now to transition from motor fuel taxes to road-use charges based primarily on Vehicle Miles Traveled (VMT charges). Some advocate that replacing fuel taxes with VMT charges is the preferred way forward, for 21st-century highway funding.

However, I emphasize that if the nation should adopt VMT charges, not VMT taxes. This is not mere semantics. This paper has stressed the many advantages of the users-pay/users-benefit model for highway funding. As noted in the main text, this means of paying for highway use is analogous to bills (based on usage) for using other network utilities such as electricity, telecommunications, water, natural gas, etc. Hence, a VMT charge should be configured as a payment for the use of roadway infrastructure. As such, its amount and structure should be based on two principles:

  • Cost recovery—enabling the infrastructure provider to recover the full (life-cycle) costs of building, operating, maintaining, expanding and ultimately replacing the infrastructure in response to customer demand.
  • System management—structuring the charges to manage short-term (hourly, daily) demand for best overall service to customers.

The cost recovery principle obviously means that the charge per mile traveled can be different for different categories of roads: urban expressway vs. rural two-lane highway, major urban arterial vs. neighborhood street, etc. The costs of building and maintaining different categories of roads vary enormously, reflecting not only the type and size of road but also geography and land costs. Cost recovery also means that the charge per mile can be different for types of vehicles that impose markedly different cost to the roadway provider—as heavy trucks do compared with almost all other types of vehicles.

The system management principle means that various forms of congestion pricing are legitimate, as long as they are used to manage traffic flow rather than to extract monopoly profits. This may require some type of regulatory oversight. The fear I have of using VMT cost recovery the state and federal fuel taxes will remain in place and the used will be double taxed. This is what usually happens when new taxing schemes are introduced.

Suppose we went to a VMT for of pricing to finance our federal highway system. Consider if you drive 20,000 miles per and your vehicle averages 24 miles per gallon (many newer 6-cylinder attain this figure on a regular basis).This would mean you are purchasing 833 gallons of gasoline per year. With a federal fuel tax of 18½ cents per gallon you are contributing $154 dollars to the highway fund. If the federal government no longer charged the fuel tax and went to VMT they would have to charge you $0.0077 per mile – which would no doubt be rounded up to one-cent.

This would be fine, but we all know from our history with uncapped taxes, such as sales taxes, that is always a creep factor to these taxes. Also, there is the problem of metrics and the collection of the tax. Would you now have a box to fill in on your incomes statement? Would this work on an honor system – something I very much doubt? How would the government measure the mileage you drive? Would you put your yearly beginning and ending mileage on your tax return or would each car be equipped with a monitoring GPS unit that would record your mileage? If GPS was used this would open a Pandora’s Box of mischief for the government. Like you cell phone usage the government could retrieve data showing where you drove and this, without a warrant, could violate your constitutional rights. I am sure many folks would not want the government to know how many trips they made to the Pussy Cat Ranch, Mary Sue’s Massage Parlor, or their local gun store. Another method might to have the vehicle owner get a mileage check each year when they renew their license plates. This would be similar to your smog test. As you can see while he argument may make financial sense for highway funding due to the increase gas mileage vehicles are achieving but the metrics are problematic.

These principles are equally applicable to roads built and operated by state DOTs, by government toll authorities, and by investor-owned companies operating under long-term concession agreements.

What has not been included in these principles are road-user payments for negative externalities imposed by road users on the surrounding people and environment. Addressing such externalities—noise, tailpipe emissions, CO2 emissions, etc.—is a task for government in its regulatory role. In the United States, this is sometimes done via regulations (e.g., CAFÉ standards on motor vehicle fuel economy, technology mandates such as catalytic converters) and sometimes via externality taxes (e.g., proposed carbon taxes or the cap-and-trade alternative). Various states have also legislated requirements for noise walls along certain types of roadways in urban areas.

It is legitimate for government to take action against externalities that cause harm to non-consenting parties. But our distinction is between the roads-utility function (which can be carried out by DOTs, toll authorities, and concession companies) and the regulatory function (which is purely governmental).

Some of those proposing VMT charges want such charges to be based on a host of factors that are regulatory in nature—such as engine size, CO2 emission level, number of occupants, etc. Doing so would seriously blur the distinction between a charge and a tax, thereby undercutting the utility-pricing model and the many benefits of the close connection between users-paying and users-benefitting. It would also increase the political difficulty of replacing fuel taxes with VMT charges, by introducing a host of “social engineering” factors that would engender opposition.

What is the Appropriate Federal Role?

Why do we have a federal government? Most historians and political scientists would say that it exists to do things that the state governments cannot do—and potentially to keep the states from doing harmful things. One of the reasons for replacing the Articles of Confederation with the Constitution was that under the former, the original 13 states were erecting barriers to interstate commerce. To the framers of the Constitution, fixing this problem was so important that it led them to include the interstate commerce clause. Yet despite the widely accepted view of the appropriateness of the federal government ensuring the free flow of interstate commerce, the idea of the federal government, rather than the states, building and operating highways was controversial right up until the creation of the Interstate highway system.

To be sure, in the first half of the 20th century there was a well-marked system of U.S. highways, ranging from US1 on the east coast to US101 on the west coast. But it was well-established that these highways were owned, operated and maintained by the states, though they took advantage of modest federal aid that was provided, based on a two-cent federal fuel tax. (Prior to the creation of the Highway Trust Fund in 1956, however, the federal gas tax was considered general federal revenue, and federal highway aid was appropriated each year from general revenues.)

From time to time, experts on federalism have questioned the current division of responsibilities between the federal, state and local governments. In her 1992 book for the Brookings Institution, Alice Rivlin recommended that “The federal government should eliminate most of its programs in education, housing, highways, social services, economic development, and job training,” so that it could focus its resources on more truly national priorities.

In 2004, Tom Downs, a former senior official with a number of federal, state and local transportation agencies, gave the Turner Lecture at the annual American Society of Civil Engineers conference. His assessment was that the federal transportation program had evolved into little more than a revenue block grant to the states, with no clear national objectives. After further cataloguing the program’s shortcomings, he suggested that “It is time to seriously consider an option that has been rejected out of hand in the past, namely a reversion of the federal gas tax to the states.

Still more recently, the Government Accountability Office, in a whole series of reports, has cited many of the same shortcomings of the federal programs as have other critics. It recommended “identifying issues in which there is a strong federal interest and determining what federal goals should be related to those interests — for issues in which there is a strong federal interest, ongoing federal financial support and direct federal involvement could help meet federal goals. But for issues in which there is little or no federal interest, programs and activities may best be devolved to other levels of government.

If we could start with a clean sheet of paper in the highway sector, it would seem obvious that federal transportation dollars should be narrowly focused on transportation projects that are clearly national in scope or impact. Instead of focusing on funding state programs through a highly politicized process plagued by redistribution, pork-barrel spending and projects that would never pass a benefit/cost analysis, federal transportation policy should focus on key areas of national interest:

Maintaining the Interstate System — The federal government should work with states to maintain the core national mobility and goods movement network.

Interstate Highway upgrades — When state highways link up regionally in fast-growing corridors, sometimes an upgrade to an Interstate will make sense, and the federal government should partner with states to accomplish that.

Multi-state coordination — Some transportation problems, particularly in expanding urban areas, have taken on multi-state dimensions. The federal government can serve a useful role in mediating and even coordinating transportation decisions, infrastructure and funding, given its constitutional role in facilitating interstate commerce.

Freight corridors — Producers need the roads to get materials in and products out; services need roads to interact with customers, and consumers need roads to connect with goods and services. Protecting interstate commerce is a national issue and federal transportation policy should ensure that major interstate goods movement corridors and bottlenecks receive adequate capacity and maintenance.

Transportation research, safety and related issues — The federal government has been the lead driver on a lot of research into new technologies and methods of managing transportation systems, coordinating common standards, incentivizing experimentation and innovation. Highway safety regulation, in a major nation involved in the global economy, needs to be uniform and national in scope, so it is appropriate that the National Highway & Traffic Safety Administration (NHTSA) and the National Motor Carrier Safety Administration (NMCSA) be part of the U.S. Department of Transportation and federally funded.

The current federal surface transportation program, as noted, bears little resemblance to this model. Congress has gradually expanded the “federal” program—originally concerned almost exclusively with the Interstate highway system—into an all-purpose highway, streets, sidewalks, bikeway and transit program, with many additional frills and flourishes, called “enhancements.” There is no federal purpose for this enormous expansion of scope other than (1) it enables members of Congress to provide desired projects to organized interest groups, and (2) those paying the federal “highway user taxes” have failed to protest effectively at the diversion of their “highway utility bill” payments to these ever-expanding purposes.

I have liberally used comments from a report from The Reason Foundation’s Restoring Trust in the Highway Trust Fund. This is 2010 report authored by Robert Poole and Adrian Moore and expresses many of the thoughts I have touted for the past 20 years. My hat tip to the Reason Foundation for publishing such a comprehensive and intelligent report. You can read the entire report by clicking here.

In my next blog on this issue I will address some of the recommendations to restore trust in our federal and state highway trust funds along with expanding and maintaining our Interstate Highway System.

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