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Federal Funding

Do Highway Users Pay for the Highway System? Not Even Close.

We tend to have a few good laughs when Randal O'Toole fires up his Cato computer and weighs in on transportation issues. It's hard to take seriously a man who thinks that having the government tax people to build something which it then gives away for free is the libertarian ideal.

record_gas_prices_large.jpgDo federal gas taxes really charge "users" of the highway? (Photo: CAP)

But occasionally O'Toole provides an opportunity to discuss some interesting aspects of the transportation planning process and learn from his errors. And so we turn to his latest policy paper, which was released yesterday. Therein, he writes:

The Interstate Highway System accomplished all of this [construction of the system] without any subsidies. Federal highway user fees paid for 90 percent of the cost of the system, and state highway user fees covered virtually all of the remaining 10 percent.

This brings up an interesting question: What is a user fee? Common sense would suggest that a user fee is a fee paid by a user of something in order to use that something. A common example might be a train fare. When one wants to ride a train, one purchases a ticket. One doesn't purchase a ticket if one doesn't want to ride the train, and one doesn't ride the train without a ticket. A ticket is specifically meant to extract a fee from a potential user, that that user might then be allowed to use the train.

So do gas taxes count as highway user fees? Well, one might pay gas taxes even if one never uses highways. You pay the gas tax on gas used to drive down local roads or private driveways, or to power lawnmowers and tractors that never even see publicly-funded blacktop.

And one can use highways without ever paying gas taxes. Anyone able to obtain a vehicle powered by natural gas or electric batteries or canola oil can ride on the federal highway system for thousands of miles and never pay one cent to do so.

So gas taxes are not user fees. Indeed, the lack of actual user fees is one reason American highways suffer from severe congestion problems; when you give away something valuable for free -- like scarce highway space -- it ends up seriously over-consumed.

As a thought experiment, let's consider a world in which federal gas taxes functioned more like a user fee. That is, let's imagine that when drivers fill up, they pay a federal gas tax only on the gasoline consumed while driving on federal highways. That's still not really a user fee, but it's a little closer.

Light vehicles traveled a total of around 2.8 trillion miles in 2007, of which about 23 percent were driven on interstate highways, according to the Department of Energy. If we divide the total number of miles driven on interstates by the weighted average fuel economy of cars and light trucks, we find that about 31 billion gallons of gas were consumed on highways in 2007. That's a lot!

Next, we know that the Federal Highway Administration budget is around $39 billion. If we assume that truck and diesel revenues are unchanged, then we have about $24 billion in highway funding to be covered by a tax on those 31 billion gallons of gas, for an estimated gasoline tax of about 80 cents per gallon.

That's an extremely rough estimate. In fact, the nation's light vehicle mileage includes some diesel-burning engines. If we adjusted the calculations to reflect that, the estimated tax rate would be higher. Highway fuel economy is also higher than the average figures, which means that the calculations above probably overstate the gallons of gas burned on highways. This, too, means that the estimated gas tax rate is too low.

An appropriate gas tax rate to cover the annual highway budget -- which many argue is far too small -- would be on the order of about $1 per gallon.

All in all, this should illustrate that if you set aside all the O'Toole hand waving about trust fund revenues shifted to other modes, you still wind up in a world where federal roads come nowhere near paying for themselves.

One final point: We learned last year that it doesn't take much of an increase in the price of gas to generate reductions in VMT and increases in transit use. If we adjusted the current price of a gallon of gas to reflect an appropriate federal gas tax, gas would be selling for nearly $3.50 per gallon, on average.

With gas at that price, travelers would drive less and use transit more often. During the gas price spike last year, we saw a number of transit systems enjoy high demand during peak periods, to the extent that fares might easily have been raised to reduce system overcrowding.

In other words, what transit systems can charge riders depends upon what the government is (or isn't) charging drivers. This is exactly what we'd expect; if Coke began heavily subsidizing its sodas, Pepsi would have to find a way to cut its prices or face going out of business.

What we see then is that there are two funding equilibria. If drivers pay a fair price for the use of roads, then highway revenues rise and transit fares can rise until both modes are full but not congested. This is the high revenue equilibrium.

But if drivers don't have to pay a fair cost for the use of roads, then highway revenues will be low, roads will be congested, and transit systems will have too little ridership, such that transit systems will be unable to raise fares without losing riders to the already congested roads. This is the low revenue equilibrium, and it's a bad place to be -- inefficient use of all modes, costly road congestion, and a constant shortage of funding for needed infrastructure maintenance and investment.

That's where we are now.

When Congress finally gets around to crafting a transportation reauthorization, it would be nice if they recognized some of these dynamics. America needs smarter infrastructure investment rules, but it also needs smarter revenue-raising methods. If you get the money the right way, that makes it easier to spend the money the right way.

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