How Should Congress Distribute Funding for State Transportation Revenue Replacement?

How Should Congress Distribute Funding for State Transportation Revenue Replacement?

May 05, 2020  | Jeff Davis

The novel coronavirus’s suppression of demand for transportation and commerce is having significant effects on tax revenues at all levels of government. A month ago, state departments of transportation asked Congress for $50 billion in aid “as an immediate revenue backstop to state DOTs in order to prevent major disruptions in their ability to operate and maintain their transportation systems during this national emergency.”

The states asked for this aid to be included in the next round of coronavirus relief legislation, and the House of Representatives hopes to consider that bill as early as next week (though that schedule might slip). No details of the bill are yet available, but the Speaker of the House has repeatedly indicated that fiscal relief for state and local governments, generally, will be a key feature of the legislation.

If Congress does choose to provide targeted financial aid to state DOTs, how should that money be distributed?

The letter from the state DOTs only asks that the money be “distributed to state DOTs via formula.” But what kind of formula?

Congress has just embarrassed itself by writing a formula based on incomplete data to distribute $10 billion in funding to airport sponsors to replace revenues lost due to the coronavirus’s effect on air travel. As first noticed by ETW and then later explained by POLITICO, the formula written by Congress ordered the FAA to divide by zero in some instances, which is impossible, and some tiny airports with no debt wound up getting enough money to support full airport operations, in the complete absence of pesky things like airplanes or passengers, for four years to a decade or more. Meanwhile, the largest airports only got enough aid to sustain operations for three to six months, depending on the airport.

Obviously, avoiding those kinds of inequities should be a prime consideration for Congress when providing future aid.

For anything highway-related, the path of least resistance is to use the standard highway funding formula that is used to apportion over $40 billion in new highway contract authority to the 50 states and the District of Columbia each year. But, as Eno’s 2019 report Refreshing the Status Quo: Federal Highway Programs and Funding Distribution pointed out at length, that formula is badly outdated and is now a mishmash of real-world factors like road-miles, traffic, bridge costs, and air quality as they existed in the summer of 2007, plus all the earmarks in the 2005 pork-barrel extravaganza of SAFETEA-LU, plus annual adjustments for how much gas and diesel fuel is purchased in Texas every year.

If Congress uses the standard federal highway funding formula to distribute aid meant to replace dedicated state transportation revenues, they will produce similar inequities to those generated by the botched airport aid formula.

We are talking about revenues here, not spending. The letter from the state DOTs asks that the $50 billion “be essentially treated as state revenues that would otherwise have been collected for a wide range of state DOT activities without the COVID-19 pandemic.”

When talking about replacing state transportation revenues that are dropping due to coronavirus-related travel and economic changes, having specific numbers to use as a starting point would help. Fortunately, the Federal Highway Administration publishes detailed totals of state-by-state highway revenues, most recently in the updated Table SF-1 released in January of this year.

(Yes, state DOTs usually handle other modes of transportation as well, but Congress has already provided $25 billion directly to transit providers, which in some instances are state governments, and has already given the aforementioned $10 billion directly to airport sponsors, some of whom are also state governments, and once you subtract those, what is left at state DOTs is almost completely highway-centric.)

States (and state equivalent the District of Columbia) collectively raised or received $182.6 billion for highways in fiscal 2018, per Table SF-1. The money came from a wide variety of sources:

The federal grants are continuing at the authorized FAST Act level despite the coronavirus, so that money doesn’t need to be replaced. And while coronavirus is having an effect on the municipal bond market, stability there is being provided separately by the Federal Reserve, so that money shouldn’t be addressed by Congressional check-writing. And $8 billion of that “other state funding” was state appropriations from general revenues – and, separate from the AASHTO request, state governors have requested $500 billion in flexible funding to replace those kind of revenues, so we are also removing those from the equation. Indeed, the whole rationale for the federal government providing aid to state DOTs separately from aid provided to state governments in general is that the DOTs have their own dedicated revenue streams that are being adversely affected by coronavirus, so excluding state general revenues spent by states on highways from the count seems necessary. (An earlier article on this subject suggested that we not count the $4.7 billion in local revenues kicked upstairs to state DOTs as revenue in need of replacement, but we have reconsidered that, partly because it looks like the Minnesota motor vehicle sales tax, a key component of the state transportation program, is collected that way.)

All told, of the $182.6 billion shown in the chart above, $108.7 billion can be considered dedicated, non-federal, tax revenues used for highways.

FY 2018
Source of Revenues Billion $
Motor Fuel Taxes 35.739
Motor Vehicle & Carrier Taxes 28.101
Road and Crossing Tolls 14.562
Subtotal, Highway User Revenues 78.402
State General Fund Appropriations 8.080
Other State Imposts 12.675
Miscellaneous State Revenues 12.883
Bond Proceeds – Original Issue 14.650
Bond Proceeds – Refunding 9.189
Federal Funds 41.986
From Local Governments 4.730
TOTAL REVENUES 182.595
Minus State GF Appropriations -8.080
Minus Bond Proceeds -23.839
Minus Federal Funds -41.986
TOTAL DEDICATED NON-FEDERAL TAX REVENUES 108.690

In their request, AASHTO used a starting point of $111 billion per year (a FY 2019 estimate from the National Association of State Budget Officers (see Table A-5 here)), then assumed a 30 percent drop in those revenues over the last six months of fiscal 2020, then a full-year reduction of 30 percent over fiscal 2021. (111/2 = 55.5, x 0.3 = 16.65, and then 111 x 0.3 = 33.30, and 16.65 + 30 = 49.95.) (We prefer to use the FHWA numbers – they are a year older than the NASBO estimate, but the NASBO dataset is notably incomplete and excludes Mississippi, Wyoming, Alaska, and the District of Columbia.)

Congress may choose not to provide the full $50 billion requested by the state DOTs, in part because that state request was for revenue replacement through September 2021, and Congress has been providing aid in other areas with much shorter time horizons, but for the purpose of this analysis we will assume that Congress provides the full $50 billion.

States, the “laboratories of democracy,” have wide variances in how they fund their highways. On a national average, 13 percent of total state highway funding comes from borrowing, but 18 states issue no highway bonds at all. (Massachusetts funds half its highway program via bonds.) General revenues fund 25 percent of Alaska’s highway program but zero percent of the programs in 19 other states. Cent-per-gallon motor fuel taxes only support 2 percent of the District of Columbia’s highway program, but support over 39 percent of Tennessee’s program. (Go Vols!)

Because of these discrepancies, any federal aid to replace lost revenues should actually look at the amount of those revenues being replaced, on a state-by-state basis. And that is something that the standard federal highway funding formula just does not do.

The table at the end of this article lists each state’s FY 2018 dedicated non-federal highway tax revenues (“dedicated” means excluding state general fund appropriations, non-federal is self-explanatory, and “tax” means we are excluding bond proceeds), which totaled $108.7 billion in 2018, per the January 2020 updated FHWA Table SF-1. It then lists each state’s share of $49.95 billion if that money is distributed via the standard federal-aid highway funding formula (taken from total apportionments for FY 2020 in Table 1 of FHWA Notice 4510.837). It then compares the two columns and is ranked in order of the ratio of state shares of the $50 billion in hypothetical federal relief as a percentage of total FY 2018 dedicated non-federal revenues (on a national average level, $50 billion is 46 percent of $108.7 billion).

The lack of any real relationship of the standard highway funding formula to actual dedicated highway revenues is most apparent when looking at the letter “D.”

The state equivalent with the highest ratio is the District of Columbia, at 381 percent, and the state with the lowest ratio is Delaware, at 17 percent.

Delaware and the District are not that far apart in population (about 700 thousand for D.C., about 975 thousand for Delaware). But Delaware has four times the road lane-miles that D.C. has (13,972 versus 3,447, per Table HM-60), and as a result, Delaware’s highway program is almost three times the size of the District’s ($1.71 billion versus $607 million in highway spending in 2018, per Table SF-2).

When it comes to highway revenues, the District gets less than 10 percent of its annual funding from highway users. 43 percent comes from federal grants, 26 percent from bond issues, and 22 percent from general fund appropriations. But Delaware only gets 10 percent of its funding from federal grants, 18 percent from bonds, and 5 percent from state general funds.

As a result, the amount of dedicated non-federal, non-bond funding that D.C. devotes to highways is only $53 million per year, while Delaware’s equivalent number is almost $1.3 billion per year. As a result, if you just give $50 billion to states and distribute it via the standard highway funding formula, you only give Delaware $215 million in highway revenue replacement, which is only two months worth. But the same distribution would the District almost as many dollars ($202 million), which would be almost four years worth of revenue replacement.

Similarly, distributing $50 billion via the highway funding formula would give Alaska two years worth of dedicated non-federal highway revenue replacement ($636 million versus $310 million – Alaska’s highway funding share is still based on decades of reauthorization work by Ted Stevens and Don Young, and to this day, its highway formula share still reflects the “Bridge to Nowhere” and other earmarks in the 2005 SAFETEA-LU law), while it would only give New York less than four months of revenue replacement ($2.13 billion versus $7.13 billion).

Congress is, of course, free to write its own formula, whether by just referencing certain columns in the latest Table SF-1, or by taking those percentages and writing them into the law itself (see section 202 of the 1995 NHS Designation Act for how that kind of thing looks).

A printable form of the following table, along with another table showing the dollar amount of each state’s apportionment of $50 billion if it were apportioned by each state’s share of total dedicated tax revenues spent on highways, can be downloaded in PDF format here.

State Dedicated Non-Federal Highway Revenues vs. $50 Billion in Funds Distributed by the Standard Federal-Aid Highway Funding Formula

Thousands of dollars. Source: FHWA (Table SF-1 and Notice N.4510.837).
Column A Column B Column C Column D
State FY18 State Share of Difference Ratio
Dedicated $50B via (Column B (Column B
Highway Tax/ FY20 Highway Minus Divided By
Fee Revenue Funding Formula Column A) Column A)
Dist. of Col. 53,176 202,442 +149,266 381%
Alaska 310,100 636,174 +326,074 205%
Wyoming 174,379 325,034 +150,655 186%
Montana 310,588 520,564 +209,976 168%
Rhode Island 208,688 277,474 +68,786 133%
Louisiana 767,517 890,478 +122,961 116%
Vermont 230,242 257,500 +27,258 112%
South Dakota 326,832 357,803 +30,971 109%
North Dakota 308,156 314,990 +6,834 102%
Mississippi 647,814 613,627 -34,187 95%
Hawaii 248,644 214,590 -34,054 86%
Georgia 1,932,045 1,638,221 -293,824 85%
New Mexico 562,242 465,921 -96,321 83%
Missouri 1,479,208 1,201,111 -278,097 81%
Alabama 1,197,323 962,580 -234,743 80%
Tennessee 1,341,149 1,072,138 -269,011 80%
Connecticut 902,964 637,249 -265,715 71%
South Carolina 1,267,749 849,588 -418,161 67%
Indiana 1,916,020 1,208,934 -707,086 63%
Nevada 740,987 460,709 -280,278 62%
Idaho 584,892 362,891 -222,001 62%
Arkansas 1,085,897 656,888 -429,009 60%
Ohio 2,823,457 1,700,665 -1,122,792 60%
West Virginia 942,758 554,465 -388,293 59%
Minnesota 1,428,366 827,331 -601,035 58%
Kentucky 1,562,763 842,997 -719,766 54%
Illinois 3,380,198 1,803,847 -1,576,351 53%
New Hampshire 394,862 209,628 -185,234 53%
Wisconsin 1,810,213 954,647 -855,566 53%
Texas 8,848,259 4,642,770 -4,205,489 52%
Kansas 946,140 479,458 -466,682 51%
Arizona 1,901,848 928,301 -973,547 49%
Michigan 2,776,621 1,335,840 -1,440,781 48%
Massachusetts* 1,609,168 770,572 -838,596 48%
Oklahoma 1,788,900 804,659 -984,241 45%
Oregon * 1,479,834 634,160 -845,674 43%
Pennsylvania 4,884,713 2,081,700 -2,803,013 43%
Iowa 1,651,668 623,540 -1,028,128 38%
Colorado 1,800,149 678,449 -1,121,700 38%
North Carolina 3,753,866 1,323,247 -2,430,619 35%
California 13,495,828 4,656,722 -8,839,106 35%
Maryland 2,228,093 762,441 -1,465,652 34%
Utah 1,334,299 440,563 -893,736 33%
Florida 7,652,155 2,403,861 -5,248,294 31%
New York 7,130,665 2,129,671 -5,000,994 30%
New Jersey 4,321,265 1,266,798 -3,054,467 29%
Virginia 4,605,258 1,291,107 -3,314,151 28%
Nebraska 1,446,197 366,723 -1,079,474 25%
Maine 930,101 234,204 -695,897 25%
Washington 3,905,853 860,105 -3,045,748 22%
Delaware 1,260,463 214,621 -1,045,842 17%
50 STATES + D.C. 108,690,572 49,950,000 -58,740,572 46%

*The FHWA Table SF-1 for 2018 only has FY 2017 data for Massachusetts and Oregon.

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