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Eno Transportation Weekly

RAISE USER FEES: The Road to Good Highway Policy

BY TOM McNAMARA
Transportation Consultant, and former UDOT policy staff, OST

Good highway policy is difficult to achieve. Nonetheless, it is a worthy pursuit in itself and good highway policy can help other surface transportation modes as well.

Experts disagree whether this nation faces imminent calamity regarding its surface transportation infrastructure. An enlightened consensus would probably conclude that we face acute infrastructure challenges, but probably not calamity. Regardless of how serious conditions have become, however, what is alarming is the aimless way the nation has been addressing highway funding issues for more than a decade. The February 26, 2014, call by the current Administration to use General Funds to replenish the Highway Trust Fund (HTF) was another poor policy choice. And, the Administration’s April 30 GROW AMERICA proposal for formally re-authorizing federal highway legislation reinforces the shortcomings.

HTF fuel tax receipts have remained nearly flat for a decade. Meanwhile, highway construction and maintenance costs have increased and a growing funding gap has emerged. To adequately fund the highway infrastructure which it oversees, the Federal Government now faces three choices. It can raise highway user fees – the best option. Or, the Federal Government can obtain the funds either by cutting other programs or raising other taxes. Finally, if it prefers to fund infrastructure inadequately, it can stay put.

PAVING THE WAY

  1. User Fees Are a Proven, Accepted Tool of Governance. Prices help markets and countries allocate resources and user fees (user charges) resemble prices. User fees are an appropriate tool for governance in any country and applicable in many types of both private and public funding situations. Transportation is often one of the easiest, most obvious, and most efficient applications of user fees.

Among the various kinds of user fees for highway transportation, fuel taxes may be imperfect but are still very appropriate. Vehicle Miles Travelled (VMT) fees are excellent in theory but still years away from widespread practice; facilitating their adoption is good long term policy but not a sound current funding strategy. Tolls are clearly a direct user charge, a proven mechanism, a growing percent of funds raised for U.S. highway facilities, and an appropriate financing/funding tool. All three of these user charge mechanisms have various strengths, and each should be on the table for policy purposes.

Yes, the nation needs to repair and probably expand its highway and transit networks. And yes, it should pay for these. Most of the money, however, should come from user fees – not by raiding general funds. Using general funds for highways is usually ill advised even when a nation is flush with cash. But raiding general funds for highways is particularly difficult to justify when annual deficits exceed $500 billion, the cumulative debt exceeds $17 trillion, and competing purposes for general funds abound.

  1. Realistic Investment Targets Shape User Fees. Identifying and choosing a realistic annual investment number is not without challenges. But doing so is crucial to determining appropriate user fee levels. Many, and often conflicting, attempts to identify the number have been made in the past decade. Estimates vary enormously. For example, the comprehensive federal Commission reports of 2007 and 2009 (“The Policy Commission” report and “The Finance Commission” report) estimated annual capital outlay levels of $194 billion and $172 billion, respectively, just to maintain conditions and performance of the nation’s four million-mile road network (“Paying Our Way,” p. 58, Exhibit 2-29). The 2013 Conditions and Performance (C&P) Study estimates that only $146 billion is needed annually to actually improve conditions and performance of the four million-mile network.

As the table below shows, there are capital and non-capital annual outlay figures; additionally there are nominally Federal and non-Federal system components of the nation’s highway network. To guide current policy makers, “the Federal number” should probably be the capital outlay figure either for the Interstate Highway System (IHS) or the National Highway System (NHS).

U.S. Highway

Component

Existing Annual

Non-Capital Outlays *

Existing Annual

Capital

Outlays *

Exist. Annual

TOTAL

Outlays *

Additional Annual Capital Outlays **
Total 4,000,000 Mile U.S. Roadway Network $105 billion $100 billion $205 billion $46 billion
224,000 Mile NHS (contains the IHS) $54 billion $21 billion
47,000 Mile

(federal) IHS

$20 billion $13 billion

* From the 2013 Conditions & Performance Study, Exhibits 6-8, 6-17, 6-18, and related notes. Data for 2010.  

** Figures are from the 2013 C&P Study, Exhibit 8-2. The figures are forecast annual average estimates through 2030 for the “Improve Conditions and Performance” scenario. What the nation’s appropriate outlay levels should be can be debated, but the figures should not take years to determine and should be anchored in reality. While the nation’s highway policy should encourage and perhaps ensure that States prudently sustain the non-IHS and the non-NHS components within their states, for clarity and simplicity purposes it is reasonable for Federal policy to focus its responsibility just on the IHS and NHS components of the U.S. roadway network.

The existing Federal HTF annually collects about $24 billion in gasoline taxes and another $9 billion in diesel fuel taxes ($33 billion total), before approximately 16 percent is set aside for mass transit funding. This receipt level has remained quite constant for nearly a decade. If government officials were to estimate, for example, that another $33 billion in annual receipts were needed for the NHS, people could quickly judge that we need an ADDITIONAL amount equal to what the current Federal gas and diesel taxes generate. If only $21 billion more were needed for the NHS, i.e., Column 5 in the accompanying table, then smaller user charge increases would be required. Phasing in any increase over several years would be a reasonable way to proceed. For example, in 2008, economics reporter Robert J. Samuelson suggested a 1¢ per gallon fuel tax increase each month for 48 months as a palatable approach to raising what were then considered appropriate amounts.

  1. Face Reality: Infrastructure User Fees Are Small. Whatever the prudent annual capital outlay figure for U.S. highway infrastructure is, as a percent of the U.S. economy it is quite small. And, on a per-driver basis, it is close to tiny. This is an infrastructure fee or “pavement” charge. It does not cover other driver-related costs, like pollution and congestion.

When candidate Barack Obama ran for President in 2008, he quickly criticized a proposed “federal gas tax holiday” for the three summer months of 2008 as too little to help consumers but big enough to harm the Highway Trust Fund. He even specified that the tax holiday would amount to only about $30 per driver for the three months. The nation’s media repeated his assertion, but few seemed able or willing to confirm how accurate the assertion was. Some very simple arithmetic shows that the existing Federal gas tax indeed hits the average American driver for only about $120 total per year, or $10 per month – or $30 for the summer!

Rather than call for using general funds to replenish the Highway Trust Fund, as the President’s 2014 proposal now does, senior officials should underscore how small a user charge – gas tax, vehicle miles traveled (VMT) fees, tolls, or whatever fee or mix of fees – is needed to shore up the HTF. For those who have very little money, $10 per month is understandably a lot. For everyone else, $10 per month towards a serious national road network is not much money. Doubling the existing Federal gasoline tax from 20 cents per gallon (actually 18.4 cents) would only cost each driver about an ADDITIONAL $10 per month – or as a clear thinking Federal DOT bureaucrat once mused, “about 2 and 1/2 lattes per month.”

  1. Include All Costs. “All Costs” is, of course, an ambitious term. Identifying and including “all costs” may be difficult and, in some cases, not desirable. Still, people familiar with the concept of externalities know that there are many activities in public life where users are not always required to pay the full extent of costs for which they are responsible. And yet, users should pay for these other costs.

If my car does 1¢ of pavement damage per vehicle mile and my gas tax is equivalent to 1¢ per vehicle mile, then my 1¢ user fee adequately covers my pavement damage. If in today’s dollars, it now costs 2¢ per vehicle mile to repair or replace the highway, then I should be paying 2¢ per vehicle mile in fees or 40¢ per gallon (not 20¢) to account for my pavement damage. People understand this concept, and most infrastructure discussions address it.

What sometimes escapes the discussion is the fact that people’s driving can spew harmful emissions and sometimes delay other people. In addition, petroleum consumption often has strategic and national security implications (costs) associated with keeping petrol dollars out of enemy hands while still making fuel available to lubricate the global economy. In sum, using roadways can entail costs that go beyond simple pavement damage. A sound user charge policy should collect from (highway) users the fees necessary to cover the array of costs those drivers are responsible for. Use the pavement, pay for it; pollute the air, pay for it; use premium rush hour time slots, pay for them.

Charging drivers for full costs does raise the price of using roadways, but not unfairly so. Charging for the costs also generally makes it easier for communities to price their transit services more competitively, thereby requiring smaller general subsidies. The same would be true for intercity rail passenger service. Thus, good highway policy promotes good transit and rail passenger policies. In sum, highway user charges help fund highway facilities, cover externalities, and make alternatives more attractive.

CONCLUSION

User fees (or user charges) are a fair and efficient way to pay for many publicly available goods and services. For funding highways, they have been used pervasively and successfully for decades. The country should expand their use to fully cover infrastructure funding, rather than rely on general funds. The amount for almost any level of “pavement fee” is very small. Because of the fairness and efficiency associated with user charges, the concept should also be extended to the external costs drivers impose, including environmental damage and congestion costs. Charging for these costs will raise the price of driving, but the country will benefit and other transport modes may be more successful as a result.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of The Eno Center for Transportation.

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