Innovative State Transportation Funding and Financing

This paper extends and updates earlier work by: (1) providing case studies of state and international experience with a full range of policy options, (2) addressing new options that have emerged, (3) summarizing new developments in public private Partnerships (PPPs), and (4) detailing financing options, such as congestion pricing, which establish a price signal to users that can both raise revenue and encourage more efficient use of the transportation infrastructure.


Executive Summary

Governors and states have long recognized the importance of investing in surface transportation. The nation’s roads, rails, and bridges provide for personal mobility and facilitate commerce and shipping. When operated efficiently, the surface transportation system can enhance the economic competitiveness of states and the nation, as well as increase safety and quality of life for users. However, a growing imbalance between use of the system and its capacity is leading to an increasingly strained system in many parts of the country. States are looking to a number of innovative funding and financing approaches to help meet the dual challenges of better managing demand, particularly in congested areas, and increasing investments in capacity.

Today, states and the federal government rely primarily on motor fuel taxes to fund the surface transportation system. Motor fuel taxes have offered revenue stability and predictability with a relatively low administrative burden. Compliance costs in paying motor fuel taxes are also limited, and there is a low risk of tax evasion. Fuel taxes can generate substantial amounts of revenue at a relatively low cost to individual users. By charging per gallon, fuel taxes provide an incentive for users to purchase more efficient vehicles.

The current transportation system is facing challenges relating to demand and investment. Nationwide, the increase in user demand is far outpacing the addition of capacity. Since 1980, vehicle miles traveled have increased by 95 percent, but road capacity has increased 4 percent. The result in a number of regions is increasing congestion, the costs of which are borne by users and the nation. In 2005 the nation wasted 2.9 billion gallons of fuel and lost 4.2 billion hours of productivity due to congestion, leading to a net economic loss of $200 billion. While demand has been growing, investment has not been adequate to maintain and enhance the system. The National Surface Transportation Policy and Revenue Study Commission recommended spending between $225 billion and $340 billion annually for the next 50 years to maintain and enhance the system, and noted that currently our nation spends less than $90 billion annually.

There are several reasons for this shortfall in investment. A primary reason is that the largest revenue source for transportation, the current set of motor fuels taxes at the federal and state levels (which comprise the largest single source of transportation revenue for federal and state governments), is not producing adequate revenue to meet system needs.

Motor fuels tax receipts are levied on a per-gallon basis, and unless the tax rate is regularly increased or indexed to account for inflation, fuels taxes can face eroding purchasing power. This shortfall is particularly acute because the cost of construction and materials has been rising and is projected to continue rising. The result is that the purchasing power of the federal government and many state governments has been declining at the same time demand is increasing.

Addressing the challenge of managing demand requires some focus on congested areas and road usage during peak periods. In most situations, users are charged for gallons of fuel consumed; they are not charged more for using scarce road space during peak periods or for the actual number of miles they travel. While not necessarily well-suited to all projects, increased use of direct user fees and peak period fees can encourage users to reduce miles traveled and shift travel to alternative modes. Each state is facing the challenges of rising demand and inadequate revenue to some degree. However, they each have unique needs and strategic goals and objectives.