Saturday, September 6, 2008

Highway Trust Fund shortfall and the future of transportation finance

As gas tax revenues have declined because of slackened demand for gasoline and diesel, the Highway Trust Fund has seen it's fortunes decline. It now has a potential shortfall which will limit the amount of money transferred to the states for their local road projects that are dependent on federal dollars. There are many policy questions to contemplate about the future of the Trust Fund, and there is no time like a crisis to change the status quo.

Perhaps the first policy question is what exactly should the federal role in transportation finance be? Federal monies pay up to 90 percent of federally aided road work, but often these investments are made towards new facilities and infrastructure rather than maintenance. New road projects, porky as they are, make for great ribbon cutting experiences. Bridge maintenance doesn't have the same gravity with voters even though maintenance is critical and underfunded. In the absence of federal funding for road projects I suspect that far fewer new highways would be built, and I think that's okay. I don't think that maintenance would improve at all, however, if the onus for funding was local or state.

One solution to the trust fund shortfall identified in the NY Times article is to transfer money that is reserved for transit to highway projects. While federal transit subsidies distort the types of transit investments, for instance light rail would not be nearly as popular with transit agencies if they had to pay for it themselves, transit needs shoring up. Any transfer of funds from transit to highways is going to be difficult to reverse and would harm transit at a time when it has the potential to make some gains as a mode choice.

The last policy point is that the delicate state of finances for the trust fund is not going to get better at any point in the future. The trust fund is best suited for times when gas prices are low and fuel efficiency is terrible. When people drive a lot and use a lot of gas per mile they contribute a lot to the fund. As people drive less and economy increases the per mile and overall contribution declines (though there is a rebound effect where people increase their driving as economy increases because the price of driving declines on a per mile basis). In an efficient system these changes would be offset by reduced need for new investment. However, politically new investment is desirable-and John McCain can't change the desire for pork projects no matter how hard he tries-and future declines in the trust fund will have to be made up somehow. It seems to me that user fees of some sort will have to be implemented. At the very least, a transition to a new fuel offers opportunities to revisit our highway finance system. The trust fund won't last forever.

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