Paying More and Getting Less - How $8 Billion for Transportation Could be Better Funded

Just this week the US House of Representatives overwhelmingly passed a bill to provide the Highway Trust Fund with $8 billion from general revenue. The fund is expected to have a multi-billion dollar shortfall in 2009 because it is not bringing in enough revenue from the gas tax to cover all of the projects for which it is supposed to pay. This shortfall is a result of two things, and although the House bill postpones an inevitable reckoning it does not address the problematic lack of vision in the 2005 transportation bill. That 2005 bill predestined the current shortfall by authorizing more spending than the gas tax could fund (because it did not raise the gas tax), and it doomed the fund to shortfall when oil prices rose and driving declined (thus depressing gas tax revenue, which is fixed and not tied to the price of gas). The White House has threatened to veto the bill, saying it is a gimmick and shifts costs away from users to taxpayers in general. They recommend moving money from the mass transit account to the highway fund. This is also an inadequate response.

The basic problem in funding our transportation system today is that there is little public or political recognition of three truths:

1. Good infrastructure costs money.
2. People are not currently paying the full cost of their transportation, whether it is by vehicle or transit.
3. The best projects are not being funded because no prioritization process exists.

Of most importance in this current blog is truth number two. This is the situation, in very broad strokes: Drivers are not paying the full cost of driving. They create external costs in terms of environmental damage, congestion, injuries, and the national security harm of oil dependence. Transit users also don’t pay the full cost of their movements, and transit systems are generally quite subsidized, yet they create external benefits in that they are often more environmentally friendly, ease road congestion by diverting travelers, and can boost real estate value around subway stops, etc. Both have additional costs that are not mentioned, and both provide other benefits. The key though is that transit’s additional benefits outweigh its externalities, whereas highway’s do not. Funding these systems should stem from that context.

If there was no Highway Trust Fund then obviously there would be a public value in paying for transportation from the general fund. But that’s not the most efficient way to run the system. Charging users an accurate, true-cost price for their driving and transit not only helps maximize the use of already built infrastructure but ensures that enough funding exists for new infrastructure, both roads and transit. Getting the prices right holds a lot of promise for improving the system.

But getting the prices right also means people need to come to terms with the true cost of transportation. In short, it probably means paying more. If they don’t want to directly pay the full cost of moving about, then the system needs to be subsidized, and that means money must be diverted from uses like education, healthcare, and defense. A good transportation system is not free. But funding the system from the general tax fund does not get the same bang for the buck as when users pay directly for their use, either through vehicle-miles-travelled charges, gas tax, pay as you drive insurance, congestion pricing, or combinations of those charges and others. If users pay more directly for their transportation, they really do end up paying less for better system performance in the long run.

-Daniel Lewis