Topics: Transportation Finance in the United States

Websites and Citations:
Theme Music: Five Star Fall, Mercurial Girl, Magnatune.com
Summary of Fuel Taxes: National, Regional and State
Government Accountability Office: Highway Trust Fund Estimates

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Episode 26 – Transportation Finance in the United States

Hello and welcome to Talking Traffic. My name is Bill Ruhsam and I host this podcast and its sister website, TalkingTraffic.org. Today is Monday December 22nd, 2008. This episode is about something that is on the mind of every American this fall and arguably decided the presidential election: Economics. Specifically, the economics and mechanisms behind the funding of transportation projects and maintenance. Who pays for that new traffic signal and how does the money get spent? In some respects, this is an easy question to answer, but in others it’s horribly complicated.

But first, let’s talk about the new recording setup that I’m using for the podcast. Normally I wouldn’t go into too much boring detail about my microphone,etc, but I want to know how it sounds. I had an efficient system for the first 25 episodes but I’ve made a big change by going to a condenser mic and an audio interface. This leads to different methods of recording which might improve, or possibly worsen, the sound quality. If things aren’t sounding as well as before, please let me know.

On another personal note, with a few exceptions like the previous few months, I’ve been holding to an approximately every two weeks publication schedule. I plan to continue that, but I will reiterate that there are other things that might get in the way which would push back my podcasts. Unfortunately for my dedicated listeners, TalkingTraffic is not on the top tier of priorities at this time. Right now I have the standard Family, Friends, Athletics trio on that top shelf and I’ve made a commitment to race in the 2009 Florida Ironman triathlon, which will start sucking up more of my time for training. I’ll do my best to keep the podcasts coming in order to supply you with information about the transportation world around us. To keep them coming regularly, I implore you to send me the topics that you most particularly want to hear about. Bring on the suggestions and they will be met.

Moving on! Todays topic is about transportation finance and how the system works. Really ,what I’m going to give you is a general overview of how transportation projects are funded here in the United States. This may be very different in your part of the world you two or three international subscribers (thanks for listening!). In fact, some of what I’m going to talk about may not even be applicable to the listeners in the US, sort of. We here Americans have a nicely Federal system whereby decisions about transportation projects are made at the State, County or City levels. The federal government doesn’t make any choices regarding projects except on federal lands. What this means for this podcast topic is that there are 50 states, 5 overseas territories and one federal district which can all have distinctive and mutually exclusive funding mechanisms. I’m going to start at the Federal level and work my way down the pyramid to the local town or city. At the federal level I can be very specific; at the local level, I can give examples but there are way too many different places to look at to be comprehensive. I encourage you to look at your state constitution and city laws to see how things work for you.

The topic of funding starts logically from the source of all the money. That source is taxes. In the United States, the majority of transportation funds come from fuel taxes and charges on heavy-vehicle related items such as tires, sales, and use charges. The current federal excise tax on fuel is 18.4 cents per gallon of gasoline and 24.4 cents per gallon on diesel fuel. States and local governments add on to that federal excise tax with their own taxes and fees. These taxes are additional excises and/or sales taxes. It depends on the particular state.

The average fuel tax in the United States, as of October 2008, was 48.4 cents per gallon for gasoline. For convenience, I’m going to ignore diesel today. I don’t want to bog you with numbers. As I said, the average gas tax per state is 48.4 cents per gallon. The maximum is in California with 67.1 cents per gallon and the minimum is in Alaska which has no state tax and only pays the 18.4 cents of the federal excise. Here in Georgia, I pay the 18.4 cents of the federal tax plus an additional excise of 7.5 cents and then a 4% sales tax. This totals to 46.5 cents per gallon on gasoline so I enjoy being 2 cents beneath the national average.

All of these taxes are pooled and sent to two places: the federal government gets the federal 18.4 cents for deposit in the Highway Trust Fund and the states get their own taxes for their transportation programs. It gets more complicated when local goverments assign levies, so I’m not going to get into it except to talk about bonds, later. These sources are where the money comes from to produce transportation projects. However, there is a serious problem with fuel-tax based transportation funding. That problem goes by the name of inflation. Most fuel taxes are fixed excises, like the 18.4 cents per gallon federal tax. That 18.4 cents stays the same until congress decides to change it, and we know how much a politician loves to propose a tax increase. Thusly, inflation chips away at the effective buying power of that 18.4 cents. For example, the inflation rate since 2000 has averaged about 2.7%. The 18.4 cents in 2000 is only worth about 14.8 cents today. That’s a 20% drop in buying power at the same time that costs of asphalt, cement and steel are going up at record rates. This all adds up to a reduction in the number of projects that can be funded. But wait! this podcast isn’t about how to fix the transportation funding system, it’s about how the funding system works.

Back to the federal level. We’ve got our steadily declining bucket of money sitting in the Federal Highway Trust Fund and the state transportation agency. How does that money get assigned to a project? The Highway Trust Fund was created in 1956 by an act of Congress and is the way that the FHWA doles out moulah to the states. It has a fixed income, through the 18.4 cents fuel excise, and it has a not-so-fixed drawdown depending on what monies are assigned to the states. These monies come about through authorized projects which are selected by the state transportation agencies. Once the state has selected a project, they pony up some set amount of money, say 20%, and the feds kick in their 80% share. That is a typical breakdown of the state and federal shares for a transportation project. The 80% match comes from the highway fund, which as I’ve just discussed is getting smaller every year. The FHWA has final authority on whether a project will receive the matching funds and that normally depends on the state being able to make the commitments that it has said it will make for each project and whether the project looks like it will make through the environmental process.

The state comes up with money to fund its projects through the fuel taxes I’ve mentioned and through bond issues. Usually, the bond issues are conducted by entities beneath the state level such as counties and cities. The bonds are being issued against projected future tax revenues, so basically the county or city is betting that the growth in its tax base will be sufficient to cover the interest of the bond. You may notice that there’s not a lot of economic growth going on right now. Another problem with existing transportation funding. But we’re not talking about fixing the system! At least, not this podcast.

Another way that a state can fund a project is to forget about federal money and just do it by its own self. This lets the state avoid some of the nastier bureaucratic tangles that can occur when you follow the federal environmental process, thus speeding up delivery of the project, maybe making it even *possible* to build the project. Cities and Counties can do the same thing, opting to avoid state money and spend their own dollar to do transportation improvement. That is rare because smaller political entities just dont’ have the werewithal to drop 10 million dollars on a road project.

There are other funding mechanisms for specific things, but what I’ve described is the meat of the matter. States pick projects which are approved by the Feds who pay about 80% of the freight from the Highway Trust Fund account.

Astute listeners may be wondering, “if the federal excise tax is 18.4 cents, but the average state tax is about 30 cents, and the federal highway trust fund pays for 80% of the projects, why is the state gas tax so high?” I’m glad you asked that. For one, don’t forget about what I just mentioned, that there are plenty of projects that only have state funding, no federal money at all. For another, that state tax is the sole source of revenue for the majority of maintenance that goes on. The highway trust fund pays for New construction, not maintenance of existing infrastructure, so all that state money needs to be used to keep the potholes filled, the roads resurfaced, the bridges painted, etc. That’s a big job, in fact it’s half or more of the annual outlays of most transportation agencies.

I’m sure everyone has heard the news reports and speculation about the stimulus through infrastructure funding. From what I’ve heard and read, this means that the Congress is going to issue some X amount of money where X is very large for use in buiding projects that are, Quote unquote, “shovel ready.” This means that there are plans sitting on a shelf or that are withing 90 days of completion so that the projects can go immediately to be bid on by contractors. This seems like a good idea to me for a couple reasons: One, contractors working on projects tend to employ a lot of people and subcontractors who would otherwise be not working. Two, these projects are worthy in their own right because they help to keep our nation’s infrastructure up to date. I dont’ think that this package will help me, personally, in my guise as an engineering consultant because ti will be very unlikely that we’ll be helping with any of these “shovel ready” projects and also because it doesn’t’ make sense to stimulate companies like mine. We don’t go out and hire bunches of people when we get work. I think that, indirectly, this package could have an effect on my industry, but whether it’s positive or negative remains to be seen. It might help because by clearing away a backlog of projects that are on the shelf, the states may issue more contracts to design more projects. Or, it might hurt because the states have to come up with money to match the federal stimulus, thus drawing down the amount available to issue design contracts to the likes of me. Time will tell.

One interesting question I have about the infrastructure stimulus package is, “how exactly will it be admiistered”. The Congress has a ready-made and tested vehicle to place a huge pile of money into for the sake of the nation’s roadways. Namely, the highwya trust fund. The X amount of dollars could be injected directly into that bucket and then the normal state of affairs would continue. Or they could cut checks directly to each state transportation agency for them to use as they feel fit. Or they could come up with some new federal agency specifically in charge of this stimullus. Who konws. As of now, I don’t think anyone has any idea which way they’re going to jump.

A couple last things before I sign off. Remember how I said that the bucket of money that is the highway trust fund keeps getting smaller? Well, there is general agreement that the fund will be insolvent by this coming summer. What does this mean? Basically the same as what they’ve been talking about for Social Security. The amount going into the fund via taxes will be less than the amount issued out of it by statute. In September 2008, the congress issued a direct 8 billion dollar injection into the trust fund from the US General fund. While this prevented the insolvency of the highway trust fund, it doesn’t fix the underlying issue: Less money, worth less, is going into it. Something that also affects the highway trust fund and its solvency is the tendency for people to a) drive more fuel efficient cars and b) to simply drive less. Every month this year has seen fewer vehicle miles than the year before it. Not that this is a bad thing, generally, but from the perspective of the highway trust fund, its murderous.

Thanks for listening to talking traffic. As always, I encourage you to send me your comments or suggestions. You can send an email to Bill @ Talkingtraffic.org or just post a comment on the shownotes. I like hearing from everyone and look forward to your comments.

This episode is released under a creative commons 3.0 attribution noncommercial no-derivatives license. Which means you’re free to share it with anyone and everyone, but please don’t change it or sell it, and if you do share it, make sure you credit me and talkingtraffic.org.

The music you hear is by Five Star Fall and can be found at Magnatune.com. I hope everyone has a merry christmas and a glorious new year. I’ll see you next time in 2009.