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posted on 28 February 2016

Two Factors Highlight The Importance Of Making Each Dollar Spent On Federal Highway Programs More Productive Economically.

from the Congressional Budget Office

Federal spending on highways (or, synonymously, roads) totaled $46 billion in 2014, roughly a quarter of total public spending on highways. About 95 percent of that amount was spent for the construction of highways or for their improvement, expansion, and major repair, and the remainder was spent for operation and maintenance.

Recently, two factors have combined to highlight the importance of making each dollar spent on federal highway programs more productive economically. First, the federal government's main source of funds for highways - gasoline tax revenues dedicated to the Highway Trust Fund - has been insufficient to pay for federal spending on highways. Since 2008, lawmakers have transferred about $143 billion from other sources to maintain a positive balance in the trust fund. Second, adjusted for changes in construction costs, total federal spending on highways buys less now than at any time since the early 1990s.

How Is Spending on Highways Related to Their Use and Performance?

Spending on highways does not correspond very well with how the roads are used and valued. Almost all federal spending for highways occurs through formula grants to state and local governments, and historically, less than half of the funding has been tied directly to the amount of travel on the roads. Although data from the past 20 years show that, on average, pavement quality is improving, fewer bridges have deficiencies, and highway fatalities occur less frequently, those averages mask differences between urban and rural areas and between Interstate highways and other roads, differences that sometimes are not reflected in spending. For example, even though highway travel is more concentrated on Interstates and in urban areas, and urban roads are typically in poorer condition than rural ones, the federal government and state governments typically have spent more per mile of travel for major repairs on rural roads.

Moreover, the extent to which new highways boost economic activity has generally declined over time, increasing the importance of maintaining existing capacity. Yet spending has not shifted much accordingly.

How Could Federal Spending Be More Productive?

Spending for highway infrastructure can increase economic productivity and well-being by providing benefits to businesses and households. It can increase the productivity of businesses when it reduces freight delivery costs, shortens travel times, or improves reliability. Spending for highway infrastructure can also provide benefits to households by lowering the costs for employees to commute to work; shortening commuting times and improving the reliability of commutes; improving households' access to health care, education, and other valued services; improving the safety of travel; and reducing some of the harmful byproducts of transportation, such as pollution.

Three approaches that the Congress could consider would make highway spending more productive:

  • Have the federal government - or allow states or private businesses to - charge drivers directly for their use of roads more often, including charging them more for using roads when traffic is more congested;

  • Allocate funds to states on the basis of the benefits and costs of specific programs and projects; and

  • Link spending more closely to performance measures - such as ones for traffic congestion or road quality - by providing additional funds to states that meet standards or penalizing states that do not.

Lawmakers may also choose to fund highway projects to achieve various other objectives - including boosting economic activity in the short term, increasing employment, and increasing rural access to transportation networks. They may want to avoid too much of a mismatch between the gasoline taxes paid in each state and the federal funds allocated to each state. Or they may wish to direct less of the spending and, instead, provide money for states to pursue their own objectives, as long as the work is done, say, on the National Highway System or some other set of roads with national significance. Nevertheless, viewed in terms of the support provided to long-run economic growth, the way highway spending is allocated could be more productive.

Drivers Could Be Charged for Their Highway Use

Charging drivers specifically for using roads would increase economic output by allowing highly valued transportation to move more quickly and more reliably. Such pricing could take the form of per-mile charges (also known as vehicle-miles traveled, or VMT, charges), congestion charges, or tolls on Interstate highways. When faster travel and avoiding delays were a priority, drivers could opt to pay for the use of a less congested road, and when travel speed was less important, they could use a road with a lower fee or avoid paying a fee by using a road without one. Charges that varied by time of day or that differed by road would also affect economic activity by limiting congestion.

Besides affecting travel, such pricing would raise revenues, which could be used to make repairs, expand capacity, or substantially renovate the Interstate System or could be put to other purposes. It would also provide important information for spending decisions by showing how much drivers value the use of a road, helping to set priorities for future improvements. Over time, with more use of pricing, spending could shift from less productive to more productive uses of highways. Such shifts could boost economic growth - or they could allow spending to be reduced without affecting overall growth. According to the Federal Highway Administration (FHWA), widespread use of congestion pricing, for example, could reduce the amount of capital investment needed to meet a given set of goals for performance of the highway system by roughly 30 percent.

However, that approach would raise several concerns: Charging drivers to use roads could raise concerns about privacy, depending on the methods used. The approach could also place a proportionately greater burden on low-income households. Moreover, highway users could resent paying tolls if they believed that they had already paid for the roads through gasoline taxes over the years. And technological hurdles may exist: Although the costs of charging drivers are declining with improvements in technology, the costs remain higher than those for collecting revenues through the gasoline tax.

Spending Could Be Allocated on the Basis of Benefits and Costs

Policymakers could also boost the impact of highway spending on the economy by allocating more funding to programs or projects with economic benefits that were expected to outweigh the costs - rather than allocating funds on a geographic basis or providing fixed allocations to states. According to FHWA's analysis, capital spending would produce greater benefits relative to costs than it has recently if it was reoriented toward these purposes:

  • Expanding urban Interstates,

  • Making major repairs of urban highways (both Interstates and other roads), and

  • Repairing bridges, particularly those in the Interstate System in rural areas and those not part of that system in urban areas.

Lawmakers could also provide more funding to programs that use benefit-cost analysis in selecting projects, including several existing programs, such as the Transportation Investment Generating Economic Recovery, or TIGER, grant program. According to FHWA, funding projects with the highest net economic benefits could realize most of the benefits of highway spending for about 25 percent less cost or allow the same amount of spending to have a greater economic payoff. Another approach would be to promote the use of benefit-cost analysis at the state and local levels, where most of the spending decisions are made.

But programs that assess the benefits and costs of highway spending will improve the economy's performance only to the extent that the calculations adequately capture the benefits to the economy, and benefit-cost analysis on a project-by-project basis may miss important ways in which distinct components of the highway network affect one another. Also, some such policies would reduce state and local governments' discretion in how they use their federal funds.

Spending Could Be Linked More Closely to Performance Measures

Using appropriately chosen performance measures (such as standards for traffic congestion or for the condition of pavement) could also make highway spending more productive. The cost, speed, and reliability of travel can largely be captured through measures of congestion, road quality, bridge quality, and safety. Formulas for federal highway spending in each state could be tied more closely to realizing set standards based on those measures.

Using performance measures to guide spending could be easier than using pricing or benefit-cost analysis because performance information can be readily obtained. However, using such measures would be less effective than using pricing or benefit-cost analysis. Performance measures alone do not provide any information about the relative costs of improving the performance of the system in different places or the valuation of the benefits that would accrue from those improvements. As a result, using performance measures to guide spending does not always yield the same results as benefit-cost analyses. In some instances, benefit-cost analysis would suggest constraining spending for parts of the highway system with poorer performance, whereas needing to meet a performance measure could suggest the opposite - increasing spending for those parts of the highway system.

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