July 22, 2001

July 22, 2001 | Commentary on Smart Growth

Our Roads Suffer Because Federal Program Ships State Funds North

Virginians didn't need to read the recent report from the Texas Transportation Institute to know that traffic congestion in the Washington area had worsened since 1992, and now ranks third-worst in the nation behind San Francisco and Los Angeles.

What to do about the worsening congestion has been a top political issue for the past several years, most recently pitting Northern Virginia officials against Gov. Jim Gilmore over how much discretion localities should have in raising taxes for more roads. Reflecting similar concerns, the road-building industry recently proposed a 10-cent-per-gallon increase in the federal fuel tax to fund what it claims are unmet highway needs.

But before frustrated Virginia commuters commit themselves to higher taxes, they might want to first urge their elected officials to take a closer look at how the federal highway program treats, or mistreats, the Old Dominion. In so doing, they will discover opportunities for fundamental reform that can bring substantially more federal highway money to Virginia at current tax rates.

One promising reform--called "turn back"--would devolve the program to the states by allowing each to keep the federal fuel-tax revenues raised within its borders rather than sending them to Washington. This reform would guarantee that federal fuel taxes paid by Virginia drivers will no longer subsidize motorists in the wealthy states in the North, or the special interests that have diverted transportation money to other purposes.

For the most part, the predominant share of public spending for roads and transit comes from the fuel tax that motorists pay every time they fill their tank with gasoline. In Virginia, the price of each gallon of gas includes a state fuel tax of 17.5 cents and a federal fuel tax of 18.4 cents, adding up to 35.9 cents per gallon (exclusive of local surcharges). The Virginia tax stays in the state for local transportation purposes, but the federal tax first goes to Washington before a portion is returned to the state for highway spending.

In the case of Virginia, as well as 24 other mostly Southern states, the amount of money returned is less than the taxes paid, while the other 26 states, mostly in the North, get more back than they pay.

Between 1992 and 1996, Virginia received only an 83 percent share of what it had paid into the highway trust fund, while Massachusetts got back two and a half times what it had paid in. Other Southern states--notably Georgia, Florida, South Carolina, and Texas--did even worse, receiving less than 80 percent of their contribution. In contrast, Pennsylvania, New York, and all of New England received paybacks exceeding the fuel taxes they collected.

Although legislation passed in 1998 attempted to lessen these regional disparities, the effort fell short of closing the gap. Between 1997 and 1999, virtually all Southern states were still subsidizing highway spending in the North. In 1999, Virginia received only 88 percent of its contribution to the trust fund; the missing 12 percent was a costly loss. Had Virginia received as much as it had paid in that year, it would have had an extra $80 million dollars for roads.

Compare that loss to the proposal by Northern Virginia officials to impose a regional surcharge of a half cent on top of the 4.5 percent state sales tax to generate about $125 million per year for transportation. Obviously, a more equitable federal program would have obviated much of the need for such a highly regressive tax on Northern Virginians.

A second congestion-causing flaw in the federal program is the growing diversion of federal fuel-tax revenues to purposes other than roads. When the trust fund was created in 1956, all such federal revenues (then just 3 cents a gallon) were spent on the construction of the interstate highway system. However, over time--and even as the interstate system neared completion in the early 1980s--the federal fuel tax was increased and a growing share of the revenues generated were siphoned off into non-highway programs such as mass transit, and into programs that do not serve general-purpose transportation needs.

In 1982, for example, a Mass Transit Account was created within the highway trust fund, and today as much as 18 percent of trust-fund revenues paid by motorists are reserved for transit programs that benefit only a tiny fraction of commuters--currently about 5 percent.

Moreover, federal transit spending suffers from regional imbalances that are worse than those for highway spending. In 1999, more than 50 percent of federal transit spending went to just five states--California, Illinois, New Jersey, New York, and Texas.

Through the years, other, nonhighway claims on the trust fund have been added to the law to accommodate special interests, including environmentalists, congressional earmarks, federal lands, and regional development schemes. Altogether, these diversions, including transit spending, will absorb more than $11 billion, or nearly a third of the projected $35 billion in federal fuel taxes that motorists will pay this year.

As a result of these other claims on the trust fund and the diversion of federal highway money from South to North, Virginia motorists are getting back as little as 58 cents in general purpose highway money for every tax dollar they send to Washington. They will continue to do so until the federal highway law is changed to eliminate regional bias and special-interest privilege.

The first chance to do that will be in 2003 when the highway law must be reauthorized. With debate already under way in Washington, it is essential that Virginia's congressional delegation and top officials commit themselves to a legislative rewrite that ensures Virginia an equitable return of its taxes.

One promising reform--proposed by some members of Congress and several governors--is that the federal highway program be "turned back" to the states to correct the inequities and inefficiencies inherent in the program. With turnback, both the financial resources and responsibilities of the federal highway program would shift from Washington to the states. Each state would retain the federal fuel taxes collected within its borders, and spend it on the transportation priorities of its own choosing--not Washington's.

With the interstate highway system completed and with most of today's transportation problems regional in nature, a turn-back program allows states to better focus resources on pressing local needs. It also allows them to do so unencumbered by costly federal regulations that try to force a one-size-fits-all program on a diverse nation.

With freedom to choose, states with large urban populations could, for example, spend more on transit, while states with a more suburban character could use the funds for roads.

Perhaps most important, the fast-growing Southern and Western states would keep their fair share of the funds, and end the traffic congestion that past inequities have created.

Ronald Utt is Senior Research Fellow for the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation

About the Author

Ronald D. Utt, Ph.D. Herbert and Joyce Morgan Senior Research Fellow

Related Issues: Smart Growth

Originally published in The (Fredericksburg, Va.) Free Lance-Star (07/22/01)