The Heritage Foundation

Executive Memorandum #938 on Smart Growth

July 7, 2004

July 7, 2004 | Executive Memorandum on Smart Growth

The Federal Highway Program Shifts Money from South to North

A contentious issue in the current effort to reauthorize the federal highway program is the pervasive inequity between what some states pay into the highway trust fund and what they receive back. Although federal highway money is allocated by a formula intended to match need with revenue, regional distortions in the formula force "donor" states (mostly Southern) to subsidize motorists in the "recipient" states (mostly Northern).

Federal Highway Administration (FHWA) data for 2003 (see Table 1) reveal that 23 of the 50 states received smaller shares of federal highway money than they paid into the fund. Of these 23 states, 17 have been on the losing end since the program was created in 1956. Indiana, for example, has received only an 81 percent share of what it has paid in federal fuel taxes over the past 47 years.

The Illusion of Funding Equality
Congress first seriously attempted to reduce these regional distortions in 1998 by guaranteeing each state at least 90.5 percent of what it paid into the trust fund. Congress did this by adding more money to states that fell below 90.5 percent, not by changing the allocation formula. In practice, however, all states--including recipient states like West Virginia--received some of the extra money. While the donor states did receive more money, so did recipient states, and longstanding winners like New York and Pennsylvania became even "more equal" than the donor states.

One way that Congress created this illusion of restored equity was by comparing the dollar amount that a state pays to the dollar amount it receives. This would make sense if trust fund spending always matched tax receipts, but in years when trust fund spending exceeds receipts--such as in 2002--all states can receive more than they pay. This allows Congress to pretend that they have achieved the mathematically impossible result of giving each state an above-average share of the money.

Texas' current situation illustrates this deceptive measurement technique. In 2002, this measure indicated that perennial donor state Texas received more than it paid. Specifically, the FHWA reported (in Table FE-221 of Highway Statistics, 2002) that Texas motorists paid $2.54 billion in federal fuel taxes into the trust fund and that Texas received $2.56 billion in federal highway money--for a return ratio of 1.01. However, because of the "deficit trust fund spending" that year, every state's return ratio was above 1.00.

Of course, not every state can be above average. A more honest measure of equity indicates that nothing of substance changed and that federal fuel tax revenues continued to flow north. The FHWA data also show that Texas fuel tax revenues accounted for 9.1 percent of all of the money flowing into the trust fund, but that Texas' share of trust fund spending was only 7.7 percent. Comparing shares of taxes against shares of spending, Texas' return ratio was actually 0.84, not 1.01 as reported by the FHWA. If Texas had received the same share of spending as it paid in taxes, it would have received an additional $462 million in federal highway money that year.

Conclusion
With fuel tax revenues expected to grow slowly--and at a rate below projected road spending--no extra funds will be available to perpetuate this illusion of equity. As a result, donor states could fare even worse under the proposals now in conference, unless they refuse to endorse any plan that does not put them on par with the recipient states concentrated in the North. One way that Congress could achieve fairness would be to "turn back" to the states the right to collect, retain, and spend the federal fuel tax that they now send to Washington, D.C. This result would happen under the Transportation Empowerment Act (H.R. 3113), introduced by Representative Jeff Flake (R-AZ). Congress should seriously consider this option.

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