Restoring Regional Equity to the Federal Highway Trust Fund

Among the many flaws in the federal highway and transit program are the pervasive regional inequities in the way that federal highway spending is distributed among the 50 states, the District of Columbia, and five territories.[1] Under current law, motorists and truck owners pay a federal fuel tax--18.3 cents per gallon on gasoline and 21 cents per gallon on diesel fuel--into the highway trust fund, which returns these fuel tax reve­nues to the states for their highway and transit projects.

In fiscal year (FY) 2005, $32.9 billion in user fees and taxes was collected for the highway component of the trust fund, and a total of $37.6 billion was re­turned to the states and territories according to a statutory formula that determines how much each state receives.[2] However, as annual U.S. Department of Transportation (USDOT) data reveal, many states were shortchanged, while others--notably Alaska and the District of Columbia--received far more in return than they put into the trust fund.

As Congress and the President begin to develop legislative proposals to reauthorize the federal high­way program, which will expire in 2009, ending these regional inequities should be a high priority.

More Losers Than Winners

While trust fund revenues reflect actual tax pay­ments made by motorists in each state, spending allo­cations to the states from the trust fund are determined by a mathematical formula that attempts to measure "need" based on several quantitative measures (e.g., miles of road and number of licensed drivers). In fact, the system embodies a number of inexplicable inequities that transfer billions of dol­lars from states in the South and the Midwest to the Northeast, the Mountain West, and Alaska.

Table 1 presents USDOT data on the extent to which each of the 50 states and the District of Columbia has gained or lost from the federal pro­gram by comparing their share of the tax revenues paid into the trust fund to the share they receive of trust fund spending.[3] The first three columns pro­vide equity information for FY 2005, the most recent year available, while the second set of three columns provides equity information for all program spend­ing since the program's inception in 1956.

Specifically, the first column in each set is the share of the tax revenues that the motorists in each state paid into the trust fund in 2005, while the sec­ond column is the share each state received in trust fund spending that year. Column three provides a ratio of the two (return divided by payments). Any state scoring less than 1.0 is a loser (paying in more than it gets back), while any state scoring over 1.0 is a "winner" because motorists in other states are sub­sidizing its road building.

For example, South Carolina was one of the biggest losers in 2005 because its motorists pro­vided the trust fund with 1.836 percent of its rev­enues while receiving only 1.535 percent of spend­ing in return. In effect, South Carolina received only an 83.6 percent payback on its investment share. South Carolina is also one of the biggest losers over the 50-year history of the program. Only Texas and Oklahoma have done worse since the program's inception.

Table 2 ranks the seven biggest all-time losers in the federal highway program. With the exception of Oklahoma, the poor performance of loser states continued into 2005. (See Table 1.) For every loser providing a subsidy to other states, there are almost as many winners receiving these subsidies.

Table 3 lists the top seven winners in the federal highway trust fund misallocations. Over the past 50 years, the motorists in Alaska have received six times as much from the federal highway trust fund as they have paid into it. Table 1 also shows that these high­way trust fund misallocations are exceptionally regressive. For example, the less wealthy Southern states are subsidizing the much more prosperous Northern states. Emblematic of this peculiar federal policy is the fact that motorists in Mississippi (0.893 trust fund return ratio), the poorest state in the union, are subsidizing motorists in Connecticut (1.451 return ratio), the richest state.

In dollars and cents, the inequity can be quite costly to the states on the losing end of the flawed allocation system. Table 4 offers a few examples drawn from the 30 donor states in 2005 to illustrate how much less these states received in federal high­way spending because of the flaws in the federal highway allocation formula. The return share defi­ciency is the difference between the payment per­centage and the return percentage in Table 1.

Against these examples of losers--except for Minnesota, all of them have been losers since the program's inception in 1956--are 21 winners in 2005. Table 5 provides examples of several states that received the extra money in 2005 because of the inequities in the system.

Not surprisingly, given all of the publicity about the infamous "Bridges to Nowhere," Alaska is in a class by itself in terms of receiving excess benefits from the highway trust fund. In FY 2005, its motorists paid only $66.3 million in fuel taxes into the trust fund but received a staggering $490.4 mil­lion in trust fund spending, thereby earning the distinction of achieving the most egregious ineq­uity in the system.

One other troubling observation from Table 4 and Table 5 is that the current system effectively transferred $559 million from motorists in Texas (median income of $41,645 in 2004) to motorists in Connecticut (median income of $56,617) and Alaska (median income $52,141).

Another perverse consequence of the donor- donee misallocation is that most states on the losing end are experiencing above-average population growth rates and thus have a greater need to build new roads because of the increasing numbers of motorists. By contrast, winner states are generally experiencing below-average population growth and thus need fewer new roads.

Between 2000 and 2006, the U.S. population grew 6.3 percent, while among donor states, Texas's population increased by 12.9 percent, South Carolina experienced a 7.7 percent increase, and Georgia's population increased by 14.4 percent.

Among the winning donee states, Connecticut's population increased by just 2.9 percent between 2000 and 2006, New York experienced a 2.1 percent increase, Pennsylvania's population increased by 1.3 percent, and West Virginia's population increased by only 0.5 percent.

In Alaska--the biggest winner of all--the popu­lation increased by 7.0 percent--just slightly higher than the national rate--but its extremely small population (670,053 in 2006) meant that its FY 2005 windfall of $412 million helped to accommodate the road needs of just 43,121 new Alaskans.

In contrast, the 2.6 million new Texans had to make due with a $559 million deficiency in their share of the highway trust fund.

The Dos and Don'ts of Fixing These Inequities

As the last three columns of Table 1 illustrate, the state-by-state inequities have been a long-standing problem.

A Pattern of Failure. Periodically, the donor states have attempted to organize in an effort to cor­rect the problem. Perhaps the most notable effort was in 1996-1998, when Congress developed and ultimately enacted the 1998 highway reauthoriza­tion bill, known as the Transportation Equity Act for the 21st Century (TEA-21).[4]

In advance of the 1998 reauthorization, more than 20 states--many in the South and West-- organized themselves into a coalition called STEP 21 and lobbied for a fairer system. In response, Congress made what can best be described as "important cosmetic changes" in the bill. As the FY 2005 data in Tables 1, 2, and 4 reveal, these changes largely failed to impose any semblance of equity. Most donor states remained donors and to much the same degree.

In the years preceding enactment of the 2005 reauthorization bill--the Safe, Accountable, Flexi­ble, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU)--a similar though less well-organized coalition was formed, but it accom­plished little, and the final bill did not reduce the inequities among the states.

Efforts to work within the system by modifying the existing program have accomplished little despite well-organized campaigns to change the law. In large part this is due to resistance from Mem­bers of Congress representing "winner" states, which are predictably reluctant to surrender their advantage. To date, these states have been quite suc­cessful in maintaining the status quo and their ben­efits from it.

Turnback. As an alternative to the failed work-within-the-system approach, some Members have proposed ending the federal highway program and "turning back" to the states the responsibility and right to collect the 18.3 cents per gallon fed­eral fuel tax.

The interstate highway system was completed in the early 1980s, fulfilling the original goals of the highway program. Since then, the program has become a vast spoils system, of which Alaska's Bridges to Nowhere are only one of more than 7,000 earmarks enacted in 2005. Indeed, as a result of the poorly conceived 2005 reauthorization, only about 60 percent of the federal fuel taxes paid by hapless motorists will go to roads.[5]

Legislation to turn back the federal highway program to the states was first introduced by Sen­ator Connie Mack (R-FL) and Representative John Kasich (R-OH) in 1996 during the congres­sional debate leading up to TEA-21.[6] In the years since then, several other members of the House and Senate have introduced variations of this bill. Yet none of them went very far because the short­changed states' congressional delegations and state government officials have been reluctant to push the legislation.

Opting Out. Given that Congress might be re­luctant to abandon a federal program that provides so many earmarking opportunities, an alternative might be to keep the program in its current form but allow individual states to opt out of it and re­place the federal fuel tax with their own levies. In re­turn, opt-out states would agree to meet certain performance standards, including maintaining and enhancing segments of interstate highway in their states. Beyond that, opt-out states would be free to pursue transportation objectives in the best interest of their citizens, while states that chose to stay in the program would continue to benefit from the guid­ance of the USDOT and Congress.[7]

Conclusion

Although SAFETEA-LU does not expire until September 2009, interested trade associations and lobbyists representing tax-using enterprises and institutions are pushing Members of Congress to adopt new schemes to raise taxes and tolls on motorists to fund their privileged and influential constituencies. In these circumstances, there is an opportunity for some Members of Congress to step forward on behalf of beleaguered tax-paying motor­ists and introduce legislation that will redirect the motorists' taxes to projects that enhance mobility and promote economic prosperity.

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.