May 6, 2009
By Ronald D. Utt, Ph.D.
Among the many contentious issues that Congress will confront in
the lead up to the 2009 reauthorization of the federal highway
program are the inherent inequities in how the program distributes
trust fund revenues among the states. Under current law, the
federal fuel taxes paid into the trust fund by motorists and
truckers are returned to the states according to a series of
mathematical formulas that attempt to match payments from the
federal highway programs to the scope and usage of each state's
surface transportation system.
Because of flaws in these distribution formulas, many states
(donors) consistently receive shares that are less than they pay in
gas taxes, while other states (donees) consistently receive more.
This deficiency, in turn, exacerbates regional transportation
problems because the shortchanged donor states typically are those
with above-average population growth, which creates greater
transportation needs, while the donee states often have
slower-growing populations. While Congress has made some
halfhearted efforts to mitigate this problem, it has made little
real progress, and the depletion of the trust fund in 2008 will
exacerbate these inequities and reverse what little progress has
In anticipation that Congress and the White House may again fail
to address the equity issue in the upcoming reauthorization
process, many donor states are organizing as the Donor State
Working Group, led by Representative Jeff Flake (R-AZ). With donor
states numbering 28 according to the most recent data,
unified action by their congressional delegations could finally
solve the equity problem in the next reauthorization bill.
Winners and Losers
Over the past several decades, the states shortchanged by the
federal highway program have been concentrated in the Southeast and
the Great Lakes region and have also included some Western states,
notably California and Arizona. The states receiving more than
their fair share have been concentrated in the Northeast, the
Mid-Atlantic states, and sparsely populated Mountain regions. In
fiscal year (FY) 2007, there were 28 donor states and 22 donees,
although many states broke about even in their return ratios.
Among the donor states, Texas received a payback of only 83.8
percent in 2007, costing it $619 million in lost federal payments.
Florida received just 87.3 percent, Indiana 85.7 percent, and South
Carolina 86.5 percent. Column 3 in Table 1 provides the return
ratios for 2007, while column 6 provides the return ratios since
the program's inception in 1956. These and many other states have
been consistent losers since the program's creation. Tabulating
return ratios over the past 51 years reveals that, of the 23
long-term losers, Texas received just 79.9 percent, Georgia 83.8
percent, and Oklahoma 84.6 percent.
As unacceptable as these losses were, they would have been much
worse if SAFETEA-LU (the 2005 highway reauthorization bill) had
not created the Equity Bonus program to partially offset the donor
states' losses. This program authorized the U.S. Secretary of
Transportation to spend up to $41 billion of the highway trust fund
between FY 2005 and FY 2009 to ensure that states received a
minimum share of 90.5 percent in 2006 and a maximum of 92 percent
by 2009. Despite these goals, the program's benefits have been
greatly exaggerated. Achieving even the modest goal of a 90.5
percent share relies entirely on spending more of the highway trust
fund than is received in federal fuel tax revenues (with the excess
funds used to help even things out for donor states) and uses an
inaccurate methodology to calculate these return shares.
For example, under the methodology of share or return ratio
calculations used in this paper (and recently adopted by the
Federal Highway Administration in its report on 2007 spending),
Texas experienced an 83.8 percent return ratio in 2007. This
reflects the fact that its tax revenues accounted for 9.176 percent
of the money flowing into the fund compared to the 7.694 percent of
trust fund spending that it received (7.694 is 83.8 percent of
In contrast to this more accurate measure of equity, Congress
and the U.S. Department of Transportation (USDOT) have based their
share calculations on the total dollars paid into the fund compared
to dollars paid out, which are distorted by the excess spending of
recent years. By this method, the USDOT reports that Texas received
a 100 percent share in FY 2007, reflecting the $3.2 billion it paid
in and the $3.2 billion it received.
Again, this appearance of equity depends on the trust fund
spending much more than it takes in to provide the equity bonus
that offsets Texas's otherwise inequitable treatment by the
formulas. In FY 2007, the highway trust fund took in a total of
$34.9 billion but spent $41.5 billion. With the trust fund surplus
hitting zero early this fiscal year, there will no longer be any
funds left to pay this equity bonus after FY 2009.
When SAFETEA-LU was enacted, the trust fund surplus was above
$10 billion, but years of overspending and sluggish growth in fuel
tax revenues are among the factors that have depleted the surplus.
When the surplus hit zero in early FY 2009, Congress and the
President agreed to an unprecedented bailout of the fund with $8
billion in general taxpayer revenues, enough to carry through to
the expiration of SAFETEA-LU in September 2009.
Which States Benefit and Lose the
With the exception of Oklahoma, the poor treatment of these
states continued into 2007, as Table 2 reveals. For every loser
(donor), there are many winners receiving these interstate
subsidies. Table 3 lists the top seven winners in this ongoing
misallocation of the federal highway trust fund.
Table 3 reveals that over the past 51 years, the motorists of
Alaska have received nearly six times more from the federal highway
trust fund than they paid into it in fuel taxes. Table 1 also shows
that the misallocation of federal highway funds is exceptionally
regressive: The less wealthy southern states are subsidizing the
much more prosperous northeastern states. Emblematic of this
peculiar federal policy is that over the past 51 years, the
motorists in Mississippi (0.951 return ratio in 2007), the poorest
state in the union, have subsidized motorists in Connecticut, the
richest state (1.301 return ratio).
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 from the 28 donor states in 2007 that
illustrate how much less these states received in federal highway
spending because of the flawed federal highway formulas. Column 2
is the percentage point difference between the share paid in and
the share returned to the state from the trust fund, and column 3
presents the additional funds that each state would have received
in 2007 if its return share had equaled its share of gas tax
revenues paid into the trust fund.
Against these examples of losers--all of which have been losers
since the program's inception in 1956--are the 27 long-term
winners. Table 5 provides examples of the extra money that several
states received in 2007 because of the inequities in the
Federal Transit Spending Is Even More
The federal highway program, trust fund, and reauthorization
process actually fund two different transportation programs:
highways and transit. Transit includes buses, commuter rail,
trolley cars, and metro systems. Although less than 2 percent of
all surface passengers and less than 5 percent of commuters use
some form of transit, transit receives about 20 percent of the
federal transportation spending authorized by the highway bill. In
2007, $10.5 billion was spent on 15 separate transit programs,
while $41.5 billion was spent on all highway programs, although
some of this money was diverted to transit, hiking trails, and
Most federal and state transit spending is paid by motorists
through federal and state fuel taxes. The federal fuel tax is
currently 18.3 cents per gallon, 2.87 cents of which goes into the
"transit account" within the highway trust fund. Another
approximately $2 billion in annual federal transit spending is
funded by general revenues. In turn, these dedicated revenues are
allocated to the states according to a formula (and earmarks).
As columns 7 and 8 of Table 1 show, the regional distribution of
transit spending is far more inequitable than the distribution of
highway spending. In 2007, 36 states were donors to the transit
program, and their return shares were substantially lower than what
donor states typically experience with the highway program. While
the worst return ratio under the highway program was just 83.8
percent, return ratios of less than 40 percent are common with the
transit program, and South Carolina and Nebraska fared the worst
with returns below 20 percent.
Most transit funding winners were also highway winners, notably
Alaska, Connecticut, the District of Columbia, Massachusetts, Rhode
Island, Pennsylvania, and New York. Indeed, New York received 23.1
percent of all federal transit spending in 2007. As with the
highway program, the transit program transfers billions of dollars
of income from motorists in the South and the Midwest to a small
number of transit riders concentrated in the wealthier Northeast
and the Mid-Atlantic states and a few major urban areas in Illinois
and on the West Coast.
Not surprisingly, given all of the publicity about the infamous
"Bridge to Nowhere," Alaska is in a class by itself in terms of
receiving excess benefits from the highway trust fund. On a
cash-in/cash-out basis, in 2007, motorists in Alaska paid $124.3
million in fuel taxes into the trust fund, but the state received a
staggering $541.3 million from the trust fund, thereby earning the
distinction of achieving the most egregious inequity in the system.
One other troubling observation from Tables 4 and 5 is that the
current system effectively required Texas motorists (2007 median
household income of $45,294) to transfer $615 million of their
federal fuel taxes to motorists in Connecticut ($64,158), Alaska
($60,506), and other donee states during FY 2007.
Another perverse consequence of the donor- donee misallocation
is that most donor states are experiencing above-average population
(and motorist) growth rates and thus have a greater need to build
more roads. By contrast, many donee states are generally
experiencing slower-than-average population growth and thus need
fewer new roads.
Between 2000 and 2008, the U.S. population grew by 8.0 percent,
while the population increased by 16.7 percent in donor state
Texas, 11.7 percent in South Carolina, 26.7 percent in Arizona, and
18.3 percent in Georgia. Among the donee states, Connecticut's
population increased by just 2.8 percent between 2000 and 2008, New
York's grew by 2.7 percent, Pennsylvania's rose by 1.4 percent, and
West Virginia's increased by only 0.3 percent. Weighting federal
highway spending by state population in 2008 reveals that Alaska
received $788 in federal highway benefits per resident, while Texas
received only $132 per resident.
Worsening Problems Could Spur
The implications of the trust fund's current financial
deficiency for donor states is a potential worsening of the
existing allocative inequities. With President Obama now on record
opposing any increase in federal fuel taxes, the flawed Equity
Bonus program will survive only if Congress and the President agree
to ongoing bailouts of the highway trust fund.
Under the circumstances, neither remedy is likely in the near
future. With gasoline prices still high and the economy weak,
Congress might not be inclined to add to those burdens by opposing
the President and increasing fuel taxes. Without a timely renewal
of the federal highway program at substantially higher taxes, the
only other relief option within the confines of a top-down,
command-and-control, Washington-centric program would be an ongoing
(and very costly) general fund bailout to maintain the meager
equity improvements expected in the final years of SAFETEA-LU.
Although this temporary solution was adopted in 2008, the exploding
federal deficits stemming from the costly fiscal stimulus plan,
financial bailouts, and the high rate of federal spending planned
for FY 2009 and FY 2010 make another such bailout less and less
Alternatively, if Congress is willing to abandon the current
system's underlying assumption that Washington knows best, it could
achieve interstate equity without another taxpayer bailout or tax
increase by allowing each state to keep the 18.3-cents-per-gallon
federal fuel tax revenues collected within its borders to spend on
the surface transportation priorities of its own choosing.
Legislation to enact such a plan was introduced in the Senate
during the 110th Congress. The bill would have phased out the
federal highway program incrementally over five years while
transferring taxing and spending responsibilities to each
Despite the simplicity of the solution, many Members of Congress
will oppose it because it would require them to surrender the
spending power to provide substantial rewards to privileged and
influential constituencies through earmarks and new programs that
divert trust fund money to non-transportation purposes.
Nonetheless, the donor states are sufficiently numerous to force a
meaningful resolution of the issue.
Rectifying the Pervasive
As columns 4 through 6 of Table 1 illustrate, the state-by-state
inequities have been a long-standing problem, and donor states have
attempted to organize to correct the problem. Perhaps the most
notable effort was undertaken in 1996-1998 as Congress developed
and ultimately enacted the 1998 highway reauthorization bill
(TEA-21). In advance of the 1998 reauthorization process, more than
20 states--many in the South and West-- organized 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 2007 data
presented in Tables 1, 2, and 4 reveal, these "changes" were
largely ineffective in restoring any semblance of equity. Most
donor states remained donors and to similar degrees. In the years
preceding enactment of the 2005 reauthorization bill, a similar but
less well-organized coalition was formed. However, it accomplished
little, and the final legislation did not significantly reduce the
This pattern of failure demonstrates that efforts to work within
the system and to modify the existing program have accomplished
little, despite halfhearted attempts to make the law fairer. While
resistance by Members of Congress from donee states has helped to
perpetuate these inequities, most elected officials from donor
states have been timid in seeking meaningful reform. They have been
content to settle for a few trifling earmarks that add no new money
to their unfair formula allocations.
As an alternative to the failed work-within-the-system approach,
some Members have proposed ending the federal highway program and
restoring the responsibility--and transferring the right to collect
the federal fuel tax of 18.3 cents per gallon--to the states in a
process known as "turnback." With its original goal (build the
interstate highway system) fulfilled in the early 1980s, the
federal highway program has become a vast spoils system, of which
the Bridge to Nowhere was only one of more than 7,000 earmarks.
Indeed, under the poorly conceived SAFETEA-LU, roads traveled by
the typical motorists receive only about 60 percent of the federal
fuel tax revenues that these hapless motorists pay into the
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. Since then, several other
Representatives and Senators--most recently Representative Jeff
Flake (R-AZ) and Senator Jim DeMint (R-SC)--have introduced
modified versions of the bill.
None of these bills have gone very far, because the
congressional delegations and government officials of the
shortchanged states have been reluctant to push the legislation.
However, creation of the new Donor State Working Group in Congress
to better organize the donor states and aggressively advocate their
cause has greatly enhanced the prospects of success during the next
Given that Congress may be reluctant to abandon a federal
program that provides Members with so many earmarking
opportunities, an alternative would be to keep the program in its
current form but allow states to opt out of it in return for
agreeing to meet certain performance standards that would include
maintaining and enhancing their segments of the interstate highway
system. 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 guidance provided by USDOT and Congress.
The current laws governing the federal highway and transit
programs will expire on September 30, 2009, and the effort to
reauthorize the programs will attract a swarm of lobbyists,
campaign contributors, and special-interest groups, each seeking
some part of the hundreds of billions of dollars to be spent
through the next reauthorization bill. Unless the donor states are
well organized and aggressive in pushing their case for reform and
equity throughout the legislative process, they will again find
themselves with just a few scraps and six more years of annual
Adding to the risk is the absence of a trust fund surplus that
could be used to continue the modest, yet inadequate, Equity Bonus
program. As noted earlier, Representative Flake's effort to
organize a Donor State Working Group could alter the dynamics of
the process and lead to a permanent end to these longstanding
inequities. To ensure the success of this reform effort:
Elected officials representing donor states should refuse to
support any transportation bill that does not end the inequitable
distribution of fuel tax revenues within one year;
USDOT officials should highlight this issue as one of several
key problem areas needing attention during reauthorization; and
Members of Congress representing donor states should introduce
and/or cosponsor turnback legislation to allow each state to keep
all of its federal fuel taxes.
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.
Show references in this report
Different formulas apply to different federal
highway programs. For example, the Surface Transportation Program
uses total lane-miles of federal-aid highways, total vehicle-miles
traveled on federal-aid highways, and a state's share of trust fund
tax payments to determine each state's apportionment.
Department of Transportation, Federal Highway Administration,
Highway Statistics 2007, Table FE-221, at http://www.fhwa.dot.gov/
policyinformation/statistics/2007/index.cfm (April 23,
Ronald D. Utt, "Ending Pervasive Inequities in the Gas Tax
Burdens," Heritage Foundation Backgrounder No. 2143, June
16, 2008, Table 1, at http://www.heritage.org/Research/SmartGrowth/bg2143.cfm.
Public Law 109-59.
Ibid., § 1104.
Public Law 110-318
Mississippi was a donee state in 2006, but this
was largely because of additional funding to repair infrastructure
destroyed by Hurricane Katrina.
data on federal transit spending are derived from U.S. Department
of Transportation, Federal Transit Administration, FY 2007
Statistical Summary, Table 6, at http://www.fta.dot.gov/funding/data/grants_financing_8542.html
(April 23, 2009).
Bureau of the Census, "Cumulative Estimates of Resident Population
Change for the United States, Regions, States and Puerto Rico and
Region and State Rankings: April 1, 2000 to July 1, 2008," December
22, 2008, at http://www.census.gov/popest/states/tables/NST-EST2008-02.xls
(April 23, 2009).
Transportation Empowerment Act, S. 2823,
110th Cong., 2nd Sess.
Ronald D. Utt, "Congress Undermines America's
Infrastructure by Looting the Highway Trust Fund," Heritage
Foundation WebMemo No. 2046, September 3, 2008, at http://www.heritage.org/Research/SmartGrowth/
Both options are detailed in Ronald D. Utt,
"Will a Bigger Role for States Improve Transportation Policy
Performance?" chap. 8 in Wendell Cox, Alan Pisarski, and Ronald D.
Utt, eds., 21st Century Highways: Innovative Solutions to
America's Transportation Needs (Washington, D.C.: The Heritage
Foundation, 2005), pp. 163-182. A pilot program allowing some
states to opt out was proposed in U.S. Department of
Transportation, Refocus. Reform. Renew. A New Transportation
Approach for America, 2008, at http://knowledge.fhwa.dot.gov/tam/aashto.nsf/0/b9fa645aea69a10d852574b700
The federal highway program's allocation formula shortchangesstates in the South and Great Lakes regions and benefits theslow-growing, high-income Northeast. The most effective remedywould be to turn back to the states the highway program and theright to collect and keep the federal fuel tax revenues and let thestates use the money for surface transportation priorities of theirown choosing.
Ronald D. Utt, Ph.D.
Herbert and Joyce Morgan Senior Research Fellow
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