Funding Important Transportation Infrastructure in a Fiscally Constrained Environment

Source: Robert W. Poole, Jr., Reason Foundation, Policy Brief, no. 102, January 2013

From the summary:
Transportation infrastructure is too important to the economy to be subject to across-the-board cuts in federal funding without first ensuring that alternate revenue streams are available. Ideally, each transportation mode should be made as self-supporting as possible via direct user fees. This would also make it feasible to use revenue-bond financing to do more reconstruction and new construction than would occur under the current policy of funding capital investment from operating cash flow. This approach would also tend to weed out projects whose benefits don’t significantly exceed their costs.

One inspiration for this policy brief is the report of the National Commission on Fiscal Responsibility and Reform (Simpson-Bowles Commission) in 2010. While its recommendations were not implemented, its proposals for transportation infrastructure reflected the above approach, including utilizing highway user tax revenues to make the Highway Trust Fund once again self- supporting, removing large and medium hub airports from the federal airport grants program to allow them to support themselves via passenger fees, and making inland waterway systems fully user-funded. This policy brief seeks to apply these users-pay/users-benefit principles more thoroughly to transportation infrastructure. …

… Another underlying problem is that the current federal grant funding approach has encouraged state and local infrastructure owners to fund most capital projects out of annual cash flow, rather than financing them. A basic principle of public finance is that long-lived infrastructure can and should be financed (i.e., capital should be raised up-front from the capital markets) and paid for over time, as the users of that infrastructure derive benefits from it. This is analogous to the way most people acquire their homes: not by saving until they can afford to pay cash, or building the home a room at a time as cash flow permits, but by taking out a long-term mortgage and paying it off over time, so as to obtain the benefits of home-ownership much sooner. Non-transportation infrastructure entities—electric and gas utilities, pipelines, telecommunications and water utilities—generally finance their major projects via revenue bonds, paid for by their users over many years. Railroads and toll roads do likewise, as do airports (to some extent) and air traffic control providers overseas. The United States is one of the few advanced developed countries that makes relatively little use of revenue-based financing for its transportation infrastructure.

Thus, the emerging and ongoing fiscal crisis of the federal government offers an opportunity to rethink how this country pays for and manages its critically important transportation infrastructure.