Semisequicentennial Transportation Conference Proceedings
May 1996, Iowa State University, Ames, Iowa

Highway Finance—Entering the Second Century

Francis B. Francois

American Association of State Highway and Transportation Officials (AASHTO)
444 North Capitol Street NW, Suite 249
Washington, D.C. 20001

The United States mostly looks to users to pay transportation infrastructure and operating costs. In 1916 the first Federal–aid Highway Act established a partnership between the state and federal governments, and approximately 900,000 miles of the nation's 3.9 million miles of roads is now eligible for some federal aid. The basic state and federal funding for America's highways comes from highway user fees—including vehicle registration fees, gasoline and diesel fuel taxes, and fees on trucks. For local governments, property taxes are a major revenue source. Not all revenue collected from highway users is used on roads or even on transportation. Funding of highways and transit must be improved. One approach would be to capture for transportation purposes more of the receipts now collected from road users. Other approaches include increasing road user taxes and fees, and more use of public funds to leverage private funds. Congress has enacted new tools to support leveraging, including a 1995 pilot program for establishing state infrastructure banks with federal funds and broadening the use of federal funds for retiring debt instruments. A number of states are enacting legislation to allow public-private partnerships, and are either engaged in or are planning new revenue facilities. Motor fuel taxes remain the most important single source of revenue. But because of the introduction of alternative fuels such as gasohol and natural gas, the possibility of electric vehicles, and new power systems and vehicles that might increase motor fuel mileage by a factor of ten, this source is threatened. These issues are examined and options are suggested. Key words: finance, user fees, leveraging, fuel taxes.

Every country has the need to transport people, information, and goods within its territory and engage in commerce with other nations. These transportation services must be financed through some combination of government and private sector funding.

Throughout our history, the United States has mostly looked to the users of transportation to pay transportation costs. Those costs fall into two basic categories: providing transportation infrastructure and operating costs for that infrastructure. This paper concentrates primarily on meeting the costs of providing our highway transportation infrastructure—the 3.9 million miles of streets, roads, and highways owned by our states and their local governments.

Because public transit infrastructure and operating costs have also become borne mainly by government since World War II and because part of transit funding has come from funds raised from highway users, public transit will also be addressed.

The American highway system was 100 years old in 1993. Over that 100 years, a complex funding arrangement for its construction, maintenance, and operating costs was devised and set in place. Before 1916, local roads were provided by local governments and state roads by the state, and there was little federal involvement. The first Federal–aid Highway Act was enacted in 1916, which established a continuing partnership between the state and federal governments. This partnership has evolved to where approximately 900,000 miles of the nation's 3.9 million miles of streets, roads, and highways is now eligible for some federal financial aid, including some roads owned by local governments.

The basic funding for America's highways comes from highway user fees. At the state and federal level, these fees include motor fuel taxes, taxes on trucks, and certain other fees. At the state and sometimes the local level they include vehicle registration fees, titling fees, sales taxes, and personal property taxes. For local governments, property taxes are a major revenue source.

In some instances, not all of the revenue collected from road users is subsequently expended on our streets, roads, and highways. Currently, at the federal level, and in some states, a portion of highway user fee revenue is utilized for transit and general government purposes. At the federal level, for example, in 1993 Congress levied a federal motor fuel tax of 4.3 cents per gallon with all the revenue going into the general fund rather than the federal highway trust fund.

At the state level, a September, 1994 report (1) found that the amount of highway-user revenue utilized for non-highway projects totaled $8.3 billion. Thirty-six states reported utilizing a total of $2.7 billion for transit, while thirty-seven states diverted $3.4 billion for general purposes, not including highway law enforcement or the use of revenues for administration and collection of highway user fees. Another $2.2 billion was diverted to general local government use, in ten states.


Different sources report different levels of revenue from highway users in the United States. For example, in its 1993 Highway Statistics publication (2) the FHWA reported that funds available for highways in 1992 totaled $84.3 billion. A private sector institute identifies a much larger amount, stating in its report (3) that it estimates total 1992 receipts from road users in the United States to be about $114 billion, of which about $76 billion was expended on highways for capital projects, maintenance and traffic services, administration and research, and law enforcement and safety. Of the remaining $38 billion, $6.5 billion went to transit and the rest to other uses, mostly not related to roads.

The institute's highway user revenue estimate takes into account revenue not normally counted by the FHWA, such as state and local sales taxes on vehicles and fuel, and personal property taxes. These taxes are paid by the motorist, and the institute believes they should be fully reported as user tax revenue. Another important highway user fee not reported by the FHWA is the revenue from the 4.3 cents per gallon federal tax on motor fuel mentioned earlier, which goes to the federal general fund.

The FHWA's grand total receipts for use on highways reported in its 1994 Highway Statistics publication (4) for 1993 and 1994 are $88.4 billion and $87.1 billion, respectively, with $39.5 billion in 1993 and $42.1 billion in 1994 having been expended for capital. The $88.3 billion includes $17.9 billion in federal funds, $47.0 billion in state funds, and $23.5 billion in local government funds; the comparable amounts for the $87.1 billion total are $16.3 billion, $46.9 billion, and $23.8 billion.


There are a little over 5,000 transit agencies in the United States. According to the 1994 Highway Statistics publication (4), total revenues for transit in 1993 were $21.6 billion, with $5.7 billion expended on capital and $15.9 billion on operations. Of this $21.6 billion total, $3.2 billion was federal funds, $4.8 billion state funds, $7.2 billion local government funds, and $6.4 billion was revenue generated by the transit agencies mainly from the fare box. The federal share of capital expenditures was $2.4 billion, coming mainly from federal highway user fee revenues deposited in the Mass Transit Account of the Federal Highway Trust Fund. The state share of transit capital expenditures totalled $1.3 billion, and in some states this came in whole or in part from state highway user fees revenue. Federal transit operating subsidies may end, as they are of concern to the 104th Congress which is committed to balancing the federal budget.


Looking at needs, the 1995 Status of the Nation's Surface Transportation System: Conditions and Performance report (5) sent to Congress by the U.S. Department of Transportation (U.S. DOT) found that the annual cost to maintain 1994 conditions on the nation's highways and bridges would be $49.1 billion, compared to the 1994 capital outlay of $42.1 billion reported by the FHWA. The 1994 cost to maintain conditions and performance on the nation's transit systems would be $7.3 billion, compared to the 1993 capital outlay of $5.7 billion. It is clear from these findings that the nation's surface transportation system is significantly underfunded even if the goal is just to maintain current conditions. These conditions are regarded as unacceptable in many parts of the nation. The same report found that the annual costs through 2013 to bring the highway system and transit system up to desired levels of conditions and performance would be $74 billion and $12.9 billion, respectively, amounts much further beyond current revenues.

The question is asked, is investment in our nation's transportation system a productive use of available funding? This issue was taken up by the U.S. DOT in the "Conditions and Performance" report (5), wherein it was found that under a cost-benefit analysis of the highway investments recommended, the benefits produced per dollar of highway investment amounted to $2.60.

AASHTO sponsored a National Cooperative Highway Research Program (NCHRP) project that analyzed the linkage between transportation investment and economic expansion (6). This study found that all types of transportation investment (new systems, expansion of existing systems, and system preservation) influence economic expansion and competitiveness to the extent that they enhance accessibility, improve service quality and reliability, increase capacity, and/or reduce transportation costs.


If either the maintain conditions or improve conditions and performance funding levels of the U.S. DOT report are to be achieved, funding of the highway program in its second century must be greatly improved. The same is true for public transportation. The question is, how can funding for transportation be improved?

In the American democracy of today, involvement of the public in transportation funding decisions is necessary. In order to have successful involvement, it is necessary to comprehend how the public views the situation and then to develop and present educational programs to help them understand problems and solutions. A few years ago AASHTO initiated two other NCHRP research projects to help in this area; the results of these two projects have been employed by a number of state transportation agencies (7,8).

The first actions that state transportation and other agencies are taking to help address funding shortfalls is to become more efficient, and to utilize advanced technologies that produce more transportation performance per dollar invested. Deserving special attention is a review of the increasingly complicated federal and state process requirements, to reduce or eliminate those steps that add no value. This set of actions is generally regarded as basic before turning to new revenue sources. There are many examples of states that have taken action to reduce their work force and re-focus their efforts while continuing to provide transportation services at a level supported by the public. James van Loben Sels, Director of the California Department of Transportation, reported that his agency has gone from some 20,000 to around 17,000 employees, with 30 percent fewer managers than four years ago, and has focused with success on customer expectation and productivity. The Iowa and Maine departments of transportation have been reorganized to eliminate antiquated management concepts and to better concentrate on providing freight and passenger transportation across the modes.

There is one obvious way to increase highway user fee revenue, without increasing the level of taxation. This is for the federal and state governments to collect all of the revenue due from motor fuel imposts, registration fees, and other user fees. For example, it is known that there are criminal organizations and others that practice federal and state motor fuel tax evasion, often through complicated schemes. In recent years the federal government has started working to improve federal revenue collection, especially of diesel fuel taxes, with the result that in 1995 about $1 billion in additional revenue was collected. Many states are now engaged in user fee enforcement programs. The combined federal and state attack on user fee avoidance should substantially increase the total revenue collected nationwide.

As to new sources of revenue, one approach would be to capture more of the receipts collected from road users to use on our highway and transit systems. For example, a major help would be to re-direct revenue from the current 4.3 cents per gallon motor fuel tax, over $4 billion annually, from the general fund to the highway trust fund. The National Governors' Association, state transportation agencies, and others are urging this action, and many in Congress support it. But most observers believe it will be difficult to achieve, at least until the federal deficit problem is solved. As to diversions at the state level, these usually occur as part of a negotiated package to get a revenue increase approved by the legislature. At both the national and state levels, it will take considerable effort to capture more user receipts.

The traditional approach would be to further increase road user taxes and fees, but this is currently very difficult to achieve. Nevertheless, some state legislatures have moved ahead with user fee increases and other transportation revenue measures.

A promising, current approach is the use of public funds to leverage private funds for the construction and operation of transportation infrastructure. While the concept of revenue facilities is old, new approaches and projects are now being pursued at the federal and state levels. The 1991 Intermodal Surface Transportation Efficiency Act (ISTEA) for the first time allows all states to use federal highway funds on toll roads. Provisions of the 1995

National Highway System Designation Act include new tools for this purpose, including a pilot program for establishing revolving state infrastructure banks with federal highway funds and broadening the use of federal funds for retiring debt instruments. The construction of additional, traditional toll roads is also being discussed and planned. Research by AASHTO released in April, 1995 found that over the past five years, 14 reporting states have opened to traffic or have under construction over $7.5 billion in toll roads and other revenue producing transportation facilities, that additional projects valued at over $16 billion are under consideration or on the drawing boards, and that seventeen states have or are considering revolving load funds for everything from toll roads to ports, airport land acquisition, and van pool programs (9). The report also had twenty-two states reporting that they have entered into public/private or state/local partnerships and joint ventures for various transportation improvements, ranging from mall developers paying for the costs of interchanges to major corporations and states sharing the cost of new expressways, to full blown private transportation projects.


Motor fuel taxes are the single most important source of highway user revenue at both the federal and state levels, accounting for some 80 percent federally and 66 percent in the states (2). The introduction of alternative fuels such as gasohol and natural gas, the possibility of electric vehicles, and new power systems and vehicles that might increase motor fuel mileage by a factor of ten are regarded by some as threatening reliance on motor fuel taxes as the major source of revenue. The situation was researched and reported in another NCHRP report sponsored by AASHTO (10). The report examines the situation from several viewpoints, including the problems with and advantages of motor fuel taxes, and an array of alternatives including direct fees for vehicle miles of travel (VMT fees), congestion pricing, emissions fees, and value added taxes on transportation. Some key findings of the study were:

One of the recommendations of the study was that a new "contract" or "compact" approach be taken between transportation agencies and their customers in which revenue sources are related to achieving benefits for the customers in terms of mobility, environmental, and economic impacts.


Four findings are evident from the facts and research results reported herein:

  1. As documented by the 1995 report on conditions and needs (5 ), both highways and transit are insufficiently funded to meet requirements of the systems over the next decade.
  2. While it will remain a principal revenue source for at least the next two decades, the motor fuel tax faces problems and alternatives to it need to be considered and developed.
  3. Use of transportation user fee revenue for non-transportation purposes drains resources at a time when more funding is needed for our highways and transit systems just to maintain current conditions, let alone improve service to the public.
  4. Approaches to using existing federal, state, and local funds to leverage additional funding show promise.


The following are recommendations of the author, and are not presented in any priority:


  1. 1994 State Highway Funding Methods. The Road Information Program, Washington, D.C., Sept. 1994.
  2. 1993 Highway Statistics. U.S. Department of Transportation, Federal Highway Administration, Washington, D.C., Oct. 1994.
  3. Estimates of Annual U.S. Road User Payments Versus Annual Road Expenditures. Research Study Number 078, American Petroleum Institute, Washington, D.C., March 1995.
  4. 1994 Highway Statistics. U.S. Department of Transportation, Federal Highway Administration, Washington, D.C., Oct. 1995.
  5. 1995 Status of the Nation's Surface Transportation System: Conditions and Performance Report to Congress. U.S. Department of Transportation, Washington, D.C., Nov. 1995.
  6. Transportation Investment and Economic Expansion: Summary Report. Transportation Research Board/National Cooperative Highway Research Program, Washington, D.C., Oct. 1995.
  7. Using Market Research to Improve Management of Transportation Systems. NCHRP Report 329, Transportation Research Board/National Cooperative Highway Research Program, Washington, D.C., Aug. 1990.
  8. Public Outreach Handbook for Departments of Transportation. NCHRP Report 364, Transportation Research Board/National Cooperative Highway Research Program, Washington, D.C., 1994.
  9. Innovative Transportation Financing – A Report on the Results of a National Survey by the American Association of State Highway and Transportation Officials. American Association of State Highway and Transportation Officials, Washington, D.C., April 1995.
  10. Alternatives to the Motor Fuel Tax for Financing Surface Transportation Improvements. Transportation Research Board/National Cooperative Highway Research Program, Washington, D.C., Oct. 1994.

CTRE is an Iowa State University center, administered by the Institute for Transportation.

Address: 2711 S. Loop Drive, Suite 4700, Ames, IA 50010-8664

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