DOT Finance

The Age of General-Fund Financing is Already Here, But It May Not Matter

» A long tradition of using the Highway Trust Fund to sponsor transportation infrastructure in the United States was thrown out the window in 2008. But has anyone in Washington noticed?

About a year ago, House Transportation and Infrastructure Committee Chairman James Oberstar (D-MN) introduced a $450 billion proposal for a six-year transportation bill, hoping to get it out of the Congress and into the President’s hands by the end of the year. Unfortunately, Mr. Oberstar’s bill hasn’t even made it out of committee — primarily because no one in Washington has taken the steps necessary to fund it.

The biggest problem for the U.S. government is that its traditional source of revenues used to build highways and transit — fuel taxes — are drying up; not only has the fixed rate not been increased since 1993, but Americans are on average driving less and are using more fuel efficient cars. As gas prices increase and the switch to hybrids and electrics continues apace, this difficulty will only intensify. Meanwhile, because of political resistance to raising the gas tax during a recession, there’s little hope of that happening anytime soon. Other conceivable funding options, such as infrastructure banks, public-private partnerships, and extensive tolling, will only cover a small portion of the growing gap.

But the future of American transportation depends on finding the money to keep the infrastructure in good shape: this is a debate that will, for instance, determine how many of the hundreds of planned transit projects across the country listed on this site actually get built. And that’s why everyone in both the executive and legislative branches spent the last year scratching their heads, as if suddenly a politically acceptable answer to their monetary woes would pop out of thin air. There’s been a collective case of naivete floating around Washington for the last year when it comes to transportation, when the fact of the matter is that the money to fund improvements is not going to magically appear.

In fact, Congress has developed a solution to this fiscal hole — it’s just one that it claims to be unacceptable: the use of the general fund. As Ken Orski — an Associate Administrator of the Urban Mass Transportation Administration (now FTA) between 1974 and 1978 — pointed out to readers of his Innovation Briefs last week, Congress has allocated a total of $79.2 billion of income tax-sourced funds to pay for ground transportation projects over the past two years. That’s almost twice what the Highway Trust Fund is supposed to devote to highway and transit projects every year.

Orski notes that $43.2 billion went directly to make up for shortfalls in Trust Fund revenues. The rest of the money went to the Stimulus’ roughly $45 billion in one-time only project funds, including the Administration’s $8 billion commitment to high-speed rail.

Indeed, despite the fact that most influential members of Congress have claimed to be completely committed to the user fee-based Highway Trust Fund model — in which roads users pay for the completion of more roads, in addition to public transportation — the fact is that the body has spent massive sums using a different funding model, in which everyone pays for transportation investments though the general fund.

This brings the transportation world into unfamiliar territory. Whereas the distribution of funds has been relatively stable since the beginning of the Interstate era, with Congress setting in stone spending levels over five to six-year periods, an increasing reliance on congressional allocations, voted on every year, could mean uncertainty and a loss of security on the part of local transit agencies, state departments of transportation, and private contractors.

The underlying concern with this situation: If fuel tax revenues aren’t determining how much is spent on new infrastructure, Congress will be deciding how much to spend, each and every year. And members will have to weigh infrastructure spending against other priorities also funded by the general account, leaving highway and transit projects in the potential lurch. There would be no assurance of continuity across presidential administrations or political control over the legislature. For lobbying groups, this is a petrifying possibility.

But it may be the future, as Orski suggested about a month ago. He quotes former Secretary of Transportation James Burnley, who told Orski “What worries me is that the whole concept of the trust fund is breaking down… By 2013, we could find the whole notion of the trust fund obsolete.”

This situation, however, is not nearly as scary as it sounds. Even if Congress decides not to increase the gas tax and determines as unacceptable another form of user fee (such as a vehicle-miles-traveled (VMT) tax), it has the technical ability to make general fund-sourced expenditures more stable than have been the current emergency shortfall allocations. The legislature could commit a certain percentage of income tax revenues directly to transportation, essentially filling the Trust Fund with standard, predictable infusions, just from a different revenue source.

From the standpoint of increasing social equity, there are strong arguments to be made in favor of this approach. And a decision fund transportation with non-highway revenues would discourage what is now the politically necessary massive funding advantage for road infrastructure creation over public transportation, a consequence of the fact that drivers are the people who pay. Everyone contributes to the general fund.

Moreover, transportation infrastructure is popular: That’s why communities across the country have endorsed transit sales tax increases by a two-to-one margin over the past ten years. This means that even if Washington isn’t able to get its act together to dedicate adequate dollars for transportation, other levels of government can step in; the public sector, after all, doesn’t begin and end on the National Mall. And America, despite suffering the effects of a recession, remains a wealthy country that can find the money to pay for things — if its leadership demonstrates an interest in doing so.

There are plenty of ways states, metropolitan areas, and cities could develop new and more effective funding sources without relying on the federal government. Regional compacts could dedicate a certain percentage of a fuel tax surcharge to a high-speed rail line, for instance. Big cities with already adequate public transit systems could implement congestion pricing. States could implement VMT systems of their own (as Oregon already has). By increasing reliance on local sources of funding, states and cities may find themselves better able to get what they want done.

Indeed, though there may be negative consequences for poorer jurisdictions to reducing their reliance on Washington for the funding of local roads and transit, many regions may find themselves suddenly able to do things they hadn’t done before. If New York had more control over its local transportation spending, couldn’t it build the Second Avenue Subway more quickly? Couldn’t many of the smaller cities planning bus rapid transit lines simply construct them, without waiting on Washington to allocate them the funds?

Of course, that may be unreasonably optimistic thinking. States already have the ability to shift most of the “highway” revenues they get from Washington to other projects, like transit or pedestrian facilities — but they very rarely do they do so. Yet if states and municipalities are to take an increasing role in the transportation funding process, they may become the ground floor of discussions about where to direct limited funds for transportation investments. They must be pressured into responding appropriately to their new role.

13 replies on “The Age of General-Fund Financing is Already Here, But It May Not Matter”

I’m curious how other developed nations fund their transportation spending. Are they user fee focused or simply general fund?

The Australian states, and the New Zealand govermnent, have extremely “general” general funds. Most revenues are commingled at Treasury and doled out in an excruciating annual budgeting process. In practice, choosing between trains and schools and hospitals is such a losing proposition for a politician that most budgets look pretty much like the previous year’s budget, unless revenues are going down.

The other danger in this “general fund” system is that the prioritisation decisions can easily be transferred from the politicians to their staffs, especially Treasury staff. That can mean more expertise, but also less accountabiilty. Not always a good trade.

Watching Australian states has made me much more enthusiastic about compartmentalised sources that fund a particular government activity. The source doesn’t have to be directly related to the activity, but there needs to be a clear decision that this source (or mix of sources) will be used for a particular purpose. If you can get this through a referendum, so much the better for its legitimacy. That’s what we were after in the Sydney Morning Herald work that I discussed here:

If the trust fund model is dead, then all funding decisions should be pushed back down to the state level. Between the lack of a distinct capital budget and the Senate, I can’t see how federal spending will have any kind of rationale behind it.

One advantage the Feds have is borrowing ability–or at least this would be an advantage if Washington wasn’t already so far in hock bribing senior citizens and killing people overseas.

True, the federal government does have a distinct advantage when it comes to borrowing, in terms of amounts and yields. But if the federal borrowing is spent on stupid stuff, what’s the point?

The Federal advantage extends to printing money as well as borrowing it but PeakVT makes what I think is the strongest point, it is not the quantity of the deficit any more so than what the deficit is spent on. If that consideration is allowed then I feel our deficit is much higher than anyone would acknowledge.

The Highway Trust Fund may be endangered by the move from user based funding to general funds; but there still can be a Trust Fund- a Transportation Trust with similiar quarantees like contract authority and firewalls. The Transportation Trust Fund would be intermodal and such a Fund would allow transportation officials to invest in the best transportation solutions their communities/states/regions believe are the best mobility solutions.
A general fund Transportatio Trust fund is not shackled by the arguments that a certain portion has to be dedicated to a certain transport mode, because it was generated fom users of that mode. The current way we fund transportation has created modal silos that are ineffecient and ineffective to met todays problems.
Transportation accounts for between 11-12% og the US GNP. Congress should allocate 11-12% of GNP to the Transportation Trust and disband the Highway and Aviation Trust funds and allow the states to keep or void the user fees collected in their states.The contribution to GNP also serves as a performance measure for future transportation funding. Now funding is based on the effeciency and effectiveness of the transport system to the economy. Multimodal decisions are then possible.
Congress would fund the Transportation Trust Fund by an increase in the income tax, at the same time it is removing the federal motor fuels and aviation taxes.
It is time to finance transportation at the national level on the bases of those who benefit from transportation- all of us and the business community; and not rely on consumption base taxes that encourage the wrong transport policies and behaviour. Think of the stupidity of how we finance transportation today- the consumption of a non renewable commodity. Every DOT head, unfortunately, has to wish for its citizens to go out and buy a Hummer and drive it 1000 miles a week to improve its revenue stream to build more roadways to meet the 1000 mile a week demands.
Moving to a benefit approach with a protected Transportation Trust Fund funded by the general fund is probaly the best possibility for the future of public sector finance transportation.
These ideas were expressed by me in a study in 2004 entitled “Financing Intermodal Transportation.”

There isn’t a single developed countries that spends 11-12% of GDP on transportation. Not even close. The US currently spends about 1.5-2% of GDP on transportation, most of which is on roads.

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