Clearing it Up on Federal Transportation Expenditures

» The federal government has already devolved most of its transportation powers to local and state governments. And there is little evidence that further reducing the power of Washington will produce better transportation investments.

The reaction to President Obama’s 2013 budget for transportation has ranged from the dismissive — “it’s too big to be part of the discussion” — to the supportive (myself, among others), most of the commentary revolving around the proposed program’s large size. Another theme, however, has reemerged in the discussion: The role of the federal government in funding transportation. It’s not a new conversation, of course; in American transportation circles, the roles of the three major levels of government are constantly being put into question.

The argument goes something like this: The federal government, because of its national power and ability to collect revenues from the fuel taxes it administers, is a wasteful spender and it chooses to invest in projects that are inappropriate enough that they wouldn’t be financed by local governments if they were in charge.

Harvard Economist Edward Glaeser argues for the de-federalization of transport spending, suggesting “Whenever the person paying isn’t the person who benefits, there will always be a push for more largesse and little check on spending efficiency. Would Detroit’s People Mover have ever been built if the people of Detroit had to pay for it? We should move toward a system in which states and localities take more responsibility for the infrastructure that serves their citizens.” He also suggests, somewhat contradictorily, that federal funding “tie spending to need or performance.“*

USC’s Lisa Schweitzer asserts that if cities want improved sidewalks or public transportation, they should pay for them themselves. “The typical arguments [are] that “those things are good for us!”,” she writes. “Of course they are. Why can’t you fund them at the city, or in the case of transit, the state level?” [She adds that she will defend federal investment in a future discussion.]

Bruce Katz of Brookings chimes in. “The states and metropolitan areas are once again playing their traditional roles as “laboratories of democracy” and centers of economic and policy innovation,” he adds. “An enormous opportunity exists for the next president to mobilize these federalist partners in a focused campaign for national economic renewal.” The federal government, it is implied, is just too intrusive to make the right decisions.

Here’s the thing: The large majority of decisions on transportation spending with federal dollars is already made at the state and local levels. And state and local governments already contribute huge sums to the operation, maintenance, and expansion of their transportation programs.

Once the federal government collects tax revenue, it distributes funding to the states based on formulas agreed upon by members of Congress. For the most, part, the money goes back to the states and to metropolitan areas, which then fund projects based on the priority lists that they generate. It is true that Washington allocates some money for transit and some for highways, but within those categories, states and local governments generally have power to pay for the projects they want.

Washington does run very competitive grant programs — exactly the type of performance-based financing Mr. Glaeser demands — for transit investment projects and for programs like TIGER (and, indeed, for the much-hated high-speed rail program). Federal guidelines require most of these projects (unlike those funded by formula) to meet cost-effectiveness and ridership standards. This was not true at the time of the Detroit People Mover (a project I admit I abhor), but it is certainly true now.*** While earmarks (now out of the equation entirely) got a lot of attention as being wasteful, even at the height of the process they only accounted for about 5% of transportation spending from Washington.

I can think of plenty of expensive and arguably inappropriate transit projects paid for by local governments that would not meet the guidelines to be funded by the federal government under its competitive programs. Should we hail Mr. Katz’s “laboratories of democracy” that produced these? Would Mr. Glaeser have these federal grant programs dismantled so states or localities could fund underperforming transit?

Meanwhile, states and local governments are contributing massively to transportation funding already, just as Ms. Schweitzer asks them to. I studied Oregon and Illinois a year and a half ago and found that only about a quarter of Oregon’s Department of Transportation budget comes from Washington; about a third of Illinois’ comes from the national capital.

What about those profligate transit agencies that are egged on by the federal government’s wasteful spending? Their operations spending comes from local, state, and fare revenues — not Washington. And expansion projects — especially the big ones — are mostly financed by local revenues, like dedicated sales taxes that voters across the country have approved repeatedly over the past twenty years. The six largest transit expansion projects currently receiving or proposed to receive funding from the Obama Administration this year each rely on the federal government to contribute less than 43% of total costs. Perhaps Detroit would have paid for the People Mover even if it had had to use its own revenues to do so.

Now, even if we were to recognize the high level of devolution of power and funds that currently does exist in the U.S., some might still argue that the federal government exercises too much power. Its distribution formula for fuel tax revenues results in certain states getting more money than their drivers contributed (“donor” states) and certain states getting less (“donee” states). Why not simply allow states to collect their own revenues and spend money as they wish? Why should Washington be engaged in this discussion at all?

For one, as I have noted above, states and municipalities have no clear record of choosing to invest in better projects when they are fully in charge of collecting the revenues to do so. States have too often proven a complete disregard for public transportation investments when they’re left fully in charge — see state infrastructure banks as evidence for that fact. While federal investments in transportation have been far from perfect, they have nonetheless provided for the significant expansion in transit offerings we’re now seeing.

From the 1980s on, the Congress has maintained a steady stream of funding for transit from the fuel tax revenues it collects. How many states, which collect a huge amount of fuel tax revenues themselves, can say the same?

But the most important role of the federal government in transportation financing is to ensure that funding is maintained during economic downturns. The Obama Administration actually increased spending on roads and transit projects following the 2008 recession, despite a decline in federal fuel tax revenues, because it was able to use its power of deficit spending (an authority state and local governments do not have**) to maintain investments when the country needed them. Devolution is overrated.

* Glaeser, when criticizing the transportation budget, also takes the opportunity to refresh his years-long tirade against rail projects, suggesting “Instead of chasing the quixotic dream of high-speed rail in Texas, public-transit aficionados should start agitating for better bus service, with plenty of private competition.” But no one is arguing that we sacrifice better urban bus service for high-speed rail. Is Glaeser suggesting we stop building urban rail lines? If so, how does he expect to transport the people living in all of the towers he wants to construct in the dense urban cores of American cities? Meanwhile, the Obama Administration, no one seems to have noticed, has invested more in bus service improvement projects through BRT and BRT light than any previous federal government.

** Commenter John notes that many transit projects are paid for through bonds, which are in essence deficits, and that states have the technical power to have deficits — and these points are both valid. However, all states except Vermont have some form of balanced budget rule. And the selling of bonds by transit agencies are reliant on them having future guaranteed funding sources to pay back the debt — federal funding like capital grants are an important part of making that equation happen. Transit agencies do not have the ability to expand their debt capacity greatly (unlike the federal government) because of investor fears about future funding security.

*** Update, 22 February: There was a competitive grant program to provide funding for downtown circulators in the 1980s, and four cities won awards. Detroit and Miami built their projects.

Image above: U.S. DOT Headquarters: Not the be-all, end-all. From Flickr user Elvert Barnes (cc)