Convoluted Highway Funding

August 5, 2010

A common theme with federal programs that fund state and local activities is that the distribution formulas are highly complex and politically-driven. The result is that policymakers at the federal and state level are constantly jockeying for more money, while the general public remains largely ignorant as to where the money comes from and how it’s spent.

A good example is federal highway aid to the states, which is supposed to be paid for by user taxes on fuels and other fees. To give a simplistic example, fuel taxes generated by a driver filling up in Kansas are sent to Washington where it’s designated to a trust fund. Money is then taken out of the trust fund and sent back to Kansas (and other states) via a formula for roads, transit, bicycle paths and all kinds of other stuff.
You might ask yourself, “Why doesn’t Kansas just tax the fuel and keep the revenues for its own roads?” The short answer is federal policymakers generally like spending money, and state policymakers like to receive “free” money from the Feds.
Every few years, Congress writes a bill to reauthorize transportation funding. The chief controversy that arises is the question of “donor” versus “donee” states, which leads to further tinkering with the formula and more complexity.
The Government Accountability Office examined the issue of states receiving less than their highway users send to Washington (donor states) versus those state that receive more (donee states). All states (except Texas) receive more money back from Washington that what their highway users pay. A major reason why is because Congress has recently authorized and apportioned more money to be spent than designated highway taxes have been bringing in. To fill the gap, Congress has transferred $30 billion in general funds to the highway trust fund in recent years.
However, as the GAO report details, when the distribution is looked at in terms of the states’ share received versus the share each state paid in highway-related taxes, significant differences emerge.
For example, Indiana is a donor state because the share it receives is only 91 percent of the share its highway users pay in highway-related taxes. In contrast, Alaska’s share received is 429 percent of the share its users pay in. The result is 28 states that lose, and 23 states (including the District of Columbia) that win.
Transportation expert Ronald Utt notes the problem:
These formulae, however, embody a number of serious flaws that cause many states (called donors) to consistently receive shares that are less than they pay in while others (called donees) consistently receive more. This deficiency in turn exacerbates regional transportation problems because the shortchanged states are typically those with above-average population growth and transportation needs that exceed those of the slower-growing states, which often receive shares that are greater than the amounts that they pay in.
A Cato essay on federal highway funding discusses this issue and other reasons why federal highway financing and control should be devolved to the states and, even better, the private sector.



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