Cost Overruns Fuel “Transportation Cliff”

May 15, 2014

Congress is currently debating options to solve the “transportation cliff.” Broadly, the federal government spends more on highways and transit than it collects in fuel tax revenue, which has depleted the Highway Trust Fund. One reason for the imbalance is the federal government’s inability to control costs on projects. Federal transportation projects frequently go over budget.

This morning’s Washington Post details a cost overrun in Congress’ back yard. Arlington County, just across the Potomac River from Washington, D.C., is building a 4.5 mile street car project. Costs are currently estimated at $358 million—up $100 million from original estimates and up $48 million from just last year. If the project goes ahead, federal taxpayers are on the hook for $140 million of the project’s costs.

This is just one of many examples of government transportation projects going over budget. Transportation cost overruns are not new. A Government Accountability Office report of federal highway projects found that a quarter of them went over budget. Costs of the infamous Big Dig in Boston grew from $2.6 billion to $14 billion.

A study by Danish economists in 2003 examined 258 large transportation projects across Europe and North America. Eighty-six percent of projects went over budget; the average cost overrun was 28 percent. Rail projects were the worst offenders, with an average cost overrun of 45 percent.

Why does this happen? In the United States, cost overruns are partly caused by the complex nature of transportation funding, which reduces political responsibility. The federal government collects much of the revenue, divides it up, and sends it back to the states. Grants are handed out mostly by formula, and the states are generally not rewarded for using the money in an efficient and frugal manner.

As a result, neither level of government has an incentive to control costs. When a project goes over budget, the federal government often points the finger at the state government and the state often returns the gesture. GAO frankly said that “this fragmented approach impedes effective decision making.”

Controlling spending on projects would help to close the $14 billion annual gap between spending and revenue in the Highway Trust Fund. Unfortunately, the new Senate highway bill actually increases spending, and it fails to address wasteful spending problems such as cost overruns.

A better approach is the TEA proposal by Sen. Mike Lee and Rep. Tom Graves, which would devolve most highway and transit spending to the states. State and local governments would have stronger incentives to control project costs if it were their own taxpayers footing the bill.


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