Transportation Cliff or Pothole?

Recent news reports have zeroed in on Washington's next "cliff," the "transportation cliff" that is expected to happen when the federal Highway Trust Fund runs out of money sometime this summer. Most of those articles have a hidden agenda: to increase spending for transit even though transit now gets 20 percent of federal surface transport dollars but carries little more than 1 percent of the travel carried by automobiles (about 55 billion passenger miles by transit vs. 4.3 trillion passenger miles in cars and light trucks). This post will explain some of the politics of the transportation cliff.

1. Why are we about to go off a transportation cliff?

Since 1956, federal highway programs have been financed with federal gasoline taxes. Those revenues go into the so-called Highway Trust Fund ("so-called" because it's no longer very trustworthy) and then are distributed to the states for highway construction and maintenance. In 1982, Congress began dedicating a small but growing share of gas taxes to transit. Today, more than 20 percent of federal gas taxes are spent on transit, and there is no guarantee that the remaining 80 percent goes for highways, as Congress often diverts some of that money to such things as bike paths, national park visitor centers, museums, and other local pork barrel projects.

Congress reauthorizes this spending every few years. Traditionally, an authorization bill provides a spending ceiling. But the 2005 reauthorization bill made spending mandatory, meaning the ceiling was also the floor. (In 2012, Congress passed another reauthorization bill. That one didn't mandate spending, but Congress went ahead and spent to the limit anyway, knowing full well that this would mean the Highway Trust Fund would be exhausted by sometime in 2014.)

When the 2008 financial crisis led to a reduction in driving, gas tax revenues failed to keep up with spending. Since then, Congress has had to supplement gas taxes with about $55 billion in general funds in order to keep the Highway Trust Fund from running out of money.

Anti-auto interest groups often portray these supplements as highway subsidies. But they would not be necessary if Congress weren't diverting 20 percent of gas tax revenues to transit. Although more money goes to highways than to transit, because highways are so much more heavily used, federal subsidies to transit are about 80 times as great, per passenger mile, as federal subsidies to highways.

2. What will happen if we go over the transportation cliff?

In the past, states made their highway and transportation budgets assuming they will get a steady flow of federal dollars. But as transportation expert Ken Orski has shown, states have already realized they can't count on a steady stream of federal funds and at least half have taken steps to back away from federal dependence.

If Congress goes over the transportation cliff, it won't mean a sudden halt to highway projects and transit systems. Instead, states will spend money out of their own accounts, possibly getting short-term loans until the federal funding situation is resolved. Rather than a transportation cliff, it would be more accurate to describe current events as a "transportation pothole." But while everyone expects Congress to soon supplement the Trust Fund, this particular pothole will give more states incentives to find alternative sources of funding.

The cliff isn't the real issue. Instead, it is the reauthorization bill. Though most transportation reauthorization bills last six years, the 2012 bill expires this September. All of the posturing about the cliff is really an effort to promote changes in a new reauthorization bill.

3. What is the Obama administration's position?

President Obama has proposed to replace the 2012 law with the "GROW AMERICA Act," which absurdly stands for "Generating Renewal, Opportunity, and Work with Accelerated Mobility, Efficiency, and Rebuilding of Infrastructure and Communities throughout America." This bill would increase overall transportation spending by 38 percent, including a 22 percent increase in highway spending and a whopping 70 percent increase in transit funding.

Where would all that new money come from? Obama has also proposed to reform corporate taxes, which is supposed to reduce them in the long run but somehow produce a $150 billion one-time increase in revenues over 10 years. Obama proposes to spend four years of this increase on transportation. After that, the Highway Trust Fund would go over another transportation cliff.

There are a lot problems with this proposal. Congress hasn't agreed to corporate tax reform, nor has it agreed to dedicate any revenues from that reform to transportation. The one-time injection of funds still leaves federal transportation programs unsustainable in the long run. Perhaps most important, increasing transportation's dependence on general funds will make it less accountable to users and more accountable to pork-barrel politicians.

Historically, most federal transportation money is in "formula funds," meaning it is distributed to states based on such factors as state populations, land areas, and road miles. Such funds are hard to use as pork. But Obama wants much, if not most, of the new spending in competitive grant programs, which supposedly allows the money to be spent where it is most needed. But in reality, competitive grants give the administration enormous power to reward the faithful and punish opponents. For example, Obama's last grant of $2.5 billion to the California high-speed rail project came with a mandate that the money be spent in the congressional districts of two Democrats who were facing stiff opposition in an election that took place a few weeks after the grant was awarded. (They narrowly won re-election.)

4. What is Congress' position?

Most observers assume that the GROW AMERICA bill is DOA. While House Transportation and Infrastructure Committee Chair Bill Shuster has promised to have a new reauthorization bill "on time," there is still likely to be a major fight in Congress.

In 2012, the House Transportation Committee passed a bill that reduced spending to little more than revenues. But they couldn't get the House as a whole to approve the bill because Republicans representing big cities objected to reduced federal spending on transit. So Congress eventually passed a version of the Senate bill, which spent about $15 billion a year more than revenues. That's why we're headed for a transportation pothole today.

The 2012 election failed to change the balance of power that led to those conflicts, so Congress is unlikely to pass a long-term bill in 2014. Instead, the push will be to supplement the trust fund and pass another two-year bill that continues the status quo. Unfortunately, the status quo means more congestion and more wasteful spending on obsolete rail projects.

5. Do we need to increase spending to keep America's highways from crumbling?

For several years, there has been an almost continuous drumbeat about "crumbling infrastructure" which naturally carries over into the Highway Trust Fund debate. "Nearly one in four of America's bridges [are] either structurally deficient or functionally obsolete," says the Washington Post.

In fact, state highways are in excellent condition. The number of bridges that are "structurally deficient," meaning worn out and requiring extra maintenance, has steadily declined from nearly 119,000 in 1992 to less than 67,000 in 2012, and now stands at less than 11 percent of the total. "Functionally obsolete" bridges represent the other 14 percent of the Post's "one in four," but these are simply bridges that have lower clearances, narrower lanes, or other issues that might slow traffic but not create serious problems. As for the 11 percent that are structurally deficient, few are in any danger of falling down: the recent bridge collapses in Minnesota and Washington states were due to design flaws, not maintenance failures.

A disproportionate share of the structurally deficient bridges are locally owned, not state owned. While states pay for most of their roads out of gas taxes, tolls, and other user fees, local governments rely heavily on sales taxes, property taxes, and other general funds. This underscores the importance of funding transportation out of user fees, not general funds.

6. Do we need to increase spending on transit?

Many of the groups most eager to portray the transportation pothole as a crisis are really interested in increasing transit spending. Yet there is virtually no relationship between transit subsidies and transit ridership. Since 1970, federal, state, and local governments have collectively spent more than a trillion dollars (in today's dollars) subsidizing transit, yet transit ridership has declined from nearly 50 annual trips per urban resident in 1970 to around 44 annual trips today.

The real goal of increased transit spending is to build new rail lines. Such lines mean increased profits for rail contractors and excuses for urban planners to increase urban densities because people living in dense housing are supposedly more likely to ride transit than drive.

At the same time, while highways and bridges are in pretty good shape, our transit systems are not. Rail transit lines suffer from a $60 billion maintenance backlog. That backlog is growing because transit agencies are putting less money into maintenance than is needed to keep transit lines in their current state of poor repair.

The problem is that politicians prefer to fund new transit lines rather than maintain existing ones. Peter Rogoff, who until recently was the head of the Federal Transit Administration, even complained that transit agencies with crumbling systems still applied for funds to build new rail lines that they couldn't afford to maintain. "If you can’t afford to operate the system you have," he asked, "why does it make sense for us to partner in your expansion?" Having said that, he continued to give out grants for new rail lines because Congress effectively required him to do so.

In 2012, about 30 percent of the money spent on highways came from general funds, mostly at the local level, but 75 percent of the money spent on transit came from general funds. That made transit agencies far more responsive to unions, rail contractors, and other special interests than to transport users, which is the main reason why transit systems are in such poor shape.

7. Should we raise gas taxes?

Raising federal gas taxes by 10 cents per gallon over the current 18.4 cents could allow Congress to continue to spend on both highways and transit at current or increased levels. Rep. Earl Blumenauer (D-OR) has even proposed a 15-cents-per-gallon tax increase. Proponents of such an increase, including Blumenauer, want to see even more money flowing into transit and the construction of new rail projects.

In the long run, however, such an increase will still run into a transportation cliff. This is partly because Congress is likely to fully spend whatever revenues come in, and partly because a combination of inflation and increasingly fuel-efficient cars will reduce long-term revenues no matter what the tax.

Gas taxes function more of a user fee than sales, income, or other general taxes. But they are an imperfect user fee, as they don't give signals to users about the costs of the facilities they use and don't give signals to highway providers about the real demand for the roads they build.

8. What's the solution?

In the immediate term, Congress will no doubt supplement the Highway Trust Fund with another $8 billion to $10 billion in general (meaning borrowed) funds. Beyond that, Congress needs to curb transportation spending so that it is no more than revenues.

In the long run, we need to find a better way to pay for transportation than gas taxes. For highways, that means mileage-based user fees. That will not only assure adequate funds for maintenance and improvements, but also enable the use of variable fees, which could virtually eliminate the traffic congestion that costs Americans $200 billion per year. One issue is that, if roads are funded out of mileage-based fees, there won't be any need for federal involvement, which is good for those who want to devolve federal power to the states but bad for members of Congress who want to get credit for giving people money.

Meanwhile, most if not all transit costs should be funded out of fares, not taxes. Funding transit out of fares means relying more on buses and halting all or nearly all rail expansions. The best way to do this is to privatize transit, as private operators will be focused on serving users while public agencies end up serving mainly transit unions and suppliers. If Congress or the states feel the need to support low-income transit riders or other transit-dependent people, they should do so using transportation vouchers, not by subsidizing unresponsive transit agencies.

None of this will happen so long as Congress remains focused on increasing revenues to spend on special interest groups. Instead, Congress needs to recognize that transportation facilities are primary for transportation users, not unions, not rail car manufacturers, and not engineering and design firms.