While many in the transportation community know something about the overall world of highway financing, most are not aware of its magnitude, complexity, intergovernmental nature, or - most importantly - where the money comes from and where it goes.

This article examines highway financing at the national level with data from the Federal Highway Administration's highway finance statistics program.

Highway Disbursements

Total disbursements for highways will likely reach $106 billion in 1998. The 1998 effort will be an increase of $12.5 billion since 1995 and exceeds 13 percent since that time.

Nearly one-half of all spending will be for capital outlays - highway construction, engineering, and right-of-way expenditures. All levels of government - federal, state, and local - will invest more than $51 billion to improve our nation's highways, roads, bridges, and streets this year. Exceeding the $50 billion threshold is an important milestone in highway financing because only a dozen years ago, total capital spending was only slightly more than $26 billion (1985). (See figure 1.)

Figure 1 - Disbursements for highways.

Highway capital outlay is increasing in both dollars expended and the share of total disbursements by all units of government. Capital outlay accounted for 47.1 percent in 1994; for 1998, the share will be about 48.4 percent of total spending. (See figure 2.)

Figure 2 - Capital outlay as a percentage of total highway disbursements.

The next largest category of expenditure for highways is maintenance and traffic services. All units of government will spend an estimated $27.5 billion in 1998. Maintenance disbursements - commanding a constant one-fourth share of all highway dollars - have increased over the years. Since 1994, total maintenance costs have increased from $23.6 billion to $27.5 billion, which is an average gain of $780 million annually. In real dollars, highway maintenance and traffic services increase slightly more than the rate of inflation.

Highway maintenance is primarily a function of state and local governments. The federal government spends relatively small amounts ($70 million annually) on national parks, Indian reservations, and other federal lands. For local governments - counties, towns, cities - road and street maintenance is their largest expense item. In 1998, local governments will spend $15.4 billion, which is 39 percent of their budgets, on street repair, snow removal, and other activities needed to maintain local road networks. States, on the other hand, spend around $12 billion, which is only 18 percent of their total spending, on maintenance.

Federal, state, and local governments together will spend about $27.5 billion this year to maintain highways, streets, and bridges.

State budgets are capital intensive. States control most U.S. higher order roads such as freeways; expressways; and the National Highway System, including interstate highways. These systems, which are the most important to the nation's transportation system, are very costly, commanding the majority of state highway funds. To help meet these capital demands, most federal funds are paid to the states. In recent years, the Federal Highway Administration (FHWA) has paid about $19 billion annually to the states for this type of work. Federal funds cover more than 50 percent of state capital outlays and about 40 percent of total highway capital outlays.

In 1997, total "user" fees and taxes, including the federal and state tax on each gallon of gasoline, was $89.5 billion.

The states' remaining funds for capital improvement in 1998 come from bond proceeds ($5.6 billion), local participation ($1.4 billion), and current tax receipts ($12 billion).

Other highway costs include administration and research, law enforcement and safety, and interest and other debt-related expenses.

Highway Revenues: The User Pays!

From where do highway revenues come? For the most part, the road users supply these funds. Both the federal government and the states rely on imposts - fees and taxes - on users to fund highway programs. Highway fees consist of motor-fuel taxes, vehicle registration fees, license plate fees, and certain levies on heavier vehicles such as trucks. Augmenting these is the most direct of all highway user fees - tolls.

While it is true that not all highways are financed from users, not all user-fees are spent on roads. In 1997, total user revenues reached $89.5 billion, but only $65 billion was spent on road programs. (See figure 3.) Another $7.3 billion was spent for mass transportation. This leaves a "gap" of approximately $17 billion. About $7 billion, which came from 4.3 cents per gallon of the federal fuel tax, went to reduce the federal deficit. As a result of the Taxpayer Relief Act, effective Oct. 1, 1997, the Highway Trust Fund's Highway Account received the proceeds of 3.45 cents per gallon, and the Mass Transit Account received 0.85 cents per gallon. Other measures include the mass transit share - $3.9 billion for 1997 - of the federal road-user taxes and similar actions at the state and local levels. More than $3.1 billion of highway user revenues went for collection expenses in 1997.

Figure 3 - Revenue for highways.

At their peak, road-user taxes and fees at all levels of government accounted for 91 percent of all highway disbursements. With the return of the deficit reduction amount, user revenues meet 82 percent of the 1998 costs for highways. The Taxpayer Relief Act delayed the deposit of Highway Trust Fund monies in FY 1998; otherwise, this percentage would have been higher. (See figure 4.)

Figure 4 - Highway user revenues as a percentage of total highway disbursements.

At the local level, only incidentally are user fees levied; nevertheless, road-user revenues contribute a significant share of local road improvement. Tolls account for one-fourth of local user fees, whereas they represent only 9 percent for state user revenues. Nearly all the states share a portion of their user-tax receipts with local governments. For 1998, nearly $10 billion of state user revenues will be paid to local governments for roads. All highway-user revenues will cover 47 percent of local road improvements and maintenance.

Other Financing Sources

At the other end of the financing spectrum is the practice of using broader-based taxes (such as general revenues) for highway programs. Most locally raised revenues come from general taxes. These may include a local option motor-fuel tax (levied by counties in Florida) or a vehicle tag fee.

Intergovernmental Payments

Highway financing is characterized by the flow of funds from and between governments at all levels.

From the "top down," a review of the flow of funds shows the federal government performs little direct work. For the most part, federal highway programs participate in the financing of highways via grants to states and local governments. For 1998, $19.5 billion will be paid to the states, some $372 million of which will be passed along to localities.

Other federal funds - that is, nontrust funds - include: (1) earmarked natural resource payments (forest reserves funds, oil severance taxes, and so forth), (2) funds for a broad group of uses that are determined at local discretion (e.g., HUD block grants), and (3) general funds appropriated for highways.

States also distribute grants-in-aid for highways. Nearly all state statutes call for local governments to share in state motor-fuel and/or vehicle taxes and fees. The share transferred may be a few cents per gallon or a designated percentage of state road-user revenues. As noted above, states will pay out $10 billion in this manner in 1998. Selected nonuser revenues, estimated at $1.7 billion for 1998, are similarly transferred for roads at local discretion.

Occasionally, local governments share in the cost of state-administered projects. The local share is reported as a transfer from local governments to the state - about $1.375 billion for 1998.

Conclusions

This article presents a condensed view of highway financing for the most recent years for which data are available and makes a short-range projection. Generally, the data for 1995 and 1996 are contained in the annual FHWA publication Highway Statistics; the other data are projected. All the data are being published in FHWA's annual Highway Funding Bulletin.

The most important aspect on the revenue side of the ledger is that traditional road-user taxes and fees are levied at all levels and that a significant portion of the revenues do not support highway programs. If they were dedicated for highways, user revenues in 1998 would cover 82 percent of costs. With federal encouragement, states and others are using innovative financing techniques, including state infrastructure banks, to finance highways.

The role of the federal government is to participate in state and, to a lesser degree, local road programs. States are the recipients of most federal-aid funds, but they, in turn, share their state-imposed user revenues with local governments. A reverse flow occurs when local governments share in state road projects.

State and local governments do the actual spending for highways. Three-quarters of capital outlay is done by the states, whereas local governments are responsible for more than half of all maintenance of the nation's roads and streets. Highway capital outlay garners nearly one-half of all dollars spent in 1998, and maintenance consumes another quarter. Total spending will top $100 billion for 1997 and 1998. Highway capital outlay and maintenance dollars will reach $79 billion in 1998 or roughly three out of every four dollars spent on highways.

Thomas W. Cooper is a transportation specialist. He worked for FHWA for 30 years, retiring in 1991. He has written several articles on highway financing. He is currently a consultant to FHWA's Office of Highway Information Management.

For more information and data on highway financing in the United States, consult the following publications:

Highway Statistics - 1996

Highway Statistics - Summary to 1995

Highway Taxes and Fees, How They Are Collected and Distributed - 1995

Financing Federal Highways - 1992

Our Nation's Highways - 1998 Draft - Note this is a PDF file!

Highway Funding Bulletin - 1998. - Note this is a PDF file!