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Transportation Funding


Each of these funding options should be evaluated not only against how much revenue they can generate and the ease with which they do so, but also against equity and environmental considerations.


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Gas Tax Indexing and Increase

Gas tax indexing and increase—The fuel tax or gas tax, is the primary source of federal funding for transportation. Approximately 90 percent of Highway Trust Fund (HTF) revenue comes from an 18.4 cents per gallon fuel tax, with the remaining balance from truck-related taxes. The gas tax also funds transportation for older adults and sidewalk and bicycle infrastructure, highways and public transportation investments. Every state also levies a gas tax and depends on it as an essential transportation funding source.

While the gas tax has provided a reliable stream of revenue for transportation since 1956, many now question its long-term viability as the tax has not increased since 1993 nor does it increase with the price of gas. Higher fuel efficiencies, coupled with less driving, led to a negative HTF balance sheet by September 2008 and Congress responded by adding $34.5 billion to the HTF from the General Fund, which is only temporary solution. Several options are available for increasing revenue from the gas tax, including raising the tax rate, indexing it to inflation, and imposing a sales tax on gasoline.

The gas tax may encourage people to reduce driving. As a result communities can benefit from decreased congestion on area roadways, improved air quality, and a reduction in global greenhouse gas emissions. On the flip side, many economists argue that the gas tax leads to inefficiencies in the transportation system. For instance, while hybrid-vehicle owners pay less tax than those who drive less fuel-efficient vehicles, their cars take up more or less the same amount of space on the road and cause roughly the same wear and tear.

Sales Tax

In the past decade general sales taxes have become an increasingly popular way of funding transportation investments. Yet sales tax is not a preferred funding method because it is likely to impose greater costs on lower-income households and is thus regressive. How sales tax funding is used also may present challenges that do not benefit the population equitably. For example, sales tax revenue that funds highway investments may not benefit low-income households as many do not have access automobiles. However, they may benefit when sales tax revenue is dedicated to public transportation. Similarly, in many cases the sales tax is directed toward rail projects. However, older adults and low-income individuals make greater use of lower-cost bus services, whereas more affluent commuters reap the benefits of rail investments. Another consideration concerns sales tax funding for transit components within new residential developments and whether housing near the transit station will be affordable by people at all income levels. Without affordable housing, the sales tax paid by all could result in gentrification and price out those who have paid the largest portion of their incomes in sales tax.

Funding transit services through sales taxes is not a long-term option. Not only is this revenue source highly volatile—retail sales decline more rapidly in a recession than does gasoline consumption—but it is an inefficient revenue source, since nondrivers subsidize drivers. Furthermore, this use of sales taxes erodes the longstanding commitment in the US to have user fees finance the transportation system. The tax base of many states exempts services frequently used by higher-income households, such as dry-cleaning, housecleaning, landscaping, attorneys, architects, accountants, etc. To make sales taxes less regressive, policymakers could expand the tax to cover these services while exempting necessities such as groceries, medicine, and utilities. Policymakers can also treat highway and transit funding more evenly.

Mileage Fees

Levying a tax on each mile people drive creates a more direct user fee than the gas tax, captures the actual amount of transportation-facility use, provides an incentive to drive less, and like the gas tax, does not require nondrivers to subsidize drivers. As such, mileage fees could help manage system demand and improve the environment. Most experts agree that implementing a mileage fee is not feasible on a national scale for another 15 years. Privacy protection is one major hurdle, since the system requires that a computer chip be installed on each vehicle to track mileage between fuel stops.

Road Pricing

Under this plan, drivers are charged through any of several methods, including traditional toll collection, congestion pricing, value pricing, high-occupancy toll (HOT) lanes, express toll lanes, and cordon pricing. Each of these involves a direct user charge in the form of a tolled road or other facility. Congestion pricing, value pricing, HOT lanes, and express toll lanes are largely synonymous methods in which the toll varies by level of road congestion, typically along a freeway corridor. In exchange for paying the toll—at a premium price during peak demand periods—users are guaranteed free-flow conditions on the roadway. With cordon pricing, a cordon line is drawn around an area (typically a business district), and any vehicle that crosses the line must pay a toll, also usually variably priced. Variable priced lanes offer a great advantage over traditional toll roads. Along with generating income, they let administrators manage the demand on the facility, thus it functions more efficiently. The costs are more equitably distributed toward those who benefit most. In the case of unpriced lanes, both users and nonusers incur the costs associated with congestion.

Economists have argued that pricing allows facility managers to offset some of the negative environmental and social effects of automobile travel, most notably air and water pollution. Road pricing, such as congestion pricing, also has economic benefits for these roads may be used by people of all income levels.  Variably priced lanes are regressive when poorer households cannot avoid paying the tolls because their are no alternate transportation routes or must use cash or a banking account to pay tolls. The effects of a variably priced facility can be reduced by channeling a portion of the revenue toward improved transit service and by offering payment systems to accommodate lower-income users. Additionally, low-income users also can be offered tax credits.

Public-Private Partnerships

Although state transportation departments could own and operate a priced transportation facility, such as a highway, they often lack the upfront funds to build it, especially during difficult economic times. One answer may be to fund major transportation projects through a public-private partnership. For example, under a concession model, state and/or local governments grant a private firm the right to operate a toll road for profit for a particular period of time or to lease the facility for a specific period of time. The toll road can be either an existing government asset or a new road that the private firm will build as well as operate.

The danger of the concession model is that the public sector gives up its rights over a transportation investment for a significant period of time, without fully understanding what value this asset may have to the public in the future. Negotiating this kind of asset transfer is complex. Key to such discussions is the need for government owners to carefully establish contract provisions, such as:


  • facility maintenance;


  • the portion of revenue that will be channeled to improve public transportation services in the corridor;


  • revenue-sharing provisions to ensure that the public sector reaps some rewards if toll revenues are higher than projected;


  • ample public involvement in project design and the fulfillment of all applicable planning and environmental requirements;


  • transparency, including any tax incentives given to private-sector partners—Confidentiality should be limited to only those instances where it is legally required;


  • noncompete clauses—Local governments should not be prohibited from building or improving adjacent facilities; and 


  • proof of value—Objective analysis must show that private-sector financing provides better value than if the concession were financed using public funds. This assessment must take into account the loss of federal tax revenue from tax-exempt municipal bonds, as well as the tax consequences of depreciation.

Carbon Pricing

A carbon tax would set a fixed price on every ton of emissions. A cap-and-trade program would limit or cap total emissions and establish a market for trading (buying and selling) permits to emit a specific amount of greenhouse gases, allowing the market to determine the price of emissions. The transportation sector contributes one-third of the nation’s carbon output. Revenue raised through carbon taxation or trading could be channeled back to transportation projects that reduce the nation’s carbon footprint, such as public transportation, pedestrian and bicycle infrastructure, and clean vehicle research and technology.

National Infrastructure Bank

Several policy organizations (e.g., the Center for Strategic and International Studies, American Planning Association, and the American Society of Civil Engineers), as well as the Obama administration, have endorsed the concept of establishing a national infrastructure bank to leverage private and public resources to fund transportation projects. A national infrastructure bank could be structured similar to the World Bank, Federal Deposit Insurance Corporation, a private investment bank, or any other entity that evaluates project proposals and assembles a portfolio of investments to pay for them. The bank would be an independent entity responsible for evaluating and financing capacity-building infrastructure projects of substantial regional and national significance, perhaps through some form of a competitive discretionary program. Potential projects could include construction and rehabilitation of publicly owned transit systems, high-speed rail, roads, bridges, drinking water supplies, wastewater systems, broadband, the electricity grid, schools, and housing developments.

Regardless of format, if a national infrastructure bank is created, project selection should be de-politicized and merit-based. Transportation projects should be rated according to national significance, promotion of economic growth, reduction in traffic congestion, environmental benefits, smart-growth land-use policies, and mobility improvements. Preference should also be given to projects that leverage private financing. Another consideration would be how to address public input as part of its project decisionmaking process.

Consumer Expenditures

Transportation currently consumes more than 20 percent of the average annual household budget. It is a major consumer expense that many households seek to lower. Infrastructure investments that enable travelers to choose lower-cost travel increase the efficiency of the overall transportation system. Moreover changes to the tax code and private-sector pricing on transportation-related goods and services can also directly affect consumers’ out-of-pocket costs and travel choices. When fuel prices rise, many people choose to drive less, link trips by purpose, or take public transit. Employers may offer a transportation reimbursement benefit to employees for certain costs incurred while commuting and in exchange, may receive a federal tax-exempt reimbursement.

The private sector can also support alternative travel by appropriately pricing other transportation goods and services. One example of this is voluntary pay-as-you-drive (PAYD) auto insurance. Insurance is billed on a per-mile basis rather than as a lump sum per vehicle, encouraging people to drive less. PAYD is more equitable for low-income people and for women, who tend to drive fewer miles on average and currently subsidize high-mileage drivers.

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