Improving Efficiency and Equity in Transportation Finance

Martin Wachs


Ever since the widespread adoption of automobiles, the American highway system has generally been financed with “user fees” ? money collected from those who
use the roads. Tolls and fuel taxes, which levy charges roughly proportionally to
travelers’ use of roads, have been the most common.

However, tolls have traditionally been costly and difficult to collect because of the need
to construct toll plazas and staff them with salaried workers. In addition, revenues from
fuel taxes have for three decades been rising more slowly than program costs as legislators
become ever more reluctant to raise them to meet inflation. As a result, the burden of raising
the funds for transportation programs is gradually being shifted to local governments
and voter-approved initiatives that are, in most instances, not based on user fees. As a
result, new sources of revenue, especially local sales taxes have come to pay for transportation

In fact, seemingly modest local tax increases enacted as short-term solutions to immediate
problems are setting a major national trend. Without any deliberate or conscious
change in policy, transportation finance is gradually devolving to local governments and
lessening its reliance on user fees. User fees are, however, more efficient and more equitable
than local sales taxes for transportation projects. In the short run, increases in fuel
taxes are viable and practical. In the longer term, tolls collected electronically promise the
most appropriate and flexible method of user fee financing.

This policy brief outlines the complex series of relationships that define federal, state,
and local roles in financing transportation systems. It summarizes some of the most pressing problems regions and the nation face in paying for the growth, management, and
maintenance of the American transportation system. And it argues that continued or
expanded reliance on user fees remains the most promising way to promote efficiency and
equity in transportation finance.