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Public Works Financing

Four Principles for Expanded U.S. Tolling

Why future highways should be paid for by mileage-based user fees and other suggestions for highway funding

Robert Poole
July 9, 2012

Congress's compromise surface transportation bill will likely be the last such reauthorization that delivers a net increase in federal highway funding. With the revenue base of per-gallon fuel taxes likely to continue shrinking over time, and with "no-tax-increase" sentiment still politically potent, any future spending increases would have to rely on further transfers of general fund money into the Highway Trust Fund.

But the harsh reality that is gradually sinking in among scholars, the financial community, and even some elected officials is this: there will be no more general fund money. Between ever-growing budgets for Medicare, Medicaid, Social Security, national defense, and interest on the national debt (the latter alone forecast by Congressional Budget Office to consume 16 percent of all federal revenues by 2021), there will simply not be any money left over to subsidize either the Highway Trust Fund (HTF) or numerous other long-standing programs.

And don't expect state governments to make up the shortfall. Nearly all states are saddled with massive unfunded pension liabilities, estimated at $542 billion by Fitch Ratings and a massive $3 trillion by analyst Andrew Briggs at American Enterprise Institute.

Thus, America's highways desperately need a new source of funding, one that will grow along with the economy and be independent of the source of motor vehicle propulsion. There is a growing consensus that future highways should be paid for per mile driven, rather than per gallon of fuel consumed. This is sometimes referred to as mileage-based user fees or VMT (vehicle miles traveled) charges. Whatever the name, it's the direction we need to go.

Numerous pundits have frightened much of the electorate with visions of a government-mandated GPS box in every vehicle, recording exactly where and when every vehicle travels. That approach to VMT charging is almost certainly not the way forward-it's far too costly and far too intrusive to be either economically or politically viable.

A much simpler approach would be to break the problem into two parts, rather than requiring a one-size-fits-all solution. For "ordinary" streets and roads, a basic charge of one to two cents per mile could be assessed via several possible versions of odometer reading-very low-tech and low-cost. For premium roads, such as expressways and Interstates, those using them would pay electronic tolls using today's proven technology of transponders supplemented by license-plate-imaging. Those rates would be considerably higher, consistent with the much higher cost of building and maintaining limited-access highways.

Critics will denounce the latter proposal as tolling the freeways and Interstates-and that's exactly what it amounts to. So the task before us is to consider how to make this transition genuinely in the interest of highway users. To that end, I'd like to suggest four principles.

The first of these is 21st-century tolling. Most people still think of tolling in the 20th-century version: temporary (until the initial bonds are paid off), cash-based, and inconvenient (those horrible toll plazas). The emerging 21st-century tolling model differs in five ways:

These features make 21st-century tolling a far better user fee than fuel taxes.

The second principle is to safeguard the toll revenues, preventing their diversion to other uses, so that highway customers get what they pay for and pay for only what they get. Most U.S. toll roads adhere to this principle (as do new P3 concession projects). But as documented in a Feb. 15, 2012 report from Moody's, in several notable cases state governments have begun diverting significant annual amounts of toll revenue to other purposes, weakening the financials of the toll agencies involved. The New Jersey Turnpike must now divert 17 to 20 percent of its toll revenue; the Pennsylvania Turnpike diverts more than half.

What we need instead (principle #3) is to reposition major highways as another network utility-like electricity, water, natural gas, cable, telecoms, etc. These are all vital networks, and we pay for all of them on the basis of how much we use them. But only with highways do we pay very indirectly (and through a political intermediary). Even in the water sector, where local governments run most water utilities, people expect to get and pay a water bill, not have the cost taken out of their property taxes. We'll know when we've accomplished this paradigm shift when people are as matter-of-fact about paying their highway bill as they are about paying their mobile phone bill.

The fourth principle suggests the most user-friendly way of making the transition to electronic tolling for all limited-access highways. I call it Value-Added Tolling. Since people are accustomed to paying for highways indirectly, we can't just throw a switch and expect them to start paying tolls for the same old roads. Instead, we should introduce tolling only where by doing so we can add significant value for highway customers. In other words, use toll finance for:

The last of these is critically important. The new reauthorization bill authorizes tolling for "new capacity" but not for "existing capacity." But that leaves out replacement of a worn-out highway by a new highway, rebuilt to 21st-century design and safety standards, with sufficient capacity for the next 25 to 50 years. Rebuilding and modernizing most of the 50-year old Interstate system is probably the most important future use of tolling in our lifetimes. And that is not "tolling existing capacity."

Those of us who understand the need for large-scale highway investment need to make this case to highway customers (the AAAs and ATAs of the world), to opinion leaders, and to elected officials. I offer these four principles (21st-century tolling, users-pay/users-benefit, highways as network utilities, and value-added tolling) to help us do that job.

Robert Poole is director of transportation policy at Reason Foundation.


Robert Poole is Searle Freedom Trust Transportation Fellow and Director of Transportation Policy


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