Discussion Paper

Transportation Revenue Options: Infrastructure, Emissions, and Congestion

| September 2010


For more than half a century, the United States adhered to the user fee principle in financing its transportation infrastructure; designing systems in which users, not the general public, paid for the construction and maintenance of roads. Under this principle, the federal government relied heavily on a fuel tax to support the cost of its highway system.[1] Revenues from the tax go into the federal Highway Trust Fund, which is independent of the General Fund; and every five years or so Congress passes an authorization bill to allocate these revenues. At the state level, similar mechanisms have been in place for decades, though tax rates vary from one jurisdiction to the next.

In recent decades, this funding mechanism has faced a variety of challenges. Increased awareness of local air pollution and traffic congestion has given rise to the accusation that motorists do not pay for the higher health and economic costs that they incur. Increasingly the U.S. transportation sector, as a major contributor to greenhouse gas emissions and consumer of oil imports, is also under pressure to shoulder its fair share of the costs to mitigate climate change and promote energy security.

In the meantime, federal and state transportation funds financed by fuel taxes have been unable to cover the expenses necessary to keep the highway system from deteriorating. The demand for new roads and the cost of expanding and maintaining the transportation system have increased with population and economic growth. But fuel tax revenues have not kept pace because the federal government and most states have not increased gasoline tax rates since early 1990s, while inflation has eroded their real buying power. In the meantime, cars and trucks have become more fuel-efficient. Although this is a favorable trend for the environment and energy security, it poses challenges for transportation finance because motorists consume less fuel per mile traveled and thus pay fewer tax dollars for the same amount of road use.

Policymakers have dealt with funding gaps in various ways, though rarely by raising gasoline taxes and other user fees, which is perceived as politically unpopular. Instead, despite growing budgetary problems, state and federal governments have reached into their general funds to fill this gap.  Some states have also issued bonds or raised sales taxes through local referenda approved by voters. As a result, an increasing share of transportation funding comes from nonusers and, to some extent, from future citizens who will have to repay the money borrowed to cover today's transportation costs.

Recognizing the tradition of the user fee principle, numerous studies (e.g., National Surface Transportation Infrastructure Finance Commission 2009; Transportation Research Board 2006) have proposed alternatives to replenish transportation funds, such as raising gasoline taxes or, in light of rising fuel economy, charging motorists according to the number of miles they drive. Meanwhile, a growing number of stakeholders advocate funding options that also advance other objectives such as congestion fees (to make the most of existing highway capacity) or carbon taxes (to promote electric and alternative fuel vehicles). While these other objectives are important, they inevitably complicate — and politicize — the debate on how to fund the nation's transportation infrastructure.

This summary report examines three main categories of user charges: charges based on fuel consumption, on distance traveled, and on congestion levels. It explores the financial and environmental advantages and disadvantages of each option and then discusses a number of pressing policy questions. As with the workshop, this report does not strive for consensus. Rather it articulates different perspectives on the problems and the various options to address them.

[1] There are other user taxes and fees (e.g., diesel fuel tax, registration fees) though they generate smaller revenues than taxes on gasoline purchases.  The federal gasoline tax, for example, brought in $24.6 billion (66% of all tax receipts) for the Highway Trust Fund in FY2009 (see FHWA statistics).

For more information on this publication: Please contact Energy Technology Innovation Policy
For Academic Citation: Huang, Edward, Henry Lee, Grant Lovellette, and Jose Gomez-Ibanez, "Transportation Revenue Options: Infrastructure, Emissions, and Congestion." Discussion Paper 2010-13, Cambridge, Mass.: Belfer Center for Science and International Affairs, September 2010.

The Authors

Henry Lee