How should America pay for its infrastructure needs?

Dr. Richard Geddes

Biographical Statement:
Rick Geddes is Professor in the Department of Policy Analysis and Management at Cornell University and Director of the Cornell Program in Infrastructure Policy. His research focuses on policies toward the funding and financing of infrastructure projects in the transportation, water, and energy sectors.

Geddes is also a core faculty member of the Cornell Institute for Public Affairs (CIPA) and a Visiting Scholar at the American Enterprise Institute (AEI). He is a Research Fellow with the Mineta Transportation Institute at San Jose State University. Geddes has won numerous teaching and advising awards, including three Merrill Presidential Scholars Awards for Outstanding Educator, and a SUNY Chancellor’s Award for Excellence in Teaching.

Geddes has held several visiting and advisory positions. He is an Advisor to the Rocky Mountain Hyperloop Consortium. He was the Edward Teller National Fellow at Stanford University’s Hoover Institution during the 1999-2000 academic year. He served as a senior economist at the Council of Economic Advisors during the 2004-2005 academic year, and was a commissioner on the National Surface Transportation Policy & Revenue Study Commission.

Geddes was also a Fulbright Senior Scholar during the 2009-2010 academic year to study transportation public-private partnerships in Australia, and a Visiting Faculty Fellow at Yale Law School during the 1995-1996 academic year. He has advised numerous Fortune 500 companies, including United Parcel Service and CSX. He has testified numerous times before House and Senate committees.

Geddes’ publications have appeared in numerous academic journals, including the American Economic Review, Journal of Regulatory Economics, Journal of Legal Studies, Journal of Law & Economics, Transportation Research Part A, and Journal of Law, Economics, and Organization, among others. He teaches courses at Cornell on infrastructure policy, corporate governance, microeconomics, and the regulation of industry. Geddes holds MA and Ph.D. degrees in economics from the University of Chicago, and a BS in economics and finance from Towson State University.

 

Meanwhile, the revenue sources available to maintain, operate and selectively expand the road network remain inadequate and unreliable. Large system parts are past their original design lives and in need of major overhaul. Maintenance of roads, bridges and tunnels has been deferred, sometimes for decades. New approaches to funding the U.S. transportation system are necessary.

A key insight is to appreciate the distinction between the funding of infrastructure and its financing. “Funding” for transportation infrastructure refers to the underlying dollars or financial resources necessary to maintain, operate, and renovate the nation’s transportation system. Those dollars can only be obtained from one of two broad sources: (1) some sort of user fee where the driver is charged in proportion to road use; or (2) a broader-based tax that is unrelated to road use. Possible user fees include fossil-fuel taxes on gasoline, tolls such as those on a bridge or tunnel, or mileage-based user fees. Examples of tax funding that can support transportation include dedicated sales, property, or income taxes, among others.

In contrast, “financing” refers to the use of financial markets to obtain the large up-front payments that are needed to design, construct and maintain roads once adequate funding is in place. Examples include tax-exempt municipal bonds, taxable privately issued debt, federal Transportation Infrastructure Finance and Innovation Act (TIFIA) loans, equity stakes in a public-private partnership contract, and state revolving-fund loans, among others. Infrastructure financing presupposes adequate infrastructure funding. That is, both lenders and equity investors will require assurances that their investments will be paid back with adequate compensation for risk assumed before any financing will be forthcoming.

Credit: Twenty20

The gap, and thus problem facing much U.S. infrastructure, is one of funding rather than financing. If a city or state is able to commit the underlying dollars to adequately fund an infrastructure project, then the financial markets will invariably generate the necessary financing.

Public policy should therefore focus on creating a reliable, ongoing funding stream sufficient to bring existing U.S. infrastructure up to a state of good repair, and to expand it where necessary.

Policy toward sustainable infrastructure funding should be guided by the basic user-pays principle. This is the same principle used to fund the majority of goods and service we consume. Indeed, the United States has historically relied on dedicated user fees in the form of fossil fuel taxes to fund its surface transportation network. Taxes on fossil fuels, including gasoline and diesel fuel, account for more than 90 percent of the federal Highway Trust Fund’s revenues.
Those taxes are becoming less of a direct user fee, however, as vehicles become more fuel efficient and as motorists increasingly drive vehicles that burn no gasoline at all.

There are several reasons why adoption of more direct user fees, such as mileage-based user fees or road-usage charges, are a better approach than increasing gas taxes. Each levies a per-mile price for road use that if desired can vary depending on the demand for road space at that specific time.

This is a standard funding approach. Similar per-unit fees are used to fund many other industries that are viewed as utilities, including communications and electricity. Such fees can be made to vary with the level of demand for use of the road at that time of day. In addition to raising revenue, variable mileage-based user fees will help mitigate traffic congestion while creating a reliable, sustainable, non-political funding source for U.S. transportation infrastructure.

It is critical however that mileage-based user fees be a replacement for fuel taxes rather than simply an additional tax. Fuel taxes paid must be rebated when MBUFs are adopted. That vital point must be clear to gain motorist support for a shift to MBUFs.

Although the congestion-reduction benefit of variable MBUFs is often stressed, a less understood but equally important benefit is MBUFs help direct sparse funding dollars toward projects where those resources are most highly valued by motorists, and away from lower-valued projects. Like any price, MBUFs create the vital link between customers’ value of a facility and how dollars flow. MBUFs thus help address one of the most challenging problems facing transportation policy today: the perceived misdirection of scarce funding dollars caused by widespread earmarking and high-profile, pork-barrel projects.

To summarize, switching to true user fees to fund transportation infrastructure would have many benefits.

First, they creating sustainable, long-term transportation system funding.

Second, they separate charges for road use from the type of fuel the vehicle uses. That makes road charges independent of evolving engine technology.

Third, they would allow scarce road space to be allocated to motorists who value it most highly at that particular time of day.

Fourth, mileage-based user fees will encourage commuters to explore travel alternatives during peak times by providing current toll prices. Although partial, that list suggests that the social benefits realized from variable per-unit road charges are substantial.

America’s transportation infrastructure is facing a range of pressing challenges, such as traffic congestion and a large funding gap. Those problems are exacerbated by deferred maintenance on many sections. This analysis suggests that policy should urge adoption of more direct user fees to funding infrastructure.

 

 


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