Here are two recent events you might have missed:
- In March, House speaker Paul Ryan was widely quoted as saying, “The last thing we want to do is pass historic tax relief and then undo that, so we are not going to raise gas taxes.”
- The next month, in California, Republicans submitted 54 percent more than the required signatures to put on the November ballot a measure that would repeal the 2017 state law increasing gasoline and diesel taxes.
Meanwhile, roads in Los Angeles are in such bad shape that it costs the average driver $892 a year in additional vehicle wear and tear, some 25 percent of all U.S. highway bridges are either too narrow or structurally deficient, and chronic traffic congestion costs Americans $160 billion per year in wasted time and fuel.
Fuel taxes were sold to the public last century as “highway-user fees.” And originally, they were used solely to build and maintain highways. Yet that is far from the case today. Nearly one-fourth of all federal fuel taxes are used for non-highway purposes, and it’s worse than that in some states. In California, over the next 30 years, $18 billion of state gas-tax money is pledged for paying off bonds issued to build Jerry Brown’s high-speed-rail boondoggle.
It’s not hard to see that there is something fundamentally wrong with the way we fund and manage the highways we all depend on. Highways are one of our basic public utilities — along with water, electricity, natural gas, telephones, etc. Yet we don’t have huge political battles over how to pay for those utilities. Every month you get a bill from your electric company, water company, phone company, and satellite or cable company. You pay for the specific services you used, and the money goes directly to the company that provided those services. None of that is true for highways.
Many years ago, Milton Friedman put his finger on what was wrong. Highways, he wrote, are “a socialized industry, removed from the test of the market.” Compared with other utilities, that means that for highways:
- There is no pricing;
- Major investments are not financed via long-term revenue bonds;
- Decisions on what gets built are made by politicians;
- Proper maintenance gets what little funding is left over after legislators spend most of the budget on projects in their districts; and,
- You are not a customer — just a “user.”
In my new book, Rethinking America’s Highways, I make the case that because highways really are utilities, they need to be financed and operated as utilities, rather than as politicized, state-owned enterprises. That means each highway needs an owner. Highway customers should pay their highway bills directly to that owner, based on how much they use the roads and how damaging their vehicle is to the pavement. The owner should assess the need for new links or more lanes, and finance the construction by issuing long-term revenue bonds. Of course, as with any other major construction projects, they should have to comply with existing planning and environmental regulations.
This might sound like a libertarian fantasy, but it’s a model with a long history that stretches into the present day. Private turnpikes were the main inter-city roadways in 18th and 19th century Britain — and 19th century America. After WWII devastated Europe, three countries — France, Italy, and Spain — developed their major highway networks as investor-owned toll roads. Highways there remain very similar to our electric-utility franchises today. Companies bid for a long-term franchise to build and operate a particular highway, subject to the terms and conditions of a long-term contract called a “concession.” In the 1980s and ’90s, this model was embraced by the three largest metro areas in Australia as they sought to develop modern expressway systems. And by the dawn of our current century, private investment in long-term highway concessions was becoming common in most of the countries of Latin America, especially Brazil and Chile.
If done right, a shift from politicized highways to customer-friendly highway utilities could address the American system’s major shortcomings.
It has taken a couple of decades for this model to catch on in the United States, with the first two projects — the 91 Express Lanes in California and the Dulles Greenway in Virginia — opening in 1995. Since 2000, investor-funded toll projects worth $36 billion have been financed, primarily in Colorado, Florida, Texas, and Virginia. Three of these projects — in Chicago, Indiana, and Puerto Rico — are long-term leases of existing toll roads. Those highways are being upgraded with all-electronic toll systems, resurfacing, some added lanes, and better service plazas, among other things.
Of course, we also have an array of state and local toll-road agencies, some of them (like the Florida Turnpike) run as customer-friendly businesses and others (like the New Jersey Turnpike and the Pennsylvania Turnpike) run as money machines that divert toll revenue to politicians’ favorite projects.
If done right, a shift from politicized highways to customer-friendly highway utilities could address the American system’s major shortcomings. Highway owner/operators have strong incentives to properly maintain their facilities, so that customers willingly pay to use them. (In fact, those who purchase the revenue bonds insist on proper maintenance for this very reason.) With per mile toll charging, they have reliable, bondable revenue streams that make it possible to finance large-scale reconstruction, widening, etc. when it’s needed, not someday in the future when the money is somehow cobbled together.
Chronic expressway congestion has a twofold solution: Market pricing brings demand into balance with supply, which in this case means capacity, but it also generates the funds to expand capacity to what makes sense for current and projected traffic levels. Like a cell-phone company, a highway company wants to have the capacity it needs to provide good service — and unlike the state, it will have the means to pay for that additional capacity.
You may see the merits of this case yet despair over how such a large change could ever come about. But continuing the status quo is untenable.
The federal highway-funding system, which now depends on tens of billions in “general revenue” each year to supplement dwindling fuel-tax revenue, is not sustainable. As the national debt nears 100 percent of GDP and entitlements, defense spending, and interest payments consume nearly all federal revenue, there will be little or no general revenue left to subsidize highways and transit. State governments are poorly positioned to take up the slack, since the majority of them have massive unfunded liabilities in their public-employee-pension systems that will restrict their spending for decades to come. And the 20th century gas-tax system is running out of steam, as conventional engines go twice as far on a gallon of gas and electric and other propulsion sources get set to become mainstream in coming decades.
So we will soon need to shift from taxing per gallon to charging per mile. The technology to do that on major highways — all-electronic toll collection — already exists. Across the country, toll-road operators are tearing down toll booths and plazas in favor of cashless tolling, which uses windshield-mounted transponders to charge a driver’s credit or debit card electronically. Cashless tolling is well-accepted, and can be adapted to those who don’t have debit or credit cards; in Puerto Rico, for example the system allows people to replenish their toll accounts with cash at kiosks in convenience stores.
Those three factors — federal insolvency, state pension liabilities, and the growing use of per mile charging via all-electronic tolling — will make the transition to highway utilities possible. And three other things will make the transition more likely.
One of these is growing awareness of the global (and U.S.) track record of long-term toll concessions, financed by investors. There have been missteps here and there as this model has been adopted by more and more countries, but by and large it has been much more successful than the socialized model.
A second important factor is the enormous growth of infrastructure-investment funds since 2000. Over the last five years, the largest 50 such funds have raised $316 billion in equity to invest in privately financed infrastructure. Since equity is typically about 25 percent of the total (the rest being revenue bonds), that money could finance nearly $1.3 trillion worth of infrastructure. The real question is whether there will be enough American projects for these funds to invest in — currently, the bulk of their investments are in Europe, Asia, and Latin America. The Trump infrastructure proposal included a number of provisions to make the U.S. a more attractive market for such investments, but that is now in the hands of Congress.
A third factor is the growing interest of pension funds in investing in long-lived infrastructure. This began about 15 years ago with Australian and Canadian pension funds, before their American counterparts got on board about five years ago, mostly investing in privatized airports and toll roads in Europe before beginning to expand domestically. In 2015, when the Indiana Toll Road concession was put up for bid, an Australian fund won the bidding on behalf of clients that included 70 large American pension funds. Since most public-employee-pension funds in the United States invest on behalf of retired, unionized public employees, the desire of these funds for more American-owned projects to invest in could attract moderate Democrats to policies that foster private infrastructure investment.
I’m optimistic that the transition suggested here will happen, and the most likely place for it to begin is with rebuilding and modernizing the aging Interstate highway system. The minimum cost of such an undertaking has been estimated at $1 trillion — and there is no existing federal or state funding source or program to carry it out, making it an ideal starting point for the transition to highway utilities. That transition won’t be altogether painless, but it is long overdue and sorely needed.