Congressional Budget Office

Testimony

CONGRESSIONAL BUDGET OFFICE

SECOND AND D STREETS, S.W.

WASHINGTON, D.C. 20515

Statement of 

Joseph Kile

Assistant Director for Microeconomic Studies

The Highway Trust Fund and

Paying for Highways

before the 

Committee on Finance 

United States Senate

May 17, 2011

This document is embargoed until it is delivered at 

10:00 a.m. (EDT) on Tuesday, May 17, 2011. The 

contents may not be published, transmitted, or otherwise 

communicated by any print, broadcast, or electronic 

media before that time.
Pub. No. 4275

Notes

Unless otherwise noted, all years referred to are federal fiscal years, which run from 

October 1 to September 30.

Numbers in the text and tables may not add up to totals because of rounding.
CBO

Chairman Baucus, Senator Hatch, and Members of the Committee, thank you for 

the invitation to testify on issues related to the funding of highways. My testimony 

draws on several publications of the Congressional Budget Office (CBO) that discuss 

highways and other infrastructure related to transportation, water resources, and 

wastewater.1 Although the testimony is focused on highways, the principles discussed 

here are relevant to all infrastructure that is financed by the public sector.

Summary

This testimony reviews the status of the Highway Trust Fund and examines three 

questions facing the Congress:

B How much should the federal government spend on highways?

B How should the federal government direct the use of those funds?

B How should the federal government raise those funds? 

Status of the Highway Trust Fund

The United States spends about $160 billion annually on highways, with about 

one-fourth of that total, or roughly $40 billion, coming from the federal government. 

Federal highway spending is funded mainly through taxes on gasoline and other 

motor fuels that accrue to the Highway Trust Fund. In recent years, the Congress has 

spent more on highways than the revenues accruing to the fund for that purpose, and 

it has supplemented the trust fund’s balance with money from the general fund of the 

Treasury. 

The law that authorizes collection of taxes for and spending from the Highway Trust 

Fund is set to expire on September 30, 2011. Even if the provisions of that law are 

extended, the trust fund will be unable to meet its obligations in a timely manner by 

the summer or fall of 2012, CBO projects, unless transfers similar to those in the past 

are made, other sources of revenue are identified, or spending is reduced.

How Much Should the Federal Government Spend on Highways?

The Congress has a range of options for future spending on highways, and the one it 

selects will influence the amount and distribution of economic benefits from the 

nation’s network of highways and roads. Those options include the following:

B Limit spending to the amount that is collected in current taxes on fuel and other 

transportation activities; doing so would result in spending that would be about 

$13 billion per year below the current amount.

1. See Congressional Budget Office, Alternative Approaches to Funding Highways (March 2011); 

Spending and Funding for Highways, Issue Brief (January 2011); and Public Spending on 

Transportation and Water Infrastructure (November 2010).
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CBO

B Maintain current capital spending, adjusted for inflation. 

B Spend enough to maintain the current performance of the highway system; doing 

so would require about $14 billion per year more than current spending. 

B Fund projects whose benefits exceed their costs; doing so would require even more 

spending than maintaining current services, up to about $50 billion more than 

current spending, depending on the degree to which benefits would be expected to 

exceed costs. 

The additional spending needed to meet specific performance goals or to fund 

projects whose benefits exceed their costs would be less if highway users paid tolls that 

varied with congestion. Doing so would reduce demand for future spending by providing an incentive to use those roads less during congested periods. Although the size 

of that reduction is uncertain, the Federal Highway Administration (FHWA) estimates that the spending required to maintain current services or realize additional 

benefits from highways could be one-quarter to one-third less than current estimates 

if congestion pricing was widely adopted.

How Should the Federal Government Direct the Use of Highway Funds?

From the point of view of economic efficiency, the authority to make decisions about 

which highway projects to undertake is best placed with those who have the incentive 

and the information to weigh all of the costs and benefits of the decisions. Whether 

the federal government or state or local governments are more likely to make more 

efficient decisions about highway projects depends on who receives benefits from 

those decisions and who bears the costs. 

The Congress currently directs resources for highway infrastructure through three 

mechanisms: 

B About 80 percent of the money the federal government spends goes to grants 

to state governments under formulas that allocate funds for such purposes as 

construction, rehabilitation of existing roads, and safety programs. The remaining 

20 percent goes to specific projects or purposes identified by the Congress or by the 

Secretary of Transportation.

B The federal government lends money to state and local governments and provides 

loan guarantees that reduce their cost of borrowing. Although that leverage allows 

more projects to be built today with a given amount of federal funds, the borrowed 

money ultimately must be repaid—either by state and local taxpayers or by highway users. The reduction in the cost to state and local governments imposes a cost 

on federal taxpayers, who bear the risk of default; that cost would otherwise be 

borne by the borrowers through the interest rates they would pay. 

B The federal government also reduces the cost of borrowing for state and local 

governments by offering tax preferences for bonds they issue. Tax-exempt bonds 

use a well-established tax preference. However, they are not generally considered 
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CBO

cost-effective because the federal revenues that are forgone may be significantly 

greater than the reduction in state and local borrowing costs. In recent years, the 

Congress has authorized tax credit bonds, which allow bondholders to claim a 

credit against their tax liability (or, in certain cases, to bond issuers, who can claim 

a credit payable by the Secretary of the Treasury). Such bonds can be a less expensive way for the federal government to reduce the cost of borrowing by state and 

local governments.

Some funding mechanisms concentrate decisionmaking authority with the federal 

government; others offer greater latitude for state and local governments. Currently, 

state and local governments choose most federally funded projects. However, concerns 

about that process have motivated proposals for a federal infrastructure bank that 

might use the results of cost–benefit analyses to select projects. In addition, a federal 

infrastructure bank could lower the cost of borrowing by providing credit assistance 

and thus could attract private financing; however, it would impose the cost of such 

credit assistance on federal taxpayers.

How Should the Federal Government Raise Funds for Highways?

Funding for highway infrastructure ultimately comes either from highway users or 

from taxpayers, regardless of how the financing of a project is structured. Taxes, tolls, 

and fees imposed on highway users now fund about half of highway spending by federal, state, and local governments; the rest comes from the Treasury’s general fund and 

from similar state and local funds. Judging from estimates of the costs of highway use, 

a system that charged for the full cost of travel would have most if not all motorists 

paying substantially more than they do now—perhaps several times more, potentially 

providing more than sufficient revenue for spending on highways.

As with other decisions, concerns about fairness are important in determining where 

to find the required funds. For example, whether increased user charges would impose 

relatively greater burdens on low-income and rural users would depend on the structure of those charges.

Increasing the charges that users pay also could promote more efficient use of the 

highway system. Although taxes currently are charged for fuel, most of the costs of 

using a highway—including pavement damage, congestion, accidents, and noise—

are tied more closely to the number of miles traveled than to the amount of fuel consumed. Fuel consumption depends not only on the number of miles traveled but also 

on fuel efficiency, which differs among vehicles and changes with driving conditions; 

therefore, charging highway users for the full costs of their use, or charging in proportion to the full costs, could not be accomplished solely through fuel taxes. Charging 

users according to costs would require a combination of fuel taxes and per-mile 

charges, sometimes called vehicle-miles traveled (VMT) taxes. Imposing such prices 

on system use would promote efficiency by encouraging motorists to use highways 

only when the benefits to them outweigh the full costs of that use. Alternatively, 

revenues could be raised from sources unrelated to transportation. That approach, 

however, would not promote efficient use of highways.
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CBO

Table 1.

Estimated Revenues and Interest Credited to the 

Highway Trust Fund, by Source, 2011

(Billions of dollars)

Source: Congressional Budget Office.

The Highway Trust Fund

The federal government’s surface transportation programs are financed mostly 

through the Highway Trust Fund, an accounting mechanism in the federal budget 

that comprises two separate accounts, one for highways and one for mass transit. The 

trust fund records specific cash inflows from revenues collected on excise taxes on 

the sale of motor fuels, trucks and trailers, and truck tires; taxes on the use of certain 

kinds of vehicles; and interest credited to the fund (see Table 1). In some years, the 

Congress has enacted laws to transfer money from the general fund of the Treasury to 

the Highway Trust Fund to ensure that the fund retains a positive balance. The Highway Trust Fund also records cash outflows for spending on designated highway and 

mass transit programs. (Some transit programs receive appropriations from the Treasury’s general fund.) The largest component of spending, by far, is for the federal-aid 

highway program (see Table 2).

Excise taxes on motor fuels generate 89 percent of the Highway Trust Fund’s revenues 

and interest, mostly from the tax of 18.3 cents per gallon on gasoline and ethanolblended fuels. Under current law, most of that tax—14 cents per gallon—is set to 

expire on September 30, 2011. The remaining 4.3 cents per gallon will no longer be 

credited to the trust fund but will go to the Treasury’s general fund. The gasoline tax is 

the source of about two-thirds of the fund’s total revenues and interest. The secondlargest source is the diesel fuel tax of 24.3 cents per gallon, which accounts for about 

one-quarter of the fund’s revenues and interest. The balance comes from the other 

taxes and interest that are credited to the fund. Most of the revenue from fuel taxes is 

credited to the highway account of the trust fund, but 2.86 cents per gallon of all fuel 

Gasoline Tax 20.2 3.9 24.0 65

Diesel Tax 7.6 1.0 8.7 24

Tax on Trucks and Trailers 2.2 0 2.2 6

Use Tax on Certain Vehicles 1.0 0 1.0 3

Truck Tire Tax 0.4 0 0.4 1

Interest Credited 0.4 0.2 0.6 2 ____ ___ ____ ____

Total 31.8 5.1 36.9 100

Highway

Account Total

and Interest

Share of 

(Percent)

Fund Revenues

Total Trust 

Account

Mass Transit
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CBO

Table 2.

Components of the Highway Trust Fund, 2011

(Billions of dollars)

Source: Congressional Budget Office.

Note: n.a. = not applicable.

a. Revenues are deposited in the highway and mass transit accounts but are not designated for 

specific purposes. Those designations come from budget authority as specified in legislation 

such as the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users.

b. Obligation limitations enacted in appropriation acts limit the amount of budget authority 

available to most Highway Trust Fund programs. The amounts shown are the sum of obligation 

limitations and budget authority that is not subject to any such limitation.

taxes credited to the Highway Trust Fund goes to the mass transit account, which 

receives about 14 percent of the trust fund’s revenues and interest. 

Spending from the Highway Trust Fund is determined by authorization acts that provide budget authority for highway programs, mostly in the form of contract authority 

(the authority to incur obligations in advance of appropriations).2 Annual spending 

from the fund is largely controlled by limitations on the amount of contract authority 

that can be obligated in a particular year, and such obligation limitations are customarily set in annual appropriation acts.3

The most recent authorization law to govern spending from the trust fund is the Safe, 

Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (often 

called SAFETEA-LU), which expired in 2009 but has since operated under a series of 

short-term extensions, the latest of which is set to expire on September 30, 2011. 

SAFETEA-LU provides specific amounts of contract authority and authorizes appropriations for some programs that are not funded through contract authority. It also 

2. An authorization act is a law under the jurisdiction of a committee other than the House or Senate 

Committee on Appropriations. Budget authority is the authority provided by law to incur financial 

obligations that will result in immediate or future outlays of federal government funds. 

3. An obligation limitation is a provision of a law or legislation that restricts or reduces the availability 

of budget authority that would have become available under another law (in this case, the authorizing law). 

Highway Trust Fund 36.9 52.7 44.3

Highway account 31.8 44.3 36.7

Federal-aid highway program n.a. 43.0 35.4

Motor carrier safety program n.a. 0.6 0.5

Highway traffic safety program n.a. 0.7 0.7

Mass transit account 5.1 8.4 7.6

Interesta Obligation Limitationsb

Estimated

Outlays

Budget Authority and

Estimated

Revenues and
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CBO

Figure 1.

Status of the Highway Account of the Highway Trust Fund

(Billions of dollars)

Source: Congressional Budget Office.

Note: Under current law, the Highway Trust Fund cannot incur negative balances. The negative 

balances shown above illustrate the projected inability of the fund to pay obligations as 

they are incurred by the states. If the Highway Trust Fund was unable to meet its obligations 

in a timely manner, spending on programs financed by the fund could continue more slowly, 

to keep pace with tax collections. The Department of Transportation has stated that if the 

fund faced a shortfall, it would ration the amounts it reimburses to states in order to 

maintain a positive balance in the fund.

specifies annual obligation limitations, which may be superseded each year by limitations set in appropriation acts.

History of the Highway Trust Fund’s Revenues and Outlays 

Highway Trust Fund balances once were stable, but over the past decade, the fund’s 

receipts have fallen behind its expenditures. Balances in the highway account of the 

Highway Trust Fund were steady during the 1980s and the first half of the 1990s, in 

the vicinity of $10 billion (see Figure 1). The most recent increase in the gasoline tax 

occurred in 1993; after the Taxpayer Relief Act of 1997 redirected 4.3 cents of that 

tax from the general fund to the Highway Trust Fund, the unexpended balance in the 

highway account began growing rapidly. Then, an agreement to spend down balances 

in the trust fund, which began with the enactment of the Transportation Equity Act 

for the 21st Century (known as TEA-21) in 1998, also eliminated the practice of 

crediting interest to the trust fund. Since 2001, outlays, which were boosted by 

TEA-21 and SAFETEA-LU, have generally exceeded revenues.

On several occasions since 2008, the Department of Transportation (DOT) has indicated that the trust fund would not meet its obligations on time without a transfer 

from the Treasury’s general fund. Since then, the Congress has appropriated a total 

Federal

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-75

-50

-25

0

25

50

75

End of Year

Balance or

Shortfall

Revenues, Interest, and

General Fund Transfers

Outlays

Actual Projected
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of $34.5 billion from the general fund to the Highway Trust Fund. In 2010, the 

Hiring Incentives to Restore Employment Act (Public Law 111-147) authorized 

the most recent transfer from the general fund and the resumption of interest credits 

to the trust fund. That law also shifted certain refunds for tax-exempt use of motor 

fuels, such as fuel consumed by state and local governments, from being paid out of 

the Highway Trust Fund to being paid out of the general fund, also boosting trust 

fund balances. Because of the infusion of general revenues, at the end of 2010, the 

account balances were positive: The highway account had $20.7 billion and the 

transit account had $8.9 billion. 

Projections of the Highway Trust Fund’s Revenues and Outlays 

CBO estimates revenues and outlays independently to project what the trust fund’s 

balances might be in the future. Revenues depend on the collection of various taxes. 

Under the rules that CBO follows in constructing its baseline revenue projections, the 

expiring excise taxes dedicated to the Highway Trust Fund are assumed to be extended 

beyond their scheduled expiration. Outlays depend on the obligation limitations 

set in appropriation acts as well as on the timing of spending for obligations that are 

incurred. For its projections, CBO assumes that policymakers will continue to control 

spending through such limitations. Furthermore, for the purpose of those projections, 

the agency assumes that appropriation acts will set obligation limitations equal to 

those enacted in the 2011 DOT appropriation act, adjusted for inflation. 

If the current taxes are extended beyond their 2011 expiration date, CBO estimates, 

revenues and interest credited to the Highway Trust Fund will grow from $36.9 billion in 2011 to $40.9 billion in 2021. Over that period, the estimated rate of increase 

is projected to average a little more than 1 percent per year, which largely reflects 

expected growth in gasoline and diesel fuel consumption.

CBO bases its estimates of trust fund outlays for a given set of obligation limitations 

primarily on historical spending patterns, which reflect states’ multiyear projects to 

plan and build roads, bridges, and other transportation infrastructure. Most obligations for the highway account involve capital projects on which money is spent 

over several years. (The federal-aid highway program, for example, typically spends 

about 25 percent of its budgetary resources in the year they are made available for 

spending; the rest is spent over the next several years.) Most of the highway account’s 

existing obligations will therefore be met using tax revenues that have not yet been 

collected, because the obligations far exceed the amounts currently in the account. 

CBO estimates that at the end of 2011, the balance in the highway account will be 

$14.8 billion but outstanding obligations will total about $75 billion (by comparison, 

at the end of 2007, outstanding obligations totaled about $45 billion).

Even if lawmakers set obligation limitations to increase at the rate of inflation, CBO 

estimates, outlays from the highway account would rise from $32.0 billion in 2010 to 

$36.7 billion in 2011 and subsequently to $41.9 billion in 2012. That increase is 

largely attributable to the fact that general funds appropriated under the American 

Recovery and Reinvestment Act of 2009 (ARRA, P.L.111-5) temporarily displaced 
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CBO

some spending from the highway account in 2009 and 2010. States had greater incentive to use ARRA funds than highway account funds because they were required to 

obligate ARRA funds more quickly than highway account funds and because they did 

not need to contribute any state or local resources to projects using ARRA funds, as is 

the case for projects funded from the highway account. Now that funds from ARRA 

have mostly been spent, CBO expects that state governments will spend the unused 

balances from appropriations for regular programs of the trust fund. In addition, 

CBO anticipates that about $2 billion from the highway account will be transferred 

to the mass transit account between 2011 and 2012 as states use some highway 

money for transit projects, as they are allowed. 

Under those baseline assumptions, outlays would exceed revenues and interest credited to the highway account by about $5 billion in 2011 and by almost $10 billion in 

2012. As a result, the highway account would be unable to meet its obligations sometime toward the end of fiscal year 2012 or early in fiscal year 2013, CBO estimates.4

In all, outlays would exceed revenues and interest credited to the highway account by 

about $115 billion (or 31 percent) between 2011 and 2021.5 If obligation limitations 

were held constant at 2011 amounts rather than increasing with inflation, that gap 

would be $85 billion (or 19 percent). 

The situation for the Highway Trust Fund’s mass transit account is similar. Under 

CBO’s baseline projections and including transfers from the highway account, the 

obligation limitation for mass transit would grow from $9.3 billion in 2010 to 

$9.4 billion in 2012. Outlays would exceed revenues and interest credited to the 

mass transit account by about $2.5 billion in 2011 and by about $3.2 billion in 2012. 

The mass transit account would be able to meet obligations in a timely manner 

through 2012 but would be unable to meet some such obligations during 2013. 

Subsequently, projected spending from the transit account would exceed receipts by 

$4 billion to $5 billion a year, CBO projects.

Thus, future obligations for spending on transportation programs funded by the 

Highway Trust Fund will need to be significantly lower than in 2011, revenues 

available to the trust fund will need to be significantly higher, or both. If the Congress 

chose solely to cut spending, those cuts would need to decrease spending by about 

4. Under current law, the Highway Trust Fund cannot incur negative balances. If the trust fund is 

unable to meet its obligations in a timely manner, spending could continue more slowly, to keep 

pace with tax collections. DOT has stated that, in the event of a shortfall, reimbursements to states 

would be rationed to maintain a positive balance.

5. CBO’s projections of spending from the trust fund are based on historical averages, but actual 

spending will differ from projections from year to year depending on such factors as the states’ construction schedules and plans. Future revenues might differ from CBO’s projections depending on 

changes in the price of oil, the economy, and the fuel efficiency of vehicles. Small deviations from 

the projections of spending and revenues, however, would not significantly affect the status of the 

Highway Trust Fund or the expected imbalance between obligations and resources.
9

CBO

Figure 2.

Spending for Highways, by Level of Government

(Billions of 2010 dollars)

Source: Congressional Budget Office based on information from the Census Bureau and the 

Bureau of Economic Analysis.

Note: State and local spending from 2008 through 2010 were estimated by updating prior-year 

spending for changes in the value of state and local highways.

one-third. If the Congress chose to boost revenues, it could do so by increasing taxes 

that are dedicated to the Highway Trust Fund or by making transfers from the 

Treasury’s general fund. 

How Much Should the Federal Government Spend on 

Highways?

Almost all spending on highway infrastructure in the United States comes from public 

funds. The private sector participates in building, operating, and maintaining highways, but the federal government and state and local governments typically determine 

which projects to undertake and how much to spend on them. Despite several prominent examples of private financing for highways, private spending constitutes just 

a small share of the total. Spending by federal, state, and local governments has 

increased over the past half-century (see Figure 2). In 2010, the federal government 

spent $45 billion and state and local governments spent $116 billion on highways.

Determining whether the federal government—rather than state or local governments—should fund infrastructure projects depends, at least in part, on whether a 

project will benefit the nation as a whole more than it will a particular state or locality. 

Economic efficiency could be improved if the federal government limited its support 

to projects (such as the Interstate highways) that offer significant multistate benefits, 

leaving state and local governments to fund projects with more localized benefits. If 

the people who benefit from a project bear its costs, the likelihood is diminished that 

1956 1962 1968 1974 1980 1986 1992 1998 2004 2010

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100

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State and Local Spending

Federal Spending
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too large a project (or too many projects) will be undertaken or that too many infrastructure services will be consumed relative to the resources needed to provide them. 

In the past, the Congress also has considered other factors, including equity among 

the states and between urban and rural areas, in choosing which projects to fund. 

Economic Returns on Public Spending for Highways 

Highway spending has contributed to the nation’s economic growth and prosperity 

and can continue to do so, depending on how and where funds are spent. Specifically, 

public investment in infrastructure can increase economic output by raising the stock 

of capital in the economy, thereby increasing the productivity of labor. Increasing 

transportation infrastructure would, in general, make it easier to move materials and 

workers to production facilities, supply finished goods to consumers, and transport 

service providers and customers to places of business. Consequently, workers would 

produce and deliver more in a given time and at a given cost. A more productive 

national economy would result in more goods and services and more resources for 

further investment and continued growth.

Over the past three decades, economists have produced a wide range of estimates of 

the benefits of investing in infrastructure.6

 A review of the literature indicates that 

the returns on investment in public capital in the United States are positive, although 

they are lower than some early estimates suggested. The literature also suggests that 

the returns on the initial phase of a system of public investments can be large but 

that the economic payoff declines as the system expands. In particular, economic 

gains from investing in highways appear to have been greatest during the initial 

construction of the Interstate Highway System and to have fallen off since then. 

According to one study of data spanning the period from 1953 to 1987, that initial 

construction made vehicle-intensive industries in particular more productive, but 

capital spending after the system was essentially completed in 1973 appeared not to 

have affected productivity in those industries.7 Another study, which focused on the 

period after 1973, showed that even into the 1990s, the costs of logistics fell in vehicle-intensive industries because of highway improvements, although not as much 

as they had during the 1970s.8 One 2006 report stated that every dollar of capital 

or maintenance spending for highways in 1996 reduced annual congestion costs to 

drivers by $0.11 that year.9

6. See Congressional Budget Office, Issues and Options in Infrastructure Investment (May 2008); and 

The Economic Effects of Federal Spending on Infrastructure and Other Investments (June 1998). 

7. See John Fernald, “Roads to Prosperity? Assessing the Link Between Public Capital and Prosperity,” 

American Economic Review, vol. 89, no. 3 (June 1999), pp. 619–638.

8. See Chad Shirley and Clifford Winston, “Firm Inventory Behavior and the Returns from Highway 

Infrastructure Investments,” Journal of Urban Economics, vol. 55, no. 2 (May 2004), pp. 398–415.

9. Congestion costs reflect both the amount of gasoline consumed and the value of the time that 

motorists lose to traffic delays. See Clifford M. Winston and Ashley Langer, “The Effect of Government Highway Spending on Road Users’ Congestion Costs,” Journal of Urban Economics, vol. 60, 

no. 3 (November 2006), pp. 463–483.
11

CBO

Total benefits over time would be greater, but whether they would be enough to justify the costs would depend on what else would be forgone to pay for more highway 

investment and the rate at which new or improved highways deteriorate.

Options for Federal Spending

The Congress faces difficult decisions about how much to spend on highways. The 

options include the following: 

B Spend only what is collected from highway users through the gasoline and other 

taxes that are credited to the Highway Trust Fund; 

B Maintain current capital spending, adjusted for inflation; 

B Spend enough to maintain the highway system’s current performance; or 

B Fund projects whose expected benefits exceed costs by a particular amount.

Those options could be coupled with policies to manage use of highways by imposing 

congestion pricing during periods of peak demand. 

Spend Revenues Credited to the Highway Trust Fund. The highway account of the 

trust fund received $30 billion in 2010 (see Figure 3). CBO projects that if current 

highway taxes are extended beyond their 2011 expiration date, revenues and interest 

credited to the Highway Trust Fund will rise at an average annual rate of a little more 

than 1 percent per year over the coming decade. That growth rate is slower than the 

expected growth in nominal gross domestic product, which CBO anticipates will 

increase by about 4 percent annually over the next 10 years—in part because fuel 

tax revenues depend on how much fuel is consumed and because fuel efficiency is 

expected to increase. Revenues for the highway account are projected to average 

$34 billion annually over the 2011–2021 period.

Maintain Current Capital Spending, Adjusted for Inflation. Total federal spending 

on highway infrastructure for 2010 amounted to $45 billion. Historically, federal 

spending for highway infrastructure has been predominantly for capital spending. Of 

that $45 billion, $43 billion was spent on capital projects, and $2 billion was spent on 

operations and maintenance. Real spending (that is, spending adjusted for inflation, 

in this case because of the rising costs of highway construction) by the federal government for highway construction has increased, on balance, over the past 30 years (see 

Figure 4). However, real spending declined in the middle of the 2000s, when the cost 

of materials increased sharply because of higher demand, attributable in part to a 

boom in residential and commercial construction in the United States and in part to 

increased demand from countries such as China. 

Target Spending to Maintain Performance of Highways. Spending could instead 

be targeted to achieve specific goals for highway system performance, such as 
12

CBO

Figure 3.

Selected Options for Annual Federal Capital Spending for 

Highways, With and Without Congestion Pricing

(Billions of 2010 dollars)

Source: Congressional Budget Office based on Department of Transportation, Federal Highway 

Administration and Federal Transit Administration, 2008 Status of the Nation’s Highways, 

Bridges, and Transit: Conditions and Performance, Chapter 8.

Notes: Current spending is for capital projects and excludes $2 billion spent by the federal 

government for operations and maintenance.

n.a. = not applicable.

maintaining average delays or pavement quality. According to the FHWA, if current 

spending for highway capital was maintained over the coming decades, even adjusted 

for inflation, the performance and quality of the highway system would decline. On 

the basis of the FHWA’s most recent projections (using 2006 data), CBO estimates 

that maintaining the current performance of the highway system would require 

$127 billion per year in combined capital spending by federal, state, and local governments.10 Historically, federal capital spending has constituted about 45 percent of all 

such spending. If the FHWA’s assessment is accurate, and if the federal government 

10. See Department of Transportation, Federal Highway Administration and Federal Transit Administration, 2008 Status of the Nation’s Highways, Bridges, and Transit: Conditions and Performance, 

pp. ix, xii. The FHWA’s report defines the system’s performance in terms of average user costs, 

including the costs of travel time, operations, and accidents. The FHWA’s estimate is similar to the 

$131 billion (in 2008 dollars) estimated by the Congressionally chartered National Surface Transportation Infrastructure Financing Commission for the average annual spending needed to maintain the current performance of the highway system. See National Surface Transportation 

Infrastructure Financing Commission, Paying Our Way: A New Framework for Transportation 

Finance (February 2009), p. 53. Unless otherwise noted, figures in the text that are based on the 

FHWA’s spending estimates are expressed in 2010 dollars.

Current

Spending

(As of 2010)

Spend Revenues

Credited to

Highway

Trust Fund

(As of 2010)

Maintain Current

Spending, Adjusted 

 for Inflation

Target Spending

to Maintain

Performance of

Highways

Fund Projects for

Which Benefits

Exceed Costs

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20

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With Congestion Pricing

n.a. n.a.

Current Spending (As of 2010)
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Figure 4.

Total Federal Spending for Highways, in Constant and 

Nominal Dollars

(Billions of dollars)

Source: Congressional Budget Office based on information from the Department of Commerce, 

Bureau of Economic Analysis.

funded a share of that total in proportion to its historical average, then the federal 

portion would be about $57 billion per year. That amount exceeds what the 

federal government actually spent in 2010 by $14 billion, or about one-third. State 

and local governments also would need to increase their spending significantly to 

meet that target. 

Fund Projects for Which Benefits Exceed Costs. By the FHWA’s estimates, the 

amount of public spending that could be justified for projects whose benefits 

outweigh their costs would be $209 billion per year. If the federal government maintained its historical share of funding, federal annual capital spending for highways 

would need to be about $94 billion, an increase of about $51 billion from the $43 billion spent in 2010; that increase would represent more than a doubling of federal 

spending.

Selecting projects carefully can increase the highway system’s contribution to the 

performance of the economy. Even within a group of projects for which the benefits 

exceed the costs, some projects will offer greater returns than others. Systematically 

ranking and funding projects to identify those with the highest net benefits, and then 

undertaking those projects, could yield a large share of total possible benefits at a 

lower overall cost. For example, if benefits had to exceed costs by some stated amount 

(such as 20 percent or 50 percent), those estimates of future spending would be lower. 

According to the FHWA’s analysis, $188 billion per year would pay for all projects 

whose benefits outweighed their costs by at least 20 percent; and $165 billion would 

pay for projects whose benefits exceeded costs by at least 50 percent. In either 

1956 1962 1968 1974 1980 1986 1992 1998 2004 2010

0

10

20

30

40

50

Constant 2010 Dollars

Nominal Dollars
14

CBO

scenario, travel delays and user costs would be less than they are currently, and 

pavement quality would be expected to improve.

The size of returns on investments in infrastructure depends on the investments 

undertaken and the type and amount of infrastructure already in place. For example, 

the FHWA groups capital spending into three categories, one each for expanding, 

enhancing, or rehabilitating highways. According to the FHWA’s analysis of future 

needs, spending for Interstate highways should shift over time, going more toward 

expansion and less toward rehabilitation if the goal is to sustain the system’s 

performance.11

Use Congestion Pricing. If highway users were charged fees that reflected the costs 

of driving when traffic was especially heavy, the existing infrastructure would be used 

more efficiently and the demand for future spending would be lower. Specifically, 

congestion pricing would result in fewer trips whose value to the driver was less than 

the costs of additional congestion imposed on other drivers. To the extent that some 

drivers would avoid paying a fee by choosing not to drive during peak hours, congestion would be reduced; the eventual outcome would be less need for spending on 

highways.12

According to the FHWA’s estimates, widespread use of congestion pricing would 

reduce by nearly one-third the amount of capital investment needed to sustain the 

operational performance and condition of the highway system—from $127 billion 

per year to about $85 billion per year. The federal share, at the historical average of 

45 percent, would be $38 billion—a little less than federal highway spending in 2010. 

Congestion pricing could reduce spending by about one-quarter, from $209 billion to 

$158 billion, for the set of projects for which benefits exceed costs. On the basis of 

historical averages, the federal share of that figure would be $71 billion.

How Should the Federal Government Direct the

Use of Highway Funds?

A second major issue facing the Congress is how best to direct federal spending for 

highways. From the point of view of economic efficiency, which level of government 

directs the use of highway funds should depend on who will benefit from the projects 

and who will bear the costs. The level of government with the incentives and information to weigh all of the costs and benefits is best positioned to make efficient decisions 

about highway investment. 

If guided by that general principle, the federal government would select highway projects of national importance that provide broad geographic benefits, whereas state and 

11. Department of Transportation, 2008 Status of the Nation’s Highways, Bridges, and Transit,

Chapter 8.

12. For a comprehensive discussion of the benefits and challenges of congestion pricing, including 

options for its design and implementation for highways, see Congressional Budget Office, Using 

Pricing to Reduce Traffic Congestion (March 2009).
15

CBO

local governments would be better situated to select highway projects if the benefits 

accrue primarily in their jurisdictions and their taxpayers would fund the projects. For 

projects that involve a mix of federal, state, and local benefits, efficiency is enhanced 

when decisionmaking can be coordinated among federal, state, and local governments 

and the costs can be shared. In contrast, transfers from the federal government may 

cause state and local governments to undertake some projects for which the costs 

exceed the benefits simply because federal money is available to be spent. 

Some mechanisms that have been proposed would change the way the federal government directs a portion of spending for infrastructure, including highways, by placing 

decisions about which projects to fund in the hands of a federal infrastructure bank 

that selects projects on the basis of cost–benefit analysis rather than according to the 

geographic distribution of funds among the states. Concerns about project selection 

also have motivated federal and state initiatives to encourage private entities to finance 

highways.

Federal funds to support highway projects currently are provided in three different 

forms: grants to states; loan guarantees and other forms of credit assistance to states 

and localities; and tax preferences for debt issued by state and local governments for 

their own projects or for those undertaken by private entities on behalf of the public 

sector. In addition, partnerships between state and local governments and private entities sometimes use federal funds to support highway projects.

Federal Grants to States

About four-fifths of the funding appropriated to DOT for highways under 

SAFETEA-LU from 2005 to 2009 was distributed according to formulas. Those formulas allocated spending to states through various programs for constructing, 

improving, and maintaining highways and bridges; enhancing safety; reducing pollution; planning; and promoting alternative forms of transportation.13 The formulas 

apply criteria that typically are related to the use and extent of state roadways (such 

as each state’s share of highway lane-miles, vehicle-miles traveled, or fuel use) to determine a state’s share of funds. An additional formula program, the Equity Bonus 

program, guarantees that each state’s share is at least a specified percentage of that 

state’s contributions to the highway account of the Highway Trust Fund. Once the 

Congress determines the formulas and the grants have been allocated, the states select 

the projects.

In most cases, the law requires that state and local governments match some 

portion—generally 20 percent—of federal highway funds.14 If capital spending is 

anticipated to provide predominantly local benefits, however, the federal government 

13. See Department of Transportation, Federal Highway Administration, Highway Statistics 2009 

(December 2009), Table FA-4A, for a list of 2010 apportionment formulas. For descriptions of 

various programs see Department of Transportation, Federal Highway Administration, “Fact Sheets 

on Highway Programs,” www.fhwa.dot.gov/safetealu/factsheets.htm.

14. In general, the match is smaller for some projects on Interstate highways and for projects in states 

with high concentrations of tribal or federal land. 
16

CBO

could place more of the responsibility of paying for highway infrastructure with state 

and local governments by increasing the required matching rate. Evidence suggests 

that if federal spending decreases, state spending will increase somewhat. Confirming 

earlier analyses, the Government Accountability Office has reported that states 

reduced their own funding to offset roughly half of the increase in the federal highway 

grants that occurred during the 1990s.15 Effectively, although an 80 percent federal 

contribution might be required to induce state and local spending on some projects 

that generate primarily national benefits, a smaller federal contribution might have 

been sufficient to foster state and local spending on most projects. Raising the state 

and local matching rate above 20 percent would reduce the ability of those governments to substitute federal grants for their own funding and thereby divert to other 

uses some funds they otherwise would have spent on highways.

Moreover, formula grants are not closely linked to the performance of the transportation system. Although the current formulaic approaches to dividing federal resources 

for highways among the states may address notions of equity, the formulas do not 

necessarily promote the most economically advantageous projects. For example, the 

economic benefits of highway spending may be greater in areas with more traffic congestion or in areas of greater anticipated population growth and economic activity, 

but the current approach may direct federal resources to other areas. Similarly, costs to 

construct and improve highways could depend more on population density and geographic features than on other factors that are more important in the formulas, such 

as the size of a state’s highway system and its recent volume of highway use.16

The remaining one-fifth of highway funding provided by SAFETEA-LU was allocated through mechanisms other than formulas to special-purpose programs and specific projects. The funds were divided among states on the basis of criteria specified in 

law or at the discretion of the Secretary of Transportation. About half of that amount 

was directed by the Congress to individual projects, such as building a specific bridge 

or widening a particular stretch of road. The Congress may specify particular projects 

for reasons it deems appropriate—equity, efficiency, or some other consideration—

but to the extent that the selection of those projects gives little weight to efficiency, 

the federal government could promote efficeincy by encouraging the funding of highvalue projects through more systematic analyses of costs and benefits.

On occasion, highway funding has been distributed competitively to states and 

localities that apply for DOT funding. ARRA authorized $1.5 billion for the Transportation Investment Generating Economic Recovery program (known as TIGER), 

15. See Government Accountability Office, Federal-Aid Highways: Trends, Effects on State Spending, and 

Options for Future Program Design, GAO-04-802 (August 2004), www.gao.gov/products/

GAO-04-802.

16. For a discussion of the importance of performance metrics for transportation, see National 

Transportation Policy Project, Performance Driven: A New Vision for U.S. Transportation Policy 

(Washington, D.C.: Bipartisan Policy Center, June 2009), www.bipartisanpolicy.org/library/report/

performance-driven.
17

CBO

which provided grants that would fund up to 100 percent of the cost of various highway, bridge, transit, rail, and port projects. DOT chose state and local recipients on 

the basis of the results of cost–benefit analyses, among other criteria, and recipients 

had to demonstrate a significant benefit from the project for the nation, a region, or a 

metropolitan area. 

Federal Loans and Loan Guarantees 

The federal government also directs resources to state and local governments by 

providing and guaranteeing loans for infrastructure. Such credit assistance reduces 

state and local governments’ costs because it allows borrowing at interest rates that are 

lower than otherwise might be available. Specifically, in providing loans and loan 

guarantees, the federal government assumes the risk that would be borne by a lender 

and paid for by a borrower in the form of higher interest rates. 

The cost to the federal government of providing loans and loan guarantees largely 

depends on the cost of each loan and the number of loans made:

B The cost of each loan or loan guarantee depends on the creditworthiness of 

the projects financed by the loan and the structure of the loan. Creditworthiness 

depends on the borrower’s likelihood of defaulting on the loan and on the lender’s 

prospects for recovering the amounts owed if a default occurs. The loan’s cost also 

depends on the structure of the loan, including the loan’s period of repayment; the 

effective interest rate, including fees; whether the debt is subordinate to other debt 

(meaning that it is repaid only after other debts are repaid in the event of default); 

and whether the borrower can choose to defer payments to the federal government.

B The number of loans and loan guarantees made depends on demand and on 

limits on the amount of loans or loan guarantees that the government is authorized 

to make. Demand for loans and loan guarantees depends on the size of the subsidies provided and on how those subsidies compare with subsidies offered through 

the tax code and by other federal programs for financing infrastructure. Demand 

also is limited by the total value of loans that the federal government is authorized 

to make or guarantee. In some cases, appropriation acts specify a maximum 

amount of loans or guarantees. For most credit programs, however, the budget 

authority appropriated for the subsidy cost ultimately limits the number of loans 

issued or guaranteed.

The Federal Credit Reform Act of 1990 (FCRA) requires the subsidy costs of loans 

and loan guarantees to be calculated on an accrual basis—unlike most items in the 

federal budget, which are calculated on a cash basis—and those subsidy costs must be 

recorded in the budget when loans are disbursed and loan guarantees are committed 

to. As a result, the lifetime cost of a credit commitment is recognized in the year in 

which the loan or loan guarantee is made. The budgetary impact of most federal 

credit programs is calculated by that method.
18

CBO

The lifetime cost of a direct loan or loan guarantee is calculated as the net present 

value of expected cash flows over the life of the loan or loan guarantee (including any 

fees paid by the borrower to the government).17 Under FCRA, net present value is 

estimated by discounting cash flows back to the time a loan is disbursed or commitment of a loan guarantee is made using the interest rates on Treasury securities of 

comparable maturity. (For example, cash flows that will occur one year after disbursement are discounted using the rate on one-year Treasury securities; flows that will 

occur five years out are discounted using the five-year rate; and so on.) 

The budgetary cost of a credit program tends to be lower than the budgetary cost of 

an economically equivalent grant or benefit payment because FCRA accounting does 

not provide a comprehensive measure of the economic cost of credit assistance. 

Through its use of Treasury rates for discounting, FCRA implicitly treats market 

risk—a type of risk that investors require compensation to bear—as having no cost to 

the government. Specifically, FCRA’s procedures incorporate the expected cost of 

defaults on government loans or loan guarantees but not the cost of uncertainty about 

the magnitude of those defaults. Investors require compensation (a “market risk premium”) to bear certain types of risk. The market risk premium on a risky loan or 

guarantee compensates investors for the increased likelihood of sustaining a loss when 

the overall economy is weak and resources are scarce; that likelihood is reflected in 

higher expected returns and lower prices for assets that carry more market risk. Taxpayers bear the investment risk for federal credit obligations. When a borrower 

defaults on a loan, the loss ultimately must be covered by higher taxes or by reduced 

spending on other programs. By omitting the cost of market risk and thereby understating the economic cost of federal credit obligations, FCRA accounting may lead 

policymakers to favor credit assistance over other forms of aid that have a similar 

economic cost.18

An important aspect of the budgetary treatment of federal credit programs is that 

agencies must receive an appropriation equal to the estimated subsidy cost before 

they can make or guarantee a loan. In the case of direct loans, FCRA specifies that 

loan repayments are unavailable for future spending; those repayments are already 

accounted for in the estimated net present value of the loan, so they are not available 

to “revolve” into new loans. Such a revolving fund is the model on which many state 

infrastructure banks are based. However, for the federal government, those repayments represent part of the financing for the original loans and are implicit in the 

17. Present value is a single number that expresses a flow of current and future payments in terms of an 

equivalent lump sum received today. Thus, a $100 million, 30-year loan disbursed in 2011 that is 

determined to have a subsidy cost of 10 percent would be recorded as $10 million in budget 

authority and $10 million in outlays on the budget that year. The cash flows repaid to the government over the next 30 years (principal and interest) would not be recorded on the budget (except 

for credit reestimates, which are adjustments made to the original subsidy rate).

18. Moreover, subsidy rates computed under FCRA exclude federal administrative costs, even those 

that are essential for preserving the value of the government’s claim to future repayments, such as 

loan servicing and collection costs; those costs are accounted for separately in the budget.
19

CBO

subsidy calculation. Allowing loan repayments to be used for new loans—without any 

additional appropriation to cover the subsidy costs of the new loans—would raise the 

effective subsidy cost on the original loans to 100 percent (the same as for grants). 

Because the federal budget records the lifetime cost of loans and loan guarantees 

rather than the initial amount of lending, loans and loan guarantees with a given 

budgetary cost lead to more money flowing initially to projects than if that same budgetary cost was incurred through grants or other direct payments to the states. As a 

result, credit assistance initially provides greater leverage for federal funds than grants 

and other direct payments do. Unlike grants and other direct payments, however, 

funds borrowed under credit assistance programs ultimately must be repaid by state 

and local governments or by users of the projects that are financed by the credit. 

A program created by the Transportation Infrastructure Finance and Innovation Act 

of 1992 (TIFIA) provides credit assistance for highways and other types of surface 

transportation infrastructure. Some recent proposals would create a federal infrastructure bank to offer similar assistance under a different organizational structure.19

Whether federal credit assistance is provided through a federal program or a special 

entity, however, it involves similar budgetary costs to the federal government. Therefore, differences between the existing TIFIA program and an infrastructure bank 

would be primarily operational, concerning the scope of infrastructure to fund, the 

kinds of credit assistance to provide, the selection process for projects, the amount of 

leverage to provide for federal funds, and the amount of private-sector participation to 

encourage or require.

Transportation Infrastructure Finance and Innovation Act. The TIFIA program offers 

federal loans to qualifying state and local projects for up to 35 years at the interest rate 

on a Treasury security of similar maturity. (For example, 4.26 percent was the rate for 

a 30-year Treasury bond as of May 5, 2011.) It also provides loan guarantees and lines 

of credit. TIFIA assistance can be used for up to one-third of a project’s costs.

DOT administers the TIFIA program and selects projects on the basis of criteria, 

established by statute, that include an analysis of a project’s benefits and costs and 

whether it has national or regional significance. Loans made by the federal government at Treasury rates for risky projects represent taxpayer-financed subsidies, and 

riskier projects involve larger subsidies. TIFIA loans are restricted to projects that 

are considered relatively safe—as evidenced by a high rating from a credit-rating 

agency—to keep the subsidy rate relatively low. (Subsidy rates average around 

10 percent.) As access to credit became more restricted during the recent financial 

crisis, demand for TIFIA assistance outpaced availability, and project selection 

became competitive. 

19. Other government programs that provide credit assistance for infrastructure projects include the 

Environmental Protection Agency’s grants for states’ revolving loan funds for water projects and 

states’ infrastructure banks, all of which are capitalized with federal funds and administered by 

states. 
20

CBO

Several features of the TIFIA program attract private finance. The program subsidizes 

credit assistance, and TIFIA loans encourage private-sector participation by having 

lower priority for repayment than private debt in the event of a default.20 TIFIA’s loan 

terms also allow private managers to defer repayment for up to five years after a project’s completion—a valuable benefit, for example, if there is uncertainty about how 

much toll revenue a highway project will generate.

From fiscal year 2005 through fiscal year 2010, the TIFIA program provided about 

$5 billion in loans for highways, transit, and intermodal projects, supporting $18 billion worth of projects. As authorized by SAFETEA-LU and its extensions, TIFIA 

received about $732 million of budget authority over that period. 

Proposals for a Federal Infrastructure Bank. In recent years, the Congress has considered several proposals for establishing a federal bank to fund infrastructure projects 

through loans and grants. The President’s budget requests have suggested creating a 

similar entity. In principle, an infrastructure bank could use any of several methods to 

finance projects, including providing federal loans, lines of credit, and guarantees for 

private loans. Moreover, some proposals suggest mechanisms for disbursing grants to 

fund projects that would not create enough revenue to repay a loan. 

An infrastructure bank could focus on financing transportation infrastructure, or it 

could define infrastructure more broadly to include sewers, wastewater treatment 

facilities, drinking water supply facilities, broadband Internet access, or even schools. 

A federal infrastructure bank could be located within an existing federal agency, such 

as DOT or the Treasury, or it could be created as a separate entity. Most proposals 

would have such a bank select projects on merit, considering, for example, their likely 

impact on the national or regional economy.

Some financial and transportation analysts contend that making funds available 

through an infrastructure bank would encourage state and local governments to work 

together across jurisdictional lines and transportation modes to plan and complete 

comprehensive projects. For example, an infrastructure bank could participate in 

developing projects that involve more than one mode of transportation—although 

the Congress could encourage this otherwise through language authorizing more 

funding for mass transit or other projects involving more than one mode of transportation. As another example, an infrastructure bank could fund cross-jurisdictional 

projects by helping different government entities gain coordinated access to credit 

markets.

Other analysts point to the potential capacity of an infrastructure bank to use cost–

benefit analysis effectively in project selection. The capacity of state and local 

governments to complete such analyses varies significantly, and proponents believe 

20. However, upon bankruptcy, insolvency, or liquidation of an asset backed by a TIFIA loan, that loan 

would have equal priority with private debt in its claim for repayment.
21

CBO

that a bank could help bolster that capacity nationwide, thus leading to better 

selection of projects overall. 

In addition, some financial and transportation analysts suggest that an infrastructure 

bank could encourage more private funding of infrastructure projects by using funds 

more efficiently than occurs under the current system of distributing formula grants. 

By providing federal funds that reduce the amount of private investment a project 

requires, for example, an infrastructure bank could allow projects that rely on tolls 

or other funding mechanisms to offer returns sufficient to attract private-sector participation. As a result, private-sector entities, in conjunction with state and local 

governments, could choose to fund projects that, in the absence of federal financial 

assistance, would not be built. 

Regardless of how it was constituted, however, an infrastructure bank would be 

unlikely to supplant the established methods of distributing most federal infrastructure funds. One limitation is that few surface transportation projects are good candidates for bank funding because they mostly do not involve toll collections or other 

mechanisms for charging users directly to repay construction loans. Furthermore, 

about three-quarters of current federal funds spent on surface transportation are used 

to maintain existing infrastructure. Those projects are not good candidates for funding from an infrastructure bank because, in general, they would not generate revenue 

that could be used to repay loans. 

Tax Preferences 

The federal government provides several types of tax preferences for infrastructure 

financing. Tax-exempt bonds use the well-established tax preference of paying interest 

that is not subject to federal income tax. Such bonds can be issued to finance either 

the functions of state and local governments or certain projects undertaken by the private sector. A second, more recent type of tax preference for infrastructure financing is 

used by tax credit bonds. Such bonds come in two basic forms: those that provide a 

tax credit to the bondholder in lieu of interest and those that provide a tax credit to 

the bond issuer, payable by the Secretary of the Treasury. Tax-exempt and tax credit 

bonds alike transfer some of the cost of borrowing from state and local governments 

and the private sector to the federal government in the form of forgone federal tax 

revenues. 

In contrast to grants and credit assistance, tax preferences are outside the annual 

appropriation process, so the federal government may exercise less oversight over their 

allocation. Also, because forgone revenues do not appear directly in the federal budget, the use of tax preferences can mask the full scope of the government’s financial 

activities. Moreover, some tax preferences are an inefficient way to deliver a federal 

financial subsidy to state and local governments. With a tax exemption for interest 

income, for example, state and local borrowing costs are reduced by significantly less 

than the federal revenues that are forgone, and the remainder of that tax expenditure 
22

CBO

accrues to bond buyers in the highest income tax brackets. Modifying federal tax preferences for infrastructure financing by increasing the use of tax credit payments made 

directly to borrowers can improve both budgetary practice and economic efficiency.21

Tax-Exempt Bonds. Federal tax exemptions for interest income from government 

bonds (and qualified private activity bonds—bonds issued by a government on behalf 

of a private entity—under certain circumstances) enable issuers of such debt to sell 

bonds that pay lower rates of interest than do taxable bonds with the same maturity, 

risk, and so on. Because purchasers of tax-exempt bonds demand a return that is at 

least as high as the after-tax yield they could obtain from comparable taxable bonds, 

the amount by which the return from tax-exempt bonds is lower than the yield on 

comparable taxable bonds depends on the income tax rate of the marginal (or marketclearing) buyer of tax-exempt bonds.22

The amount of subsidy that state and local borrowers receive by issuing tax-exempt 

bonds is largely determined indirectly by the federal tax code. Data on tax-exempt 

and taxable bond transactions allow estimation of the marginal tax rate faced by the 

market-clearing buyer of tax-exempt bonds and, thus, the amount that states and 

localities save in financing costs by issuing such bonds. In 2007, the average yield on 

(taxable) high-grade corporate bonds was 5.6 percent, and the average yield on taxexempt municipal bonds of similar creditworthiness was 4.4 percent—a difference of 

1.2 percentage points, or approximately 21 percent of the taxable return. That 21 percent also represents the marginal tax rate at which an investor would be indifferent 

between purchasing a taxable bond yielding 5.6 percent and a tax-exempt bond yielding 4.4 percent. Thus, the market-clearing investor in 2007 paid income tax at a rate 

of 21 percent—which is also the average implicit income tax rate observed for such 

buyers of tax-exempt bonds during the two decades just before that, according to the 

staff of the Joint Committee on Taxation.23 Investors’ appetite for risk, the desired 

time-horizon of their investments, and other bond-specific features can also influence 

the demand for taxable and tax-exempt debt. The implicit tax rate of the marginal 

buyer of tax-exempt bonds fell to an average of about 15 percent per year from 2008 

21. For a more complete discussion of how federal tax preferences operate in financing investment 

in highways and other infrastructure, see Congressional Budget Office and Joint Committee on 

Taxation, Subsidizing Infrastructure Investment with Tax-Preferred Bonds (October 2009).

22. Issuers of tax-exempt debt need to increase the interest rate they pay until the pool of bond purchasers is large enough to purchase all of the debt the issuers are bringing to market. The marginal 

buyer of tax-exempt bonds will typically demand a higher tax-exempt yield than someone in a 

higher income tax bracket does. Issuers raise the interest rate enough that the yield on tax-exempt 

bonds is competitive with the rate of return on taxable instruments (after taking taxes into account) 

to draw in bond buyers from lower income tax brackets. The market-clearing buyer thus determines the interest rate that issuers of tax-exempt bonds must pay—and, implicitly, the savings in 

financing costs that issuers enjoy relative to issuing taxable debt. 

23. See Joint Committee on Taxation, Present Law and Issues Related to Infrastructure Finance, 

JCX-83-08 (October 24, 2008), p. 28, www.house.gov/jct/x-83-08.pdf. 
23

CBO

to 2010 because turbulence in financial markets led investors to favor less risky 

debt—such as U.S. Treasury securities—which reduced the yield on those securities 

relative to tax-exempt debt.24

However, the loss in federal revenues results from both the market-clearing investor 

and investors in higher income tax brackets. Several analysts suggest that about 

80 percent of the tax expenditure from tax-exempt bonds translates into lower borrowing costs for states and localities, with the remaining 20 percent taking the form of 

a federal transfer to bondholders in higher tax brackets.25 If 20 percent of the federal 

revenue loss from tax-exempt bonds accrued to that group without lowering borrowing costs, and if the outstanding stock of tax-exempt debt for infrastructure during the 

2010–2014 period instead took the form of tax credit bonds designed to deliver the 

same amount of interest subsidy per year, the federal government would save more 

than $32 billion (20 percent of an estimated $162 billion in tax expenditure).26

Moreover, a direct appropriation of funds would purchase more infrastructure per 

dollar of impact on the federal budget.

Tax Credit Bonds. Starting in the late 1990s, the Congress turned to tax credit bonds 

as a way to finance public expenditures. In their early form, tax credit bonds allow 

bondholders to receive a credit against federal income tax liability instead of—or in 

addition to—the cash interest typically paid on the bonds. The amount of tax credit 

equals the credit rate, which is set by the Secretary of the Treasury, multiplied by the 

face amount of the holder’s bond. Because bondholders pay taxes on the amount of 

credit they claim, tax credit bonds do not, in contrast to tax-exempt debt, provide a 

revenue transfer to investors in high marginal tax brackets. As a result, the revenues 

forgone by the federal government through tax credit bonds reduce state and local 

borrowing costs dollar for dollar. Tax credit bonds also allow the amount of federal 

subsidy to be determined independent of other federal policy decisions (such as 

marginal income tax rates). Thus, tax credit bonds offer the promise of increasing 

24. CBO calculation based on Council of Economic Advisers, Economic Report of the President

(February 2011), Table B-73, p. 276, www.gpoaccess.gov/eop/.

25. See Dennis Zimmerman, The Private Use of Tax-Exempt Bonds: Controlling Public Subsidy of Private 

Activity (Washington, D.C.: Urban Institute Press, 1991), pp. 103–104; and James Poterba and 

Ramirez Verdugo, Portfolio Substitution and the Revenue Cost of Exempting State and Local Government Interest Payments from Federal Income Tax, Working Paper 14439 (Cambridge, Mass.: National 

Bureau of Economic Research, October 2008), www.nber.org/papers/w14439. 

26. In addition to being an inefficient means of providing a subsidy for debt financing, tax-exempt 

bonds also are regressive: The amount by which the benefits captured by an investor exceeds 

the issuer’s cost savings increases with the investor’s marginal tax rate. One study estimates that 

eliminating the tax exemption on state and local debt would reduce after-tax income primarily for 

taxpayers in the highest income quintile—and particularly for individuals in the top 1 percent of 

the income distribution. See Leonard Burman, Eric Toder, and Christopher Geissler, How Big Are 

Total Individual Income Tax Expenditures, and Who Benefits from Them? Discussion Paper 31 

(Washington, D.C.: Urban Institute, December 2008), p. 11, www.urban.org/publications/

1001234.html.
24

CBO

the efficiency and equity with which federal resources are allocated to support infrastructure and other investments. 

ARRA authorized Build America Bonds, a new type of tax credit bond that was sold 

only in 2009 and 2010. State and local governments were authorized to issue Build 

America Bonds either as traditional tax credit bonds or, if certain conditions were 

met, as direct-pay tax credit bonds (known as qualified Build America Bonds). In 

contrast to earlier tax credit bonds, Build America Bonds have an interest rate (or 

coupon) that is set by the issuer rather than by the Secretary of the Treasury. In the 

direct-pay scenario, a credit equal to 35 percent of each interest payment could be 

claimed by the issuer in lieu of a tax credit going to the bondholder. Because state and 

local governments issuing direct-pay Build America Bonds are not liable for taxes on 

that credit, they pay less interest than they would for Build America Bonds that provide the credit to the bondholder. As a result, the direct-pay version of Build America 

Bonds proved to be the one used by issuers. Sales of those bonds financed $38 billion 

in transportation spending in 2009 and 2010.27

Direct-pay tax credit bonds offer several advantages over other types of tax-preferred 

bonds. Making a payment directly to state and local governments to compensate 

them for the interest they pay on a direct-pay tax credit bond is a more cost-effective 

way to provide a federal financing subsidy than offering a tax exemption on interest 

income. And unlike other tax preferences, interest subsidies on direct-pay bonds 

appear as outlays in the federal budget, making the cost of that financial subsidy more 

transparent and, in principle, enabling comparison with other federal outlays for the 

same purposes. Also, because the yields provided to holders of direct-pay tax credit 

bonds are similar to the yields of other taxable securities, direct-pay tax credit bonds 

are more attractive to tax-exempt entities than other tax credit bonds and thereby 

potentially increase the pool of funds available to state and local governments to 

finance their investments in infrastructure and other activities. 

Public–Private Partnerships

Public and private financing are distinguished by the entity that issues debt or raises 

equity to provide the funds for a project. In the traditional approach to building highways, a state or local government uses its own tax receipts, federal grants, public bond 

issues, and sometimes toll revenues to cover the costs of construction. In public–

private partnerships that include private financing, the private partner enters into 

contracts with a state or local government to build and finance a highway in exchange 

for future payments from the public sector or the right to collect toll revenues. To 

finance construction, the private entity usually raises equity or borrows in the private 

capital market. It does so with the expectation that some combination of future toll 

revenues and payments from state and local governments will cover the project’s costs, 

which include debt payments and a market return to equity holders.

27. Section 301 of the Hiring Incentives to Restore Employment Act extended the direct-pay provision 

to other tax credit bonds: new clean renewable energy bonds, qualified energy conservation bonds, 

qualified zone academy bonds, and qualified school construction bonds (also authorized by 

ARRA).
25

CBO

Although private sources can provide additional financing for infrastructure, that 

financing needs to earn a return over time—and the ultimate sources of payment for 

the return on private financing are the same as the sources of public financing, namely 

taxes or user fees. Therefore, private financing does not provide truly new resources 

for infrastructure investment. 

Still, an argument is sometimes made that public–private partnerships can accelerate 

the availability of funds for infrastructure investment by tapping private capital markets in ways that governments cannot or will not. That contention holds only in 

the context of the legal constraints that states and localities face and in the context of 

their budgetary practices. For example, many states and localities have statutory or 

constitutional limits on borrowing, and budgetary practices used to assess borrowing 

generally include standard debt instruments but may not include other types of future 

obligations, such as those made through public–private partnerships. Although some 

limits are informal or easily bypassed, many limits cannot be raised without voter 

approval or a legislative supermajority. When limits cannot be raised, states may turn 

to private debt or equity to finance roads. Traditional financing is therefore restricted 

not only by constituent aversion to taxes, which provide the stream of revenues 

that make bond issuance possible, but also by statutory or constitutional limits on 

borrowing. 

Several privately financed highway projects that relied on toll revenues have struggled 

financially, beset by inaccurate revenue projections and encumbered with high debt 

service payments. As a result, subsequent projects that are still under construction 

have been put together differently, reducing the private partner’s exposure to the 

uncertainty of demand for driving on the highway and keeping down debt service 

payments, which have amounted to the largest continuing cost for past projects with 

private financing. States more commonly offer private partners state revenues—

so-called availability payments—instead of, or in addition to, tolls; in doing so, 

they assume a part of the risk that tolls will fall short of expectations. Project debt 

service payments are being reduced by increasing the amount of public financing 

through state and federal programs, such as the use of private activity bonds and the 

federal TIFIA program. Those changes have brought public–private partnerships with 

private financing more in line with the traditional methods of financing highway 

construction.

How Should the Federal Government Raise 

Funds for Highways?

About 10 percent of all funding for highways, by all levels of government, comes from 

issuing bonds (see Figure 5). The remaining 90 percent comes from the combination 

of current revenue collected from highway users and, to a slightly lesser extent, current 

revenue collected from general sources. Of course, all of the costs of building and 
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Figure 5.

Sources of Funding for Highways, All Levels of 

Government, 2008

Source: Congressional Budget Office based on Department of Transportation, Federal Highway 

Administration, Highway Statistics 2008 (December 2009), Table HF-10.

maintaining highways are ultimately borne by users and taxpayers, regardless of 

whether governments or private entities pay for highways now or borrow funds and 

repay them over time. About three-quarters of the amount paid for debt service on 

bonds comes from taxes and tolls imposed on highway users; the balance comes from 

general revenues and interest income (see Figure 6).

Approaches to funding highways can be evaluated in terms of equity and economic 

efficiency. Equity is a subjective attribute that can be assessed in several ways. Observers of highway funding often gauge equity by considering the share of funding that is 

obtained from taxes paid by highway users (rather than from general taxpayer funds), 

from people in households that fall into various income categories, or from people in 

rural versus urban households.

The economic efficiency of a funding approach depends partly on its effects on users’ 

travel behavior and partly on what it costs to implement. Charging users for the costs 

Motor-Fuel and

Vehicle Taxes

 (44%)

Tolls

(5%)

Property Taxes

and Assessments

(4%)

General Fund

Appropriations

 (21%)

Other Taxes 

and Fees

(6%)

Investment

Income and

Other Receipts

(9%)

Bond Issue

Proceeds

(10%) Current Revenue from

General Sources: 41%

Current Revenue from

Highway Users: 49%

Bond Issue

Proceeds: 10%
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Figure 6.

Sources of Funding for Paying Debt Service on Bond Issues, 

All Levels of Government, 2008

Source: Congressional Budget Office based on Department of Transportation, Federal Highway 

Administration, Highway Statistics 2008 (December 2009), Table SB-3.

Note: Excludes proceeds from sales of other bonds.

that their travel imposes on society would create incentives for people to limit highway use to trips for which the benefits exceed the costs, thus reducing or eliminating 

overuse of highways and helping identify the economic value of investments in highways. However, the costs of collecting and enforcing such user charges also influence 

the efficiency of that approach.

User Charges

Economic efficiency is promoted when highway users are charged according to the 

marginal (or incremental) costs of their use, including external costs that are imposed 

on society. A combination of a fuel tax and a mileage-based tax (a VMT tax) that 

accounts for the type and weight of a vehicle and the location and time of its use 

could provide incentives for reducing the full range of driving’s social costs and could 

generate funds for federal spending on highways. 

The external costs of highway use vary widely depending on the characteristics of a 

vehicle and where it is driven. Some external costs are associated directly with the use

Motor-Fuel and

Vehicle Taxes

(51%)

Tolls

(26%)

Investment

Income

(2%)

Other Federal,

State, and Local Funds

(21%)

Current Revenue from

General Sources: 23%

Current Revenue from

Highway Users: 77%
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Figure 7.

Estimated Fuel-Related Costs and Fuel Consumed in 

Various Years

Sources: Congressional Budget Office based on Ian W.H. Parry, “How Should Heavy-Duty Trucks 

Be Taxed?” Journal of Urban Economics, vol. 63, no. 2 (March 2008), p. 660; and 

Department of Transportation, Federal Highway Administration, Highway Statistics 2008 

(December 2009), Table VM-1.

Notes: Passenger vehicles have two axles and four tires and include automobiles and light trucks 

(pickup trucks, minivans, and sport-utility vehicles).

Fuel use shares exclude motorcycles and buses.

Local air pollution costs are classified as mileage related for passenger vehicles and fuel 

related for trucks.

of motor fuel, such as the costs of local air pollution from trucks, climate change, and 

dependence on foreign oil. Those costs are estimated to average more than 30 cents 

per gallon for passenger vehicles and more than 70 cents per gallon for trucks (see 

Figure 7). Other external costs are related to the miles traveled by vehicles, such as the 

costs of road congestion, pavement damage, and accidents. Although the external 

costs imposed on society by trucks are greater than those imposed by passenger vehicles on a per-mile basis, the much higher volume of passenger vehicle travel means 

that those vehicles also contribute substantially to external costs from vehicle-miles 

traveled (see Figure 8). Specifically, passenger vehicles account for more than 90 percent of vehicle-miles traveled, with passenger vehicles in urban areas alone accounting 

for more than 60 percent. Passenger vehicles’ contribution to traffic congestion 

in urban areas imposes estimated costs of about 10 cents per mile, on average,

Rural

Passenger

Vehicles

Urban

Passenger

Vehicles

Rural

Trucks

Urban

Trucks

0

10

20

30

40

50

60

70

80

Cost per Gallon, 2000

(2009 Cents)

Urban

Passenger

Vehicles

 (58%)

Rural

Passenger

Vehicles

 (21%)

Urban

Trucks

 (12%)

Rural

Trucks

 (10%)

Share of Fuel Consumed, 2008
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Figure 8.

Estimated Mileage-Related Costs and Vehicle-Miles Traveled in 

Various Years

(2009 cents per mile)

Sources: Congressional Budget Office based on Department of Transportation, Federal Highway 

Administration, 1997 Federal Highway Cost Allocation Study Final Report (1997), 

Tables V-22 (noise), V-23 (congestion), V-24 (accidents), and V-26 (pavement damage); 

Addendum to the 1997 Federal Highway Cost Allocation Study Final Report (May 2000), 

Table 13; and Highway Statistics 2008 (December 2009), Table VM-1.

Notes: Passenger vehicles have two axles and four tires and include automobiles and light trucks 

(pickup trucks, minivans, and sport-utility vehicles).

Mileage shares exclude motorcycles and buses.

Local air pollution costs are classified as mileage related for passenger vehicles and fuel 

related for trucks.

* = less than 0.5 cents per mile; n.a. = not applicable.

Pavement Damage Congestion Accidents Noise Local Air Pollution

0

5

10

15

20

25

30

35

40

45

Urban

Passenger

Vehicles

 (63%)

Rural

Passenger

Vehicles

 (29%)

Rural

Trucks

 (4%)

Urban

Trucks

 (4%)

n.a. n.a. * *

Share of Vehicle-Miles

Traveled, 2008

Cost per Mile, 2000

Rural Trucks

Urban Trucks

Rural Passenger Vehicles

Urban Passenger Vehicles
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constituting one of the largest sources of total external costs of motor vehicle use. Estimates of pavement damage by trucks, the largest per-mile external cost of truck use,

average roughly 15 cents and 40 cents per mile in rural and urban areas—making 

those vehicles another significant source of external costs, even though truck travel 

represents less than 10 percent of all miles traveled. For different trucks, pavement 

damage costs vary widely, depending on the weight of the truck and the number of 

axles over which the weight is distributed. Accidents, noise, air pollution, and other 

fuel-related costs from passenger vehicles and trucks represent smaller shares of 

external costs.

Just as the external costs of highway use are related to fuel use and miles traveled, user 

charges can take the form of fuel taxes and mileage-based fees. Those charges differ in 

the administrative costs they entail, how efficiently they match the external costs that 

users impose, and in the extent to which they are borne by people in different income 

groups or different locations.

Fuel Taxes. Viewed according to different conceptions of equity, fuel taxes offer a mix 

of positive and negative characteristics. They satisfy a “user-pays” criterion, but they 

also can impose a larger burden relative to income on people who live in low-income 

or rural households. Fuel taxes impose a burden even on households that do not own 

passenger vehicles by raising transportation costs, which are reflected in the prices of 

purchased goods. 

Fuel taxes have two desirable characteristics for efficiency: They cost relatively little to 

implement (the government collects taxes from fuel distributors, and users pay the 

taxes when they purchase fuel), and they offer users some incentive to curtail fuel use, 

thus reducing some of the social costs of travel. At best, however, a fuel tax discourages 

some travel too much and other travel too little, because it does not reflect the large 

differences in cost for use of crowded roads compared with uncrowded roads or for 

travel by trucks that have similar fuel efficiency but cause different amounts of pavement damage. Moreover, for a given tax rate on fuels, the incentive to reduce mileagerelated costs diminishes over time as more driving is done in vehicles that are more 

fuel efficient.

VMT Taxes. VMT taxes and fuel taxes have qualitatively similar implications for 

equity. Like fuel taxes, VMT charges satisfy the user-pays principle, but they impose 

larger burdens relative to income on people in low-income or rural households. To the 

extent that members of such households tend to drive vehicles that are less fuel efficient, such as pickup trucks or older automobiles, however, those highway users 

would pay a smaller share of VMT taxes than of fuel taxes.

VMT taxes would provide stronger incentives than fuel taxes could for efficient use 

of highways if VMT taxes were aligned with the costs imposed by users, because most 

of those costs are related to the number of miles driven. Appropriately aligned, VMT 

taxes could meet various goals, including paying for pavement damage, reducing 
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congestion (and thus curtailing the need to spend money on highway expansion and 

highway maintenance), or fostering efficient use with regard to all social costs. 

If VMT taxes were intended to maximize or even significantly improve the efficiency 

of highway use, they would need to vary greatly by vehicle type, by time and place of 

travel, or both. For example, because pavement damage increases sharply with vehicle 

weight but decreases with the number of axles on a vehicle, the portion of VMT taxes 

assessed to maintain pavement could be small or nonexistent for passenger vehicles 

but substantial for heavy-duty trucks, particularly those with high weight per axle. 

Similarly, every vehicle would be assessed more to travel on crowded urban roads during peak hours than in off-peak hours or to travel on less congested roads at any time. 

The rates charged for peak-hour travel would be set in keeping with specific local or 

regional conditions, including the duration and severity of daily congestion, rather 

than on the basis of national averages.

VMT taxes’ effect on efficiency also would depend on how much it costs to put the 

taxes in place and to collect the money. Estimates of what it would cost to establish 

and operate a nationwide program are rough. One source of uncertainty is the cost 

to install metering equipment in the nation’s cars and trucks. Having the devices 

installed as original equipment under a mandate to vehicle manufacturers would be 

relatively inexpensive but could lead to a long transition; requiring all vehicles to 

be retrofitted with devices could be faster but much more costly, and the equipment 

could be more susceptible to tampering than factory-installed equipment might be. 

Despite the various uncertainties and impediments, some transportation experts have 

identified VMT taxes as a preferred option.

The idea of imposing VMT taxes that vary by time and place has raised concerns 

about privacy because the process of assessing such taxes could give the government 

access to specific information about how individual vehicles are used. Various 

approaches have been suggested to allay those concerns, including restricting the 

amount of travel-related information that could be used for billing or restricting the 

kind of information conveyed to the government; making devices appealing to the 

public by allowing businesses to use them to provide other services, such as real-time 

traffic reports or electronic payment for parking; and allowing users to choose not to 

pay per-mile charges but to pay higher fuel taxes instead. (Under such proposals, the 

optional fuel taxes would be set at rates high enough to appeal only to users with the 

greatest privacy concerns.) 

A system of VMT taxes need not apply to all vehicles on every road. Indeed, there 

are already less comprehensive systems of direct charges for road use: Toll roads, lanes, 

and bridges are common in the United States, and several states and foreign countries 

place weight-and-distance taxes on trucks. Expansion of existing systems could 

focus on highly congested roads or on entry points into congested areas; that targeted 

approach could cost less to implement if it required relatively simple in-vehicle 

equipment. Alternatively, the focus could be on specific vehicle types, such as trucks. 
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Although only 4 percent of the nation’s fleet is made up of trucks (excluding lightduty trucks), they account for roughly 25 percent of all costs that highway users 

impose on others, including almost all of the costs associated with pavement damage.

General Revenues from Taxpayers

Two arguments can be made in support of funding highways with broad-based taxes, 

such as income taxes: First, the incremental costs of collection would be negligible, 

and second, large amounts could be raised through small changes in tax rates. The 

staff of the Joint Committee on Taxation has estimated that raising all tax rates on 

ordinary individual income by 1 percentage point would yield an average of $48 billion per year from 2012 to 2021—more than all of the current Highway Trust Fund 

taxes combined.28 Moreover, funding highways through broad-based taxes meets at 

least one standard of equity: Such taxes do not impose a larger burden relative to 

income on rural or low-income users. 

In other respects, however, the use of general revenues poses significant disadvantages. 

In particular, the approach gives users no incentive to reduce the mileage- or fuelrelated costs of their highway use, and it does not satisfy the user-pays standard of 

equity. Moreover, even small increases in existing rates would hamper efficiency by 

exacerbating existing deviations from efficient prices, thus further distorting many 

individual decisions. The distorted decisions would include reductions in work and 

saving, shifting of income from taxable to nontaxable forms, and shifting of spending 

from ordinary to tax-deductible goods and services. 

28. See Congressional Budget Office, Reducing the Deficit: Spending and Revenue Options (March 

2011), p. 139.