ECONOMIC AND BUDGET ISSUE BRIEF

Spending and Funding for Highways

The nation’s network of highways plays a vital role in the 

U.S. economy; private commercial activity and people’s 

daily lives depend on that transportation infrastructure. 

In 2007, the public sector spent $146 billion to build, 

operate, and maintain highways in the United States. 

About three-quarters of that total was provided by state 

and local governments. One-quarter was provided by 

the federal government, primarily through the Safe, 

Accountable, Flexible, Efficient Transportation Equity 

Act: A Legacy for Users (SAFETEA-LU). The initial 

authorization for that law has expired; as the Congress 

considers the future role of the federal government in 

providing highway infrastructure, it faces three important 

questions: how to structure decisionmaking about highway projects, how much money to spend on highways, 

and how to pay for that spending. 

Making Decisions About Highway 

Projects

In the United States, almost all highway infrastructure is 

provided by the public sector.Although private firms play 

a large role in building, operating, and maintaining highways, the federal government and state and local governments typically determine which projects to undertake 

and how much to spend on them. 

The public sector provides most highway infrastructure 

for several reasons that tend to limit the role of the private 

sector. First, such infrastructure displays, at least to some 

degree, important characteristics of “public goods.” Such 

goods are usually not profitable for the private sector to 

produce, because once they have been produced, they are 

available to anyone who wants to use them; as a result, 

they are often provided by the public sector. Second, 

because such infrastructure is costly to build, though less 

expensive to operate and maintain, having competing 

highway networks is not practical. As a result, such “natural monopolies” are often either provided directly by the 

government or regulated by it. Third, the benefits of 

highways—promoting commerce, for instance—may 

extend beyond the places where they are built and beyond 

the people who use them directly. All three of those 

characteristics of highway infrastructure tend to limit the 

incentives for the private sector to provide it. The private 

sector, on its own, would provide less of that type of 

infrastructure than is socially beneficial.1

The Role of the Federal Government and State and 

Local Governments

From the point of view of economic efficiency, decisionmaking authority is best placed with those who have the 

incentive (along with the information) to weigh all of the 

costs and benefits of the decisions. Whether the federal 

government or state or local governments make more 

efficient decisions about highway projects depends on 

who receives the benefits of those decisions and who 

bears the costs. Having the federal government select 

highway projects at the national level promotes projects 

with broader geographic benefits, but state and local governments may be best situated to identify and set priorities among highway projects if the benefits are expected 

to be realized primarily at the state or local level. 

The benefits of highway projects vary significantly in 

their size and geographic scope, and realizing the greatest 

economic gains from highway spending depends on identifying economically advantageous projects. To the extent 

that spending on highway infrastructure contributes to 

improved economic performance on a wide scale—by, for 

instance, lowering the costs of transporting labor and 

materials to production facilities and finished goods to 

consumers throughout the country or a broad region—

having those spending decisions made at the federal level 

is more efficient because it aligns the decisionmakers with 

the geographic scope of the benefits. Therefore, certain 

kinds of spending (for example, to facilitate transportation planning in areas that encompass different states) or 

spending on certain kinds of highways (such as those in 

the Interstate system) may be more efficiently directed 

by the federal government. 

CBO A series of issue summaries from

the Congressional Budget Office

JANUARY 2011

1. For a fuller discussion of the role of the public sector in providing 

highway infrastructure, see Congressional Budget Office, Public 

Spending on Transportation and Water Infrastructure (November 

2010).
2 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

However, many of the benefits of highway projects are 

concentrated locally or in small regions rather than accruing nationally. In those instances, state and local officials 

generally have better information about what projects 

make the most sense for their areas and are likely to be in 

a better position than federal planners to make efficient 

decisions about the projects. 

Currently, the Congress determines how much federal 

spending each state receives for highways, primarily 

through the use of formulas and, to a lesser extent, 

through appropriations directed to special-purpose programs and specific projects. Of the funds appropriated to 

the Department of Transportation (DOT) for highways 

under SAFETEA-LU from 2005 to 2009, about fourfifths was distributed using formulas, as directed by that 

law. Those formulas allocated spending to states through 

programs designed for a variety of purposes: the construction, improvement, and maintenance of highways and 

bridges; safety; pollution reduction; planning; and alternate forms of transportation.2

 The formulas use different 

criteria (such as each state’s share of highway lane-miles, 

vehicle-miles traveled, fuel use, population, or contributions to the Highway Trust Fund) to determine the share 

of funds available to each state under a particular program. Once the Congress determines the formulas and 

the grants are allocated, the states determine which specific projects to undertake with those funds on the basis 

of their own criteria. 

In most cases, the law requires federal funds to be 

“matched” with state or local dollars. Most states and 

localities need to supply only 20 percent of the funds for 

projects involving federal funds, and the federal government provides the rest. In cases in which capital spending 

is anticipated to provide predominantly local benefits, the 

federal government could place more of the responsibility 

of paying for highway infrastructure with state and local 

governments by increasing the rate at which they need to 

match federal funding. Evidence suggests that if federal 

spending decreased, then spending by states would 

increase to some extent.3

Although the current formulaic approaches to dividing 

federal resources for highways among the states may 

address notions of fairness or equity, the formulas do not 

necessarily provide federal support to the most economically advantageous projects. For example, the economic 

benefits of highway spending may be greater in areas with 

more congestion or in areas of greater anticipated population growth and economic activity, but the current 

approach may direct federal resources to areas where the 

benefits of additional spending for highways are less. 

Similarly, costs to construct and improve highways may 

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 level of use. 

The remaining one-fifth of highway funding provided by 

SAFETEA-LU was allocated to special-purpose programs 

and specific projects through mechanisms other than formulas. Those 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 this portion 

of funding 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 is not based on 

efficiency considerations, the federal government could 

promote efficiency by encouraging the funding of highvalue projects using more systematic analysis of their 

costs and benefits. 

Alternative Methods for Selecting Projects

The Congress has authorized or considered several alternative methods for selecting highway infrastructure projects. A small portion of highway funds is awarded 

through competitive processes for selecting projects, with 

states and localities submitting applications for assistance 

to DOT. In particular, the Transportation Infrastructure 

Finance and Innovation Act (TIFIA) program is designed 

to attract private investment, particularly to projects that 

create new capacity. DOT evaluates eligible projects for 

selection on the basis of the extent to which they generate 

economic benefits, leverage private capital, promote 

innovative technologies, and meet other objectives of the 

program. Since 2008, the demand for assistance has 

2. See Department of Transportation, Federal Highway Administration, Highway Statistics 2009, Table FA-4A, for a list of 2010 

apportionment formulas, and www.fhwa.dot.gov/safetealu/factsheets.htm for descriptions of the programs’ purposes.

3. In the opposite case, when federal highway grants increased in the 

1980s and into the 1990s, states appear to have offset roughly half 

of the increases by reducing their own funding. See Government 

Accountability Office, Federal-Aid Highways: Trends, Effects on 

State Spending, and Options for Future Program Design, GAO-04-

802 (August 2004).
ECONOMIC AND BUDGET ISSUE BRIEF

SPENDING AND FUNDING FOR HIGHWAYS 3

Figure 1.

Total Federal Spending for Highways, 

1956 to 2009

(Billions of dollars)

Source: Congressional Budget Office.

exceeded the available funds, so the selection process 

has become effectively competitive. Similarly, as part of 

the American Recovery and Reinvestment Act of 2009, 

the Transportation Investment Generating Economic 

Recovery (TIGER) program makes awards for transpor

tation projects, including highway projects, on a compet

itive basis. DOT selects grant recipients among state and 

local governments on the basis of criteria that include the 

results of cost–benefit analyses, and the recipients must 

show a significant impact on the nation, a region, or a 

metropolitan area.4

Programs that provide for a mix of federal and state and 

local government decisionmaking through competitive 

submissions by states and localities are an alternative to 

allocating funds through formulas or to specific projects. 

The efficiency of the projects funded by such programs 

depends on how well the criteria used to evaluate the sub

missions capture their costs and benefits. The degree of 

competition depends on the structure of the program and 

the amount of funds available relative to the volume of 

applications received. 

Another alternative is to use a quasigovernmental 

institution, such as a socalled “infrastructure bank,” to 

make decisions about which projects receive federal 

funds. The advantages and disadvantages of placing 

decisionmaking authority for highway infrastructure with 

an infrastructure bank would depend on the scope of 

its responsibilities and the specific design of its decision

making process. An infrastructure bank could provide 

coordinated funding for projects encompassing different 

types of infrastructure (transportation and drinking water 

projects, for example), different kinds of transportation 

infrastructure (such as highways and transit), or just a sin

gle kind (such as highways). An infrastructure bank oper

ating across different kinds of infrastructure would be 

able to compare the relative costs and benefits of a 

broader array of projects; however, users of one kind of 

infrastructure might be concerned about the possibility of 

losing funding to another kind of infrastructure. Effi

ciency would be enhanced by explicitly evaluating proj

ects on the basis of their costs and benefits to society; as 

long as the demand for funds exceeded the supply, com

petition based on costs and benefits would make it more 

likely that only those projects estimated to provide sub

stantial net benefits would receive funding. However, 

such a process would result in less local control over proj

ects than the current system, and it could engender con

cerns about geographic equity if fewer projects were 

selected in some states or localities. 

Spending for Highway Infrastructure

Among its many possible choices for future highway 

spending, the Congress could extend current spending, 

target certain performance measures, or fund projects 

with benefits that exceed their costs by certain amounts. 

Depending on the performance targets or threshold of 

benefits chosen, total spending could increase or decrease.

Extend Current Spending

One approach is to base future spending on existing 

amounts, such as maintaining the same spending 

either with or without adjusting for the effects of infla

tion. Total federal spending on highway infrastructure for 

2009 amounted to $41 billion (see Figure 1); of that 

amount, $39 billion was for capital projects, and 

$2 billion was for operations and maintenance. Real (that 

is, inflationadjusted) government spending for highway 

4. SAFETEALU also authorized the Projects of National and 

Regional Significance program, providing for DOT to award 

funds competitively. Although DOT established guidelines for 

selecting projects that included their economic costs and benefits, 

ultimately no funds were allocated for those competitive awards.

1956 1969 1982 1995 2008

0

5

10

15

20

25

30

35

40

45

50

Nominal Dollars

2009 Dollars
4 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

30 years. However, such spending declined in the middle 

of the 2000s, when the cost of materials used to build 

highways increased sharply because of increases in U.S. 

demand arising from residential and commercial construction and in worldwide demand from countries such 

as China. Going forward, capital spending could be 

indexed to the costs of highway construction or to overall 

prices in the economy.5

 However, if existing levels of 

inflation-adjusted spending were maintained over 

decades, the Federal Highway Administration (FHWA) 

estimates that the performance and quality of the highway system would decline—with increases in delays 

caused by traffic congestion and increases in the amount 

of travel on roads with pavement of less than acceptable 

quality. 

Target Performance Measures

Spending could instead be targeted to different measures 

of the performance of the highway system, such as average delay, pavement quality, or user cost. According to the 

most recent projections by FHWA, which are based on 

2006 data, maintaining the highway system at its current 

performance would require $126 billion per year in capital spending by all levels of government.6

 Historically, 

federal capital spending for highways has constituted 

about 45 percent of all capital spending. If FHWA’s 

assessment is accurate, based on that share, the necessary 

federal spending per year would be about $57 billion—

an amount that exceeds actual federal capital spending for 

highways in 2009 by $18 billion, or nearly 50 percent. 

Spending by state and local governments would also need 

to increase significantly to meet that target.

FHWA categorizes capital spending as being for expanding, enhancing, or rehabilitating the highway system. 

According to an analysis by the agency, to sustain the 

system’s performance, more of the spending for Interstate 

highways should go toward expansion and less toward 

rehabilitation.7

 The analysis also suggests that spending 

for the entire highway system, including all highways and 

roads, is generally appropriately allocated among those 

three endeavors but that spending more in urban areas 

and less in rural areas would improve the system’s 

performance.

Fund Projects for Which Benefits Exceed Costs

Estimates of economic returns on public spending on 

highway infrastructure have been positive on average, but 

returns for individual projects vary significantly and 

depend on a number of factors.8

 In general, the economic 

gains from investing in highways appear to have been 

greatest during the initial construction of the Interstate 

Highway System but have fallen off since then.

Carefully selected highway infrastructure projects can 

enhance the economy’s performance, but realizing potential gains depends crucially on identifying economically 

justifiable projects. Even within a group of projects for 

which benefits exceed costs, some projects offer greater 

returns than others. Systematically ranking and funding 

projects so that only those with the highest net benefits 

are implemented could yield a large share of the total possible benefits at a lower cost. 

By FHWA’s estimates, the amount of public spending 

that could be justified on the basis of projects’ benefits 

outweighing their costs would be $208 billion per year. 

Using a minimum threshold for benefits to exceed costs 

(such as 20 percent or 50 percent) would also provide an 

allowance to account for the opportunity costs of public 

spending on highways. Specifically, raising revenues or 

borrowing to support such spending could lead to 

inefficiencies in the private sector, and reducing spending 

on other public purposes could lead to smaller benefits in 

5. Technically, budget authority, not outlays, would be indexed to a 

measure of inflation. Budget authority is the authority for the federal government to enter into financial obligations.

6. 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. FHWA’s report defines the system’s performance 

in terms of average user costs, including the costs of travel time, 

operations, and accidents. The figure cited assumes that added 

spending would be financed by revenues from a user charge, such 

as a toll, fuel tax, or tax based on vehicle-miles traveled that does 

not vary with congestion, rather than from general revenues, 

which would increase the spending needed to maintain the system’s performance. FHWA’s estimate is similar to the Congressionally chartered National Surface Transportation Infrastructure 

Financing Commission’s estimate of $131 billion (in 2008 dollars) 

as the annual average spending needed to maintain the 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, spending estimates in the text are 

expressed in 2009 dollars.

7. Department of Transportation, Federal Highway Administration 

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

Highways, Bridges, and Transit, Chapter 8.

8. For further discussion of the economic returns on infrastructure 

spending, see Congressional Budget Office, Issues and Options in 

Infrastructure Investment (May 2008).
ECONOMIC AND BUDGET ISSUE BRIEF

SPENDING AND FUNDING FOR HIGHWAYS 5

those areas. According to FHWA’s analysis, $187 billion 

annually would provide for all projects with benefits that 

outweigh their costs by at least 20 percent; and $164 billion, for projects for which benefits exceed costs by at 

least 50 percent. If the federal government funded its 

share of that $164 billion at the historical average, its 

annual capital spending for highways would need to 

increase by about $35 billion, almost doubling the 2009 

amount of $39 billion.

Notably, spending could be substantially lower if demand 

for highway travel was reduced by charging fees to highway users that reflected the costs they impose on others 

when they drive during periods of congestion. Congestion fees would promote efficient use of existing infrastructure by allocating its use to those willing to pay the 

charge.9

 To the extent that some drivers would choose to 

reduce their vehicle use during congested times of the day 

rather than pay the fee, congestion would be reduced—

which would, in turn, reduce the amount of spending 

needed for infrastructure. According to FHWA’s estimates, widespread use of congestion pricing would 

reduce the amount of capital investment needed to sustain the operational performance and condition of the 

highway system by nearly one-third—from $126 billion 

per year to about $85 billion per year. Of that amount, 

the federal share, at the historical average of 45 percent, 

would be $38 billion—about the same as the 2009 level 

of spending. For the larger set of projects for which 

benefits exceed costs, congestion pricing could reduce 

spending by a quarter, from $208 billion to $157 billion. 

Based on the historical average, the federal share of that 

smaller figure would be $71 billion.

Paying for Highway Infrastructure

Although federal, state, and local governments can 

impose a variety of taxes, fees, and user charges, the funds 

to pay for highway infrastructure are ultimately drawn 

either from users of that infrastructure or from taxpayers 

in general. The federal government and state governments also have mechanisms for borrowing funds and for 

obtaining financing from the private sector (including 

both debt and equity investments); however, those funds 

are provided in expectation of future returns, which must 

be paid later by highway users or taxpayers.

The efficiency of different sources of revenues depends on 

the administrative costs involved in collecting them and 

on the incentives they provide for using the highway 

system and resources throughout the economy. In addition to efficiency, policymakers may also be interested in 

considerations of equity and in the extent to which the 

revenues available from a given source are sufficient to 

pay for the desired level of spending.

The Current Approach

The federal government’s programs for highway transportation are financed, for the most part, by various taxes on 

users and by revenues from the Treasury’s general fund 

that flow through the Highway Trust Fund—an accounting mechanism in the federal budget, recording specific 

cash inflows and outflows. Under the current system, 

receipts from various excise taxes, most notably those on 

the sale of gasoline, diesel, and other motor fuels, are collected and credited to the trust fund. The fund comprises 

two separate accounts: one for highways and one for mass 

transit. 

The largest sources of revenues for the trust fund are 

excise taxes of 18.4 cents per gallon of gasoline and 

24.4 cents per gallon of diesel fuel.10 The gas tax currently produces about two-thirds of the fund’s total revenues, and the diesel tax accounts for about one-quarter; 

under current law, those taxes are scheduled to expire 

in 2011. The trust fund is also credited with revenues 

from an excise tax on tires used by heavy trucks, a sales 

tax on heavy trucks and trailers, and an annual tax on the 

ownership of heavy trucks. Together, those additional 

three sources provide about 10 percent of the revenues 

going into the fund. In fiscal year 2009, the revenues 

credited to the trust fund totaled $36 billion.

At their current levels, the taxes in effect are insufficient 

to fully fund the existing amount of federal highway 

spending. Because spending from the fund has exceeded 

its revenues for a number of years, on several occasions 

since 2008 the Highway Trust Fund has needed additional infusions of revenues from the Treasury’s general 

fund. According to the Congressional Budget Office’s 

(CBO’s) estimates, if the historical spending and revenue 

patterns continued in the future, the highway account of 

the trust fund would be unable to meet its obligations 9. 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).

10. The Leaking Underground Storage Trust Fund receives 0.1 cents 

per gallon of those taxes on gas and diesel fuel. 
6 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

sometime during fiscal year 2012.11 Similarly, for the 

2011–2021 period, outlays would exceed revenues and 

interest credited to the fund by about $120 billion.

User Charges

Economic efficiency is promoted when users of highway 

infrastructure 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 could provide incentives 

for reducing the full range of driving’s social costs while 

also generating funds for federal spending. Moreover, if 

truck users were charged directly for the fuel-related and 

mileage-related costs they impose, the existing taxes on 

trucks and tires could be eliminated. 

The external costs of highway use vary widely depending 

on the characteristics of the vehicle driven and its location. Some external costs are associated directly with the 

use of motor fuel, such as the costs of local air pollution 

from trucks, climate change, and dependence on foreign 

oil. Others are related to the miles traveled by vehicles, 

such as 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. 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, 

constituting one of the largest sources of external costs of 

motor vehicle use. Estimates of pavement damage by 

trucks, the largest per-mile external cost of truck use, 

range from about 5 to 55 cents per mile depending on 

the weight of the truck, the number of axles over which 

its weight is distributed, and where it operates—making 

those vehicles another significant source of external costs, 

even taking into account that truck travel represents less 

than 10 percent of miles traveled. Accidents, noise, air 

pollution, and other fuel-related costs from passenger 

vehicles and trucks represent smaller shares of external 

costs.12

Just as external costs of highway use are related to fuel use 

or miles traveled, user charges take the form of taxes on 

fuel and mileage-based fees. The charges differ in the 

administrative costs they entail and in how efficiently 

they match the external costs that users impose. User 

charges may be borne to a different extent by people in 

different income groups or in different geographic areas.

Fuel Taxes. There are several advantages to drawing some 

of the funds for highway infrastructure from taxes on 

gasoline and other motor fuels. One advantage is that 

collection costs are low; another is that evading the tax is 

difficult. In addition, fuel taxes provide incentives to 

reduce the social costs of driving. Vehicles that travel farther burn more fuel and therefore cost drivers more in 

fuel taxes. The resulting incentive to drive less reduces the 

social costs posed by greenhouse gas emissions, dependence on oil, and local air pollution.

At current tax rates, the fuel tax revenues that flow into 

the Highway Trust Fund are insufficient to maintain the 

current and likely future levels of highway spending. 

Those existing taxes on gasoline and diesel fuel are a fixed 

number of cents per gallon and thus do not increase with 

inflation. Policymakers could choose to stabilize the trust 

fund’s purchasing power by indexing fuel taxes to account 

for inflation. Even so, changes to the nation’s vehicle fleet 

that reduce gasoline use, including increased fuel efficiency and the use of hybrid vehicles, could limit the trust 

fund’s receipts over time. 

Current fuel taxes also generate insufficient revenues to 

pay for the costs that users impose on the system. Vehicles 

do more much more damage to pavement and bridges 

the heavier they are. A four-axle, single-unit truck weigh- 11. Spending from the trust fund is constrained by an annual limit on 

obligations that is set in an appropriation act. For the purposes of 

its baseline projections, CBO projects spending from the trust 

fund by adjusting that annual limit on obligations for future inflation; spending rates may vary from year to year depending on 

Congressional actions and other factors such as states’ construction schedules and plans. Also, changes in oil prices, the economy, 

and the fuel efficiency of vehicles can all cause future revenues to 

differ from CBO’s projections. Small deviations from those projections would not significantly affect the future status of the trust 

fund or the expected imbalance between obligations and 

resources. 

12. See Department of Transportation, Federal Highway Administration, 1997 Federal Highway Cost Allocation Study, available at 

www.fhwa.dot.gov/policy/otps/costallocation.htm—specifically, 

Tables V-22 (Noise), V-23 (Congestion), V-24 (Accidents), and 

V-26 (Pavement damage) from the “Final Report” (August 1997) 

and Table 13 (Air pollution) from the “Addendum” (May 2000). 

For estimates of fuel-related costs, see Ian W. H. Parry, 

“How Should Heavy-Duty Trucks Be Taxed?” Journal of Urban 

Economics, vol. 63, no. 2 (2008), pp. 651–668.
ECONOMIC AND BUDGET ISSUE BRIEF

SPENDING AND FUNDING FOR HIGHWAYS 7

ing 60,000 pounds causes six times as much pavement 

damage as a comparable truck weighing 40,000 pounds.13

In contrast, the difference in fuel use by those vehicles for 

a given distance of travel, and thus the amount of fuel 

taxes paid, is much smaller. Moreover, current taxes do 

not account for the costs of congestion. A driver on a 

congested road uses only a little more fuel than he or she 

would use if driving on an uncongested road but, in 

terms of delay, imposes much greater costs on other drivers. With state and local fuel taxes and fees included, the 

national average tax on gasoline is 47 cents per gallon.14

Various studies suggest that the external costs of motor 

fuel use are at least $1 per gallon, suggesting that, to fully 

reflect those costs, excise tax rates for motor fuels would 

need to be substantially higher than current rates. However, if vehicles were also taxed according to the external 

costs associated with the miles they traveled, then the efficient excise tax rates on motor fuels would probably be 

lower than current rates.

Because fuel tax rates are the same for all purchasers of 

gasoline, regardless of income, lower-income households 

use a larger share of their income to pay them. An analysis of 2004 data showed that households with income 

between $23,700 and $65,000 (in 2004 dollars) paid 

0.65 percent of their income in fuel taxes, while households with income over $99,501 paid only 0.5 percent.15

Mileage Charges. Because about 85 percent of the external costs of driving are associated with the number of 

miles traveled rather than the amount of fuel consumed, 

paying for highways with user charges would be most 

economically efficient if it involved substantial mileagebased fees. A number of such fees already exist in the 

current financing system at the state and local levels. 

Greater use of those fees would provide better incentives 

for highway users to reduce their contribution to congestion, accident risk, and pavement damage.

Mileage-based fees could take different forms, including 

tolls on particular roads or vehicle-miles traveled (VMT) 

charges. To the extent that such fees varied by location, 

vehicle type, and time of day, the fees could closely match 

some of the social costs imposed by drivers. Tolls are 

already widely used on many roads and bridges, and they 

achieve a measure of efficiency when they vary by vehicle 

type in a way that covers the cost of pavement damage. 

Tolls can be even more efficient when they vary by time 

of day, because the cost a driver inflicts on other drivers is 

higher during periods of peak use. VMT charges could 

apply to all road use and could vary by time, location, or 

both. Unlike tolls on specific roads, VMT charges implemented nationwide could produce enough revenues to 

fund the federal contribution to building and maintaining highways. 

The costs of implementing a system of VMT charges 

would include the costs of equipment and the ongoing 

administrative costs to run the system and collect the revenues. Those implementation costs are not necessarily 

prohibitive, but they would be higher than the costs of 

collecting motor fuel taxes. According to a preliminary 

estimate by DOT, the necessary equipment could cost the 

government $10 billion.16 Any in-vehicle devices required 

to determine the amount, time, and location of highway 

use, such as global positioning system receivers, would 

add to the cost of putting VMT charges in place. After 

those costs were incurred, ongoing administrative costs 

(based on estimates from other countries) might be several times the costs for administering the gas tax, which 

are about 1 percent of the revenues generated.17

Specific occasions of imposing new tolls or mileage-based 

fees would probably need to address concerns about individual and geographic equity. The presence of attractive 

transit alternatives could mitigate such concerns. In addition, if implementing VMT charges involved tracking 

vehicle positions so as to vary charges by location in order 

to provide the strongest incentives for efficient highway 

use, privacy concerns would need to be considered.

13. Department of Transportation, Federal Highway Administration, 

“Addendum to the 1997 Federal Highway Cost Allocation Study” 

(May 2000), Table 13.

14. American Petroleum Institute, Motor Fuel Taxes: Summary Report

(October 2010), available at www.api.org/statistics/fueltaxes/.

15. Andrew Chamberlain and Gerald Prante, Who Pays Taxes and Who 

Receives Government Spending? An Analysis of Federal, State and 

Local Tax and Spending Distributions, 1991–2004, Working Paper 

No. 1 (Washington, D.C.: Tax Foundation, March 2007), p. 42.

16. National Surface Transportation Infrastructure Financing Commission, Paying Our Way: A New Framework for Transportation 

Finance (February 2009), pp. 150–151.

17. Ibid. See also I-95 Corridor Coalition, Administrative and 

Legal Issues Associated with a Multi-State VMT-Based Charge 

System (November 2010); and European Conference of 

Ministers of Transport, Conference on Road Charging Systems—

Technology Choice and Cost Effectiveness: Summary and 

Conclusions (June 2006), Table 1, available at www.

internationaltransportforum.org/europe/ecmt/taxes/

RdCharging06.html.
8 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

General Revenues 

To the extent that benefits from highway spending accrue 

to the nation as a whole, to both people who use highways and people who do not, some commitment of 

revenues from the Treasury’s general fund may be economically justified. A potential advantage of using 

general revenues is the large amount that can be raised. 

Moreover, concerns about equity can be addressed 

directly through the setting of tax rates, and the incremental costs of collecting additional general revenues are 

negligible. However, taxpayers are often a less efficient 

source of financial support for infrastructure than the 

direct beneficiaries of that investment. Financing infrastructure through general revenues provides no incentive 

for the efficient use of the system. Moreover, collecting 

additional general revenues would increase the disincentive that taxes pose for people to work and invest. Furthermore, redirecting general revenues from other public 

purposes to highways would reduce social benefits in 

those other areas.

Borrowing and Private Financing

To pay for highways, in addition to spending current 

revenues collected from user fees and taxes, the federal 

government may borrow or support borrowing by state 

and local governments or financing by the private sector. 

Both approaches involve their own advantages and disadvantages. Borrowed funds are not a source of “new 

money,” because repaying the funds ultimately depends 

on user fees or tax revenues. But borrowing against future 

revenues may accelerate the realization of projects’ benefits because construction can begin sooner. 

Besides borrowing through the Treasury, the federal 

government has several financing tools that involve subsidizing state and local governments and private entities 

that provide funds for highway spending. The federal 

government can subsidize the cost of borrowing by state 

and local governments through tax-exempt bonds, tax 

credit bonds, and directly subsidized bonds (such as Build 

America Bonds).18 The federal government can also 

provide credit subsidies such as low-rate loans, loan 

guarantees, and lines of credit, as it does through the 

TIFIA program. In some cases, public–private partnerships contractually transfer responsibilities and risks from 

the public sector to the private sector, including those 

involved in financing highway projects. Finally, some 

analysts have proposed creating a national infrastructure 

bank to provide loans; loan guarantees; lines of credit; or, 

in some instances, grants—much like transactions under 

the TIFIA program but provided through a separate institution.

Private financing of highway projects, which is currently 

only a small part of total financing, requires pledging 

future revenues to the private entities providing the 

funds. Whether private financing takes the form of debt 

or equity, private spending will typically be repaid—with 

a positive rate of return—through tolls, tax revenues, or 

both. Linking private companies’ opportunities for profits with their responsibility for tasks, such as construction 

or operations, may provide additional incentives to meet 

cost and schedule targets. Those additional incentives 

result from reallocating risk from the government to the 

private sector. To the extent that a program soliciting private financing reduces the federal share of a project’s costs 

or risks, it does so by increasing the share borne by the 

private sector. 

18. For further discussion of the use of bond financing for infrastructure spending, see Congressional Budget Office and Joint 

Committee on Taxation, Subsidizing Infrastructure Investment with 

Tax-Preferred Bonds (October 2009).

This brief was prepared by Chad Shirley. It and other 

CBO publications are available at the agency’s Web site 

(www.cbo.gov).

Douglas W. Elmendorf

Director