Surface Freight Transportation: A Comparison of the Costs of Road, Rail, and Waterways Freight Shipments That Are Not Passed on to Consumers
Published: 2011-01-26T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Road, rail, and waterway freight transportation is vital to the nation's economy. Government tax, regulatory, and infrastructure investment policies can affect the costs that shippers pass on to their customers. If government policy gives one mode a cost advantage over another, by, for example, not recouping all the costs of that mode's use of infrastructure, then shipping prices and customers' use of freight modes can be distorted, reducing the overall efficiency of the nation's economy. As requested, this report (1) describes how government policies can affect competition and efficiency within the surface freight transportation sector, (2) determines what is known about the extent to which all costs are borne by surface freight customers, and (3) discusses the use of the findings when making future surface freight transportation policy. GAO reviewed the transportation literature and analyzed financial and technical data from the Department of Transportation (DOT), the Army Corps of Engineers (Corps), and the Environmental Protection Agency to make cross-modal comparisons at a national level. Data limitations and assumptions inherent in an aggregate national comparison are noted in the report.
section_title: What GAO Found
paragraphs: Public spending, tax, and regulatory policies can promote economic efficiency in the freight transportation sector when they result in prices that reflect all marginal costs (the cost to society of one additional unit of service). These costs include private costs; public costs, such as infrastructure maintenance; and external costs, such as congestion, pollution, and accidents. When prices do not reflect all these costs, one mode may have a cost advantage over the others that distorts competition. As a consequence, the nation could devote more resources than needed to higher cost freight modes, an inefficient outcome that lowers economic well-being. Inefficient public investment decisions can result when all construction and other fixed costs are not passed on to the beneficiaries of that investment. GAO's analysis shows that on average, additional freight service provided by trucks generated significantly more costs that are not passed on to consumers of that service than the same amount of freight service provided by either rail or water. GAO estimates that freight trucking costs that were not passed on to consumers were at least 6 times greater than rail costs and at least 9 times greater than waterways costs per million ton miles of freight transport. Most of these costs were external costs imposed on society. Marginal public infrastructure costs were significant only for trucking. Given limitations in the highway, rail, and waterway economic, financial, technical, and environmental data available for the analysis, GAO presents conservative estimates. While freight costs are not fully passed on to consumers across all modes, a number of issues are important for decision makers to consider when proposing policy changes to align prices with marginal costs or reduce the difference between government fixed costs and revenues. Costs can vary widely based on the specific characteristics of an individual shipment, such as the geography and population density of the shipment's route, and the fuel-efficiency of the specific vehicle carrying it. Policy changes that align prices with marginal costs on a shipment-by-shipment basis would provide the greatest economic benefit, but precisely targeted policy changes can result in high administrative costs. By contrast, less targeted changes--such as charging user fees based on average costs, subsidizing more efficient alternatives, or broadly applying safety or emissions regulations--can change the overall distribution of freight across modes, but may provide fewer benefits. Although the current configuration of transportation infrastructure can limit the shifting of freight among modes, price changes can prompt other economic responses. Over the longer term, there is greater potential for responses that will shape the overall distribution and use of freight services.
section_title: What GAO Recommends
paragraphs: GAO is not making recommendations in this report. GAO provided a draft of this report to DOT and the Corps. DOT provided technical suggestions and corrections, which were incorporated as appropriate. The Corps had no comments.

section_title: Letter
paragraphs: Freight shipments move over vast networks of highways, railroads, and  waterways—often transported by more than one mode before reaching  their final destination. These networks connect and intersect, and play a  critical role in providing the American public with the freight mobility  needed to sustain national economic vitality and international  competitiveness. According to the Department of Transportation (DOT),  our surface freight transportation system connects an estimated 8 million  businesses and 116 million households moving $12 trillion in goods. The  movement of goods involves both private and public interests from private  trucking companies, railroads, and waterborne vessel operators to federal,  state, and local governments. While the major freight railroad  infrastructure is privately owned and operated, and port infrastructure is  privately or publicly owned and operated, governments play a primary role  in planning, building, maintaining, and operating highways and keeping  our waterways navigable. This infrastructure is designed for multiple types  of users, not just freight service providers.  Governments collect taxes and  tolls, which help offset transportation expenditures, but have a minimal  role in the direct regulation of prices and rates. Governments also regulate  various aspects of freight transportation across all modes, including  pollution, safety, and, to a more limited degree, congestion.
How governments tax, regulate, and make investment decisions across  modes could affect relative freight shipping prices. If government policy  results in giving one mode of freight transportation a cost advantage over  others—by, for example, ensuring that the wear and tear costs on  infrastructure from users are fully recouped in one mode, but not in  another mode—then shipping prices and choices made between  alternative shipping options could be distorted. As a consequence, freight  may be moved by a mode—for some portion or all of a trip—that imposes  higher costs on the general public than might occur if such distortions did  not exist. Because of your interest in the potential impact these policies  can have on the freight transportation sector and beyond, you asked us to  (1) describe how such policies can affect competition and efficiency  within the surface freight transportation sector; (2) determine what is  known about the extent to which costs are borne by surface freight users;  and (3) discuss how our findings could be used when making future  surface freight transportation policy.
To address these objectives, we reviewed reports issued by the  Congressional Budget Office (CBO), DOT, the Transportation Research  Board (TRB), and the Brookings Institution. We interviewed officials from  DOT, the Army Corps of Engineers (Corps), the Environmental Protection  Agency (EPA), representatives from professional research organizations  and industry, members of academia, and individuals knowledgeable about  freight transportation to obtain advice on economic concepts, appropriate  and available data sources, methodological approaches, and views on  government spending and regulatory policies. We obtained preliminary  reviews about the scope, methodology, and analysis contained in this  report from DOT, EPA, the Corps, as well as two members of the  Comptroller General’s Advisory Board—comprised of individuals with  broad expertise in public policy.
We obtained, reviewed, and analyzed several datasets that can be used to  estimate the revenues received from and costs imposed by users of the  surface freight transportation system—federal, state, and local highways  and roads; all classes of rail lines; and the inland, coastal, and Great Lakes  waterways. Specifically, we identified data on federal, state, and local  government revenues and expenditures on highways, railroads, and  waterways from fiscal years 2000 through 2006, the time frame of Federal  Highway Administration’s (FHWA) ongoing highway cost allocation study.  We also obtained available data on external costs associated with freight  transport, including pollution, accidents, and congestion from EPA,  related research from DOT, and the Texas Transportation Institute. We  analyzed these data to estimate the costs at a national level that freight  users impose on the public transportation infrastructure and society and  the revenues collected to offset those costs. When multiple data sources  were available for our analyses, we explain why we selected one over  another.
To assess the reliability of the financial and technical data collected and  published by various federal government agencies—such as DOT’s  Highway Statistics Series; the Department of the Treasury’s statistics on  income, debt, and tax expenditures; the Corps’ Waterborne Commerce  Statistics; and Census Bureau statistics, among others—we reviewed  relevant documentation about the agencies’ data collection and quality  assurance processes, talked with knowledgeable officials from the  agencies about these data, and compared these data against other sources  of published information to determine data consistency and  reasonableness. We determined that the data were sufficiently reliable for  the purposes of providing high-level cost and revenue estimates by mode.
We used federal statistical databases to obtain federal, state, and local  data for estimating government costs and revenues. We also used  nationwide data to estimate external costs. We recognize several  important limitations in our high-level analysis, such as discrepancies in  ton-mile estimates and difficulties in allocating costs between freight and  nonfreight users. However, we explain how we deal with such limitations  throughout the report by, for example, conducting sensitivity analyses to  understand changes in costs with respect to ton-miles. Further, this  analysis of high-level data is limited in the sense that it can obscure  variations in state spending and revenue policies, and external costs by  geographical location or by type of truck, locomotive, or marine engine.  Moreover, this type of high-level analysis does not consider how modes  compete with one another or the services or operations within each mode  that compete with one another (e.g., rail long-haul with long-distance  trucking); nor does it consider the complementary nature of freight  modes, wherein, freight moved by rail or waterways may also involve  trucks for at least some portion of its overall journey. Consequently, the  results should be viewed as representing averages across all of the  marginal shipments that were made under a wide variety of different  conditions in a wide variety of locations. The last section of this report  discusses the limitations that such high-level analyses have on policy  evaluations. Appendix I details our objectives, scope, and methodology.
We conducted our review from August 2009 to January 2011 in accordance  with generally accepted government auditing standards. Those standards  require that we plan and perform the audit to obtain sufficient, appropriate  evidence to provide a reasonable basis for our findings and conclusions  based on our audit objectives. We believe that the evidence obtained  provides a reasonable basis for our findings and conclusions based on our  audit objectives.
subsections: section_title: Background
subsections: section_title: Overview of the Surface Freight Transportation Sector
paragraphs: The nation’s transportation infrastructure consists of over 4 million miles  of public highways and roads; over 140,000 miles of national, regional, and  local railroad networks; and 25,000 miles of commercially navigable  waterways over which trillions of dollars worth of freight move annually.  Public roads account for the majority of our nation’s transportation  infrastructure mileage, reaching nearly every corner of the United States,  and as a result, enable trucks to move the greatest amount of freight on a  tonnage basis. However, tonnage as a measure does not capture important  aspects of freight mobility across the modes, such as the distances over  which freight moves. For making comparisons across the modes  throughout this report, we use ton-miles as a unit of measurement. Ton- miles measure the amount of freight moved, as well as the distance over  which it moves. Table 1 shows the estimates and sources for ton-miles of  freight moved on each mode for 2007, the most recent year that data are  available. Appendix I provides more detail on our methodology for  determining ton-miles used for the estimates in this report.
Freight shipments can also move by more than one mode before reaching  their final destination. In particular, freight moved by rail or waterways  may also be moved by truck at some point to reach its final destination, as  rail and waterways may not reach locations that can be reached by truck.  On the other hand, trains and waterborne vessels typically have far greater  capacity than does a single freight truck, so rail and waterways generally  move large volumes of commodities (e.g., coal and grain) long distances  that would not be feasible by truck alone. Modes often work as  complements to complete a shipment. For example, a ton of grain may  move from a grain elevator by rail, be transported to a port on an inland  waterway, move by barge to another port on an inland waterway, and then  be distributed by truck to its final destinations. A particular type of  shipment known as “intermodal” is designed to move on multiple modes,  using a container that can be moved from a truck to a train to a ship  without handling any of the freight itself when changing modes. Such  freight movements are growing and FHWA forecasts that intermodal  freight will continue to increase in the future.
In some cases, the modes may be substitutable for certain types of trips  and will compete directly for shipments or for segments of shipments  based on price and performance. For example, long-haul trucking and rail  shipments may be substitutable, or short sea shipping legs can be a  substitute for rail or truck shipments along coastal routes. The extent to  which mode-shifting is possible in the United States is difficult to estimate  and will largely be determined by the types of parameters discussed above,  such as whether shipping is feasible by another mode (e.g., rail lines or  waterways may not be available for some routes), or practical (e.g.,  sending heavy coal shipments by truck or time-sensitive shipments by rail  or waterways are not practical), and by the relative prices and other  service characteristics of shipping by different modes. Figure 1  geographically depicts the national freight transportation infrastructure  and tonnage of freight activity by mode, which provides a sense of the  physical reach of each modal network.
section_title: Government Plays a Key Role in the Surface Freight Transportation Infrastructure
paragraphs: Federal, state, and local governments each play a crucial role in planning,  designing, constructing, and maintaining the highways and waterways  infrastructure, as well as raising revenues for the highway and waterway  portions of the surface transportation system. Governments also play a  role in regulating the freight industry, which we address in the next  section. FHWA, state departments of transportation, and local  transportation organizations plan and fund new highway infrastructure  and maintain existing highways. The Corps has the responsibility for  construction, operation, and maintenance of the nation’s waterway  system. There is limited public sector funding for rail infrastructure. All  Class I railroads, which comprise about 91 percent of all railroad revenues,  are privately owned and, as one of the most capital-intensive industries in  the United States, make considerable investments in their own  transportation networks.
Highway infrastructure. The federal government authorized over $190  billion for the federal-aid highway program for fiscal years 2005 through  2009. A small portion of this funding was specifically identified for  surface freight transportation projects, including $25 million for the freight Truck Parking Facilities program and $30 million for the Freight  Intermodal Distribution Pilot Grant program. For the most part, however,  funding is provided for construction, reconstruction, restoration, and  rehabilitation of roads that serve both freight and nonfreight users.  Because the federal government’s expenditures for highways are based, in  part, on the user pay principle, the government collects taxes and fees,  which flow into the Highway Trust Fund—historically, the principal  mechanism for funding federal highway programs. The fund’s highway  account reported revenues of about $34 billion in fiscal year 2007—mainly  from fuel (diesel and gasoline) tax that constitutes the majority of  revenues from both freight and nonfreight users, as well as a variety of  taxes imposed on trucks used in freight movement, including a truck and  trailer sales tax, a heavy vehicle use tax, and a tire tax. In the following  year, 2008, the Highway Trust Fund held insufficient amounts to sustain the authorized level of funding, and partly as a result, we placed it o  To cover the shortfall, from fiscal years 200 list of high-risk programs. through 2010 Congress transferred a total of $34.5 billion in additional  general revenues into the Highway Trust Fund, including $29.7 billion  the highway account. Consequently, highway funding shifted aw the contributions of highway users, breaking the link between highway  taxes paid and benefits received by users. The American Recovery  and  Reinvestment Act of 2009 (Recovery Act) further augmented  transportation spending using general fund revenues of about $48 billion,  of which about 57 percent was identified for federal highway projects.
State and local governments also invest in public highways and roads.  Within the federal-aid highway program, the federal government is  responsible for funding 80 to 100 percent of highway project costs, and  state and local governments are responsible for the remainder of the costs.  State governments spent about $36 billion on capital outlays and about $21  billion more on maintenance of state-administered highways in 2007, while  local governments spent approximately $69 billion on public roads.  According to FHWA, state governments collected about $61 billion in user  revenue, and local governments collected about $4 billion from a  combination of fuel taxes, vehicle taxes and fees, and tolls. State and local  governments supplement user revenue with general fund appropriations to  support highway and road activities.
Railroad infrastructure. The federal government has helped improve  public safety on freight railroad infrastructure by providing limited funds  to states for railroad-highway grade crossings and grants for relocating  railroad tracks away from urban centers. Since January 1, 2007, freight  railroads no longer pay federal fuel taxes, and there is no federal user fee  specific to freight railroads. However, the federal government pays freight  rail companies for intercity passenger train usage of the companies’  railroad tracks to the extent that these costs are not recovered through  passenger fares. Recently, the Recovery Act funded two discretionary  grant programs, the Transportation Investment Generating Economic  Recovery (TIGER) grant program at $1.5 billion and the High-Speed  Intercity Passenger Rail program at $8 billion, both of which can provide  capital investment in railroad infrastructure. Additional funding for these  programs were made available through the 2010 appropriations for DOT,  nearly $600 million for TIGER grants and $2.5 billion for the high speed  rail program. Because these programs are new, they are not included in  the scope of our analysis of government spending on freight  transportation.
Little systematic information is available about state programs and  financial assistance for the freight railroad industry. A 1997 survey of state  departments of transportation found 10 states with dedicated freight  railroad budgets exceeding $1 million annually. A few states (e.g.,  Alabama, North Dakota, and Tennessee) tax fuel for locomotives, but this  revenue is not always used for rail projects. Railroads also pay state and  local property taxes on their infrastructure; the nation’s major railroads  paid $625 million in property taxes in 2008, according to the Association of  American Railroads.
Waterway infrastructure. The Corps, under its civil works program, is  responsible for planning, constructing, operating, and maintaining the  nation’s waterways used primarily by commercial vessels, as well as  recreational and commercial passenger boats along some sections of the  waterways. For fiscal year 2007, the Corps spent about $1.2 billion to  operate and maintain the inland waterways, as well as the nation’s coastal  harbors and channels (deep and shallow draft), and $686 million more for  a variety of construction projects along inland waterways and coastal  harbors and channels. For the same year, the Saint Lawrence Seaway  Development Corporation budgeted about $33 million for operations and  maintenance activities and $1 million for construction activities. Much of  these funds are from the Harbor Maintenance Trust Fund.
The general fund pays for all of the Corps’ operations and maintenance  activities and one-half of the inland waterway construction costs for  rehabilitating, modernizing, or replacing locks and dams. The other half  comes from commercial waterway users that pay fuel taxes which flow  into the Inland Waterways Trust Fund. The Inland Waterways Users Board  and the National Academy of Public Administration have both reported on  inefficiencies in the delivery of construction projects which have led to  delays and cost escalation that have strained the trust fund and resulted in  fewer and less-beneficial projects being funded. Some waterborne  vessels are exempt from the fuel tax, including oceangoing ships,  passenger boats, recreational craft, or government vessels. Receipts  totaled about $101 million, including excise taxes and interest on  investments, in fiscal year 2007. In contrast, revenue for the Harbor  Maintenance Trust Fund comes largely from an excise tax on imports  imposed on commercial users of certain ports. The tax applies a second  time to cargo that has already arrived at a U.S. port, but is transferred by  barge or short-sea route to another U.S. port. Importers or shippers pay an  amount equal to 0.125 percent of the value of the commercial cargo  involved at the time of unloading. Exporters are exempted from the excise  tax. In fiscal year 2007, this trust fund received about $1.4 billion from tax  collections—including $68 million from domestic shippers, which is  relevant to the scope of this study—and $154 million from interest on  investments in U.S. treasury bonds. Harbor Maintenance Trust Fund  revenues exceed expenditures, and in 2007 the Fund was carrying a  balance of nearly $4 billion, which has continued to grow. The federal  government levies other fees, such as customs and agricultural quarantine  inspection fees, on waterborne vessel operators and shippers to cover the  costs of the inspection programs.
State and local governments also provide funding to publicly owned and dock facilities on waterways for the purposes of construction,  operation, and maintenance of commercial port facilities, including  warehouses, cranes, and terminals; canals; harbors; and other public  waterways, in addition to dredging of those waterways. State and local  governments also impose a variety of fees, such as canal tolls, rents from  leases, concession rents, and other charges for use of commercial or  industrial water transport and port terminal facilities and related services.
section_title: Government Plays a Ke Role in Regulating the Surface Freight Transportation Sector
paragraphs: In addition to constructing, operating, and maintaining the infrastructure,  governments regulate various aspects of the surface freight transportation  sector. Federal regulations across all modes are focused on safety and the  environment rather than economic regulation. For example, truck safety  regulations include truck size and weight limits and restrictions governing  interstate freight operations. For rail, Congress has recently dire cted the  Secretary of Transportation to require that Class I railroads, and  commuter or regularly scheduled intercity transportation providers, instal positive train control systems to help reduce the risk of crashes. Fre ight  railroads continue to be subject to pricing regulation in areas where  shippers do not have an alternative mode for shipping goods. Waterways  freight carriers and their employees must comply with federal regulation Indeed, all three modes—trucks, railroads, and waterway vess expected to comply with federal drug testing, security, and  environmental regulations, including measures imposing new pollution  standards to reduce sulfur in diesel fuel. Except as preempted by federal  s. els—are  law, state and local governments may also establish regulations that affect  freight transportation.
Compliance with these regulations can impose costs on the freight  industries. For example, new emissions regulations may result in costlier  investments in new vehicles than would otherwise have occurred. At the  same time, government regulations are often intended to help reduce the  costs of freight movements on society by reducing emissions and  improving safety.
section_title: Public Policies That Encourage Pricing Freight Transport at Levels That Reflect Social Costs Would Maximize Economic Well-Being, but Other Objectives Also Matter
paragraphs: In a market economy, resources are allocated to their most efficient uses  (meaning they produce the greatest net benefits to society) when the  prices of goods and services reflect all of the costs entailed in producing  those goods and services. More specifically, economic efficiency requires  that the price of a good or service equals the marginal social cost (the cost  to society of consuming one additional unit of the good or service).  Governments can best promote economic efficiency in the freight  transportation sector by minimizing subsidies that produce gaps between  prices and marginal social costs and by correcting price gaps that can  occur naturally in the market. However, policies that promote efficiency  can conflict with other objectives of policymakers, such as covering the  costs of government services and satisfying certain concepts of equity.
subsections: section_title: Government Subsidies and External Costs Can Result in Differences between the Costs of Freight Transportation Services and the Prices Charged to Shippers
paragraphs: The total social costs of providing freight transportation services can be  divided into three categories on the basis of who bears them. First, there  are private costs, such as labor, equipment, and fuel that are typically paid  directly by freight service providers. Freight rail infrastructure falls into  this category, as it is mainly funded privately by the rail companies.  Second, there are the costs of public investments and services, such as the  construction, maintenance, and operations of highways and waterways.  These public costs are paid out of government budgets and can be funded  through a variety of general or targeted taxes and fees. Finally, there are  “external” costs, such as congestion, accidents, and health and  environmental damage caused by pollution that are generated while  transporting freight, that are not paid for directly by either the service  providers or by government. These external costs are imposed on other  members of society who are directly affected by these externalities. Each  of these cost categories can be divided further between marginal costs and  fixed costs. As noted earlier, marginal costs are those associated with the  production of additional units of service. In contrast, fixed costs, such as  those associated with the initial construction of infrastructure, are  incurred before any service can be provided; however, the production of  additional units of service does not add to these costs.
In order to remain in business, private companies need to set prices that  not only will cover their private marginal costs, but that will also include a  margin that provides a sufficient rate of return to be able to obtain needed  investment funds from capital markets. In a competitive market economy,  only private costs will be passed on in prices to the final consumers of  freight services, unless government policies are designed to pass the  public and external costs on to those consumers as well. Governments can  recover the public costs that support freight transportation by imposing  taxes or fees on freight service providers. Competitive market forces  should lead service providers to pass the cost of these payments on to  their customers in the same manner that private costs are passed on. If  competitive pricing prevents a particular business from passing such costs  on to its customers, it may not earn a sufficient rate of return to remain in  business. To the extent that public costs are not covered by taxes or fees  levied on freight providers or consumers, governments would be providing  a subsidy to the industry, which is paid by other taxpayers. Governments  can also attempt to make freight service consumers bear the external  costs generated by service providers by imposing taxes or fees on those  providers in proportion to the external costs that they generate. Again,  these costs should be passed on to the customers or noncompetitive  businesses will drop out of the market. Government regulation of pollution  and other factors that generate external costs can be used in conjunction  with taxes and fees to address those costs.
section_title: When Prices Do Not Reflect All Marginal Costs, Competition Can Be Distorted and Economic Efficiency Reduced
paragraphs: The hypothetical scenarios in figure 2 illustrate how discrepancies  between marginal social costs (plus a competitive return on investment)  and prices, whether caused by government subsidies or by external costs,  can distort competition and cause inefficient allocations of resources in  the freight transportation sector. In the scenarios, a shipper has to  choose between two transportation modes to ship a package. Except for  price, the services provided by the two modes are equal in all respects,  such as timeliness and reliability. In the first scenario, Mode B uses $125 in  resources to ship the package; Mode A uses $100 in resources. Price  accurately reflects costs incurred to provide the freight service for both  modes. Looking to minimize expenses, the shipper makes the logical  decision and chooses the less expensive option (Mode A). The freight  service provider represented by Mode A is rewarded for providing service  more efficiently than the competitor, and the $25 of resources that  otherwise would have been used if the product were shipped by Mode B  can be used more efficiently in other ways to produce benefits for society.
The second scenario in figure 2 shows the detrimental effects of a  subsidy. In this scenario, the government provides a subsidy to Mode B,  enabling it to charge a price that is $50 below its marginal costs. As in the  first scenario, the shipper selects the lower-priced option; however, in this  case the subsidy results in the service being provided by the higher-cost  producer. As a result, $25 of resources that otherwise could have been  used to provide other societal benefits are not used efficiently.
The third scenario in figure 2 shows how external costs can distort  competition and reduce economic efficiency in a manner similar to  government subsidies. In this scenario, Mode B generates $50 in external  costs that are not reflected in the price charged to the shipper. The fact  that these costs are not passed on to the shipper makes Mode B more  competitive than it would be if it had to include those costs in the price.  Consequently, the shipper chooses Mode B, despite the fact that society  bears $25 more in costs than if the other mode had provided the service.
When prices do not reflect marginal social costs, investment decisions are  also distorted, potentially resulting in a misallocation of resources. Much  like a freight service shipper whose primary concern is price, an investor  that is primarily concerned with profit potential is not concerned with the  social costs that a freight service provider generates if they do not affect  the provider’s net profit. Therefore, an investor looking to maximize his or  her return will invest resources in the more profitable provider regardless  of social costs. From an economywide perspective, this is a misallocation  of resources because those investment resources could be used more  efficiently if applied to another area in the economy that is more efficient.
section_title: There Can Be a Tradeoff between Recovering Fixed Public Infrastructure Costs and Promoting the Efficient Use of Existing Infrastructure
paragraphs: Certain freight transportation costs, such as the construction of new  infrastructure, are considered to be “fixed” (rather than marginal) in the  sense that they do not increase as use of the infrastructure increases. As  an example, the construction cost of a bridge is a fixed cost, but pavement  wear is a marginal cost. In freight transportation, fixed costs to build  infrastructure are generally large relative to the marginal costs of an  additional vehicle trip on an uncongested highway. Consequently, if  governments were to charge users only for the marginal costs of their use,  they usually would not be able to recover the full costs of building much of  the infrastructure. As private companies that own and invest in their own  infrastructure, freight railroads must pass on fixed costs to customers in  order to remain in business. However, once the infrastructure is in place,  charging users a portion of the fixed costs each time they use the  infrastructure (on top of a charge for any marginal costs they impose) can  result in underutilization of the infrastructure. Appendix V outlines a  number of different ways that governments can address this tradeoff  between efficiency and cost recovery. The choice among these  alternatives involves a political, rather than a strictly economic judgment.  Table 2 categorizes how the various types of costs in the freight  transportation sector can be passed on to freight service consumers.
section_title: Policies That Promote Economic Efficiency Can Conflict with Other Government Objectives
paragraphs: Government policies aimed at reducing gaps between prices and social  costs in the freight transportation sector also support the benefit principle  of equity—a widely accepted economic principle—but they can conflict  with the “ability-to-pay” principle of equity (which holds that people  should contribute to the cost of government in line with their financial  resources) and other objectives important to policymakers. The benefit  principle holds that government services should be financed by those who  benefit from those services. In the case of transportation funding, motor  fuel taxes adhere more closely to the benefit principle than does the  income tax because fuel consumption is correlated with road use.  However, motor fuel taxes are regressive, meaning that lower income  individuals pay a greater share of their income toward these taxes than do  higher income individuals. This regressivity can conflict with the ability-to- pay principle, unless compensating relief to lower income individuals is  provided in other parts of the tax system.
Other objectives may be important to policymakers, such as whether or  not a policy can be administered cost effectively. For example, attempts to  achieve a high level of precision in marginal cost pricing through taxes and  fees carry with them an administrative burden, as we discuss later in this  report. The administrative costs of implementing finely calibrated versions  of a tax may outweigh any efficiency gains achieved through increased  precision. Efficiency in the freight transportation sector depends on prices  fully reflecting marginal costs on a shipment-by-shipment basis; however,  subsidies and external costs can vary considerably from one shipment to  another based on the geographic origin and destination, time of day, and  other factors. Moreover, as we discuss below, considerable uncertainty  exists in the valuation of many types of costs.
section_title: Available Data Indicate That Consumers Do Not Pay the Full Costs of Transporting Freight, Particularly Freight Moved by Truck
paragraphs: The combination of tax, spending, and regulatory policies in the United  States does not result in consumers of all three surface freight  transportation modes bearing the full costs they impose on society,  particularly truck freight. Available data indicate that each of the modes,  in the aggregate, generates marginal costs in excess of their marginal  revenue.  Specifically, we estimate that freight trucking costs that were  not passed on to customers were at least 6 times greater than rail costs  and at least 9 times greater than waterways costs per million ton miles of  freight transport. Most of these costs were external costs imposed on  society. In particular, the modes generate external costs related to  accidents and pollution that are not reflected in prices. Furthermore,  available data also indicate that at the national level, the infrastructure  costs (both marginal and fixed) attributable to commercial freight  transported by trucks and over waterways exceed the revenue that these  freight transportation providers pay governments to fund that  infrastructure. The available data for the freight transportation networks  and vehicles we examined show that both the marginal and fixed social  costs that are not passed on to freight service consumers are greatest (per  million ton miles of freight carried) for freight trucks and lowest for  railroads.
subsections: section_title: Consumers of Freight Services Pay Less of the Marginal Costs Associated with Trucking than with Railroads or Waterways
paragraphs: Although certain data limitations and difficulties in valuing important  categories of costs prevent us from making definitive quantitative  estimates of the nonprivate (i.e., public and external) marginal costs  generated by an additional million ton-miles of freight service provided by  each of the three transportation modes, we are able to present at least  lower bound estimates of those costs and to compare the magnitudes of  these costs across the three modes. In a competitive economy, private  costs such as payments for labor and fuel are generally passed on in prices  to the final consumers of freight services; therefore, those costs did not  need to be included in our estimation of costs that are not passed on. We  are also able to estimate the amount of revenue that governments collect  from highway taxes and fees, such as those on motor fuels and tires that  are associated with marginal activity. (We use the payment of such taxes  and fees as a measure of the extent to which governments have passed  some of the nonprivate costs on to final consumers). The extent to which  the nonprivate marginal costs exceed tax and fee payments indicates the  extent to which some nonprivate marginal costs are not reflected in prices  charged to freight consumers. We refer to this difference as “unpriced  costs.” The available evidence suggests that, on average, an additional  million ton-miles of freight service provided by trucking generates  significantly more unpriced costs than an additional million ton-miles of  either freight rail or waterways service generates. We estimate that over  $55,000 per million ton-miles of service in unpriced freight trucking costs  were not passed on to consumers. In contrast, freight rail and waterways  services imposed over $9,000 and over $7,000 in unpriced costs per million  ton–miles, respectively.
Table 3 summarizes the estimates of marginal social costs attributable to  each freight mode not passed on to consumers, per million ton miles. The  estimates we present for pollution and other external costs are based on  conservative volume estimates and valuation approaches from the  available literature. Moreover, we do not include cost estimates for carbon  dioxide (CO2) emissions because of the considerable uncertainty  surrounding such estimates. For these reasons, our bottom-line estimates  for marginal social costs not passed on to consumers are likely to  represent minimum values for those costs.
Marginal public infrastructure costs—the second cost item in table 3— relate to public highway spending attributable to miles driven by freight  trucks (i.e., pavement preservation costs per million ton-miles). We  estimate from recent FHWA data that trucks imposed an average marginal  cost to pavement of $7,000 per million ton-miles. We also estimate from  FHWA data that pavement preservation costs borne by all levels of  government attributable to all single-unit and combination trucks  (excluding pickup trucks) averaged about 6.1 cents per vehicle miles  traveled (VMT). The cost per ton-mile would increase with truck weight  and decrease with the number of axles. The costs also varied by location  (urban or rural), type of road surface, temperature, and other factors.  When we compared single-unit and combination trucks using DOT data,  we found that marginal revenues exceeded the marginal infrastructure  costs by 4.8 cents per VMT for single-unit trucks and by 3.5 cents per VMT  for combination trucks, meaning that both types of trucks pay more than  their share of pavement preservation costs. Although marginal costs are  difficult to estimate from available data, CBO along with TRB and the  Brookings Institution have undertaken this effort and reported their  results. Their reports, although dated by at least 15 years, remain the most  pertinent and relevant to our study.
Because railroads generally pay for their own infrastructure, governments  spend little on railroad infrastructure. For waterways freight, marginal  public infrastructure costs, as estimated by TRB and CBO, are relatively  low because the costs of dredging channels are predominantly fixed,  rather than marginal, and vary little with the amount of tonnage that  passes through. Because the Recovery Act (2009) was enacted after the  time frame of our analysis and was a one-time funding source, our analysis  does not consider these funds. Appendix II contains more details on the  Recovery Act funds identified for freight transportation infrastructure by  mode.
subsections: section_title: Other Public Subsidies
paragraphs: Federal tax and financing programs subsidize the surface freight  transportation infrastructure used by trucks, railroads, and waterborne  vessels. Although we could not determine what portion of these benefits is  associated with marginal activity, trucking and waterways freight received  indirect, public subsidies through infrastructure improvements financed  by certain state and local government bonds, which earned interest that  was not subject to federal income tax. Trucking, railroads, and waterways  also benefited from federal loan and loan guarantee financing programs  for infrastructure improvements at attractive terms. However, we  determined that the subsidies from federal financing programs for each of  the three modes were negligible on a per-million-ton-mile basis. See  appendix III for additional information on federal income tax subsidies  and the federal financing programs.
While each of the modes may benefit from certain provisions of the federal  corporate income tax, the effects of these benefits on the three modes are  not included in table 3 because they relate to fixed costs, rather than  marginal costs. For example, eligible Class II and III railroads may take  federal business tax credits for rail track maintenance, eligible shipping  companies may make tax deferred deposits into a capital construction  fund, and all of the modes can benefit from accelerated depreciation for  tax purposes (as do many other industries). CBO’s estimates of federal  corporate effective tax rates for 2002—the best available evidence of  whether the overall corporate income tax system favors one mode relative  to another, or relative to other industries—suggest that the federal  corporate income tax may provide a slight advantage to waterways freight  over the other two modes. CBO estimated that the effective tax rate on  the category of assets that includes heavy trucks, truck trailers, and  buses—the category closest to freight trucks investments—to be 18.2  percent. Further, CBO estimated the effective tax rate on investments in  railroad infrastructure to be 20.1 percent and the rate on investments in  railroad equipment to be 11.4 percent. When weighted by the amounts of  assets in railroad infrastructure and railroad equipment, these two rates  combine for an average effective tax rate on railroad investments of 18.1  percent. The closest asset category for waterways freight includes all  investments in ships and boats. CBO estimated the effective tax rate on  these investments to be 16.5 percent. These relative effects are on top of  any benefits due to public infrastructure investments that trucking and  waterways receive over railroads. The effective tax rates for all three  modes are below the 26.3 percent average effective tax rate for all  corporations, indicating that all three modes are receiving better than  average tax rates.
section_title: Marginal External Costs
paragraphs: For all of the freight modes, external costs are large relative to public  infrastructure costs. Our analysis of available data to quantify the levels of  externalities in table 4 shows that freight trucking produces more air  pollution, accidents, and congestion per million ton-miles than do the  other modes. However, we recognized that there are many difficulties in  estimating the monetary costs associated with these external effects.  Consequently, the estimates we presented previously in table 3 should be  considered a rough order of magnitude estimate for these external costs.
EPA and DOT have not produced recent estimates of the economic costs  of air pollution on a ton-mile basis for any of the freight modes.  Therefore, we applied EPA’s estimates for the human health benefits of  reducing one ton of fine particulate matter and one ton of nitrogen oxide  to the emissions data. We estimated for freight trucking an emissions cost  of $44,000 per million ton-miles, as shown in table 3. Given the even  greater uncertainty surrounding the economic costs of CO2 emissions, we  did not produce our own estimate. The omission of these costs, as well as  the omission of other nonhealth costs associated with emissions of  nitrogen oxide and particulate matter, means that the estimates in table 3  are likely to understate the extent to which some marginal costs are not  passed on to final consumers. This understatement would be the greatest  for trucking.
According to our synthesis of EPA’s latest national emissions inventory  data (2002), freight trucks produced over six times more fine particulate  matter and over four times more nitrogen oxide on a ton-mile basis than  freight locomotives, and over 10 and six times more of each type of  emission, respectively, on a ton-mile basis than inland waterway vessels.  And, according to our analysis of EPA data on greenhouse gases, trucks  emitted the highest levels of greenhouse gas (CO2 equivalents) among the  freight modes—about eight times more per unit of freight than freight rail,  and thirteen times more than waterways freight, as shown in table 4.
Recent EPA regulatory changes require that freight carriers for all the  modes upgrade to technologies that reduce particulate matter and  nitrogen oxide emissions. EPA expects these standards to reduce diesel  engine emissions of particulate matter and nitrogen oxide by 80 and 90  percent, respectively, for locomotives and waterborne vessels and 90 and  95 percent, respectively for heavy duty trucks over the next 20 to 30 years  as older engines are taken out of service. While these regulations are  expected to reduce the overall level of air pollution external costs, overall  emissions will not be reduced to the estimated levels until 2030 or later  because older, more polluting diesel engines will still be in use for years to  come as each mode’s fleet converts to the new technology.
section_title: Accidents
paragraphs: According to our analysis of DOT data shown in table 4, nationwide  between 2003 and 2007, large trucks were involved in about six times more  accidents with fatalities and 17 times more accidents with injuries, per  billion ton-miles, than freight rail. Rates of fatalities and injuries involving  a waterways vessel were much lower than those involving both trucks and  freight rail. The economic costs of transportation accidents reflect the  value assigned to the loss of a human life and the reduced productive life  and pain and suffering related to serious injuries. The external portion of  those costs excludes any amounts borne by the freight service providers  (e.g., through insurance premiums or court settlements). Available cost  estimates from the literature, shown in appendix IV, indicate that truck  external accident costs could be as much as 2.15 cents per ton-mile,  almost nine times higher than rail external accident costs. However, these  estimates are dated and do not reflect the reduced rate of truck and rail  accidents in recent years, or the much higher economic value now  assigned to loss of human life. To obtain our conservative estimate of  $8,000 per million ton-miles in table 3, we started with the number of  fatalities in table 4, multiplied by the latest value for human life used by  DOT in guidance for its own analysts, and then assumed that carriers are  already compensated for 50 percent of these costs (see app. I for details on  our scope and methodology). We identified four studies that attempted to  determine the extent to which accident costs were compensated through  insurance premiums, payments, and other compensation. These studies  ranged from 50 to 62 percent in uncompensated or external costs. We  chose to use 50 percent of the portion of costs that were not compensated  as a reasonably conservative estimate since our calculations do not  include estimates for uncompensated costs for injuries and property  damage.
section_title: Congestion
paragraphs: Transportation Research Board, Paying Our Way, Estimating  Marginal Social Costs of Freight Transportation, (1996);  Forkenbrock, David J. (1999).  “External Costs of Intercity Truck Freight Transportation,” Transport Research part A 33,  505-526; and David J. Forkenbrock, “Comparison of external costs of rail and truck freight  transportation,” Transport Research, Part A, 35 (2001): 321-337. waterways users. There is no national policy to charge transportation  infrastructure users for their contribution to congestion.
section_title: Taxes and Fees Associated with Marginal Freight Activity
paragraphs: Federal, state, and local governments levy certain taxes and user fees on  road users that increase with the payers’ use. These levies include taxes on  motor fuels and tires, as well as tolls. FHWA provided us with underlying  data from its forthcoming highway cost allocation study that estimates  how much of the various federal highway user taxes and fees are  attributable to trucks. We combined this data with our own estimates for  state and local fuel taxes and tolls in order to obtain our estimate of the  total tax and fee payments that trucks make for their marginal use of  highways, which amounts to about $11,000 per million ton-miles. In  comparison, estimates by TRB and CBO suggest that marginal fees paid by  waterways freight service providers are less than $500 per million ton- miles. Railroads do not pay taxes or fees for the marginal use of their own  infrastructure.
section_title: Consumers of Freight Services Pay Less of the Fixed Costs Associated with Trucking than with Railroads or Waterways
paragraphs: We examined the extent to which fixed costs are not passed on to final  consumers separately from our table 3 comparison of marginal costs and  marginal taxes and fees because unpriced fixed costs will not cause  inefficient use of existing infrastructure as unpriced marginal costs do;  however, unpriced fixed costs can lead to inefficient investment decisions  (as discussed in the following section). Fixed public infrastructure costs  are those, such as investments in new roads or the dredging of a  waterway, which would exist regardless of whether an additional  shipment is made on the route. Fixed taxes and fees, such as excise taxes  on vehicle purchases and registration fees, do not vary with the number of  VMT. Our estimates in table 5 indicate that the unpriced fixed social costs  per ton-mile are largest for trucking—$7,000 per million ton-miles—and  smallest for waterways freight—$2,000 per million ton-miles. Railroad  infrastructure is, for the most part, privately owned and thus has negligible  fixed public infrastructure costs.
Within the freight trucking mode, we also compared single-unit and  combination trucks. Our analysis suggests that fixed costs exceeded the  share of fixed taxes and fees for both types of trucks, and that the amount  of these unpriced fixed costs was higher for single-unit trucks than for  combination trucks: 7.7 cents versus 5.2 cents per VMT. In contrast, the  marginal revenues exceeded the marginal costs for each type of truck,  with the difference larger for single-unit than for combination trucks: 4.8  cents versus 3.5 cents per VMT.
section_title: Formulating Policy Responses to Address Unpriced Social Costs Raises Complex Issues
paragraphs: In this report we have pointed out that the efficiency of our economy is  decreased in several ways when marginal and fixed costs are not reflected  in prices, and that the available evidence at a national level indicates that  there are unpriced marginal and fixed social costs across the three surface  freight transportation modes. Policy responses that attempt to more  closely align prices with marginal social costs (including a competitive  rate of return on capital) or attempt to reduce gaps between fixed costs  and revenues will confront a number of complex issues that are important  for policymakers to consider, particularly when considering national-level  policies. We also noted that the extent to which modes are substitutable is  difficult to estimate and will largely be determined by whether shipping is  feasible or practical by another mode, and by the relative prices and other  service characteristics of shipping by different modes. In addition to  mode-shifting, price changes can prompt other economic responses in the  short run, such as the use of lighter-weight materials; over the longer term  there is greater potential for responses that will shape the overall  distribution and use of freight services.
Costs can vary widely based on the specific characteristics of an individual  shipment, such as the geography and population density of the shipment’s  route, and the fuel-efficiency of the specific vehicle carrying it. Ideally,  policy that is able to align marginal prices with marginal costs on a  shipment-by-shipment basis would provide the greatest economic benefit.  However, achieving this in practice would typically result in high  administrative costs. For example, freight carriers may have to purchase  new technologies or be required to maintain more complex and detailed  records. Similarly, government agencies would likely have to devote more  resources to enforcement efforts. As a result, economic efficiency could  be reduced because the costs to administer the policy may actually exceed  the benefits achieved.
Less targeted interventions (e.g., charging fees or taxes based on average  costs, subsidizing more efficient alternatives, or broadly applying safety or  emission regulations) can have impacts on users and potentially change  the overall distribution of freight across modes or demand for freight  overall, but provide fewer benefits. Further, more general policy  interventions can push too much of the cost onto users who previously  had below-average unpriced costs and too little of the cost onto users who  previously had above-average unpriced costs. For example, a policy that  charges freight providers on the amount of their emissions would result in  an overcharge for those traveling in rural areas where few people live and  an undercharge for those traveling in more densely populated urban areas.  External costs from the same amount of emissions would be higher in  more densely populated urban areas because more people are exposed to  the pollutants.
Other complexities arise when attempting to align fixed costs and  revenues. In general, our current system is set up as a user pay system,  wherein the costs of building and maintaining the system are to be borne  by those who benefit. However, available data suggest that in the trucking  and waterways modes, current government mechanisms to recover the  fixed costs associated with public infrastructure do not achieve full  recovery. Aligning fixed costs and revenues for public infrastructure— whose multiple users include passenger cars and recreational boats along  with freight trucks and vessels—is a complex task requiring detailed cost  allocation studies, which are expensive and time-consuming, and are not  done regularly. Furthermore, policies designed to recover fixed costs can  conflict with policies designed to address gaps between marginal social  costs and revenues. As discussed previously, if governments were to  charge users only for the marginal costs of their use, in many cases they  would not be able to recover the costs of building the infrastructure to  begin with. However, once the infrastructure is in place, charging users a  portion of the fixed costs each time they use the infrastructure (on top of a  charge for any marginal costs they impose) would likely result in  underutilization of the infrastructure because some potential users would  not be willing to bear the higher cost. Appendix V provides options that  governments can take to address this tradeoff between efficiency and cost  recovery.
Finally, marginal social costs can vary widely across jurisdictions, and  have varying levels of impact, which has implications for the level of  government that is best suited to administer a policy response. For  example, congestion costs are local in nature, thus cities, counties, or local  authorities are in the best position to develop interventions that reduce  those costs, or attempt to price those costs. On the other hand, some air  pollution costs can be imposed on multiple states, the entire nation, or  other countries. State or local governments may not be equipped or  institutionally capable of implementing policies that are regional in nature  and affect multiple states. National policy responses to pollution and  emissions must also consider that air pollution reductions can be achieved  across a number of different industries, potentially at lower cost than in  the transportation sector. Furthermore, although considerable research  has gone into estimating the effects of climate change, there is uncertainty  around how increases in atmospheric concentrations of greenhouse gases  and temperature within ecosystems and economic growth will vary across  regions, countries, and economic sectors, and therefore, appropriate  policy responses require international coordination.
section_title: Agency Comments
paragraphs: We provided copies of a draft of this report to DOT and the Corps for  review and comment. DOT responded with suggestions to consider  additional data sources and methods for calculating infrastructure and  external costs. We accepted some of DOT’s suggestions and incorporated  those changes into our report, but for others, we believe that our data  sources and methods are appropriate. DOT also provided technical  corrections, which we incorporated in the report. The Corps indicated that  we had adequately incorporated or footnoted its comments made to a  preliminary draft of this report and had no further comment.
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If you have any questions about this report, please contact our offices at  (202) 512-2843 or (202) 512-9110 or at herrp@gao.gov or whitej@gao.gov.  Contact points for our Offices of Congressional Relations and Public  Affairs may be found on the last page of this report. GAO staff who made  major contributions to this report are listed in appendix VI.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: The objectives of this report are to (1) describe how public policies can  affect competition and efficiency within the surface freight transportation  sector; (2) determine what is known about the extent to which costs are  borne by surface freight users; and (3) discuss how our findings could be  used when making future surface freight transportation policy.
To describe the effects of public policy on the freight sector, we  conducted a review of the transportation and economic literature and  interviewed transportation policy experts to identify how government,  academic, and professional research organizations apply economic  concepts to determine the efficiency of the surface freight transportation  system in the United States. We identified the types of data that can be  used to evaluate the costs imposed by users of the surface freight  transportation system on the economy and the factors to consider when  determining the effect of government intervention.
To determine the extent to which costs are borne by users of freight  trucking, freight rail, and waterways freight services, we obtained,  reviewed, and analyzed several datasets. We used federal highway cost  and revenue data provided by the Federal Highway Administration’s  (FHWA) Office of Policy for allocating costs imposed by and estimating  revenue received from the freight trucking industry—specifically, single- unit and combination trucks. For allocating similar costs and revenues to  the same classes of trucks at the state and local government levels, we  used several tables reported by FHWA’s Highway Statistics Series. To  estimate domestic waterways costs at the federal level, we used  construction costs reported by the U.S. Army Corps of Engineers (Corps),  and used operations and maintenance costs obtained from the Corps’  Operations and Maintenance Business Information Link system. For  estimating state and local governments’ financial assistance to waterways,  we used the Census Bureau’s State and Local Government Finance data. In  terms of revenue, inland waterways and the harbor maintenance trust fund  revenue estimates were based on financial information reported by the  Department of the Treasury’s Bureau of Public Debt. We used available  cost and revenue information on railroads published by the Association of  American Railroads. To assess the reliability of finance and technical data,  largely gathered from federal statistical agencies’ databases, we reviewed  relevant documentation about the agencies’ data collection and quality  assurance processes, talked with knowledgeable officials from several  agencies about these data, and compared these data against other sources  of published information to determine data consistency and  reasonableness. We determined that the data were sufficiently reliable for  the purposes of this report.
We reviewed marginal and fixed costs from the literature, including (1) the  1997 FHWA Highway Cost Allocation Study, its addendum published in  2000, and unpublished supporting documentation; (2) the Transportation  Research Board’s 2008 National Cooperative Highway Research Program,  Synthesis 378, on State Highway Cost Allocation Studies; (3) the 1996  Transportation Research Board (TRB) report entitled Paying Our Way,  Estimating Marginal Social Costs of Freight Transportation; (4) the 1992  Congressional Budget Office (CBO) report entitled Paying for Highways,  Airways, and Waterways: How Can Users Be Charged; (5) the American  Association of State Highway and Transportation Officials publications;  and (6) Road Work, A New Highway Pricing and Investment Policy,  published by the Brookings Institution in 1989.
To understand available financial and technical data on freight, we  conducted interviews with and obtained data from officials in the  following organizations:    Department of Transportation’s Chief Economist, Federal Highway  Administration’s Freight Management of Operations, and Transportation  Infrastructure and Finance Innovation Act program office;   Federal Railroad Administration’s Railroad Rehabilitation and  Improvement Financing program office;   Research and Innovation Technology Administration’s Bureau of    Maritime Administration’s ship financing program office;    Army Corps of Engineers’ Institute for Water Resources; and    Environmental Protection Agency’s (EPA) Office of Air and Radiation.
We also interviewed Department of Transportation (DOT), Corps, and  EPA officials to obtain advice on economic concepts related to surface  freight transportation, appropriate and available data sources, and  methodological approaches. We obtained preliminary reviews about the  scope, methodology, and analysis contained in this report from DOT, EPA,  the Corps, as well as two members of the Comptroller General’s Advisory  Board—comprised of individuals with broad expertise in public policy.
We also spoke with industry representatives to discuss their views on  government spending and regulatory policy. Specifically, we interviewed  representatives from the American Trucking Association, the Association  of American Railroads, the American Waterways Operators, and the  American Association of Port Authorities. In addition to industry  representatives, we also interviewed individuals who were involved in  previous federal and state highway cost allocation studies or authored  research papers on external costs.
subsections: section_title: Cost Estimation Methodology
paragraphs: We estimated federal, state, and local government costs for the surface  freight transportation infrastructure, including the publicly owned  highways and domestic, commercial inland waterways by examining  government-reported spending data. Freight railway infrastructure, on the  other hand, is, for the most part, privately owned and operated. Private  railroad investment costs and revenues are proprietary, and therefore, we  did not attempt to produce estimates of private costs and limited our  analysis to government expenditures associated with rail, where  appropriate. Further, we did not consider in our study (1) pipeline freight  because pipelines carry specific liquid commodities, such as natural gas  and oil products or (2) air freight because air freight constitutes a fraction  of commercial freight moved by value, ton, and ton-miles and is typically  used to move high-value, time-sensitive freight which would generally not  be moved by the other modes. Where possible, we adjusted all figures to  constant 2010 dollars using the fiscal year gross domestic product price  index.
In compiling our results for freight trucking, we could only approximate  the freight truck population by using available data for all single-unit and  all combination trucks—any vehicle consisting of a power unit pulling at  least one trailer that does not have a power unit—but excluded light  trucks, which are generally passenger vehicles and delivery vans. In using  this population to represent freight trucks, we include some trucks that  are involved in nonfreight purposes, such as municipal waste disposal  trucks and utility trucks, which account for a small percentage of the total  vehicle miles traveled (VMT) of this population. Some of the nonfreight  trucks are likely to have marginal costs and tax payments that are lower  than those for the average freight truck, while other nonfreight trucks will  have higher costs and tax payments. While the population of freight trucks  could also have been defined based on the number of axles on a truck,  FHWA’s 1997 Highway Cost Allocation Study—the basis for some of our  spending and revenue projections—reported costs and revenues by  various weights of single-unit and combination trucks.
Our estimates of external costs—the costs imposed on society, such as the  cost of lost time resulting from traffic congestion or the health  consequences related to pollution—reflect activities that can be attributed  to domestic freight activity for all single-unit and combination trucks, rail  carriers, and waterborne vessels. In several instances, we made  adjustments to national data in an effort to remove nondomestic or  nonfreight activity from our calculations. For example, as shown in table 9  in this appendix, we adjusted EPA data to more accurately report  emissions attributable to domestic freight activity for all three modes.
Both our estimates of government costs and revenues and external costs  are based on high-level data in order to compare the modes on a  nationwide basis. Variations in costs and revenue across individual  shipments within each mode may be obscured by this level of aggregation.  Because these are comparisons between modes on an aggregate, national  basis, and we are not able to compare specific shipments, the estimates  associated with railroads and waterways do not consider the costs  associated with the truck ton-miles necessary to complete a shipment on  those modes (for an analysis that attempts to compare marginal costs  across the modes on a shipment-by-shipment basis, see Transportation  Research Board, Paying Our Way, Estimating Marginal Social Costs of  Freight Transportation (1996)). The results should be viewed as  representing averages across all of the marginal shipments that were made  under a wide variety of different conditions in a wide variety of locations.
subsections: section_title: Federal Highway Marginal and Fixed Costs and Revenues
paragraphs: FHWA has conducted highway cost allocation studies—the most recent  being in 1997, which superseded its 1982 study—that attempted to  determine whether all highway users are paying their fair share of federal  highway costs and to ensure that it and Congress have up-to-date  information when making future decisions affecting federal highway user  fees. According to FHWA officials, sections of the 1997 report were peer- reviewed by TRB, and based on TRB’s comments, FHWA issued an  addendum in 2000. According to FHWA officials, an update to this study is  forthcoming. To the extent possible, we developed cost and revenue  categories similar to those used in FHWA’s 1997 study.
For this review, we obtained FHWA’s Office of Policy data on average  spending from 2000 through 2006 on highways by improvement type and  vehicle class—specifically single-unit and combination trucks.  Improvement types included new construction, preservation, minor  widening, bridge work, safety and traffic operations, and environmental,  among others. We also obtained federal revenue data by vehicle class and  revenue type—fuel, retail, heavy vehicle use, and tire taxes. We used this  FHWA data to estimate total federal highway costs and revenues  attributed to freight trucks.
We separated the federal costs and revenues into two categories—the first  included costs and revenues associated with marginal use of the highways  by freight trucks. We considered highway system preservation costs to be  the closest available approximation of the wear-and-tear costs associated  with road use. However, we did not include (1) bridge-related costs  because bridges are built to withstand a specific design load or (2)  enhancement or new capacity costs because these costs do not directly  vary with repeated truck usage. All other federal spending was considered  to be fixed costs. Our use of spending data to represent marginal costs  may result in an understatement of those costs if that spending was not  sufficient to repair all of the damage caused by road use. We considered  marginal revenue to be receipts from fuel and tire taxes—receipts directly  related to the use of the highway infrastructure. We assumed the retail tax  had little relationship to highway use, and therefore, did not include it in  our marginal revenue category.
section_title: State Highway Marginal and Fixed Costs and Revenues
paragraphs: Because FHWA efforts to update the 1997 study will not address state and  local government costs, we produced our own estimates of state and local  government costs and revenues allocated to freight trucks for the same  time period as the federal-level data that FHWA had provided to us. For  our state estimates, we summarized state expenditures on highways from  fiscal years 2000 through 2006 using table SF-12A, State Highway Agency  Capital Outlay, from FHWA’s Highway Statistics Series. With assistance  from FHWA officials, we categorized these costs into four improvement  types—new capacity, system preservation, enhancements, and other— consistent with cost categories identified in the 1997 Highway Cost  Allocation Study and in federal costs reported in the Highway Statistics  Series. Because state expenditures reported in table SF-12A included  federal funds that states received, we adjusted the expenditures to reflect  strictly state spending on highways. First, we converted federal obligations  reported in highway statistics table FA-6A (Obligation of Federal Funds)  to expenditures using factors provided by an official from FHWA. Second,  for each of the four improvement types, we subtracted the estimated  federal expenditures from state expenditures to obtain states’ spending of  their own funds. Third, for each improvement type, we estimated the  expenditure amounts attributable to freight trucks using proportions that  we derived from supporting documentation related to the 1997 study. State  and local governments are generally responsible for maintaining the  nation’s highways, and therefore, we again used a proportion derived from  data from the 1997 study and applied it to Highway Statistics Series table  SF-2 (State Disbursements for Highways) containing maintenance and  services figures to estimate operations and maintenance costs attributed  to freight trucking at the state level. As with the federal spending data, we  considered system preservation expenditures to be the best available  approximation of costs associated with marginal highway use. We  consider all other costs, such as new construction, system enhancements,  and routine maintenance to be fixed costs.
To estimate marginal state revenues attributable to freight trucks from  fiscal years 2000 through 2006, we first determined the average, annual  total receipts from motor fuels receipts (minus penalties and fines)  reported in table MF-1 (State Motor Fuel Taxes and Related Receipts) and  tolls from bridge, tunnel, and road crossings receipts reported in table SF- 3B (State Administered Toll Road and Crossing Facilities). We then  determined what shares of these revenues were attributed to freight trucks  as follows: except for tolls, the revenue shares from fuel for freight trucks  were based on results from the 1997 Highway Cost Allocation Study. The  revenue shares for each year after 2000 were adjusted for changes in VMT,  motor fuels consumed, and vehicle registrations. Since the 1997 study did  not allocate tolls, we assumed that for each freight truck category, the  share of tolls was equal to its share of total VMT in a given year. For fixed  revenues, we also included registration, drivers license, and weight- distance receipts, as reported in table MV-2 (State Motor-Vehicle and  Motor-Carrier Tax Receipts), in our calculations.
section_title: Local Highway Infrastructure Marginal and Fixed Costs and Revenues
paragraphs: We also developed marginal and fixed cost estimates for local highway  spending and revenues attributed to freight trucks. For local expenditures,  we summarized local disbursements on highways, averaged from 2000  through 2006 using table LGF-2 from the Highway Statistics Series. The  table grouped data by capital outlays, maintenance and traffic services,  administration and miscellaneous, and law enforcement, among other  categories. We grouped the data as closely as we could into categories  approximating those that FHWA used in their 1997 study and then  allocated these disbursements to single-unit and combination trucks based  on those trucks’ shares of the 1997 categories. Given that capital  construction and system preservation was reported as a single category,  the only option we had for estimating the amount spent on pavement  rehabilitation (which we used to benchmark marginal costs) was to  assume that pavement rehabilitation accounted for the same share of total  capital costs as it did in 2000. On the revenue side, we again used tables  from the Highway Statistics Series: table LDF (Local Government  Receipts from State and Local Highway User Revenue) and table LGF-3B  (Receipts of Local Toll Facilities). Table LDF reported motor fuel and  motor vehicle revenues combined as a single number. Using data from the  1997 cost study, we estimated that motor fuel accounted for 45 percent of  combined motor fuel and motor vehicle revenue in 1994. We used the  trucks’ shares of local motor fuel and motor vehicle taxes from the 1997  study to allocate our updated revenue amounts to trucks. For tolls, we  used the same allocation assumption as we did for state toll revenues.  Local revenues account for less than 3 percent of the marginal revenue  and fixed revenue amounts that we report in tables 3 and 5 respectively.  Table 6 summarizes expenditures and revenues by mode by government  per million ton-miles.
All Class I railroad infrastructure is privately owned, and most other  classes of railroads are also privately owned. However, the federal  government provides some limited assistance to privately owned railroads,  but it was negligible for the purposes of our analysis. The federal  government no longer levies any federal excise tax on railroads. There is  little available evidence on the extent to which railroads receive financial  assistance from states or local governments, but this evidence suggests  that these amounts are negligible. Railroads are subject to state and local  property taxes on their infrastructure and the nation’s major railroads paid  at least $625 million in 2008.
section_title: Waterways Freight Costs
paragraphs: The nation’s waterways are used for many purposes, such as navigation,  flood control, irrigation, and recreation. According to literature we  reviewed, the marginal infrastructure costs associated with freight on the  waterways are negligible. To estimate the overall fixed cost to the federal  government for waterway infrastructure investments, as well as  operations and maintenance in support of freight transportation, we  obtained budgeting and expenditure data by waterway (deep and shallow  draft coastal harbors and channels, Great Lakes, and inland waterways)  from fiscal years 2000 through 2006 from the Corps and the Saint  Lawrence Seaway Development Corporation.
Coastal harbors and channels operations and maintenance,  investments, and nonfuel taxed waterways investments. We allocated  the Corps’ total operations and maintenance harbors and channels (deep  and shallow draft) expenditures by year to each state based on the Harbor  Maintenance Trust Fund expenditures by state. We also obtained  waterway infrastructure investment costs by project by state from the  Corps. We allocated the expenditures to domestic freight based on  tonnage—specifically, the percent of total tonnage moved through each  state that is domestic waterways freight—as reported by Corps data  supporting table 4-1, Waterborne Commerce by States, Waterborne  Commerce of the United States, National Summaries. Such allocation may  overstate costs attributable to domestic freight operations for at least two  reasons. First, CRS reports that a significant amount of harbor spending is  directed toward harbors that handle little cargo, and therefore the primary  beneficiaries of the spending will be nonfreight users of the harbors and  channels. Second, dredging at U.S. ports may be done primarily to  accommodate ever-larger container ships involved in oceanic trade, and  therefore costs attributable to domestic trade may be negligible in those  cases. However, without a waterways cost allocation study, little more is  known about how costs may be distributed among the various users of  harbors, channels, and other waterways, and thus tonnage appears to be  the most reasonable method to allocate costs.
Inland waterways operations, maintenance, and construction costs.  After consultations with a Corps official, we allocated 50 percent of the  Corps’ inland waterways operations, maintenance, and construction  spending from fiscal years 2000 through 2006 to freight. We used 50  percent because federal law establishes a 50/50 federal/nonfederal cost- share arrangement for construction. We could not definitively determine  the extent to which waterways freight activity accounted for all waterway  activity. Two studies provide a wide range of possibilities. A 1980 Corps  study indicated that for selected waterways (the Ohio, Allegheny,  Monongahela, Lower and Upper Mississippi, among others) within the  boundaries of three Corps districts—St. Paul, St. Louis, and Pittsburgh— the average waterways freight activity accounted for 75 percent. More  recently, however, a 2010 preliminary report concluded that a wide range  of consumers benefit from the pools of water created and operated to  facilitate commercial navigation and other uses, but commercial  navigation itself appears to be a relatively small beneficiary of this system.  This finding was based on a limited scope of work, and without further  research, allocating costs or revenues to commercial freight has  limitations.
State and local governments spend their own funds for investments in  state-owned port facilities involved in domestic freight transportation. For  our state and local government analysis, we used expenditure and revenue  data on “sea and inland port facilities” from the U.S. Census Bureau’s,  Government Finance Statistics, State and Local Government Finances by  Level of Government. States and local governments provide funding to  publicly owned ports and dock facilities on waterways for the purposes of  construction, operation, and maintenance of commercial port facilities,  canals, harbors, and other public waterways; dredging of those waterways;  and maintenance of commercial docks, piers, wharves, warehouses,  cranes, and associated terminal facilities, among other things. To  determine the portion of this spending that may be allocated to domestic  waterways freight transportation, we used factors based on tonnage— specifically, the percent of total tonnage moved through the port that is  domestic waterways freight, as reported by Corps data supporting table 4- 1, Waterborne Commerce by States, Waterborne Commerce of the United  States, National Summaries.
section_title: Ton-Mile Adjustments
paragraphs: We used ton-miles to normalize our data across modes. Multiple ton-mile  estimates are available for domestic freight activity. To the extent  possible, we attempted to use ton-mile data that most accurately reflects  the total domestic freight activity within each mode.
Freight trucks. We used truck ton-mile estimates based on DOT’s Freight  Analysis Framework (FAF). According to DOT officials, the 2007 ton- mile estimate derived from the FAF are the most comprehensive  representation of domestic truck freight activity available. DOT has  another series of ton-mile estimates produced by the Bureau of  Transportation Statistics (BTS); however, according to DOT officials the  BTS series does not capture as much domestic truck freight activity as the  FAF estimate. We determined that the FAF data were more appropriate  for the purpose of presenting our cost and revenue data on a per-ton-mile  basis because the cost and revenues data we used were for the broadest  definition of truck freight traffic. One difficulty in using the FAF  estimates is that 2007 is the only recent year for which DOT has applied  the current FAF methodology. DOT in previous years applied a differentmethodology to estimate ton-miles based on 2002 data. However, given  that the methodology for estimating these figures changed significantly  between 2002 and 2007, DOT cautions that the estimates from the 2 years should not be combined in the same time series. mile estimates for all of the years that we needed, we multiplied the BTS  figure for each year by the ratio of the FAF estimate to the BTS esti mate  for 2007. Given the unavoidable imprecision of this approach, we report  error bounds of plus and minus 5 percent for all of our per-ton-mile  results. These ton-mile data are shown in table 7.
section_title: Appendix II: Recovery Act Funds for Freight Transportation Infrastructure
paragraphs: The American Recovery and Reinvestment Act of 2009 (Recovery Act)  provided one-time funding to promote job preservation and creation and  infrastructure investments, among other things. Since a portion of these  funds were targeted for transportation infrastructure projects, generally,  they may benefit both passenger and freight users. For example, where  freight and passenger trains share tracks, the High-Speed Intercity  Passenger Rail program may also enhance capacity for freight rail lines. In  this appendix, we report funds identified for infrastructure projects and do  not attempt to identify funding to freight or nonfreight users of the  infrastructure. We also report Recovery Act funds identified for the EPA’s  Clean Diesel Program which helps reduce emissions for freight vehicles  across all modes and for Army Corps of Engineers waterway projects that  we identified as pertaining to freight transportation.
In addition, the Build America Bonds program, created by the Recovery  Act,  allowed state and local governments to obtain financing at lower  borrowing costs for new capital projects such as the development and  construction of transportation infrastructure by having the Department of  the Treasury make a direct payment to the state or local governmental  issuer in an amount equal to 35 percent of the interest payment on the  bonds. We summarize this information in table 12.
section_title: Appendix III: Federal Tax Subsidies and Financing Programs
paragraphs: Tax expenditures are revenue losses to the federal government resulting  from tax provisions, such as federal tax (1) exemptions or deductions of  the interest earned from certain state and local government bonds or (2)  credits provided by the Department of the Treasury for infrastructure  projects.
We obtained estimates of fiscal years 2003 through 2007 tax expenditures  from the yearly Analytical Perspectives, Budget of the United States  Government. The Office of Management and Budget aggregates tax  expenditures for state and local government bonds used to finance  government operations, facilities, and services, and also identifies the  general purpose of the bonds. Thus, we could identify the specific  transportation mode for which these bonds were used, but not necessarily  whether the bonds were used for domestic freight or nonfreight use. We  also used the Statistics of Income’s Tax-Exempt Bonds articles from the  Internal Revenue Service to estimate the proportion of state and local  government bonds used for transportation purposes.
In addition, three federal financing programs administered by DOT  provided some subsidies to the freight industry through either interest  rates or terms that were more favorable than might be available in the  commercial credit markets. These three programs include FHWA’s  Transportation Infrastructure Finance and Innovation Act program, the  Federal Railroad Administration’s Railroad Rehabilitation and  Improvement Financing program, and the Maritime Administration’s ship  financing program. We obtained cost estimates from these program  offices for fiscal years 2003 through 2007 for 28 infrastructure projects that  we identified as being available for use by freight trucks, freight rail, and  waterways freight. Table 13 summarizes this information.
section_title: Appendix IV: Freight External Cost Estimates from the Literature
paragraphs: Appendix IV: Freight External Cost Estimates  from the Literature Cost per ton-mile (in 2010 cents)
section_title: Appendix V: Policy Options for Addressing Tradeoffs between Efficiency and Cost Recovery
paragraphs: The following cost recovery options have been identified in the economics  literature:    General subsidy. Infrastructure users could be charged for the marginal  public and external costs they impose, and any shortfall in the coverage of  total costs could be paid out of general government funds. This policy  would promote efficient use of existing infrastructure; however, it would  require higher general fund taxes (which cause their own economic  distortions) than would otherwise be necessary and taxpayers who make  little use of infrastructure may consider this to be unfair.
Ramsey pricing. If infrastructure users can be classified into different  groups depending on the strength of their demand for infrastructure use,  then those individuals who would not reduce their use significantly, even  if they were charged an amount that exceeded the marginal costs they  impose, could be charged a higher price to cover fixed costs. Users with  weaker demands could be charged prices equal to their marginal costs.  Under these conditions, infrastructure would be utilized up to an efficient  level, even though some users are charged more than their marginal costs.  The principal impediment to implementing this approach is the difficulty  of estimating the strength of various users’ demand. In addition, users with  high demands may consider it unfair to be charged higher fees than other  users solely on that basis.
Two-part tariffs. Infrastructure users could be charged two types of fees.
One could be a flat-rate fee to cover fixed costs that everyone could pay to  gain access to the infrastructure. The second fee could be a per-use charge  designed to cover the marginal costs arising from each use. This policy  option could lead to less-than-efficient levels of infrastructure use because  some who would have used the infrastructure if only the per-use fee were  charged may not use it if the additional access fee were charged. This  approach might be made more attractive to and be perceived as more  equitable by different types of users if they were given a choice between  (1) a high access fee with a low per-use charge and (2) a lower access fee  with a higher per-use charge.
Average-cost pricing. Charging users for the average, rather than  marginal, costs that they impose would raise sufficient revenue to cover all  costs; however, this policy would reduce efficiency because some users  who would use the infrastructure if they were charged only for their  marginal costs may not be willing to use it if they were charged the higher  amounts needed to cover average costs.
section_title: Appendix VI: GAO Contacts and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the contacts named above, Andrew Von Ah (Assistant  Director), James A. Wozny (Assistant Director), Max B. Sawicky (Assistant  Director), Peace Bransberger, Bertha Dong, Brian James, Bert Japikse,  Delwen A. Jones, Steve Martinez, Ed Nannenhorn, and Donna Miller made  key contributions to this report.