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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of Transportation, the Secretary of Defense, the Commanding General and Chief of Engineers of the U.S. Army Corps of Engineers, and interested congressional committees. In addition, the report will also be available at no charge on the GAO Web site at http://www.gao.gov. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. Appendix IV: Freight External Cost Estimates from the Literature Cost per ton-mile (in 2010 cents) 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. 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.

Summary: 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. 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. 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.