Federal funding for highways is provided to the states mostly through a series of formula grant programs collectively known as the federal-aid highway program. Periodically Congress enacts multiyear legislation that authorizes the Nation’s surface transportation programs, including highway, transit, highway safety, and motor carrier programs. This legislation authorizes the federal-aid highway program and the individual grant programs that comprise it, and it sets overall funding for it and other surface transportation programs. In 1991, for example, Congress enacted ISTEA, which authorized $121 billion for highways for the 6-year period from fiscal years 1992 through 1997, and in 1998 Congress enacted TEA-21, which authorized $171 billion for the federal-aid highway program from fiscal years 1998 through 2003. In 2004, the House and Senate each approved separate legislation to reauthorize the federal-aid highway program, the House authorizing $226.3 billion and the Senate authorizing $256.4 billion for fiscal years 2004 through 2009. These authorizations provide multiyear “contract authority” that gives the states notice several years in advance of the size of the federal-aid program and the approximate amount of federal funding they may expect to receive. Funding for the federal-aid highway program is provided through the Highway Trust Fund. Established by the Highway Revenue Act of 1956, the Highway Trust Fund is a dedicated source of revenues generated by highway user fees such as taxes on motor fuels, tires, and trucks. TEA-21 established two additional mechanisms to support the dedication of highway user fees to highways. First, the act established guaranteed funding for certain highway, transit, and highway safety programs, including the federal-aid highway program, by protecting them with “firewalls” from competing for funding with other domestic discretionary programs through the congressional budget process. Second, the act provided that the highway program funding authorizations would be adjusted to reflect changes in estimates of Highway Trust Fund revenue, ensuring that funding available for the federal-aid highway program reflected the revenue taken in by the Highway Trust Fund. Both the Senate and the House have each approved separate legislation to extend the collection of fuel taxes to the Highway Trust Fund, the Senate through 2009 and the House through 2011. Amid concerns that the introduction of more fuel-efficient vehicles and clean fuels may undermine the sustainability of financing the Highway Trust Fund through fuel taxes in the future, both houses also included provisions to create a National Commission to examine future revenue sources to support the Highway Trust Fund and to consider, among other things, the roles of the various levels of government and the private sector in meeting future surface transportation financing needs. Once Congress authorizes funding, FHWA makes federal funding available to the states annually at the start of each fiscal year through apportionments based on formulas specified in law for each of the several formula grant programs that make up the federal-aid highway program. Ninety-two percent of the funds apportioned to the states in fiscal year 2003 were apportioned by formula. The remaining highway program funds were distributed through allocations to states with qualifying projects. The highway programs with apportionments based on formulas are shown in table 1. As we reported in 1995, the federal funding formula derives from a complicated set of calculations and is a complex process in which the underlying data and factors are ultimately not meaningful because they are overridden by other provisions that yield a predetermined outcome. One reason is the presence of “equity provisions” that ensure that states receive set amounts based on historic funding levels and other considerations. These equity provisions were strengthened after our 1995 report. For example, as table 1 shows, TEA-21’s Minimum Guarantee Program ensures that each state’s share of apportionments from nearly all federal-aid highway funds is not less than 90.5 percent of that state’s percentage share of contributions to the Highway Account of the Highway Trust Fund. Funds from this program accounted for nearly a quarter of all highway funding in fiscal year 2003. Under separate legislation approved by both the House and the Senate, each state’s share of apportionments could rise to 95 percent by 2009. Furthermore, as table 1 shows, states receive minimum apportionments regardless of the formula for several grant programs. States have broad flexibility to transfer funds between the various grant programs. For example, states may transfer up to 50 percent of their Interstate Maintenance and National Highway System Program funds to other programs, including the Surface Transportation Program, which, as table 1 shows, has broad eligibility rules. In addition, ISTEA and TEA-21 provided the states broad authority to transfer federal-aid highway funds to transit projects and vice versa. Between fiscal years 1992 and 2002, 47 states and the District of Columbia transferred about $8.8 billion from federal-aid highway funds to transit programs to fund rail line improvements, motor vehicle purchases, new or improved passenger facilities, and other projects. During that same time, about $40 million was transferred from FTA to FHWA for highway projects. Once FHWA apportions funds to the states, funds are available to be obligated by the states for construction, reconstruction, and improvement of highways and bridges on eligible federal-aid highway routes and for other purposes authorized in law. About 1 million of the Nation’s 4 million miles of roads are eligible for federal aid; however, these roads accounted for 85 percent of the vehicle miles traveled on the Nation’s roadways in 2001. The roads that are generally ineligible are functionally classified as local roads or minor collectors. Around 161,000 miles of federally eligible roadways are on the National Highway System, of which around 47,000 belong to the Interstate Highway System. With few exceptions, federal funds for highways must be matched by funds from other sources—usually state and local governments. The matching requirement on most projects is 80 percent federal and 20 percent state or local funding. In addition to matching federal funds, states and localities spend funds to finance highway capital projects and to maintain existing roadways. The federal-aid highway program is administered by FHWA, whose responsibilities include reviewing periodic transportation improvement plans prepared by state and local governments, approving projects for federal aid, apportioning grant funding to the states, providing technical support, and overseeing federally funded projects. In fiscal year 2004, FHWA received $334 million to provide these services, with an authorized staff level of 2,931 positions. FHWA personnel are located in Washington, D.C., and in 52 field offices located in each state, the District of Columbia, and Puerto Rico, as well as a regional “resource center” with four offices across the country that provide specialized technical assistance to the field offices and the states. The federal-aid highway program has a considerable regulatory component. As a condition of receiving federal aid, states agree to apply and enforce certain federal laws on federally aided projects, such as the environmental assessment provisions in the National Environmental Policy Act, the Americans With Disabilities Act, the nondiscrimination protections found in the Civil Rights Act of 1964, and others. In addition, states are required to establish goals and to award a set percentage of contracts (the national goal is 10 percent) on federally aided projects to small businesses owned and controlled by socially and economically disadvantaged individuals, including minority and women-owned businesses. Furthermore, in accepting federal-aid highway funds, states must enact certain laws to improve highway safety or face penalties in the form of either withholdings or transfers in their federal grants.In addition to these penalties, states may apply for and receive highway safety incentive grants through programs administered outside the federal-aid highway program by the National Highway Traffic Safety Administration (NHTSA). For example, states in which the use of seat belts exceeds the national average or improves over time are eligible for incentive grants based on NHTSA’s calculation of the annual savings to the federal government in medical costs that resulted from the increased use. In general, there are three possible ways that federal grant funding can influence state spending for a program, as illustrated in figure 1. First, increased federal funding may stimulate, or leverage, additional spending from state resources. For example, a state may have to increase its own spending in order to meet federal matching requirements and obtain federal funds, thus increasing the overall level of spending by more than the amount of the federal grant. As the federal-aid highway program in most cases requires that states must contribute 20 percent of the total cost of a project in order to receive federal matching funds of 80 percent of the total cost, the suggestion is that every $1.00 increase in federal funds would go towards a total spending increase of $1.25 ($1.00 is 80 percent of $1.25), $0.25 of which would be funded with state and local government funds ($0.25 is 20 percent of $1.25). The result of a stimulative effect of federal grant funding is illustrated in the first panel of figure 1, in which an additional $1.00 of federal aid increases spending from state resources by 25 cents, increasing the overall level of highway spending by $1.25. Alternatively, increased federal funding may supplement state spending by adding to what states would otherwise have spent, increasing the overall level of spending by the amount of the federal grant, as illustrated in the second panel of figure 1. To the extent that states maintain their own spending when they receive additional federal funding, either because federal policy requires that they do so or because they do so voluntarily, then the additional federal aid supplements state spending. Finally, states may use increased federal funding to substitute for, or replace, what they would otherwise have spent from state resources, so that the overall level of spending increases by less than the amount of the federal grant. This substitution of federal funds for state funds is illustrated in the third panel of figure 1, in which an additional $1.00 in federal funding results in only a 50 cent increase to total spending because in response to the influx of federal funds, the state withdraws 50 cents of its own spending on the program and uses these funds for other purposes.