Potholed U.S. Roads Are a Creation of Washington

Another winter storm is slated to bury the nation's capital in snow and ice later this week. It's likely to shut down the federal government and schools, and make road conditions dangerous. The bigger problem, however, will become clear when the snow clears: fresh potholes and frost heaves will make driving more hazardous and expensive.

Americans already pay $67 billion in extra repairs due to poorly-maintained roads, and weather is partially to blame. But mostly it's Washington itself-where an outdated funding approach and political inaction ensure the continued deterioration of roads, bridges, and tunnels.

Funding for the expansive U.S. Interstate Highway System is falling dramatically while maintenance needs are rising. From its inception in 1956, the network has relied on revenue from state and federal gasoline and diesel taxes, which are levied on a cents-per-gallon basis.

The rub? A host of new measures, from ethanol mandates to fuel economy standards, discourage the use of those very fuels. In the words of former U.S. Transportation Secretary Mary Peters, it's "a policy at war with itself."

As Americans trade in Hummers for Priuses, they're also driving less. Annual vehicle-miles traveled in the United States peaked in 2004 and have been declining steadily since. That means less fuel burned and less money for roads. And despite reductions in total miles travelled, congestion in many of America's largest cities has increased as more people move in.

Making matters worse, inflation has decimated the purchasing power of most fuel taxes. The 18.4 cents-per-gallon federal gas tax buys about a third less than it did two decades ago, when it was last raised.

Shrinking revenues don't mesh well with an aging system, large sections of which are well past their intended design lives. The Congressionally-established National Surface Transportation Policy and Revenue Study Commission (on which one of us served) estimated that the U.S. needs to invest $185 billion annually for the next 50 years to adequately maintain existing highways and modernize outdated facilities. Current sustainable funding levels would leave them $117 billion short.

Congress could raise fuel taxes to fund these needs, but that solution isn't likely. Most Americans oppose a hike, and policymakers are loath to support it.

Moreover, pumping more money into a flawed system doesn't make it better. Current policy tends to put political returns ahead of social benefits. The last full transportation bill, passed in 2005, included 6,371 earmarks and the $230 million "Bridge to Nowhere."

Most economists agree that the best solution involves transitioning from a per-gallon tax to a per-mile fee. Mileage-based user fees, or MBUFs, reflect the basic consumer-pays principle at the core of the Interstate system: Motorists who use roads should pay for them. Fuel taxes effectively subsidize hybrids' use of the roads at the expense of motorists who can't afford new and efficient vehicles. MBUFs correct that by charging for road use, not fuel use.

MBUFs could generate billions in stable, reliable revenue to revitalize the system-and better isolate those dollars from political opportunism. They can help ease traffic congestion if rates are allowed to rise during peak traffic times and fall during off-hours. They also provide a clear and much-needed signal for prioritizing investment: New capacity is needed most where demand is greatest.

Moving to per-mile fees, however, is a massive policy change. With distrust in government at record highs, taxpayers are justifiably leery of new charges and charges.

An innovative approach called an investment public-private partnership, or IP3, could help states meet transportation needs that the federal government cannot, while addressing taxpayer and motorist concerns.

The IP3 would enable a state or locality to price existing highways, generating fresh investment and easing congestion. Like a traditional public-private partnership, the IP3 would involve a public entity (like a state) leasing the right to operate and collect toll revenue from a highway to a private operator in return for a large upfront payment, often called a concession payment.

The IP3 would preserve that upfront payment forever in a public permanent fund-like those used by Alaska, Texas, and Norway to conserve natural resource wealth. Citizens in the newly-priced region would then be issued an annual dividend based on the fund's investment earnings.

The IP3 recognizes that states and their citizens-not the federal government or private corporations-own roads. As owners, citizens have a right to the value unlocked by pricing them.

The permanent fund also addresses what economists call the "agency problem": elected representatives using public funds for political interests rather than public good. The IP3 shutters this political candy store by channeling road pricing dollars directly to the citizens-owners of infrastructure.

The IP3 also helps address inequality. Its flat dividend payment-a greater income boost for low-income households-could help alleviate the burden transportation costs impose on the poor, who spend a larger share of their income getting to work. A recent AEI analysis performed using data from Columbus, Ohio, suggests that annual payments could be as high as $1,800.

States like Florida, Texas, and Virginia are already utilizing PPPs to deliver better roads with less federal funding. One key obstacle remains: States aren't permitted to price existing Interstates, even as they are increasingly tasked with paying for them. Congress might not be able to provide more funding. But it should give states the flexibility they need to cope with it.

This simple change would open the door to innovative solutions, like the IP3. It would free states to improve their infrastructure with fewer federal dollars. It would shield citizens from elected officials who may be tempted to misallocate public money, while also protecting the poor. And it could help return America's Interstate network to the global benchmark it once was.