from Renewing America

Transportation: Overhyped “Can-Do” States and P3s

A police vehicle escorts visitors through one of two tunnels that will replace a stretch of California's Highway 1 near Pacifica, California on March 25, 2013 (Robert Galbraith/Courtesy Reuters).

August 15, 2013

A police vehicle escorts visitors through one of two tunnels that will replace a stretch of California's Highway 1 near Pacifica, California on March 25, 2013 (Robert Galbraith/Courtesy Reuters).
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Advocates for more U.S. transportation spending are accustomed to discouraging news. So it is understandable they would claim a resounding victory when a handful of (small) “can-do” states manage to buck the national trend and raise taxes and revenues dedicated to transportation spending. More private dollars than ever before are being funneled into infrastructure projects, too. But the underlying, fundamental problem remains: the federal government and the vast majority of states are failing to raise enough public funds to pay for upkeep on the nation’s road and highway system, not to mention make new capital investments.

The United States is no global leader when it comes to infrastructure spending, as we lay out in the Renewing America report on the competitiveness of the U.S. transportation system. The rest of the developed world spends about 50 percent more of its GDP on transportation than the United States. And while the United States used to be ranked fifth in the overall quality of its infrastructure in 2002 by the World Economic Forum, it has since tumbled to twenty-fifth.

Given current tax revenues available for transportation spending, the United States’ free fall in the rankings will likely continue. A 2008 independent federal commission warned of the dire fiscal outlook for “surface” transportation (e.g., highways, roads, transit) budgets. Just to keep up on maintenance, the country would have to spend 60 percent more than what projected available revenues would cover. Add in necessary capital investments on new highways and roads, and the price tag would be 100 percent more.

Everyone agrees the main way the country funds its highway and road system—with gas taxes—is a mess. Gas taxes, which are generally a fixed cent amount and unpegged to inflation, have been extraordinarily politically difficult to increase and so their real value has declined over time. The federal gas tax, for example, has been 18.4 cents since 1993. The same story can be told of most state gas taxes. A combination of three (generally positive) trends has led to declining gas tax revenues: steady and normal inflation levels, Americans are driving less, and cars are more fuel efficient. Meanwhile, upkeep and replacement costs are set to skyrocket as a whole generation of infrastructure built in the 1950s and 1960s nears the end of its useful life. Worsening congestion in metro areas, in large part fueled by simple population growth, screams for expanding highways and transit.

Policymakers are up against the wall to do something.

In the last year, five states—Virginia, Maryland, Arkansas, Vermont, and Wyoming—figured out a way through the political impasse and significantly raised gas taxes or rejiggered elevated sales taxes to go directly to surface transportation. For these states, revenues should now allow for investment levels closer to those recommended by the federal commission.

Public-private partnerships, or P3s, are the other big idea on the block. By using more private resources for financing, designing, and constructing projects, governments could stretch scarce public dollars further. More states are embracing the possibility of P3s, reworking laws to enable and streamline P3 partnerships. There has been explosive growth in P3 projects over the last decade, especially for complex and expensive urban projects for which it makes the most sense to bring in private-sector expertise. And indeed, such P3s have a better track record of finishing projects on-budget and on-time than purely public undertakings.

But the United States’ massive transportation financing problem is nowhere close to being solved.

The five “tax-raising” states are minor players in the overall context of transportation spending. Big, populous states like California, Texas, New York, and Florida are still stuck in a fiscal hole. During the Great Recession, highway and road spending was cut by 31 percent in California and by 8 percent in Texas. For every state that has passed a tax-raising initiative, two others have failed. According to one estimate, public construction spending as a percent of GDP is now at its lowest level in more than 20 years.

P3s alone cannot fill the yawning investment gap. They can be good financing and project delivery tools, but they aren’t substitutes for public revenues and funding. Only a sliver of transportation projects involve large enough traffic flows to be profitable for private parties. This is why most P3s are isolated to urban congestion-relief projects. Even in Canada, which has long been the trailblazer with P3s, only 15 percent of all infrastructure projects are P3s. In the words of Bill Reinhardt, one of the brightest minds in P3 finance, “P3s are like charter schools. They offer a great lesson when they work well, but they are still rare and will never be a system-wide solution.” Transportation infrastructure is a public good, and public dollars must make up the lion’s share of the investment gap.

Ultimately, Americans will have to stomach higher taxes to pay for their roads and transit. Five states are leading the charge. Now for the remaining states—and the federal government—to follow suit.

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