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The Congressional Budget Office (CBO) is studying innovative ways of financing highways at the request of the Chairmen and Ranking Minority Member of the Senate Committee on Environment and Public Works and its Subcommittee on Transportation and Infrastructure. This memorandum presents preliminary findings from that study that relate to toll financing.
The memorandum describes efforts by state and local agencies and the private sector to develop new toll roads. In most cases, those efforts take advantage of changes in policy provided by the Intermodal Surface Transportation Efficiency Act of 1991 and the National Highway System Designation Act of 1995.
The memorandum also suggests that toll roads can help fill gaps in highway demands. Tolls are unlikely to generate substantial increases in highway funding over the next decade, however, unless they are imposed on existing roads to ease congestion--a measure now unpopular with motorists. Yet tolls might gain greater acceptance over the longer term, especially if the public begins to view them as an alternative (not an addition) to user taxes, and they could become an increasingly important source of revenue for highways.
The memorandum was prepared by Elizabeth Pinkston of CBO's Natural Resources and Commerce Division under the direction of Jan Paul Acton and Elliot Schwartz. Mark Booth, Karen McVey, Pearl Richardson, and Jean Wooster of CBO reviewed a draft and provided comments.
Paul L. Houts edited the manuscript. Rae Wiseman prepared the memorandum for production.
Questions about the memorandum may be addressed to Beth Pinkston.
SUMMARY
OVERVIEW OF THE FEDERAL-AID HIGHWAY PROGRAM AND TOLL-ROAD POLICIES
TOLL ROADS IN THE 1990s
BENEFITS OF TOLL-FINANCED ROADS
OBSTACLES TO TOLL-FINANCED ROADS
APPENDIX - History of Federal Policy Toward Toll Roads
SUMMARY
The federal-aid highway program is due for reauthorization in 1997. In determining the future course of the program, the Congress has many issues to consider. Among them is to develop new ways to help states finance highways. This memorandum describes efforts by state and local governments to expedite the construction of new roads through greater use of private financing backed by toll revenues.
In the near term, the set of potentially successful road candidates for tolling is limited, primarily because of public resistance to imposing tolls on previously "free" roads. As a result, tolls are unlikely to generate substantial increases in highway funding over the next decade. During that time, however, the toll projects that are developed could help fill important gaps in highway facilities, allowing new roads to be opened sooner than with traditional financing. Over the longer term, if tolls gain greater public acceptance, a gradual shift from user taxes to toll financing could occur. Studies suggest that imposing tolls on existing roads to ease congestion could generate substantial additional revenues.
Toll roads can help meet highway demands by supplementing existing sources of federal, state, and local highway funds with private capital. In doing so, they enable state and local governments to build new capacity sooner than they otherwise would be able. Obtaining financing from private investors and lenders is a key element in the toll roads described in this memorandum. A blend of public and private investment and sponsorship is instrumental in providing more highway capacity with fewer public funds.
Toll roads can also help allocate resources efficiently. For example, if tolls were set in a way that reflected the cost of congestion, they could decrease traffic delays for motorists whose value of time is high and who are willing to pay, while other traffic would remain on toll-free--but more congested--roads. Toll roads also improve efficiency in investment. To attract private capital, they must meet the market test of offering a competitive rate of return. That test reduces the chances of building uneconomic roads.
Sponsors--public and private--of new toll roads face many obstacles. As with roads financed entirely with tax revenues, they must acquire rights of way, often over the objections of property owners, and they must obtain environmental approvals. The risks that those obstacles present may be greater than most investors want to bear, making private financing difficult to get in the initial stages of a highway project. Investors must also assess whether enough motorists will use a toll road to generate an adequate return on investment.
The most promising candidates for toll roads in the near term are new roads or additional lanes on existing roads, especially where those new lanes are separated from the older roadway or otherwise easily distinguished. Those are roads on which motorists have not become accustomed to driving for free. Moreover, because those roads are new, motorists have the alternative of taking the toll-free routes that they used before the new roads were built, thereby diminishing the effects on low-income motorists.
Efforts to build toll roads are affected by past and present federal policies. From 1916 to the late 1980s, because toll roads were considered an impediment to interstate commerce, federal policies discouraged states from building them or imposing tolls on existing roads. As a result, the nation has relatively little experience with toll facilities. But fiscal constraints at all levels of government (and advances in the technology of toll-taking) have generated renewed interest in toll roads and led to more liberal federal policies as a result of the Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA) and the National Highway System Designation Act of 1995 (the NHS act).
The federal government could encourage greater use of financing with toll roads by removing restrictions on the use of federal aid. For example, it could allow states to use as much of their highway aid as they wanted to provide credit enhancements--such as loan guarantees, lines of credit, and interest-rate subsidies--that make bonds for toll projects more attractive to investors. Several states are already taking advantage of provisions of a pilot program authorized by the NHS act to establish state infrastructure banks (SIBs) to help finance transportation projects. Encouraging all states to use some of their grant money to make loans or establish lines of credit for toll (or other revenue-generating) projects could make federal aid go farther in meeting highway needs. The requirement that states provide a matching share to the federal funds could also be waived.
The federal government could also encourage toll roads by increasing restrictions on federal aid. For example, it could prohibit federal aid to build new highway capacity unless those roads or lanes were subject to tolls. Putting new projects to such a market test would help discourage uneconomic spending of public funds. New restrictions, however, run counter to the general trend of reducing federal intervention in state and local matters.
Some of the new toll roads take advantage of indirect federal aid in the form of tax-exempt financing. The federal government could support toll projects by expanding the use of tax-exempt debt, although that measure may reduce efficiency in capital markets and would make balancing the federal budget more difficult. As currently structured, such aid is essentially open-ended from the standpoint of the federal government: as long as a project meets the requirements of the tax code, tax-exempt bonds can be issued, although such financing may be subject to state and local constitutional or statutory limits. In addition to the negative effect on the budget, tax-exempt financing distorts resources in capital markets by favoring public over private investment.
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