Smart Transportation Funding

Governments need money to finance transportation system improvements, but revenues from traditional sources are flat. This is leading to debate over how best to generate new funds. There are many possible options, some better than others, because in addition to raising revenue, they support other strategic objectives. Politicians will be tempted to choose the easiest funding options. It is up to planners to point out the best options, taking into account all impacts.

5 minute read

January 27, 2013, 9:00 PM PST

By Todd Litman


Governments need money to finance transportation system improvements, but revenues from traditional sources are flat. This is leading to debate over how best to generate new funds. There are many possible options [PDF], some better than others, because in addition to raising revenue, they support other strategic objectives. Politicians will be tempted to choose the easiest funding options. It is up to planners to point out the best options, taking into account all impacts.

Although vehicle travel has peaked in most developed countries, reducing the need for roadway expansion, many roads and transit systems are due for major maintenance and reconstruction, and demand for alternative modes is increasing [PDF]. In response to aging population, rising fuel prices, increased urbanization, increased health and environmental concerns and changing consumer preferences, many communities want to improve their sidewalks, cycling facilities and public transit services. This requires money.

Peaking vehicle travel, increasing fuel efficiency, and the fact that per-gallon fuel taxes do not increase with inflation means that real (inflation-adjusted) tax revenue per vehicle-mile driven is only about half what it was thirty years ago. Gasoline taxes and road tolls now finance only about half of total road spending, the rest is funded through general taxes. As a result, some experts to claim that the transport finance system is “broken” and must be replaced.

This has lead to various new transport funding proposals. Theoretically, the best involves charging road user fees that vary by time and location, which can internalize and therefore reduce costs such as congestion and pollution emissions. Recent studies demonstrate that the technology works. However, this approach requires installing instruments in each vehicle to track when and where it is driven in order to impose new, more complex fees. Despite the theoretical benefits this would surely face even more opposition than proposals to raise fuel taxes.

On the other hand, some politicians want to finance transport improvements through general taxes instead of user fees. For example, Virginia Governor Bob McDonnell recently proposed replacing the state’s 17.5-cent gas tax with an increase in the state’s sale tax from 5% to 5.8% dedicated to transportation expenditures. This is foolish. It would force residents who drive less than average to cross-subsidize their neighbors who drive more than average, and by reducing the marginal cost of driving will stimulate more vehicle travel which will increase traffic congestion, accidents and pollution emissions. The Governor’s proposal seems to reflect the illusion that a 0.8% tax on a broad range of consumer goods looks smaller than a 17.5¢ tax on a specific good.

Experts are too quick to dismiss fuel taxes. They are very cheap to collect (there is virtually no administrative cost to increasing existing fuel taxes), are no more regressive than most other taxes, and they support other planning objectives including congestion reduction, safety, energy conservation and emission reductions. Instead of dismissing them, governments should increase them to account for increasing fuel efficiency and inflation during the last few decades. The result would be revenue plus a more efficient transport system.

The potential benefits are significant. The U.S.’s high traffic fatality rates (the highest among peer countries) is largely explained by low fuel prices, which stimulate more per capita vehicle travel and therefore more traffic deaths. Financing transport improvements through fuel tax would save lives [PDF].

Communities should perform a comprehensive and systematic analysis of potential transport funding options. Earlier this month I presented a paper at the Transportation Research Board Annual Meeting which did this. Local Funding Options for Public Transportation [PDF] evaluates eighteen potential funding options according to eight criteria including potential revenue, public acceptance and ease of implementation, predictability and sustainability, horizontal and vertical equity, travel impacts, and support for strategic development objectives. Although this paper focuses on public transit funding, most of the analysis is transferable to any transport project or service.

In general, direct user fees are the most efficient and equitable road funding option. With cost-based pricing, residents who reduce their annual vehicle travel, for example, by commuting by cycling for errands or commuting by public transit, saves money, an option that is not possible if roads are funded by general taxes. This suggests that fuel taxes, road tolls, VMT fees and per space parking levies are the best roadway financing option.

Of course, motorists don't want to pay more than they do now, but transportaton infrastructure is costly and there are no magic solutions. It is up to transportation professional - planners, engineers and economists - to tell the whole story: some funding options solve more problems than others. It is up to us to communicate this important concept to decision-makers and the general public during tranpsort funding debates.

For More Information

Joseph Henchman (2013), Gasoline Taxes and Tolls Pay for Only a Third of State & Local Road Spending, The Tax Foundation (www.taxfoundation.org); at http://taxfoundation.org/article/gasoline-taxes-and-tolls-pay-only-third-state-local-road-spending.

Edward Huang, Henry Lee, Grant Lovellette and Jose Gomez-Ibanez (2010), Transportation Revenue Options: Infrastructure, Emissions, and Congestion, Belfer Center, Harvard Kennedy School (www.belfercenter.org/enrp); at http://belfercenter.ksg.harvard.edu/files/Transportation%20Revenue%20Options%20Workshop%20Report%202010%20for%20web.pdf.

Penelope Lemov (2013), “What to Do About the Gas Tax? Two states, two different approaches for fixing how we pay for roads,” Governing Magazine; at www.governing.com/columns/public-finance/col-gas-tax-virginia-oregon.html.

Todd Litman (2010), Raise My Taxes, Please! Evaluating Household Savings From High Quality Public Transit Service, VTPI (www.vtpi.org); at www.vtpi.org/raisetaxes.pdf.

Todd Litman (2010), Parking Pricing Implementation Guidelines: How More Efficient Pricing Can Help Solve Parking Problems, Increase Revenue, And Achieve Other Planning Objectives, Victoria Transport Policy Institute (www.vtpi.org); at www.vtpi.org/parkpricing.pdf.

Todd Litman (2011), Pricing For Traffic Safety: How Efficient Transport Pricing Can Reduce Roadway Crash Risk, Victoria Transport Policy Institute (www.vtpi.org); at www.vtpi.org/price_safe.pdf.

Todd Litman (2012), “Changing North American Vehicle-Travel Price Sensitivities: Implications For Transport and Energy Policy,” Transport Policy, July (http://dx.doi.org/10.1016/j.tranpol.2012.06.010); at www.vtpi.org/VMT_Elasticities.pdf

Todd Litman (2013), Local Funding Options for Public Transportation, Paper 13-3125, Transportation Research Board 2013 Annual Meeting (www.trb.org); at www.vtpi.org/tranfund.pdf.

NSTIFC (2009), Paying Our Way: A New Framework Transportation Finance, Final Report of the National Surface Transportation Infrastructure Financing Commission (http://financecommission.dot.gov); at http://financecommission.dot.gov/Documents/NSTIF_Commission_Final_Report_Advance%20Copy_Feb09.pdf.

Ken Orski (2013), “Searching for Novel Approaches to Transportation Funding”  Innovation NewsBriefs, Vol. 24, No. 1; at www.publicceo.com/2013/01/searching-for-novel-approaches-to-transportation-funding.

Stephen L. Reich, Janet L. Davis and Braden Sneath (2012), Florida MPOAC Transportation Revenue Study, Center for Urban Transportation Research for the Florida Metropolitan Planning Organization Advisory Council (www.mpoac.org); at www.mpoac.org/revenuestudy/RS_FINAL_REPORT.pdf.

Ko Sakamoto (2010), Financing Sustainable Urban Transport, GTZ Sourcebook Module, Sustainable Urban Transport Project  (www.sutp.org) Asia and the German Technical Cooperation (www.gtz.de/en); at www.sutp.org/dn.php?file=1f-FSUT-EN.pdf.

Jeffery J. Smith and Thomas A. Gihring (2003), Financing Transit Systems Through Value Capture: An Annotated Bibliography, Geonomy Society (www.progress.org/geonomy); also at www.vtpi.org/smith.pdf.

TRB (2006), The Fuel Tax And Alternatives For Transportation Funding, Special Report 285, Transportation Research Board (www.trb.org); available at http://onlinepubs.trb.org/onlinepubs/sr/sr285.pdf.


Todd Litman

Todd Litman is founder and executive director of the Victoria Transport Policy Institute, an independent research organization dedicated to developing innovative solutions to transport problems. His work helps to expand the range of impacts and options considered in transportation decision-making, improve evaluation methods, and make specialized technical concepts accessible to a larger audience. His research is used worldwide in transport planning and policy analysis.

Sweeping view of Portland, Oregon with Mt. Hood in background against sunset sky.

Oregon Passes Exemption to Urban Growth Boundary

Cities have a one-time chance to acquire new land for development in a bid to increase housing supply and affordability.

March 12, 2024 - Housing Wire

Aerial view of green roofs with plants in Sydney, Australia.

Where Urban Design Is Headed in 2024

A forecast of likely trends in urban design and architecture.

March 10, 2024 - Daily Journal of Commerce

Cobblestone street with streetcar line, row of vintage streetlights on left, and colorful restaurant and shop awnings on right on River Street in Savannah, Georgia.

Savannah: A City of Planning Contrasts

From a human-scales, plaza-anchored grid to suburban sprawl, the oldest planned city in the United States has seen wildly different development patterns.

March 12, 2024 - Strong Towns

Aerial View of Chuckanut Drive and the Blanchard Bridge in the Skagit Valley.

Washington Tribes Receive Resilience Funding

The 28 grants support projects including relocation efforts as coastal communities face the growing impacts of climate change.

March 18 - The Seattle Times

Historic buildings in downtown Los Angeles with large "Pan American Lofts" sign on side of building.

Adaptive Reuse Bills Introduced in California Assembly

The legislation would expand eligibility for economic incentives and let cities loosen regulations to allow for more building conversions.

March 18 - Beverly Press

View from above of swan-shaped paddleboats with lights on around artesian fountain in Echo Park Lake with downtown Los Angeles skylien in background at twilight.

LA's Top Parks, Ranked

TimeOut just released its list of the top 26 parks in the L.A. area, which is home to some of the best green spaces around.

March 18 - TimeOut

News from HUD User

HUD's Office of Policy Development and Research

Call for Speakers

Mpact Transit + Community

New Updates on PD&R Edge

HUD's Office of Policy Development and Research

Write for Planetizen

Urban Design for Planners 1: Software Tools

This six-course series explores essential urban design concepts using open source software and equips planners with the tools they need to participate fully in the urban design process.

Planning for Universal Design

Learn the tools for implementing Universal Design in planning regulations.