3 top priorities for the surface transportation reauthorization bill

As director of transportation policy for Reason Foundation, I’ve been writing this monthly column in Public Works Financing for more than 25 years. For readers who don’t know much about Reason, you can get some perspective by perusing our website. We are a nonprofit public policy organization with divisions focused on journalism and policy research. Reason is based on the belief in free minds and free markets, and makes the case for limited government, individual liberty, and the rule of law.

Transportation is one of many research areas we engage in. Among Reason’s transportation principles are the user-pays/user-benefits principle, market pricing, federalism (where each level of government is responsible for its transportation infrastructure and operations), and the idea that benefits should exceed costs, wherever possible. This leads to Reason supporting road pricing, toll financing of major infrastructure, public-private partnerships (P3s), and devolution of some functions from higher to lower levels of government.

In anticipation of reauthorization of the federal surface transportation program in 2026, our transportation team has developed a set of eight policy recommendations, which are posted on our website. Not all of the principles are relevant to the focus of this newsletter, so I will summarize three of the most notable for this audience here, and another one next month.

The first principle is to implement a more fiscally responsible federal surface transportation reauthorization bill. From its creation in 1956 until 2008, the Highway Trust Fund (HTF) was self-supporting—meaning that the spending it authorized each year was covered by federal highway user tax revenues collected.

However, over time, Congress has undercut this basic principle. It has not increased federal gasoline or diesel taxes since 1993, but it has continued spending far more than the gas tax brings in.

Secondly, Congress gradually converted the Highway Trust Fund into a more general transportation fund, providing grants for transit, sidewalks, bike paths, and other projects.

So instead of viewing fuel taxes as highway user fees, taxpayers increasingly see them as just taxes—and Congress refuses even to consider raising them to meet the needs of today’s highways. Reason doesn’t support tax increases. Reason supports highway users paying for the full costs of building and maintaining the highways they use. If roads require more funding, users, not general taxpayers, should be responsible for the costs.

If federal gas tax rates were adjusted for consumer price inflation since 1993, they would bring in more than double their current amount. Instead, Congress began (and continues) to bail out the Highway Trust Fund with general funds. Jeff Davis of Eno Transportation Weekly puts the total transfers from the federal government’s general fund to the HTF since 2008 at $272 billion. Since the federal government has been operating with budget deficits since 2000, all general fund transfers can be considered to consist of some borrowed money, increasing each year’s budget deficit and the overall national debt, now over $37 trillion. 

What should Congress do in the upcoming reauthorization bill?

Sooner or later, the federal government’s unfunded borrowing must cease, not only in transportation, but across the board. So Reason’s first recommendation calls for making the Highway Trust Fund’s spending equal its revenues. Congress can achieve this either by a substantial increase in federal highway gas taxes, which is unlikely politically, or by making significant reductions in Trust Fund spending, equivalent to approximately $40 billion per year, based on figures from the Congressional Budget Office.

We expect Congress to cut spending or increase the gas tax to reflect inflation since it was last raised. However, one step in that direction, which already has some supporters, would be for Congress to eliminate discretionary grants (also known as “administrative earmarks”) in the transportation bill. The Government Accountability Office cites discretionary grants, primarily due to the Infrastructure Investment and Jobs Act legislation, as costing $110 billion over five years, or approximately $22 billion per year. Reducing that spending would certainly be a start.

To offset a potentially significant decrease in Highway Trust Fund spending, Congress could consider increasing federal support for tolling and public-private partnerships, which are also discussed in several other Reason reauthorization proposals.

A fiscally responsible reauthorization bill would send a message to states that the days of so-called “free” federal money need to end to avoid the increasingly predicted federal insolvency expected when both Social Security and Medicare exhaust their current trust funds within the next decade.

Accordingly, a second Reason Foundation recommendation is to significantly increase tax-exempt private activity bonds (PABs), which enable eligible projects to utilize tax-exempt financing for surface transportation infrastructure. This idea is likely a no-brainer for Public Works Financing readers, who are well-aware of the vast array of highway and transit projects in the P3 pipeline today.

From their initial authorization in 2005, it took until 2023 for the initial $15 billion in private activity bonds to be issued for P3 projects. However, with the rapid expansion of such projects, the revised $30 billion total had already decreased to around $4 billion by the end of 2024.

The original volume caps on private activity bonds imposed by Congress ($15 billion, later raised to $30 billion) were perhaps justified at the time because surface transportation PABs were experimental—no one knew how much demand there would be for them. That concern is no longer relevant; these PABs have proven their value.

Therefore, Reason proposes simply mainstreaming tax-exempt surface transportation bonds. There is no federal cap on tax-exempt municipal bonds; neither should there be a cap on tax-exempt PABs for transportation projects. We also suggest expanding their scope to airport and seaport P3 projects.

A third Reason recommendation for the reauthorization bill concerns the successful Transportation Infrastructure Finance and Innovation Act (TIFIA) program, which provides low-interest federal loans as gap-closers for projects that can get investment-grade bond ratings. Our concern is that recent congressional and administration actions to expand TIFIA—financing 49% of project cost rather than 33%, offering much lower interest rates to rural projects, and accepting marginally transportation projects (transit-oriented development, state infrastructure banks, cleaning up lands disturbed by construction) could weaken the historical soundness of the TIFIA loan portfolio—or encourage Congress to expand the program’s scope even wider, further weakening its portfolio.

However, as reported in last month’s PWF issue, the Department of Transportation’s Build America Bureau and Transportation Secretary Sean Duffy announced administrative liberalization of TIFIA: allowing all loans to be for 49% of project cost, and potentially opening the program to transportation-marginal projects like land restoration and transit-oriented real estate projects.

At the mid-July American Road & Transportation Builders Association (ARTBA) public-private partnership conference, presenters generally welcomed the “expansion” of TIFIA (despite all loans at 49% using up available loans on fewer projects), and ARTBA itself has included this kind of expansion in its reauthorization recommendations.

Another panel at this conference brought praise for this revamp from representatives of the U.S. Chamber and the American Association of State Highway and Transportation Officials.

My political concerns over this administrative change remain. On one hand, legislators may see this “modest” expansion as encouragement to make TIFIA even broader in scope, adding further risk to its currently very sound loan portfolio. On the other hand, I can imagine populist members targeting the expanded TIFIA as a future enabler of boondoggles and therefore calling for its elimination.

We have a very different Congress and presidential administration today than we have been accustomed to over the last several decades. So Reason’s recommendation for the reauthorization bill is to return TIFIA to its original limited project scope and the 33% limit on loans. Besides being more prudent, this would also allow more projects to get TIFIA financing each year.

That’s all I have space for this month. Next month, I will discuss Reason’s potentially very large policy change for jump-starting the transition from per-gallon fuel taxes to mileage-based user fees.

A version of this column appeared in Public Works Financing.

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Source: https://reason.org/commentary/3-top-priorities-for-the-surface-transportation-reauthorization-bill/