This section presents information on the revenue sources supporting public investment in highways and bridges, and on the types of investments that are being made by all levels of government. This is followed by a discussion of the current and historic roles of Federal, State, and local governments in highway funding. The section concludes with a more detailed analysis of capital expenditures.

Revenue Sources

Exhibit 6-2 shows that all levels of government generated $128.7 billion in 2000 to be used for highways and bridges. Actual cash expenditures for highway and bridge purposes totaled only $127.5 billion in 2000; the remaining $1.3 billion was placed in reserves by various governmental units for future expenditure on highways or bridges. The $3.3 billion shown as placed in reserves in the Federal column indicates that the cash balance of the Highway Account of the Federal Highway Trust Fund (HTF) grew by that amount during 2000.

Highway-user charges, including motor-fuel taxes, motor-vehicle taxes and fees, and tolls were the source of 62.9 percent of the $128.7 billion of total revenues for highways and bridges in 2000. The remaining 37.1 percent of revenues came from a number of sources, including local property taxes and assessments, other dedicated taxes, general funds, bond issues, investment income, and other miscellaneous sources. Development fees and special district assessments are included under “Investment Income and Other Receipts” in Exhibit 6-2.

The degree to which highway programs are funded by highway-user charges differs widely among the different levels of government. At the Federal level, 95.6 percent of highway revenues came from motor-fuel and motor-vehicle taxes in 2000. The remainder came from general fund appropriations, timber sales, lease of Federal lands, oil and mineral royalties, and motor carrier fines and penalties.

Highway-user charges also provided the largest share, 75.5 percent, of highway revenues at the State level in 2000. Bond issue proceeds were another significant source of funding, providing 12.3 percent of highway funds at the State level. The remaining 14.0 percent of State highway funding came from general fund appropriations, other State taxes and fees, investment income, and other miscellaneous revenue sources.

Many States do not permit local governments to impose motor-fuel and motor-vehicle taxes, or they cap them at relatively low levels. Therefore, at the local government level, only 7.5 percent of highway funding was provided by highway-user charges in 2000. Local general funds, property taxes, and other taxes and fees were the source of 67.5 percent of local highway funding. Bond issue proceeds provided 9.8 percent of local highway funding, while investment income and miscellaneous receipts provided the remaining 14.0 percent.

Historical Revenue Trends

Exhibits 6-4 and 6-5 show how highway revenue sources have varied over time. Exhibit 6-4 identifies the different sources of highway revenue since 1921 for all levels of government, combined. Exhibit 6-5 identifies the percentage of highway revenue derived from user charges by each level of government since 1957.

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Some of the variation in revenue sources shown in the graph portion of Exhibit 6-4 is caused by changes in the share of funding provided by each level of government over time; this topic will be discussed later in this chapter. In the early 1920s, when local government bore much of the responsibility for highway funding, property taxes were the primary source of revenues for highways. Property taxes have, however, become a much less significant source of revenue over time, and have dropped to an all-time low of 4.8 percent of total highway revenues in 1999. The share of total highway revenues generated by bond proceeds has fluctuated over time, reaching a high of 32.4 percent in 1954. Since that time, combined highway and bridge programs have become less dependent on debt financing; this share has not exceeded 11 percent of revenues since1971.

Since the passage of the Federal- Aid Highway Act of 1956 and the establishment of the Federal Highway Trust Fund, motor-fuel and vehicle tax receipts have consistently provided a majority of the combined revenues raised for highway and bridge programs by all levels of government.

After peaking at an all time high of 73.5 percent of highway revenues in 1965, the share represented by highway user charges dropped to 55.2 percent in 1982. As shown in Exhibit 6-4, since that time, the percentage has rebounded and stabilized in a range of about 60 to 62 percent.

A corresponding pattern can be observed in the percentage of Federal highway revenue derived from highway user charges as shown by the Federal line in Exhibit 6-5. During the early years of the HTF, over 90 percent of highway revenues at the Federal level came from fuel and vehicle taxes. From the late 1960s to early 1980s, this percentage declined, to a low of 61.6 percent in 1981. During this period, Federal motor-fuel taxes did not increase, and a growing percentage of Federal highway funding came from other sources. In 1981, general fund revenues of $2.6 billion provided 25.1 percent of total highway funding. Since 1981, Federal motor-fuel taxes have increased significantly, and Federal general fund revenues used for highways have declined. As a result, the portion of Federal highway revenue derived from highway user charges has increased, reaching an all time high of 96.4 percent in 1999.

Exhibit 6-5 shows that the share of State government highway funding contributed by highway user charges has declined over time. From 1997 to 2000, the percentage dropped from 76.3 percent to 73.7 percent. Over the same period, States grew more reliant on debt financing, as bond proceeds grew from 10.2 percent to 12.3 percent.

Highway user charges have never been as significant a source of highway revenue at the local government level as at the Federal or State levels, for the reasons outlined earlier. In the early to middle 1990s, the share of local government highway funding derived from highway user charges rose, reaching a level of 8.1 percent in 1997. However, this pattern has reversed itself, and the share dropped to 7.5 percent in 2000.

Highway Expenditures

Exhibit 6-2 indicates that total expenditures for highways in 2000 equaled $127.5 billion, and identifies the portion of this total funded by each level of government. Exhibit 6-6 classifies this total by type of expenditure and by the level of government. The “Federal,” “State,” and “Local” columns in this table indicate which level of government made the direct expenditures, while the “Funded by…” columns indicate the level of government that provided the funding for those expenditures. (Note that all figures cited as “expenditures,” “spending,” or “outlays” in this report represent cash expenditures rather than authorizations or obligations).

While the Federal government funded $27.7 billion (21.7 percent) of total highway expenditures of $101.3 billion in 1997, the majority of the Federal government’s contribution to highways consists of grants to State and local governments. Direct Federal spending on capital outlay, maintenance, administration, and research amounted to only $2.3 billion (1.8 percent). The remaining $25.4 billion was in the form of transfers to State and local governments.

State governments combined $24.4 billion of Federal funds with $52.1 billion of State funds and $1.3 billion of local funds to make direct expenditures of $77.9 billion (61.1 percent). Local governments combined $1.0 billion of Federal funds with $14.9 billion of State funds and $31.4 billion of local funds to make direct expenditures of $47.3 billion (37.1 percent).

Types of Highway Expenditures

Current highway expenditures can be divided into two broad categories: non-capital and capital. Noncapital highway expenditures include maintenance of highways, highway and traffic services, administration, highway law enforcement, highway safety, and interest on debt. Highway capital outlay consists of those expenditures associated with highway improvements, including land acquisition and other right-of-way costs; preliminary and construction engineering; new construction, reconstruction, resurfacing, rehabilitation, and restoration costs of roadways, bridges, and other structures; and installation of traffic service facilities such as guardrails, fencing, signs, and signals. Bond retirement is not part of current expenditures, but it is included in the figures cited for total highway expenditures in this report.

As shown in Exhibit 6-6, all levels of government spent $64.6 billion on capital outlay in 2000, or 50.7 percent of total highway expenditures. Highway capital outlay expenditures are discussed in more detail later in this chapter.

Current non-capital expenditures consumed $57.1 billion (44.8 percent), while the remaining $5.7 billion (4.5 percent) went for bond redemption. Most Federal funding for highways goes for capital items. Noncapital expenditures are funded primarily by State and local governments. In 2000, State and local noncapital expenditures were close to equal, as State governments spent $27.2 billion while local governments spent $27.9 billion. The majority of maintenance expenditures occurred at the local government level, or $14.9 billion (61.6 percent) of the $24.2 billion total.

Historical Expenditure and Funding Trends

Exhibits 6-7 and 6-8 provide historical perspective for the 2000 values shown in Exhibit 6-6. Exhibit 6-7 shows how the composition of highway expenditures by all levels of government combined has changed over time. Exhibit 6-8 shows the amounts provided by each level of government to finance those expenditures and the share of funding provided by the Federal government for total highway expenditures and for highway capital outlay.

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The increased Federal funding for highways available under the Transportation Equity Act for the 21st Century (TEA-21) contributed to a 25.0 percent increase (from $102.0 billion to $127.5 billion) in total highway spending by all levels of government between 1997 and 2000. Capital outlay by all levels of government increased by 33.7 percent from $48.4 billion to $64.6 billion.

The percentage of total highway expenditures that went for capital outlay peaked at 61.3 percent in 1958. Subsequently, capital outlay’s share of total spending gradually declined to a low of 43.8 percent in 1983. As shown in Exhibit 6-7, this share has climbed back up, reaching 50.7 percent in 2000. This was the first time this percentage had exceeded 50 percent since 1975.

Exhibit 6-8 shows that the portion of total highway funding provided by the Federal government rose from 20.8 to 21.7 percent from 1997 to 2000. It is interesting, however, to note that the Federal share of capital funding dropped from 41.6 to 39.9 percent over this same period. While Federal cash expenditures for capital purposes increased 28.3 percent from 1997 to 2000, State and local capital investment increased even faster (37.1 percent).

Federal support for highways increased dramatically following the passage of the Federal-Aid Highway Act of 1956 and the establishment of the HTF. The Federal share of total funding peaked in 1965 at 30.1 percent. Since that time, the Federal percentage of total funding has gradually declined, but remained above 20.0 percent until 1998, when it dropped to 19.0 percent. Because TEA-21 was not enacted until late in Federal Fiscal Year 1998, the increased funding under the legislation did not translate immediately into increased cash outlays during that year. Because the Federal-aid highway program is a multiple-year reimbursable program, the impact of increases in obligation levels phases in gradually over a number of years. The Federal percentage of total funding rose in 1999 and 2000, as the increased obligation authority provided under TEA-21 began to translate into higher cash outlays.

The Federally-funded portion of capital outlay by all levels of government rose above 40 percent in 1959, peaking at 58.3 percent in 1981. From 1987 through 1997, the Federal share remained in a range of 41 to 46 percent. However, the Federal percentage of capital funding dropped to 37.1 percent in 1998, and has not risen back to the 40 percent level since then. The 1999 C&P report incorrectly predicted that the Federal share for 1999-2003 would return to a range of 41 to 46 percent, after declining in 1998. This did not occur due to the unexpectedly large increases in State and local capital investment since 1997 that were noted above.

Spending by all levels of government on maintenance and traffic services increased by 15.7 percent from 1997 to 2000, but declined as a percentage of total highway spending, since other types of expenditures grew even faster. As shown in Exhibit 6-7, maintenance and traffic services’ share of total highway spending dropped to 24.3 percent, its lowest level since 1972. Spending on other non-capital expenditures include highway law enforcement and safety, administration and research, and interest payments also grew more slowly than overall highway spending from 1997 to 2000, falling from 21.8 percent of total spending to 20.5 percent.

The 1999 edition of this report noted that expenditures for highway law enforcement and safety grew more quickly than other spending categories from 1995 to 1997. This trend has not been maintained in subsequent years, as spending growth in this category was slower than overall highway spending growth from 1997 to 2000. The 1999 edition also noted that expenditures for administration and research remained relatively flat between 1994 and 1997. Since 1997, this trend has changed, and growth in this category kept pace with the overall growth in highway spending over this later period. The share of total spending devoted to debt service also remained relatively equal between 1997 and 2000.

Constant Dollar Expenditures

Highway expenditures grew more quickly than inflation between 1997 and 2000. As noted earlier, total highway expenditures increased 25.0 percent from $102.0 billion to $127.5 billion between 1997 and 2000, which equates to an average annual growth rate of 7.7 percent. Over the same period, it is estimated that highway construction costs increased at an annual rate of 3.7 percent, and other costs rose at an annual rate of 2.4 percent. In constant dollar terms, total highway expenditures grew by 14.4 percent between 1997 and 2000.

Exhibit 6-9 shows that highway expenditures have grown in current dollar terms in each of the years from 1957 through 2000. In constant dollar terms, total highway expenditures by all levels of government reached a plateau in 1971. From 1972 to 1981, highway spending did not keep pace with inflation. Since 1981, constant dollar highway spending has increased, and by 1986 it had moved back above the 1971 level. Constant dollar spending reached an all time high in 2000.

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Much of the increase in constant dollar spending since 1981 has been driven by highway capital outlay expenditures, which have grown more quickly than maintenance and other non-capital expenditures in both current and constant dollar terms. Over this 19-year period, highway capital outlay grew at an average annual rate of 6.5 percent from $19.0 billion to $64.6 billion. In constant dollar terms, this equates to a 112.3 percent increase. Over this same period, maintenance and traffic services grew by 34.5 percent in constant dollar terms, and other non-capital expenditures grew by 53.4 percent in constant dollars. Highway construction costs grew more slowly than the CPI during this period, so the purchasing power of funds used
for capital outlay expenditures has not eroded as quickly. Highway construction costs grew at an average
annual rate of 2.3 percent since 1981, compared to an average annual increase in the CPI of 3.4 percent.
Exhibit 6-10 compares current dollar and constant dollar spending for capital outlay, maintenance and traffic
services, and other non-capital expenditures (including highway law enforcement and safety, administration
and research, and interest payments).

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Constant Dollar Expenditures per VMT

While not all types of highway expenditures would necessarily be expected to grow in proportion to vehicle miles traveled (VMT), increases in VMT do increase the wear and tear on existing roads, leading to higher capital and maintenance costs. The addition of new lanes and roads to accommodate additional traffic results in one-time capital costs, as well as recurring costs for preservation and maintenance. Traffic supervision and safety costs are also related in part to traffic volume. As the highway system has grown and become more complex, the cost of administering the system has grown as well.

In current dollar terms, total expenditures per VMT have grown steadily over time. Between 1997 and 2000, expenditures per VMT rose from 4.0 cents to 4.6 cents. Expenditures per VMT in constant dollars also rose in this period, increasing 6.6 percent. This increase reversed the downward trend noted in the 1999 C&P report. During the 1960s and 1970s, total expenditures per VMT declined steadily in constant dollar terms, but the rate of decline slowed during the 1980s and 1990s.

Capital outlay per VMT increased 11.7 percent between 1997 and 2000 in constant dollar terms. The 2000 level of 2.35 cents per VMT was the second highest since 1976. As shown in Exhibit 6-11, over time, spending on maintenance and traffic services and other non-capital items has not kept pace with capital spending on a constant dollar per VMT basis.

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Highway Capital Outlay Expenditures

State governments directly spent $47.6 billion on highway capital outlay in 2000. As discussed earlier in the chapter, and as shown in Exhibit 6-6, this figure includes the $24.4 billion received in grants from the Federal government for highways. Exhibit 6-12 shows how States applied this $47.6 billion to different functional systems and also includes an estimate of how the total $64.6 billion spent by all levels of government was applied. State government capital outlay is concentrated on the higher-order functional systems; local governments apply the larger part of their capital expenditures to lower-order systems.

Total highway capital expenditures by all levels of government amounted to $7,825 per lane-mile in 2000, or 2.3 cents per VMT. Capital outlay per lane-mile was highest for the higher-order functional systems and was higher on urban roads than rural roads. Capital outlay per VMT ranged from 3.3 cents on rural other principal arterials to 1.5 cents on urban minor arterials. On a cents-per-VMT basis, capital outlay for rural roads is about 9 percent higher than for urban roads.

Capital Outlay by Improvement Type

States provide the Federal Highway Administration with detailed data on what they spend on arterials and collectors, classifying expenditures on each functional system into 17 improvement types. For this report, these improvement types have been allocated among three groups: System Preservation, System Expansion, and System Enhancement.

Exhibit 6-13 shows the distribution of the $42.7 billion in State expenditures among these three categories. Detailed data on Federal Government and local expenditures is unavailable, so the combined $51.6 billion of capital outlay on arterials and collectors by all levels of government was classified based on the State expenditure patterns. Similarly, little information is available on the types of improvements being made by all levels of government on local functional system roads. To develop an estimate for the improvement type breakdown for the $64.6 billion invested on all systems in 2000, it was assumed that expenditure patterns were roughly equivalent to those observed for arterials and collectors.

*Improvement type distribution was estimated based on State arterial and collector data.
Sources: Highway Statistics 2000, Table SF-12A and unpublished FHWA data.

In 2000, about $33.6 billion was spent on system preservation (51.9 percent of total capital outlay). As defined in this report, system preservation activities include capital improvements on existing roads and bridges that are designed to preserve the existing pavement and bridge infrastructure, but does not include routine maintenance.

About $12.2 billion (18.9 percent of total capital outlay) was spent on the construction of new roads and bridges in 2000. An additional $13.7 billion (21.2 percent) is estimated to have been used to add lanes to existing roads. Another $5.1 billion (7.9 percent) was spent on system enhancement, including safety enhancements, traffic operations improvements, and environmental enhancements.

Exhibit 6-14 examines how the share of capital outlay devoted to these major categories has changed over time. After declining between 1995 and 1997, the overall share of highway capital improvements going toward system preservation increased significantly from 1997 to 2000, reaching 52.0 percent. This represents a larger share than in 1995, and is significantly higher than the 44.7 percent reported for 1993. The share devoted to system enhancements was steady between 1997 and 2000, and remains higher than the 1993 level. Expenditures for new roads and bridges increased relative to other improvement expenditures between 1997 and 2000, from 15.6 percent of total expenditures to 18.9 percent. Other system expansion decreased significantly, however (28.8 percent in 1997 versus 21.2 percent in 2000), resulting in a proportional decrease overall for system expansion outlays, compared to preservation and enhancements.

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Exhibit 6-15 shows significant variations in the types of capital expenditures made by States on different functional systems. The portion of capital outlay devoted to system preservation ranges from 43.0 percent on urban other principal arterials to 72.9 percent on rural minor collectors. Overall, system preservation’s share on arterials and collectors in rural areas (59.8 percent) was greater than in urban areas (46.1 percent).

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System expansion expenditures also vary significantly by functional class. The portion of capital used for construction of new roads and bridges is highest on urban interstates, at 28.6 percent, while urban minor arterials have the largest share going to other system expansion improvements (30.0 percent). Rural other principal arterials have over 53 percent of capital investment devoted to system expansion. Total system expansion shares are lower on collectors (23.8 percent) than on interstates (39.6 percent) and other arterials (44.9 percent).