Shifting Gears

How we pay for transportation, why it’s not working, and how to fix it

The U.S. system of transportation finance, designed a century ago with the sole purpose of funding the construction of the nation’s highways, is today a major obstacle to a cleaner, healthier and more sustainable transportation system. Addressing the challenges of the 21st century will require a new paradigm for transportation finance – one that charges transportation taxes and fees that reflect the full costs of our transportation choices, and which prioritizes projects that deliver the greatest societal benefits in decisions over how to spend those dollars.

Highway interchange
Irina Blok via Unsplash
Highway interchange

The U.S. system of transportation finance is broken. Created a century ago to fund the build-out of the nation’s road network, the system was designed to funnel revenues from gas taxes and motor vehicle fees into “trust funds” devoted to highway construction and maintenance. That system succeeded in financing the construction of the most expansive highway network in the world. But it is failing America today.

Too much money is wasted on boondoggle projects, even as critical 21st century transportation needs go unmet. The original bargain at the heart of the system – that drivers would bear the costs of building and maintaining the roads they use – has been broken, with decision-makers at all levels spending increasing amounts of general tax revenue on roads to avoid raising gas taxes. By making driving relatively cheap and convenient – and options such as transit, biking and walking difficult and expensive – the transportation finance system is a formidable obstacle to building a cleaner, healthier and more livable America.

America cannot address the challenges of the 21st century with a transportation finance system created in the horse-and-buggy era. The nation should build a new system based on two simple principles:

  • Charge transportation taxes and fees that reflect the full costs – including health and environmental costs – that Americans’ transportation choices impose on society.

  • Prioritize spending on transportation projects based on the benefits they deliver to society.

The transportation funding bargain has broken down. America’s transportation system was built on a simple idea: drivers would pay for the cost of the roads they use through gas taxes and motor vehicle fees. So-called “user fees” never completely covered the full cost of the roads, but today, the gap is wider than ever.

  • Gas taxes and other fees on drivers pay for only around half of the total cost of building and maintaining roads nationwide, and often less than that. Since 2008, Congress has channeled more than $153 billion in general revenues to the federal Highway Trust Fund – shifting the burden of highway construction from those who drive to all Americans, even those who rarely or never drive or who don’t even own a car.

  • Drivers have never covered the other costs they impose on society – from noise pollution to air pollution to climate change. These costs are massive and growing, well outstripping the direct costs of road maintenance. For example:

    • Motor vehicle crashes: Approximately 39,000 Americans die in car crashes every year, and millions more are hospitalized with serious injuries. In 2020, the estimated financial cost of motor-vehicle deaths, injuries and property damage totaled more than $474 billion.
    • Air pollution: Air pollution from road transportation is thought to be responsible for at least 58,000 deaths in the U.S. each year, although more recent research suggests that this figure itself is a significant underestimation. One study estimates the annual cost of damage caused by air pollutants nationwide to be up to $277 billion, 16% of which is attributable to cars, light-duty trucks and SUVs. The air pollution-related damage caused by driving is an estimated $10.7 billion to $41.6 billion per year.
    • Climate change: Transportation is the largest single source of U.S. greenhouse gas emissions. In 2020, gasoline consumption from transportation resulted in the emission of around 948 million metric tons (MMT) of carbon dioxide (CO2) and diesel consumption emitted 428 MMT. Assuming a social cost of carbon of $51 per ton of CO2, the total cost of emissions from gasoline consumption in the transportation sector is $48.3 billion and diesel emissions $21.8 billion.

Our transportation finance system lavishes funding on wasteful boondoggle projects while leaving today’s most important transportation needs unmet.

  • In 2014, the latest year for which data is available, federal, state and local governments spent $26 billion on highway expansion projects. Highway expansion has limited benefits and contributes to auto dependence, sprawl, and damage to the environment and public health.

  • At the same time, the nation’s aging highways and transit systems have massive unmet repair needs. America’s transportation infrastructure repair backlog currently totals more than half a trillion dollars, including $435 billion needed for road repair and $125 billion for bridge repair.

The U.S. Department of Transportation estimates a backlog of over $105 billion for transit infrastructure in need of replacement.

  • Federal transportation policies incentivize highway expansion and include no requirements that states prioritize spending on repairs or long-term maintenance. They also make it easier to fund highways (for which federal funding can cover 80% or more or the cost) than transit projects (which typically receive a federal match of 40% or less and require proof that each new project has the funds required for rehabilitation or maintenance).

  • Many state governments have transportation finance policies that are even more skewed toward highway construction. About half the states prohibit the use of gas tax revenue for transit, while nine states spend less than $1 per person per year on average on state support of public transportation.

  • Critical 21st century transportation needs – such as enhancing safety for people on bikes or on foot – receive only minimal federal funding.

America’s system of transportation taxes and fees often makes highly damaging modes of travel cheaper than sustainable ones.

  • Driving is subsidized directly through the use of general funds for road maintenance and construction, and through tax code provisions such as state sales tax exemptions on motor fuels and the income tax exclusion for commuter parking benefits. Tax subsidies to U.S. motorists alone amount to between $25 billion and $83 billion per year, equivalent to between $210 and $708 per U.S. household.

  • Since 1990, average transit fares have increased 143%, while the federal gas tax has not been increased since 1993.

  • Concerns that the rise of electric vehicles (EVs) will exacerbate the growing transportation funding shortfall (since they don’t use gas, and thus don’t pay gas tax) have led some states to impose registration fees and other charges on EVs that can make it more expensive to drive an EV than a gas-powered car.

Raising the gas tax, or increasing other forms of transportation revenue, won’t solve these problems on their own.

America must adopt a new system of transportation funding based on two principles:

1. Charge taxes and fees on transportation that reflect the full costs Americans’ transportation choices impose on society.

Cleaner, healthier and more sustainable forms of transportation – like riding a bus or a bike –should ideally be cheaper than dirtier and more dangerous modes, like driving, and transportation taxes and fees should be oriented toward encouraging the use of the least-impactful mode for every trip.

Specifically, policymakers should:

  • Impose taxes or fees that recover the cost of pollution, road wear, congestion and other societal impacts imposed by vehicle use. This can be in the form of impact-specific taxes and fees (e.g., congestion pricing, carbon taxes, VMT fees, parking charges) or increased fuel taxes or other taxes that act as a proxy for a mode’s impact on society.
  • Ensure that fees are differentiated by vehicle size and fuel used. Large vehicles should pay higher fees than small ones; fossil fuel vehicles should pay higher taxes and fees than electric ones. Until such time as gasoline and other fuel taxes increase to better approximate their true impacts, governments should avoid adopting EV fees that could slow adoption of cleaner vehicles.
  • Price public transportation to account for the benefits transit trips deliver to society. Transit trips should be priced relative to the marginal cost of providing them, and the cost of a transit trip should be lower than a competing car trip to incentivize mode shift.
2. Prioritize spending on transportation projects based on the benefits they deliver to society.

America should prioritize investments that address the nation’s biggest challenges and avoid wasteful boondoggle projects.

Specifically, policymakers should:

  • Treat transportation taxes and fees as taxes and use the revenue for the purposes with the greatest benefit to society. This means ending the dedication of revenues from transportation taxes and fees to support the modes from which they were raised.
  • Eliminate provisions in federal and state law that encourage spending on wasteful highway projects. Ensure that transit, biking, walking and demand reduction policies are treated at least equally to – and ideally are given preference over – highway projects.
  • Adopt clear goals to guide transportation investments. These should include goals to reduce climate pollution, reduce air and water pollution, reduce crashes and deaths, expand transportation options and access to destinations, and support thriving, healthy communities.

Breaking the link between how transportation revenue is raised and how it is spent would bring the United States into closer alignment with transportation funding practices in the rest of the developed world.  Examples from abroad indicate that a system in which driving pays its true costs and revenues collected from drivers are deposited in a general fund instead of being dedicated exclusively to transportation would not only bring in sufficient revenue to finance necessary improvements to the country’s transportation system, but also leave funds left over to invest elsewhere.

  • Drivers in the United Kingdom pay relatively high fuel taxes, including a percentage-based, value-added tax and an excise tax. However, these revenues are not ringfenced for transportation, but are instead deposited into the UK’s Consolidated (general) Fund. In 2011, total UK public spending on transportation amounted to only 72% of total fuel tax revenues (and less than a third of fuel tax revenue was dedicated to roads), the remainder staying in the general fund for use on other societal priorities.

  • In Germany, transportation investment comes from general taxation and individual states’ transportation funding in large part comes out of the federal coffers. Gasoline is taxed at a significantly higher level than the U.S., bringing in more revenue each year than the country’s total annual federal transportation spending, but these revenues are not dedicated solely to transportation. Germany also has a partial user-pay system in the form of per-mile tolls for heavy trucks on certain federal highways, revenues from which are dedicated to road-related projects.


Matt Casale

Former Director, Environment Campaigns, U.S. PIRG Education Fund

Tony Dutzik

Associate Director and Senior Policy Analyst, Frontier Group

Tony Dutzik is associate director and senior policy analyst with Frontier Group. His research and ideas on climate, energy and transportation policy have helped shape public policy debates across the U.S., and have earned coverage in media outlets from the New York Times to National Public Radio. A former journalist, Tony lives and works in Boston.

James Horrox

Policy Analyst, Frontier Group

James Horrox is a policy analyst at Frontier Group, based in Los Angeles. He holds a BA and PhD in politics and has taught at Manchester University, the University of Salford and the Open University in his native UK. He has worked as a freelance academic editor for more than a decade, and before joining Frontier Group in 2019 he spent two years as a prospect researcher in the Public Interest Network's LA office. His writing has been published in various media outlets, books, journals and reference works.