During the Antiplanner’s visit to Washington DC last week, I tried to encourage people to think about the incentives created by federal transportation funding. But the first question on the minds of most of the people I talked with was, “How will we pay for highways and transit?”
From outside the Beltway, this question almost seems like nonsense. In fact, no one would have ever asked this question before 2008. When Congress set up the Highway Trust Fund in 1956, it decided to spend the money strictly on a pay-as-you-go basis, meaning it wouldn’t spend any more than was collected in gas taxes and other highway revenues (mainly excise taxes on cars, trucks, and tires, most of which have since been repealed).
Pay-as-you-go had a disadvantage: when inflation hit, it seriously slowed the pace of construction because the gas tax wasn’t indexed to inflation. But the policy also had an advantage: since no one was borrowing money against anticipated future revenues, nearly all of the revenues could go for construction rather than a significant chunk going for interest and other finance charges.
