Time to reset the transportation funding equation

A reinvention of our transportation funding framework is on the horizon, and state and local governments, which today provide nearly 75% of transportation funding, will play a critical role.

Transportation funding in the U.S. is facing an ever-growing imbalance between the needs of the nation’s road and bridge network and the funds available to satisfy them. While the Infrastructure Investment and Jobs Act provided more than $110 billion in new road and bridge spending, the truth is that it’s but another temporary patch on a growing problem. 

The need for change isn’t new—a 2009 report from the National Surface Transportation Infrastructure Funding Commission concluded that a new funding system was imperative. Fifteen years later, however, our nation’s transportation funding remains in a structural deficit—one further under pressure as motor fuels tax receipts decline with an accelerating shift toward electric vehicles.

Have no doubt, EVs will further erode gas taxes. While recent news coverage of electric vehicle sales data has trended negative, the long-term picture remains clear. Investments made by automakers into the production of EVs and battery technology, the announcement this spring of 2027-2032 emissions standards, and a continued move toward cost parity with internal combustion models will shift the mix of new vehicle sales towards electric models.

And when that happens, state and local governments will be on the hook as they face a majority share of the funding imbalance. Excluding bond proceeds and federal grants, states provided 73% of the $189 billion collected for road funding in 2022, including collecting nearly twice as much motor fuels tax as the federal government. An analysis by my consulting firm, EY-Parthenon, utilizing the Biden administration’s target of 50% of all new vehicle sales being electric by 2030 and new fuel economy standards projects a loss of 30% of gas tax receipts by 2032, or about $20 billion annually. By 2040, this grows to $33 billion annually with total losses accumulating to over $300 billion.

At the federal level, the Congressional Budget Office projects an annual deficit in the Highway Trust Fund’s Highway Account growing to an average of $24.3 billion for the remainder of the decade.

Simply put, the current funding framework for surface transportation is not aligned with future needs. States must be proactive in designing a solution before eroding revenues force their hand. When evaluating solutions, four key metrics stand out to ensure sustainability and alignment with transportation needs:

Fairness/“User Pay.” The user-pay benefit principle has been a core tenet of transportation funding for decades. Ultimately, those who derive the most benefit from the system should pay for more of its cost.

Investments and Administrative Costs. Any new framework must safeguard that new costs and administrative requirements are not overly burdensome and are handled efficiently.

Impact of Inflation: If the federal motor fuels tax tracked consumer price index inflation since 1993, annual collections would be more than double what they are today—an additional $40 billion annually. To reduce inflationary purchasing power loss, frameworks should adjust automatically without additional legislative involvement.

Revenue Stability. Road maintenance is a 24/7/365 task that requires a steady, predictable source of funding. Variability in funding impacts the amount of work available, disrupts contractor relationships and delays project completion.

The most utilized option to address fuel tax revenue loss—an additional EV registration fee—is in place in 32 states. If all cars paid the current average annual EV fee of $124, this could replace approximately 60% to 65% of lost state revenues. However, a flat annual fee isn’t perfectly aligned to the user-pay philosophy. Additionally, there is no ability to capture revenue from out-of-state drivers. Other options exist, though each has some drawbacks when compared against the metrics above. Those options include:

Sales Tax. States can levy an additional percentage or allocate sales tax from transportation-related purchases, though such taxes violate the user-pay philosophy.

Electricity Tax. A direct analog to the motor fuels tax, a handful of states—Georgia, Iowa, Kentucky, Montana, Oklahoma and Utah)—charge a tax on the electricity used at public charging stations. However, this structure misses EV charging in the home, which makes up approximately 80% of all EV charging.

Tolling. Increased use of tolling can provide additional funds but would require higher capital investment. But states may be limited on the uses of toll revenues or on the number of tolling projects allowed.

Vehicle Miles Traveled Tax. Some 37 states have a pilot program studying feasibility or road usage charging. The infrastructure law mandated a federal pilot as well, though the deadline to initiate that program passed over two years ago. Such a tax fares relatively well on three of the four above metrics, though the investments required and ongoing administration present significant challenges, such as revenue leakage, privacy concerns and state interoperability.

It's well past time to reset our road funding equation, and the solution must address both the current structural deficit and the growing needs of our aging infrastructure. The difficulty—whether real or perceived—of the solution cannot be a barrier to its implementation. With governments facing accelerating revenue losses, a longer delay will only result in a larger and more politically painful solution.

Evan Burgstahler is a senior director at EY-Parthenon, Strategy and Transactions, Ernst & Young LLP, focused on addressing financial uncertainty through planning, forecasting and scenario evaluation. The views reflected in this article are the views of the author and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.

Editor's note: An earlier version mistakenly said that states provide "nearly a quarter" of transportation funding. It has been correct to 75%.