New Revenues are Needed to Fill the Transportation Funding Gap

Camila Fonseca-Sarmiento, Director of Fiscal Research, Institute for Urban & Regional Infrastructure Finance
Area of Expertise: Economics & Management

Much of Minnesota’s roadway infrastructure was originally constructed 60 to 70 years ago and is now in need of significant maintenance or reconstruction. However, funding challenges coupled with the pace and scale at which existing pavements are deteriorating are compromising the performance of Minnesota’s transportation system. Complicating this situation is the fact that despite increases in maintenance spending in recent years, new roads continue to be built and older ones lack the investment needed to be maintained. A major contributor to these funding challenges is the rising costs of maintaining transportation investments—made worse in recent years by rising inflation. Growth in these costs reduces the overall impact of increased spending.

Because the current transportation funding system cannot keep up with the system’s needs, new revenue-generating mechanisms as well as supplemental funding from the general fund (especially for localities) will be needed to raise adequate revenues for infrastructure needs.

The need for additional funding clashes with both the limited resources allocated to maintain the roadway system and the reality that any reallocation of local resources toward maintenance means reduced spending on other (also pressing) needs across Minnesota communities. The result is a continued state of limited funding for roadway maintenance projects and a growing list of maintenance needs. Without significant public investment, the roads, bridges, and other system infrastructure will continue to deteriorate, leading to significant negative impacts on local connectivity and the state’s economic competitiveness. 

New revenue-generating mechanisms as well as supplemental funding from the general fund (especially for localities) will be needed to raise adequate revenues for infrastructure needs. In addition, transportation asset management will be crucial to inform investment decisions going forward.

The primary funding source for the transportation system—the motor fuel tax—cannot keep up with the system’s needs. The effects of this are already being felt in state and local governments across the country. In practice, the motor fuel tax is becoming less relevant.

Three main factors have contributed to the decreasing revenue-generating ability of the motor fuel tax:

• The motor fuel tax rate has not been adjusted to keep up with inflation. For instance, the Minnesota fuel tax would be 33.4 cents per gallon—17 percent higher than the current 28.5 cents—if it had been set to automatically adjust for inflation when it was last raised in 2008. 
• Vehicle fuel economy improvements. Vehicle fuel economy increased by 32 percent between 2004 and 2020. Even though the improved fuel efficiency is good for the environment and motorists, it reduces the revenues from the fuel tax without decreasing the use of our transportation infrastructure. 
• The increasing adoption of alternative power sources has decreased fuel consumption, reducing the tax base. Even though electric, plug-in hybrid, and hybrid vehicles represent less than 3 percent of total light-duty vehicle registrations in Minnesota, registration of these vehicles has increased by 12 percent per year on average since 2016. These trends are expected to continue as governments implement policies that favor the adoption of such vehicles.

New revenue-generating mechanisms that complement or replace existing sources at the state and local level will be needed to keep a sound transportation system. The most prominent examples are surcharges levied on electric and hybrid vehicles (or EV fees), wheelage taxes, local option transportation sales taxes, and, particularly, per-mile surcharges used in lieu of current revenue sources. These sources could help raise adequate revenues to address transportation infrastructure needs at the state and local level if set to adjust for increasing costs. 

Local revenue sources earmarked for transportation will likely need to continue being supplemented with funding from local general funds for some time. Local governments mostly rely on local general funds to defray transportation expenses. As new sources of revenue are established, they will likely first offset existing funding streams and only later provide new funding to bring and maintain transportation assets into desired condition levels.

Finally, transportation asset management will be crucial to inform investment decisions going forward. MnDOT has already prioritized asset management as a key strategy at the state level in its 2014–2033 investment plan. Recommended practices for localities include identifying a consistent measure of local acceptable pavement- and bridge-condition targets, estimating the funding needed to achieve and maintain asset-condition targets, and monitoring and reporting asset conditions against target levels for the entire transportation system. These will be important steps to guide roadway maintenance investment strategies, reassess those strategies as needed, and communicate transportation infrastructure needs to the public and leaders.