Political Processes and the Common Pool Problem:
The Federal Highway Trust Fund
by
Ronald N. Johnson
Department of Agricultural Economics & Economics
Montana State University
Bozeman, MT 59717
and
Gary D. Libecap
Department of Economics
University of Arizona
Tucson, AZ 85721
and
National Bureau of Economic Research
Cambridge, Massachusetts 02138
June, 2000
I. Introduction
Although the behavior of Congress and the institutional rules it has adopted have been the
subject of numerous papers (e.g.Weingast, Shepsle, and Johnsen, 1981; Weingast and Marshall
1988), much less attention has been paid to understanding the implications of Congress= frequent
use of formulas for allocating funds amongst the states.1 It is the main contention of this paper
that Congress= use of formulas creates fiscal consistency, countering some of the cycling and
instability predicted for political agreements in the public choice literature (Mueller, 1989, pp.
181-97). Predictions of cycling and instability have not gone unchallenged. Tullock (1981), for
example, points to causal evidence suggesting there is considerable stability in programs and,
more recently, Stratmann (1996) has provided evidence of stable collective choices in Congress
regarding pork barrel expenditures at the congressional district level.2 While others, such as Lee
and Oppenheimer (1999, pp. 158-222), have noted that the allocation formulas used by Congress
tend to be simple and stable for long periods of time, they do not examine why Congress resorts
to the use of formulas to distribute funds nor do they provide an empirical test for the stability of
1
The importance of formulas for allocating federal funds is readily apparent, as nearly 90
percent of all dollars earmarked to states and local governments are allocated via explicit
formulas (Lee and Oppenheimer, 1999, p. 187). Congress, for example, uses a formula method
for allocating the bulk of federal expenditures for domestic assistance (Advisory Commission on
Intergovernmental Relations 1995). An early paper by McMahon and Sprenkle (1970) also noted
the pervasiveness of earmarking within state budgets. They are critical of earmarking for its
inflexibility in adjusting revenue flows, suggesting that it interferes with Aattainment of the
optimum levels of the service and of distributive justice.@ (p. 261). If so, the question arises as to
why earmarking is so pervasive. There has been little discussion in the literature about the
politics of formula grants and even less about why Congress adopts such rules.
2
Earmarking of tax revenues can also contribute to fiscal stability. See Lee and Wagner
(1991, 113). Tullock (1981, p. 200) has also pointed to the use of formulas as a stabilizing
influence, and earlier, McMahon and Sprenkle (1970) criticized earmarking for inhibiting
expenditure reallocation.
1
allocations. Thus, the linkage between stability and institutional rules such as the use of
formulas has not been explored.
In this paper, we examine these issues. We use basic insights about contracting costs and
enforcement problems to indicate why formulas are chosen. We argue that aspects of the
operation of Congress resemble a cartel, where maintaining agreement regarding revenue
allocation and overcoming disputes that could dismantle the initial coalition are essential for
political survival. There is intense competition for federal tax revenues, which are similar to an
open-access resource. Members of Congress and their constituents have heterogeneous interests,
and it is difficult to put together successful coalitions to initiate new programs. As the literature
has detailed, negotiation and enforcement of cartel arrangements can be very difficult and costly
when the parties and products are heterogeneous.3 Hence, there are incentives to avoid renegotiation of the basic agreement once it is in place. Revenue sharing rules that are simple,
long-standing, with well-defined contingencies for updating can assist in this objective. The
parameters are understood clearly, and minor formula adjustments can be made at prescribed
times without generating the controversy that could undermine the original compact. More
significant revisions in sharing rules are riskier, and are undertaken only when certain
benchmarks are reached, signifying that conditions have changed so fundamentally that new side
3
See, for example, Stigler (1964). Williamson (1975, 238-61) discusses the contracting
problems found with oligopolies when the firms are heterogeneous. The use of simple contingent
contracts is a way in which firms might align incentives for coordinating production and pricing.
Detailed contracts are not possible. Other examples of the use of allocation formulas include
Libecap and Smith=s (1999) description of the sharing of oil field revenues and costs. Their
analysis suggest that allocation formulas are long-lasting, comprised of just a few parameters,
and contain bench marks for adjustment. The goal is to maintain the essence of the unitization
agreements while allowing limited flexibility when certain milestones are met.
2
payments must be devised to maintain the coalition.
Cartels, of course, can break down due to changing demands and costs. But in the
empirical case examined here, the Federal Highway Trust Fund (HTF), we show how resourceful
and adaptive Congress has been in maintaining a source of funds that provides substantial
political support for incumbent politicians. As with cartel rules, the use of long-term formula
allocations with only periodic modification allows for uninterrupted operation with occasional
sharing adjustments without opening the entire program to re-negotiation. In the case of the
highway program, the formula for allocating federal funds to the states has been very stable-initiated in 1916 with generally only minor changes for over 60 years and two more substantial
adjustments in 1982 and 1998. In neither of those cases, however, was the underlying notion of
federal highway subsidies questioned. Rather, the sharing formula was revamped to incorporate
the side payments required to maintain political support in Congress for the HTF, but even these
turn out to have had only minor impacts on the shares of most states.
The paper is organized as follows: In the following section we summarize some key
points in the cartel literature regarding allocation rules and the desire of the parties to minimize
negotiation and enforcement costs through the use of simple, durable disbursement formulas.
This analysis is used to hypothesize why Congress relies on formulas for allocating funds and
why, if Congress operates like a well run cartel, we should expect the formulas to yield relatively
stable returns to the states. Section III provides a brief history of the HTF and the conflict over
allocations. Data on federal highway allocations are then analyzed for stability across time. In
the concluding remarks section, we argue that the maintenance and periodic adjustment to these
formulas provide insights into federal policy making and the performance of government.
3
II. Cartel Allocation Rules and Congresses== Use of Formulas
Although the U.S. Congress is not organized like a market there are behavioral
similarities. Firms, for example, must respond to influential shareholders= demands, just as
members of Congress are expected to deliver positive net returns to their key constituents. Both
entities compete, firms with each other for customers and members of Congress with each other
for shares of tax revenues. Firms have incentives to collude in order to avoid competitive
outcomes that could dissipate profits. If collusion fails, efficient firms, at least, can survive by
serving their customers, albeit with lower profits. Politicians also have incentives to collude, but
for them the outcome is more critical. They must agree on key issues--how much to tax and how
to distribute the revenues. Unlike firms, members of Congress must obtain at least a simple
majority to operate. The rights, or claims, to revenues to support programs for favored
constituents must be established collectively. These collective agreements, which involve the
formation of congressional coalitions, require logrolling, whereby politicians trade votes in
support of their colleagues= special interest programs in exchange for votes for their favored
programs.
Although cartel agreements often breakdown, there are exceptions, and theoretical
arguments suggest when these exceptions are likely to occur. The folk theorem, for example,
implies that cooperative pricing behavior is a possible equilibrium in an oligopolistic market.4 It
does not, however, guarantee that it will be an equilibrium. Achieving a particular equilibrium in
a game with many equilibria is a coordination problem. One way to solve this problem is
4
For a discussion of the folk theorem, and game theory in general, as it applies to
oligopolistic industries, see Tirole (1988). Also see Schelling (1960) for a discussion of strategic
4
through a collusive agreement that involves assigning market shares as a first step.5 Division of
the market provides a focal point. If a firm experiences a loss of market share, that loss can be
interpreted as cheating by the other members, triggering retaliation and the breakdown of the
cartel. Importantly, price wars will be accompanied by instability in market shares. In contrast,
successful cartels will have stable shares.6 Posner (1976, p.62), and other antitrust scholars, have
long argued that fixed relative market shares are the type of evidence prosecutors can point to
when building a case of collusive behavior. Stable market shares, however, can also be
consistent with competitive markets and stable demand and cost conditions. Hence, other
evidence must be brought forth, such as market structure, ease of entry, and examples of overt
collusion to support claims of successful collusion. The history of cartels and their formation also
indicates that considerable resources can be spent in trying to reach agreement on the allocation
games in other settings.
5
Bain (1948) argues that side payments must be made in organizing cartels so that they
are unlikely to maximize collusive profits.
6
Scherer (1980, p. 172) notes that given the difficulty of agreeing on a collusive price,
there is a tendency for price changes to be avoided in cartels once agreements are reached.
5
of output shares and in policing cheaters.7
Members of Congress also devote resources in forming coalitions and in insuring that
policy agreements are adhered to. Members of Congress represent heterogeneous constituencies
with differing and competing demands for federal tax revenues. The initiation of any new
program requires negotiation and vote trades to assemble a successful coalition. The coalition
must agree to a current and future distribution of program funds and/or services that is durable
and clear enough that sponsoring politicians can demonstrate the advantages to their constituents.
Once assembled, the coalition must be protected from unraveling and remain focused on the
overall policy objective in order to safeguard constituent benefits from competing political
demands. To be durable, policy provisions must remain in operation even after a particular
politician has left Congress.
7
The literature on industrial organization contains numerous examples of cartel behavior.
See, for example, Carlton and Perloff (1994, pp.175-204). Williamson (1975, pp. 239-43)
discusses the contracting problems among oligopoly firms in reaching and policing a collusive
agreement.
6
There are institutional characteristics of Congress that assist politicians in their collusive
efforts. The number of members is fixed, which mitigates the problem of entry that cartels often
face. Additionally, congressional logrolling, which is essential for all narrow, constituent
programs, involves long-term, repeat contracting among politicians. Weingast and Marshall
(1988, p. 133) argue that logrolling agreements are often non-contemporaneous, requiring long
term policing of deals, and rise the question, A[i]f public policy reflects a series of bargains
among various interests, how are these bargains maintained over time?@ They point to the
committee structure=s gate-keeping characteristic as instrumental to preserving log rolling
agreements.8
This logrolling environment facilitates collusion among politicians. Long-term
contractual relations would encourage members of Congress to adhere to agreements.
Assembling a coalition on any particular policy is difficult, and once it is achieved and
viewed as valuable, politicians would take action to sustain it. Widespread cheating on political
agreements would undermine logrolling and the ability of all politicians to provide benefits to
their key constituents. Further, cheating would be readily observable among members of
Congress as a shift in political position in House or Senate votes and a reallocation of program
mandates and tax allocations. McCubbins, Noll, and Weingast (1987) point to the use of
administrative rules to enforce the agreement made within the original coalition. Administrative
rules maintain policy focus and to control bureaucratic drift.
8
We concur, but would add that the use of formulas offers a focal point that provides a
signal to all members that deviations from pervious deals are being proposed.
7
In this paper, we emphasize another congressional institution, the use of allocation
formulas, as a means by which political competition can be reduced and the transactions costs
involved in assembling and maintaining policy coalitions lowered. Once agreed to, the
allocations can be formalized, written out explicitly by use of formulas. The formulas not only
prescribe the distribution of benefits and costs among coalition members, but they serve to
restrict subsequent political negotiations to formula adjustments, rather than an unbounded
reassessment of the entire program.9 Reliance on simple, long-term allocation rules that are only
adjusted periodically at set times also constrains the administrative bureaucracy to adhere to
program objectives. In a manner similar to cartels, these stable formulas reduce the dissipation
of long-term program benefits to politicians, just like they protect cartel rents.10
9
For discussion of the benefits of a restricted agenda in bargaining, see Schelling (1960,
p. 31).
10
Wyrick and Arnold (1989) examine earmarking as a deterrent to rent-seeking in the
allocation of state budgets by politicians.
8
We focus our arguments on the distribution of federal highway funds to the states. As
with other major expenditure categories, Congress elected to use a formula method for allocating
or apportioning highway funds when the program was first inaugurated in 1916 and continued
through the present.11 By developing rules for allocating funds the need for lengthy and recurrent
negotiation has been reduced.12 To assemble political support for federal subsidies for road
construction and maintenance throughout the country, funded by federal excise taxes on fuel,
bargains had to be struck between urban and rural states. In general, rural states received more in
apportionments than they contributed in tax payments. The resulting political coalition,
however, was able to establish a national highway program that was very popular. The adoption
of formula rules for allocating the funds, even though they resulted in some states, typically
urban, paying more into the system than they received, reduced the temptation to politicians to
argue at length about whether any particular highway project was more deserving of funds than a
highway in some other political jurisdiction.13 As we show below, the allocation formula created
11
For example, the bulk of federal expenditures for domestic assistance are formula
grants. (Advisory Commission on Intergovernmental Relations 1995).
12
As mentioned, there has been little discussion in the literature about why congress
adopts such rules. An exception is Lee and Oppenheimer (1999). They, however, attribute the
existence of formula rules largely to the Senate=s preference, relative to the House, to allocate a
greater share of funds to smaller states. While we concur with their argument about the existence
of a small state bias, they do not consider the implications of positive contracting costs for
explaining the frequent use of these formulas.
13
An early version of a House bill on the Federal-Aid Highway Act of 1956 suggested
that each state was to be allocated funds based on its needs. The U.S. Senate (1956, p. 3)
strongly rejected that notion claiming that, A...each State=s share would depend in large measure
upon its ability to convince the Bureau of Public Roads of the accuracy of its estimates.
Whatever may be said about the efficiency of distribution of Federal funds on the basis of need,
the committee considers it contrary to the public interest to initiate a policy of distributing
Federal funds on the basis of what each State claims it needs@
9
by Congress has had relatively little modification, and the federal support for the highway system
has operated smoothly without serious controversy, long after the initiating coalition members
had passed from the scene.
A significant formula modification occurred in 1982. It involved a readjustment in
dispersements, but importantly did not involve debate in Congress as to whether federal support
of highway programs should continue. In 1982, as the interstate highway system neared
completion, a primary goal of the original coalition, the willingness of states whose=s
contribution exceeded what they received to support the existing allocation began to erode. To
protect the program, efforts were made to accommodate an increasingly disparate set of demands.
There were efforts by some members of Congress to divert highway monies to other uses, but
these actions had to be controlled or they could threaten the viability of the program. To
maintain political support for the federal highway program, we argue that members of Congress
would only make relatively minor adjustments in the allocation formula to appease those states
who had been contributing more, while avoiding a complete overhaul of the system established
in 1916. We hypothesize that even with these adjustments, each state=s share of federal highway
funds should remain relatively stable, insuring continuation of the program by maintaining
reliable constituent benefits within each political jurisdiction.14 The analysis of the federal
highway trust fund allocations presented in the following section supports this implication.
14
Weingast and Marshall=s (1988) analysis would also appear to imply the stability of
shares. They, however, do not test for stability. Rather, they examine the structure and
membership of congressional committees and infer stability and contract enforcement.
10
III. The Federal Highway Trust Fund
A. A Brief History.
The earliest involvement, of a comprehensive nature, by the federal government in
funding highways began with the Federal-Aid Road Act of 1916 (Pub. L. 64-355), and five years
later, with the Federal Highway Act of 1921 (Pub. L. 67-212). The main objective of these two
Acts was to fund the construction of rural post roads. Monies for these projects came from the
general funds of the Treasury and were allocated to the states on a simple formula that took into
account the state=s population, and mileage of postal delivery routs.15 As early as 1921, however,
there were references to a interstate highway system, and in 1956, Congress established the
Highway Trust Fund (Pub. L. 84-627). The purpose of the HTF was to ensure a dependable
source of financing, based on motor fuel excise taxes, for the National System of Interstate and
15
In 1921, states were apportioned funds on the following basis: AOne-third in the ratio
which the area of each State bears to the total area of all the States; one-third in the ratio which
the population of each State bears to the total population of all the States, as shown by the latest
available Federal census; one-third in the ratio which the mileage of rural delivery routes and star
routes in each State to the total mileage of rural delivery and star routes in all the states at the
close of the next preceding fiscal year, as shown by certificate of the Post-master
General....@(Pub. L.67-217). See Table 3 for an account of how the formulas for apportioning
funds have changed over time.
11
Defense Highways.16
The earmarking of taxes on motor fuels to fund highway construction was first instituted
at the state level by Oregon in 1919 and by 1929, all states were imposing a tax on gasoline.
Three years later a one-cent-per-gallon Federal tax was enacted as part of the Revenue Act of
1932, but until 1956, these revenues went to the general fund of the Treasury. With passage of
the Highway Revenue Act of 1956 and the earmarking of revenues to finance the interstate
highway system, additions to user taxes became more politically acceptable. As shown in Figure
1, the federal tax on gasoline doubled from 2 cents per gallon in 1955 to 4 cents in 1960. It
remained at 4 cents until 1983. It is clear from the figure that changes to the excise tax do not
occur annually. The main reason for this is the authority to place taxes in and to expend from the
HTF have long-term expiration dates, which get extended periodically. Major changes in the
motor fuel excise taxes have generally been accompanied by considerable debate as to the goals
of the program and tax increases most often occur when Congress must vote on extending the life
of the HTF.
16
A history of the HTF and description of the various user taxes can be found in U.S.
Department of Transportation (1998), Department of Transportation (1999, pp. 31-35)
12
Major revisions to HTF, for example, occurred as a result of the Highway Revenue Act of
1982 (Pub. L. 97-424) that established a special Mass Transit Account in the HTF to receive part
of the motor-fuel tax. The adoption of this new account was accompanied by an increase in the
gasoline tax to 9 cents per gallon in 1984. Then, another increase of 5 cents per gallon was
enacted as part of the Omnibus Budget Reconciliation Act of 1990. The Act designated one-half
of the revenues derived from the 5-cent increase to the General Fund of the Treasury for deficit
reduction. Up to that point, virtually all revenues from motor-fuel excise taxes (and other
highway-related Federal excise taxes such as taxes on tires) had been credited entirely to the
HTF. Another fuel tax increase of 4.3 cents per gallon was enacted effective October 1, 1993, by
the Omnibus Budget Reconciliation Act of 1993, with the entire amount of the increase directed
to the General Fund of the Treasury for deficit reduction.17 The federal gasoline tax in 1996 was
18.3 cents per gallon. Of that amount, 4.3 cents went to the general fund of the U.S. Treasury
and 14 cents to HTF, with 12 cents dedicated to the Highway Account and 2 cents to the Mass
Transit Account. The Taxpayer Relief Act of 1997 redirected the 4.3 cents tax to the General
Fund to the HTF effective October 1, 1997, once again emphasizing the unifying purpose of the
HTF, that it was there to serve a constituency composed of highway users and the construction
industry. The most recent legislation, the Transportation Equity Act for the 21st Century
(TEA-21) (Pub.L. 105-178) extended the HTF taxes through September 30, 2005. Currently, the
federal excise tax is 18.4 cents per gallon for gasoline and 24.4 cents for diesel.
Although there has been willingness of Congress in more recent years to use federal
17
In 1996, the tax on gasoline and diesel fuels accounted for approximately 85 percent of
HTF receipts
13
motor fuel tax revenues for purposes other than highways, namely deficit reduction and mass
rapid transit systems, Figure 1 indicates that the real tax rate on gasoline experienced it=s highest
level as construction of the interstate highway system commenced in force in the 1950s. It then
declined over time as the system neared completion in the late 1970s. The interstate system was
seen as important to economic development and to national defense and received strong popular
support that overcame some hoary distributive political issues.18 The interstate highway system
was composed of links that connect cities and the value of each link increased with the
construction of additional links, thus generating network externalities. Members of Congress
appeared to have been appreciative of these points.19 But, as construction of the system neared
completion in the 1970s, conflict over the allocation of funds began to intensify.
18
These involved the need to fund rural states to greater extend than urban and concern
about the extent of cross subsidization. See the statements in the Congressional Record, April
26, 1956, pp. H 7116-17; and U.S. House of Representatives (1956, p. 2).
19
Representative Howard of New Jersey expressed the consensus view when he stated,
A[w]e need a national highway system, we need good roads in every State, if we are going to have
commerce and safety in our transportation. And so we have to consider having a good national
highway system. And if it is going to cost some States, like my own State, to have my people in
New Jersey have safe, decent, good, efficient roads when they travel to other States, that is the
way I would like it.@ (Congressional Record-House, December 6, 1982, p. 28916)
14
The allocation of funds for construction of the interstate highway system was in many
respects, universalistic. All states received funding from the HTF. But, relative to their
contributions, some received more than others. Table 1 shows the ratio of the amount each state
received from the HTF=s Highway Account over the amount contributed to the fund through
excise taxes for the periods 1956-73 and 1956-97. Funds are collected and allocated each fiscal
year, so these figures reflect the average for the two periods. These ratios are generally referred
to as Adonor/donee ratios,@ although they actually reflect the ratio of apportionments to payments.
The size of the numerator is determined by congressionally designed formulas that dictate how
funds from the Highway Account of the HTF are to be apportioned among the states. Also
included in the numerator are smaller amounts of discretionary funds within the HTF that
congressional committees allocate to the states.20 States like Alaska, with a ratio of 6.69 for the
entire period 1956-97, have experienced exceptionally high returns from the HTF, while states
like California have contributed more than they have received.
Assembling and maintaining political support in Congress for the federal highway
program involved allocation concessions from urban states to rural states. Indeed, Table 2
describes the imbalance that was agreed to in order to assemble the coalition. The table outlines
the cumulative 1957-1985 apportionment to payment ratios for the top ten recipient (donee)
states and the top ten donor states. The table also includes two measures of highway use in 1985,
vehicle registration and vehicle miles. Alaska and Hawaii are not included in the table, but their
20
For a discussion of how these discretionary funds are used to influence votes on
highway bills, see Evans (1994).
15
inclusion or exclusion does not alter any of our arguments. The table reveals that rural states
with relatively low highway use received more federal highway tax revenues than they
contributed, whereas larger more urban states, such as California, with higher vehicle use,
contributed more than they received. On average, the 10 top receiving states had mean
apportionment to payment ratios of 2.25, over two and a half times the mean ratio of the 10 top
contributing states, which was .87. The receiving states, however, had mean motor vehicle
registration of 727,018 and vehicle miles of 7,511,000 compared to the mean vehicle
registrations of 6,782,762 and mean vehicle miles of 73,175,000 for the contributing states.
Even so, that arrangement was the price necessary to assemble and maintain the political support
for a national highway system.
Examination of Tables 1 and 2 suggests that small states generally have ratios in excess
of unity while most large states have ratios that are less than unity. Indeed, regression results
strongly support the notion, advanced by Lee and Oppenheimer (1999), and others, that the
Senate=s apportionment rule of two for each state biases fund allocation in favor of smaller
states.21 Let the dependent variable be the state=s cumulative ratio for the period 1956-97 and the
explanatory variable equal one over the state=s population in 1970, the census year closest to
middle of the period.22 The explanatory variable, when multiplied by two, can be interpreted as
21
Lee and Oppenheimer (1999, pp. 158-85) examine the distribution of federal dollars for
education, housing, health and other programs and find substantial support for the small-state
advantage. They, however, include constituency characteristics in some of their regression
equations. These same characteristics can also be elements of the formulas Congress devised for
allocating funds. A cleaner test would exclude those variables.
22
Population is in 000's.
16
the number of Senators per capita. If small states tend to fare somewhat better than larger states,
the coefficient on this variable should be positive. The following regression results are
supportive:
Donor/Donee Ratioi =
0.855
+
859*1/POPi
(6.70)
(6.90)
(t-statistics in parentheses). Number of observations = 50. R-squared = .498.23
Although the small state advantage revealed in the above regression can be explained by
unequal representation in the Senate, it is also consistent with our notion that Congress operates
collusively. Small states are like fringe firms in a cartel arrangement; because they are small,
granting them high shares is a relatively low cost means for keeping them within the cartel.24
During the initial construction phase of the interstate system highly unequal shares were
seen as part of the cost of having an integrated system. A critical period for the cartel was
reached when the interstate system neared completion. At that time, the argument for
maintaining a large federal involvement in the maintenance and construction of highways was
becoming less apparent. The following comments by Senator Thurmond of South Carolina (see
Table 2) during floor debates on TEA-21 characterizes the divisions amongst the states:
23
These results are not dependent on a few outliers. Excluding the states of Alaska and
Hawaii reduces the coefficient on 1/POP to 419, but it remains statistically significant with a tstatistic of 6.3.
24
See, for example, Johnsen=s (1991) description of the how and why small refiners were
given preferential treatment by the larger members of a cartel arrangement in the 1930s.
17
AI will vote for this measure, but I do so reluctantly. The reason for my
dissatisfaction is that under it, South Carolina remains a donor State and would
receive only about 90% of its share of contributions back from the program.
Many of my colleagues may wonder at the intensity with which we who represent
so-called ``donor states'' approach this issue. South Carolina has sent, every year
since the program began in 1956, more money to fund the highway needs of other
states than have been sent back to us. The total loss, in the case of South
Carolina, now stands at over $1 billion and will continue to rise. At first, this
disparity was justifiable to build the Interstate Highway System across the nation,
and our constituents accepted this willingly. There was always the expectation
that when this good purpose was achieved, we would then be assisted with our
own road needs. After all, we had to postpone tending to our own infrastructure
while the Federal Government used the gasoline tax for priorities elsewhere.@25
The history of the HTF reveals considerable conflict over the allocation of funds, especially as
the split between urban and rural states began to widen in the 1970s, and as some states sought to
use the HTF for other purposes, such as subsidies for ethanol, and for deficit reduction.
Concomitantly, highway apportionment formulas, as they are officially known, became
increasingly more complex.26
Table 3 provides a detailed chronology of the major provisions used for allocating or
apportioning funds from the HTF. Inspection reveals that the allocation formulas have not only
25
Congressional Record, March 12, 1998, Page S1848.
26
There have been a number of studies examining how the formulas for distributing
highway funds could be made more consistent with actual needs. See U.S. General Accounting
Office (1986 and 1996). They also spell out who the gainers and losers are likely to be for the
different scenarios.
18
become increasingly more complex, but changes brought about by the larger states who pressured
for higher shares, shares that more closely reflected their contributions. In 1983, the so-called
donor states succeeded in having a provision added that no state was to receive less than 85
percent of its contribution to the HTF. Prior to that time, the only minimum provision, that no
state was to receive less .5 percent of annual apportionments, yielded an advantage to the smaller
states. Moreover, with passage of TEA-21 in 1998 the allocation rules for the Interstate
Maintenance Fund, one of the four major categories that designate the types of projects federal
funds can be spent on, for the first time, takes into account the amount contributed by a state.
These changes were likely necessary to induce donor states, such as South Carolina, to vote for
increases in taxes on motor fuels. But despite the changes in the formulas over time, it=s not at
all clear that the impact has been significant. The donor/donee ratios reported in Table 1 for the
period 1956-73 do not appear to be much different than those over the longer period 1956-97.
According to the U.S. General Accounting Office (1996, p. 2), changes to the formulas in
the 1980s and 90s were guided by two major objectives: (1) return the majority of funds
contributed to the HTF to the state where the revenues were generated, and (2) safeguard states=
historical funding shares. Given the initial shares shown in Table 1 for the period 1956-73, these
two objectives are conflicting. Nevertheless, they characterize the conflicting objectives faced by
Congressional representatives seeking to maintain a politically valuable flow of funds. The
question we seek to answer empirically is whether objective (1) dominates (2) or vis versa.
B. Donor/Donee Ratios: A Statistical Analysis of Stability.
The analysis of stability we preform utilizes annual observations on the donor/donee
ratios for the period 1974-97. The only data reported for prior years are the cumulative ratios for
19
the period 1956-73 shown in Table 1. While changes to the allocation formulas have generally
been made when Congress is the process of extending the life of the HTF, minor changes can
occur at anytime. In addition, the HTF typically runs a positive balance, and earns interest on
those monies. Thus, the amount paid out over the long-run has exceeded the amount collected.
The last row in Table 1, labeled Total, shows the ratio for the fund as a whole. Since there are
years when the HTF pays out less than it takes in, and other years when the opposite is the case,
the state observations for each year are normalized by dividing each state=s ratio by the Total ratio
for that year.
An immediate problem that has to be resolved is the selection of the statistical tests for
stability. Although the term stability implies stability over time, there are two dimensions to this
problem. First, there is the issue of whether the means and variances of the donor/donee ratios
have changed over time. If the underlying distributions have changed, that would indicate that
the allocation scheme has changed. Failure to find a significant change, however, does not imply
stability of individual state shares, because winners can replace losers while the underlying
distribution remains unaltered. Thus, the second issue revolves around the stability of each
states= shares over time. Here, rather than focusing on individual states, we attempt to identify
groups of states that may have experienced substantial shifts in their shares.
Table 4 provides descriptive statistics for each year in the sample. The mean donor/donee
ratio for each year is substantially above unity, a result consistent with the observation that
smaller states enjoy an advantage in the allocation of funds. It is also readily apparent that the
distribution of the ratios is highly skewed to the right in each year of the sample and normality is
rejected by the Jarque-Bear statistic in all cases. Tests for the equality of the means of the
20
donor/donee ratios in each year yielded an F-statistics of 0.189, degrees of freedom (23, 1176).
The critical value at the 5 percent level is 1.76, thus we can not reject equality. A Brown and
Forsythe test for the equality of the variances between the series yielded a statistic of 0.231, and
that also fails to reject equality. Various other test were performed, such as excluding Alaska and
Hawaii from the sample, and testing for a break in the sample with the introduction of the Mass
Transit Account in 1982. None of these additional tests altered the basic result that the
underlying distributions of the donor/donee ratios have remained stable over time.27
A problem with the above test, as previously mentioned, is that the underlying
distributions may remain stable over time even if state shares are fluctuating widely from year to
year. A simple, but yet direct test, of stability is to examine whether the past is a good predictor
of the future. If past shares predict future shares, that is prima facie evidence of stability. Let the
dependent variable be the state=s average donor/donee ratio over the period 1974-97, and the
explanatory variable equal the state=s average ratio over the period 1956-73, as shown in Table 1.
The regression results are:
Donor/Donee Ratioi (1974-97)
= 0.335
+
27
0.695* Donor/Donee Ratioi (1956-73)
Stratmann (1996) has proposed a unique test for cycling. Essentially, if there is
substantial variance in allocations/outcomes on a periodic basis relative to the variance of the
allocations, summed up over the entire period, that could be indicative of cyclical majorities.
The underlying notion is that cycling generates stark differences between winners and losers in
the short-run, but over the long-run the returns average out. A variant of his test as applied to the
donor/donee ratios is to first compute the coefficients of variations for each year, sum these up,
and then divide by 24. This provides an average measure of the amount of variation occurring
annually. This measure can then be compare to the coefficient of variation derived by first
computing the average ratio for each state over the 24 year period. Then, obtain the mean and
standard deviation of these average ratios. Using the donor/donee ratios of the HTF, the
coefficient of variation for the former measure is .713 and the latter, .655. While these results
can not reject cycling, there is little difference between the two measures.
21
(4.76)
(18.11)
(t-statistics in parentheses). Number of observations = 50. R-squared = .87.
The high R-squared term and high t-statistic for the coefficient on explanatory variable indicate
that the past is a good predictor, and stability is implied. But, the coefficient on the donor/donee
ratio (1956-73) is less than unity, suggesting that some changes in the allocation scheme have
occurred and closer examination is called for.
The next set of tests employ a time-series cross-section model with the donor/donee ratios
as the dependent variable. The time frame covers the period 1974-97, i.e., the number of time
periods (T) is 24 and the numbers of cross sections (N) is 50. Included in the pooled regressions
are state fixed effects and individual AR(1) terms.28 The explanatory variable is a linear time
trend, with T equal to 1 in 1974. Examination of the donor/donee ratios in Table 1 suggests that
a number of states with high ratios for the period 1956-73 experienced a decline in their ratios in
the subsequent period, while some with low ratios appear to have experienced a slight increase.
These patterns suggest a switching regression model whereby the coefficient on the time trend
variable takes on different values for states with high donor/donee ratios in 1956-73 than it does
for states with lower ratios in the earlier period.29 Application involves a search for the switch
point that optimally splits the time trend variable into two parts. The switch point was selected
by choosing the value of the donor/donee ratio for the period 1956-73 that minimized the residual
sums of squares for the pooled regression model. This procedure indicated a donor/donee ratio
for 1956-73 of 1.9 provided the best fit. There were nine states with ratios in excess of 1.9.
28
Because T<N, we make no effort to account for contemporaneous effects.
29
See Maddala (1977, pp. 394-96) for a discussion of switching regression models.
22
Denote D as equal to one if the state=s donor/donee ratio for 1956-73 exceeded 1.9, and zero
otherwise. The pooled regression model yielded the following results for the time trend variables
T and D*T:
Donor/Donee Ratioi,t
=
- 0.002*T
- 0.041*(D*T)
(-1.00)
(-6.29)
(t-statistics in parentheses). Number of observations included = 1150. R-squared = .89.
Not surprisingly, these results reveal that for the majority of states there was no statistically
significant common trend. But, for those states with relatively high donor/donee ratios in the
past, the trend was down. As mentioned before, these were generally the smaller states,
suggesting that an alternative test would be to split the time trend variable on the basis of state
population averaged over the time period 1974-97. In this case, a state population level of 4.5
million minimized the residual sums of squares. Denote D as equal to one if the state=s
population was less than 4.5 million, and zero otherwise. This pooled regression model
produced the following results for the time trend variables T and D*T:
Donor/Donee Ratioi,t
=
0.003*T
- 0.020*(D*T)
(0.72)
(- 3.74)
(t-statistics in parentheses). Number of observations included = 1150. R-squared = .89.
The above results confirm the argument that it was the smaller states with relatively high
ratios who experienced a decline in their returns from the HTF. Nevertheless, the impact was not
large and the small state advantage remains a prominent factor characterizing allocations from
the fund. But more importantly, the results taken collectively point to considerable stability in
the shares of each state. States did not experience wild shifts in their shares. Of course it would
be difficult for large states to experience substantial shifts as they are constrained by the
23
aggregate size of the fund, but that too speaks to the stability of shares for federal programs.
Once the highway program was agreed to, it was evident that only minor manipulation of the
shares could be tolerated if funding was to progress. Opportunism had to be controlled or the
entire system would be in jeopardy. Nominal increases in excise taxes were accompanied by
what, in retrospect, appears to have been minor changes, in terms of their impact, to the formulas
for allocating funds. Despite constant conflict over the allocation of funds from the HTF,
Congress has managed to operate much like a successful and enduring cartel.
IV. Concluding Remarks
Although the allocation rules adopted by Congress to preserve long-term political
coalitions serve well the objectives of the elected members of that body, they can generate
outcomes that have little semblance to what most economist would consider efficient. Because
there can be high costs to reaching an agreement, and high policing cost, one should not expect a
cartel to operate with the same effectiveness as a monopoly would. Likewise, the rules congress
adopts for allocating funds will generate outcomes that reflect heterogenous demands and side
payments rather than the expenditure of funds in a benefit and cost effective manner. A study by
U.S. General Accounting Office (1996, p. 23) reports that the highest correlations between the
various apportionment factors used for allocating funds from the HTF and estimates of repair
needs on interstate highways were interstate vehicle miles traveled in a state and the state=s
annual contribution to HTF. Because the excise tax is on motor fuels, contributions and miles
traveled are also highly correlated. Further down the list where factors such as interstate highway
miles in the state, and much further down were factors such as rural population. As Table 3
reveals, population measures and highway mileage factors have been the key components of the
24
apportionment formulas for much of the life of HTF. While allocating funds to the states based
on their contributions would seemingly yield the highest return, that only raises the question as to
why the federal government remains so heavily involved in highway programs.30 Both the extent
of the program and the allocation rules for the HTF conflict with those who have argued that user
taxes and earmarking, as in the case of the federal excise tax on gasoline, generate efficient
outcomes.31 The need to build coalitions and maintain them brings their conclusion into
question.
30
Under TEA-21, authorizations for highway and transit programs total almost $218
billion.
31
See, for example, the papers in Wagner (1991). Teja (1991, 13-26) is more explicit in
describing the use of earmarked allocations as a means of avoiding perverse outcomes under
general fund financing.
25
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Lee, Dwight R., and Richard E. Wagner. AThe Political Economy of Tax Earmarking.@ in Richard
E. Wagner. ed. Charging for Government: User Charges and Earmarked Taxes in
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Libecap, Gary D. and James Smith, AThe Self-Enforcing Provisions of Oil and Gas Unit
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McCubbins, Matthew D., Roger Noll, and Barry Weingast. AAdministrative Procedures and
Political Control.@ Journal of Law, Economics & Organization 3 (Fall 1987): 243-278.
McMahon, Walter W. and Case M. Sprenkle, AA Theory of Earmarking,@ National Tax Journal
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26
Posner, Richard A. Antitrust Law: An Economic Perspective, Chicago: University of Chicago
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Roth, Gabriel. ARoad Financing in the U.S.@ Transportation Quarterly 50(4) (1996): 107-114.
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Stigler, George J. AA Theory of Oligopoly.@ Journal of Political Economy 72 (February 1964):
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Teja, Ranjit S. The Case for Earmarked Taxes: Government Spending and Public Choice.
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Tirole, Jean. The Theory of Industrial Organization. Cambridge MA: MIT Press (1988).
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27
(1956).
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28
Table 1. Ratios of Apportionments and Allocations to Payments
State
Cumulative 1956-73
Cumulative 1956-97
1.15
8.86
1.48
0.89
0.84
1.16
1.22
1.31
0.66
0.82
3.06
1.59
1.1
0.8
0.93
0.91
1.16
1.42
1.12
1.14
1.06
0.85
1.18
1.07
0.96
2.69
0.97
2.08
1.4
0.82
1.64
0.98
0.6
1.95
1.01
0.8
1.43
0.97
1.55
0.77
1.95
1.11
0.77
2.13
1.11
6.69
1.17
0.99
0.95
1.31
1.79
1.5
0.89
0.92
3.78
1.72
1.11
0.87
1.14
1.1
1.06
1.23
1.15
1.45
1.72
0.9
1.26
0.99
0.95
2.37
1.14
1.51
1.4
1.02
1.34
1.22
0.86
1.96
0.92
0.86
1.21
1.15
2.22
0.88
1.97
0.98
0.85
1.58
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Deleware
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Misouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
28
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
Total
Source: Highway Statistics, Table FE-221.
29
2.7
1.21
1.32
2.3
0.7
2.97
1.04
2.13
1.12
1.55
1.99
0.9
1.91
1.12
Table 2
Ratio of Apportionments to Payments, Top Ten and Bottom Ten States
and Selected Highway Use Statistics, 1985
State
Ratio*
Motor Vehicle
Registration
Vehicle
Miles**
State
Ratio*
Motor Vehicle
Registration
Vehicle
Miles**
Montana
2.76
652,182
7,368
Oklahoma
.81
2,863,748
31,181
West Virginia
2.62
1,143,388
12,664
North Carolina
.83
4,450,383
49,923
Vermont
2.60
397,608
4,688
Texas
.84
12,444,187
143,263
Wyoming
2.43
499,583
5,401
Wisconsin
.85
3,186,991
36,679
Nevada
2.19
709,429
7,566
Indiana
.87
4,024,032
40,782
Utah
2.15
1,098,797
12,037
New Jersey
.88
4,909,366
52,690
South Dakota
2.01
650,352
6,277
California
.90
18,899,221
207,600
North Dakota
2.00
655,127
5,579
Michigan
.90
6,726,678
67,402
Rhode Island
1.95
610,074
5,823
South Carolina
.91
2,221,598
26,677
Idaho
1.78
853,639
7,710
Ohio
.93
8,101,612
75,549
*Cumulative Ratio of Apportionments to Payments, 1957-85. ** in 000's.
Source: Highway Statistics, Summary to 1985
30
Table 3. HTF Apportionment Rules.
Year/Statute
Highway Program
Allocation Rules
Min/Max
Allocation
Federal Aid to Rural Post Roads
1/3 State Area/Total U.S.
1/3 State Pop./Total U.S. .
1/3 State Rural Delivery and Star
Routes/Total U.S.
No provision.
Federal-Aid Highways
Same as 1916
No state to receive less
than .5% of annual
apportionments.
Federal-Aid Primary and
Secondary Roads
Same as 1916
No state to receive less
than .5% of annual
apportionments.
Federal-Aid Primary and
Secondary Highways
Same as 1916
No state to receive less
than .5% of annual
apportionments.
Interstate and Defense Highways
(for 1957-59)
2 State Pop./ Total U.S.
2 State Federal-Aid Primary Highway
Allocation/Total U.S.
(1960-69)
State Cost of Completing Interstate
System/ Total U.S.
No state shall receive
less than .75% of annual
apportionments.
Federal-aid Primary and
Secondary Highways
2/3 apportionment:
1/3 State Area/Total U.S.
1/3 State Rural Pop/Total U.S.
1/3 State Rural Delivery and Intercity
Mail Routes/Total U.S.
1/3 apportionment:
State Urban Pop./Total U.S. (Primary
system. Secondary system uses rural
pop.)
No state to receive less
than .5% of annual
apportionments.
Interstate System Completion
Federal Share of State Cost/Total Federal
Share.
No Provision.
1916-20
1921-43
1944-55
1956-77
1978-82
No State to Receive
Less than 85% of
Contribution to
Highway Trust Fund.
1983-91
Federal-Aid Primary and
Secondary Highways
Primary:
Larger of:
2/9 State Area/Total U.S.
31
No state to receive less
than .5% of annual
apportionments.
2/9 State Rural Pop/Total U.S.
2/9 State Rural Delivery and Intercity
Mail Route/U.S. Total
1/3 State Urban Pop./U.S. Total.
Or
2Rural Pop.
2 Urban Pop.
Secondary:
1/3 State Area/Total U.S.
1/3 State Rural Pop/Total U.S.
1/3 State Rural Delivery and Intercity
Mail Routes/Total U.S.
Interstate System Completion
Same as 1978.
No state to receive less
than .5% of annual
apportionments.
Interstate 4R (Resurfacing,
Restoration, Rehabilitation, and
Reconstruction).
55% State Interstate Lane Miles/Total
U.S..
45% State Vehicle Miles/Total U.S.
No state to receive less
than .5% of annual
apportionments.
(1984 and after) Interstate
Substitute Highway Projects
Federal Share of State Completion
No provision.
Costs/Total Federal Share.
No State to Receive
Less than 90% of
Contribution to
Highway Trust Fund
1992-98
Interstate System Completion
Same as 1978.
No Provision.
Interstate Maintenance (4R)
55% State Interstate Lane Miles/Total
U.S..
45% State Vehicle Miles/Total U.S.
No state to receive less
than .5% of annual
apportionments.
Interstate Substitute Projects
Federal Share of State Completion
No Provision.
Costs/Total Federal Share.
1987 Formulas used
National Highway System
(Primary, Secondary, Other)
Surface Transportation System
(STS).
No state to receive less
than .5% of annual
apportionments. For
STS no state to receive
less than 70% of its
1987-91 allocation.
No State to Receive
Less than 90.5% of
Contribution to
Highway Trust Fund
1999
Interstate Maintenance
1/3 State Interstate System Miles/U.S.
Total
1/3 State Vehicle Miles/U.S. Total
1/3 State Annual Contribution to
Highway Trust Fund/U.S. Total
National Highway System
(NHS)
.25 State Lane Miles/ U.S. Total
.35 State Vehicle Miles/U.S. Total
.30 State Diesel Fuel Use/ U.S. Total .10
State Lane Miles/State Pop.
32
No state to receive less
than .5% of annual
apportionments to
Maintenance and NHS.
No state to receive less
than .5% of annual
apportionments to
Maintenance and NHS.
Surface Transportation System
(STP)
.25 State Lane Miles/U.S. Total
.40 State Vehicle Miles/U.S. Total
.35 State Tax Payments to HTF/U.S.
Total.
No state to receive less
than .5% of annual
apportionments.
Sources: 1916-39 Stat. 355; 1921-42 Stat.212; 1944-58 Stat. 838; 1956, 1958-70 Stat 374,72 Stat. 885; 1978-82Highway Statistics; 1983-91-96 Stat. 2097, Highway Statistics; 1992-98-Highway Statistics; 1999-Highway
Statistics.
33
34