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Mid-America Transportation Center

Earmarked Revenues, Fiscal Stress, and Spending Volatility: The Case of Highway Finance and Implications for Freight Movement

Final Report
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Researchers

  • Principal Investigator: Phuong Nguyen-Hoang (phuong-nguyen@uiowa.edu
  • Co-Principal Investigator: William Duncombe (duncombe@maxwell.syr.edu
  • Project Status
    Complete
    Sponsors & Partners
  • Nebraska Department of Roads
  • About this Project
    Brief Project Description & Background
    State spending on highways comes from three sources: earmarked revenues (e.g., motor fuel taxes, tolls, and other transportation revenue), federal highway grants, and the general fund revenue. Of these three sources, earmarked revenues constitute the highest proportion (above 50%) of the total revenue states spend on highways (Nesbit and Kreft 2009). The importance of earmarked revenues emphasizes the need for research into their role in stabilizing state total highway revenues and spending, especially during economic recessions.
    Research Objective
    The objective of this research is to examine how earmarked revenues affect the volatility (or stability) of a state’s total highway revenue and highway spending, as well as the potential effects of fiscal stress on the volatility of highway spending.
    Potential Benefits
    This research will be the first to provide evidence of the role (or lack thereof) of earmarked revenues in stabilizing states’ highway revenues and expenditures and the potential negative effect of fiscal stress on highway spending. The findings of this study will be particularly important given the heavy use of earmarked revenues in highway financing, the current serious budget crises in most states, and the need of sufficient funding for highway expansion and maintenance, and thus freight movement.
    Abstract
    One of the distinguishing characteristics of highway finance in the United States is the heavy use of earmarked revenues. This study is the first to examine how such revenues affect the volatility (or stability) of a state’s total highway revenue and highway spending, as well as the potential effects of fiscal stress on the volatility of highway spending. We hypothesize that states with a greater share of highway funding from earmarked revenues have more stable overall highway revenues and spending, and that fiscally stressed states have more volatile highway spending than those with no fiscal stress. We provide implications for freight movement based on our research findings. This study seeks to answer three research questions. First, are earmarked revenues for highways more or less volatile than general taxes such as income or sales taxes? The earlier discussions suggest that revenue volatility (or lack thereof) does not necessarily lead to volatility in spending. Therefore, two additional research questions arise: whether volatility of spending for highways is greater or lesser in states with a higher share of highway funding from earmarked revenues, and whether states under greater fiscal stress show more volatile highway spending than those under less fiscal stress. In answering the last two questions, we can see whether earmarked revenues help protect highway funds from cuts, especially during periods of state fiscal stress.
    Project Amount
    $ 102,513.47