Highway financing is a major issue confronting local and state governments. Until about fifteen years ago, the states relied primarily on revenue from a dedicated tax on motor fuel sales (gasoline and diesel) to fund highway construction and maintenance. Projections now show that revenue from this tax will not even sustain highway maintenance in the near future. As an alternative, states have shifted much of the funding for highway construction to tolls on users. States have even sold rights to tollways to private firms or other government entities to fund new highway construction in the state.

1. What effect does the shift from a dedicated tax to tolls have on equity, economic neutrality, and administrative and compliance costs?

2. Cities and counties also have a role in highway construction and usually use general revenues to match grants from the state and/or federal government. Discuss the merits of and obstacles to allowing a locally piggybacked tax onto the state and federal motor fuels taxes. What are the economic merits of local governments shifting to tolls on local highways?