The past two decades have witnessed substantial changes in the dynamics of state—local relationships for highway funding. We argue that four factors have produced a funding crisis for local governments: an increase in developed land and locally owned roads; a rise in construction and maintenance costs; devolution of highway financing responsibility from the states to localities with a reduction in intergovernmental transfers; and more wear and tear on roads due to increased vehicle miles traveled. Local governments can delay maintenance and build fewer new facilities, but eventually many will seek new sources of revenues to fund their growing responsibilities. We identify several potential financing mechanisms: impact fees and smart growth policies; local option transportation taxes; nontraditional taxes and fees such as transportation utility fees and land taxes; and low-cost debt financing from state infrastructure banks. We discuss challenges faced by local governments in continuing to meet their responsibilities and financing needs.
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