decision making in the federal-aid program and state highway programs and the historical origins of the present system.

Governments spent $136.4 billion to construct and operate highways in the United States in 2004 (FHWA 2005a, Table HF-10). Highways are predominantly an activity of state governments: 60 percent of all spending and 72 percent of all capital spending are by the states (Table 2-1). Highways accounted for 9 percent of state and 4 percent of local general government direct expenditures in 2003 (U.S. Census Bureau 2005a).

The capital spending share of total expenditures has declined since the 1960s and 1970s. Since at least the 1980s (earlier data are not available), the fraction of construction expenditures that is classified by the states as new construction (that is, substantially new roads rather than reconstruction or upgrades of existing roads) has declined. For capital expenditures by state governments on roads other than local roads, 39 percent was new construction in 1981, 33 percent in 1991, and 19 percent in 2004 (FHWA 1997, Table SF-212A; FHWA 2005a, Table SF-12A).

State and local governments dedicate, by law, certain revenues from highway user fees and other taxes to pay for highways. They also receive federal grants designated for highways and issue bonds with the proceeds dedicated to highways. These sources of funds are described below. If they fall short of highway spending, the difference is charged to general funds.

Identifying the sources of funds for specific government expenditures is inherently ambiguous because revenues are fungible. To say that highway expenditures come from a particular revenue source may be taken to mean that