American Rural Highways

by T. R. Agg

General taxes are levied on all taxable property in a political unit under statutory provisions regulating the amount of the levy and the purpose for which the revenue is to be used. In the aggregate, the road taxes are large but in the township or county the rate is generally small compared to some other taxes, such as the school tax.

Vehicle Taxes.—The great direct benefit derived by those who actually operate vehicles over the roads justifies the policy of requiring a vehicle to pay a license fee in lieu of other taxes, the funds so obtained to be used for the construction and maintenance of public highways. In practice, this method has already been applied to motor vehicles in most states and has proven to be an important source of revenue. Its application to horse-drawn vehicles has not been attempted, due probably to the fact that such horse-drawn vehicles as use the public highways are also employed about the farm or in the towns and the determination of an equitable basis for taxation involves many difficulties.

The rate of the fee for motor vehicles should be based on their destructive effect on the road so far as that is possible. The scale of fees should therefore take account of weight and speed of vehicle and if the license is in lieu of all other taxes, it should also be graduated with the cost of the vehicle.

When funds are thus derived, every precaution should be taken to insure that the money is used judiciously for construction and especially for maintenance on those roads most useful to motor traffic.

Highway Bonds.—Bond issues for road improvement afford a means of constructing roads and paying for them while they are being used. A very large volume of such bonds are outstanding in the United States. Road bonds should be issued only for durable types of improvement and the life of the bond should be well within the probable useful life of the road surface. It is customary and highly desirable that the general nature and extent of the improvement be established before the bonds are issued. It is desirable that bond issues be subject to approval by referendum before issue and that is provided in every instance.

Highway bonds are of three classes known as Sinking Fund, Annuity and Serial Bonds, respectively. The earlier bonds issued were almost all of the sinking fund class, but in recent years the serial bond has been widely employed and is probably the most satisfactory to administer.

Sinking Fund Bonds.[1]—When this type of bond is employed, the amount of the expenditure for road improvement is determined upon and the length of the period during which tax payments shall be made is settled. To employ a concrete example, it may be assumed that $100,000 is to be expended for road work and is to be paid at the end of ten years. The interest rate on the bonds will vary with the condition of the bond market and the stability of the political unit issuing the bonds, but is usually about 5 per cent. Knowing these factors, the amount to be added to the sinking fund each year is computed. In order to pay the interest on the bonds, a tax of suitable rate is levied, and in order to retire the bonds at the end of the period, a sum is set aside each year which is supposed to be invested and draw interest which will be added to the principle, and the principle and interest comprise the sinking fund. The principle of the sinking fund is obtained by tax levies, a sum being added to the principle of the sinking fund each year.

[1] For a more detailed discussion of highway bonds see Bulletin 136, U. S. Dept. of Agriculture, which is the basis of this discussion.

The success of this method of financing depends upon the proper administration of the sinking fund. It must be invested with fidelity and the fund be kept intact. Usually the sinking fund cannot be invested at as high a rate of interest as the bonds bear and there is some loss as a result. Road bonds bearing 5 per cent interest can usually be sold at par while the sinking fund will usually net about 3 or 3½ per cent interest. The total cost of a bond issue will be greater by the sinking fund method than by either of the other methods described.

Annuity Bonds.—Annuity bonds are drawn in such a manner that the amount of the payment for principle and interest is the same each year during the life of the bond. When the amount of the issue and the rate of interest has been determined and the amount of the desired annual payment has been determined, the number of years the bonds must run is computed.