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Transportation Funding & Financing



Transportation project finance utilizes a wide variety of revenue and funding from federal, state, local, and private sources. Laws and regulations that govern transportation financing also extend from the federal level to the state and local level, where notable differences are found among authorized mechanisms or those that are regularly employed by a particular institution.

Traditional Finance

Traditionally, transportation infrastructure has been financed primarily through a combination of state and local taxes and fees and-for major projects-Federal grants funded by national motor fuels taxes. These resources are typically combined to fund projects on a "pay-as-you-go" basis, meaning that projects have often been built in phases or increments as funds become available over a period of years. Project funding has been tied closely to Federal and state cash management policies, with nearly exclusive responsibility for the process vested in state and local public transportation agencies.

Motor fuel and vehicle taxes are deposited into the Federal Highway Trust Fund (HTF) from which Federal-aid grants are provided, typically on an 80-20 federal-to-state matching ratio. However, state and local funding provides the majority of revenue available to highway projects-about 79 percent in 2006-through state motor fuels and vehicle taxes, tolls, local property taxes, sales taxes and other special assessments, general fund appropriations, and bond issue proceeds. Tax-exempt municipal bond issues have a long history of helping to finance public infrastructure, including local transportation improvements.

Federal aid for transit projects, through formula funds and discretionary grants, is also provided by the HTF, as well as from general fund appropriations. Again, most of the funding is non-Federal, with a majority-about 63 percent in 2005-derived from local sources, including various taxes, public funds, and fare revenues.

Innovative Finance

More recently, the term "innovative finance" has been applied to mechanisms that pay for transportation projects. Innovative finance is a broadly defined term that encompasses a combination of techniques and specially designed mechanisms to supplement traditional financing sources and methods. Innovative finance for surface transportation includes such measures as:

  • New or non-traditional sources of revenue
  • New financing mechanisms designed to leverage resources
  • New fund management techniques
  • New institutional arrangements

The Federal Government has had a long history of funding surface transportation infrastructure through grants from the HTF, backed by motor fuels taxes. Innovative finance provides an array of tools and institutional arrangements as alternatives or augmentations to traditional, grant-based funding strategies. These techniques have been designed to enhance the effectiveness of grant management and bridge investment gaps between available resources and infrastructure needs. They are intended to maximize the ability of states to leverage Federal capital, attract new sources of funds to transportation investment, accelerate project completion dates, and more effectively utilize existing funds. Often, debt issuance or other forms of credit enhancement have helped facilitate access to a wider range of capital or leverage future revenue streams.

Most of the innovative programs and tools discussed in this section have been enabled by legislative changes to Title 23 of the U.S. Code. It should be noted that some finance techniques may not be new or particularly innovative outside of the transportation sector, and that this definition is flexible and evolving. It is also important to recognize that the benefits associated with these tools are not mutually exclusive and that there is potential synergy in combining tools on a single project.

Private Finance

One particular form of finance that has been labeled "innovative" is the involvement of the private sector in developing, constructing, and operating transportation facilities. Through a public-private partnership, a contractual agreement between a public agency and a private sector entity allows for greater private sector participation in the delivery and financing of transportation projects. To this end, recent legislation and finance mechanisms have helped projects leverage private capital and redistribute project risk.


Federal Credit Assistance
Bonding and Debt Instruments
Mechanisms to Leverage Federal Aid
Other Finance Mechanisms
Proposed Finance Mechanisms