Reihan Salam at NRO on Ending the Federal Surface-Transportation Program Might Be Crazy in a Good Way :

”
So far, the most attractive realistic proposal for reforming federal highway expenditures is ‘Fix It First, Expand It Second, Reward It Third: A New Strategy for America’s Highways’ by Matthew Kahn and David Levinson, which calls for the following:

First, all revenues from the existing federal gasoline tax would be devoted to repair, maintain, rehabilitate, reconstruct, and enhance existing roads and bridges on the National Highway System. Second, funding for states to build new and expand existing roads would come from a newly created Federal Highway Bank, which would require benefit-cost analysis to demonstrate the efficacy of a new build. Third, new and expanded transportation infrastructure that meets or exceeds projected benefits would receive an interest rate subsidy from a Highway Performance Fund to be financed by net revenues from the Federal Highway Bank.

But now Rohit Aggarwala of Bloomberg Philanthropies has called for a more radical approach, which might garner bipartisan support while forcing believers in competitive federalism to ‘put up or shut up.’ The proposal closely resembles an idea floated by Christopher Papagianis, my erstwhile Economics 21 colleague. Aggarwalla calls for abolition of the federal gasonline tax and the devolution of responsibility over surface transportation to state governments:
Getting rid of the tax would force a serious discussion in each state about how, and how much, to fund roads and transit. States could choose to reimpose the same tax, or they could set a different rate based on their desired level of transportation spending. They could choose to raise other kinds of revenue to pay for roads and transit — such as sales taxes, property taxes, local taxes or tolls. Or they could simply reduce their transportation spending. “

I have been thinking about this for a while.
In the wake of MAP-21, it is worth reflecting on “Why is there a federal role?” In short the argument against are that the system exists, most is traffic local, and the states are perfectly capable of managing and preserving the system, since they already do. All they need to do is raise their gas tax by the amount the federal tax is reduced, and they are no worse off (assuming all federal transportation funds come from the Highway Trust Fund, which is less true than it used to be.
The federal role could be reduced to research (which might look self-serving as I am a researcher, but I support a federal role for this outside my field as well, since research is a public good with positive externalities), and safety regulations.
One argument against the Aggarwala position is that it is needlessly cumbersome to to fight 50 gas tax fights in 50 states, there is a strong convenience of existing revenue source, and this greatly reduces political transaction costs, since it is the status quo.
A second argument against is that we essentially need to rebuild the Interstate in place, and this recapitalization is a national need, just as the initial construction was, justifying a national funding source. We would not want one state to let its existing Interstates devolve to rubble due to poverty, even if it mostly hurt them. I don’t think that would happen (at least not at a large scale), but clearly different states would have different investment levels without the federal minimum funds.
I suggested in Enterprising Roads that state DOTs be transformed to be more like public utility than a branch of government.
Norton (in Fighting Traffic) defines ” a public utility was not just an enterprise ‘of real public importance,’ but also one in which competition was unfeasible.” That seems to be an accurate representation of most roads in the US. We could argue about long distance roads being competitive, but there are large network economies at the local level, and while we could think about what might happen with atomistic competition (a really neat idea), it is not practical implementability in the short run.
We don’t have or need federal funding of the backbone public utility electric grid (though there is regulation, and I am sure some subsidies somewhere), and seem to do ok, surely roads are similar. However, in the absence of that public utility transformation and movement to fuller understanding of direct user fees as the best funding source, avoiding 50 political battles and relying on the status quo funding (which is also an indirect user fee) for a few more years, and directing that existing funding, seems to me a good second-best solution, better than immediate complete devolution. Of course, one could argue that devolution might help force the transformation, so this is not obvious.
Looking for rationales for the highway program I stumbled on the following. In part this falls under the category: We have learned nothing in 30 (60) ((90)) years. The following paper could easily have been written today.
Gomez-Ibañez, Jose, (1985) Chapter 7 “The Federal Role in Urban Transportation” in
Quigley, John M., and Daniel L. Rubinfeld, editors American Domestic Priorities: An Economic Appraisal. Berkeley: University of California Press.

The Rationale for Federal Aid
Whatever the appropriate level of urban highway investment, one key issue is why the federal government should be so heavily involved. Since 70 percent of the United States population lives in urban areas, the majority of the country clearly has a strong interest in urban highways. At least in theory, however, our federal system reserves powers and responsibilities to state and local governments unless some compelling and distinct national interest is involved. This devolution of responsibilities is based both on democratic ideals and the pragmatic argument that those who are closest to a problem often know best how to solve it.
The principal rationale for federal highway aid programs has been the national interest in an intercity transportation system that serves long-distance or interstate as well as local traffic. When federal highway aid began in 1916, the road system was largely unpaved and road construction and maintenance were the responsibility of county governments. The counties were notorious for their failure to cooperate in improving roads that served more than one county, perhaps because their dependence on property tax revenues made it difficult to finance improvements that served more than local needs. An interconnected road system would benefit all, it was argued, by promoting interstate commerce and reducing the social and political isolation of rural communities. The federal government gave highway aid directly to state governments, on the theory that states would have more interest than counties in promoting an intercity highway system.[18]
While federal intervention may have been needed to promote an interconnected highway system seventy years ago, it may be unnecessary today. Thanks in part to early federal aid, each state now finances and administers its own system of trunk highways, leaving county and city governments responsible mainly for local or secondary roads. Federal aid may not be necessary even to induce states to build a coordinated interstate highway system. In the decade before the Interstate System was funded,
for example, many Eastern and Central states cooperated in the construction of an interconnected system of limited-access toll expressways that allowed motorists to travel between New York and Chicago or Boston and Albany without ever having to stop for an intersection or traffic light. Toll financing had eliminated the problem of using local taxes to support interstate travel and by 1956, when Interstate funding ended the boom, around 12,000 miles of toll expressways had been built, started, authorized, or projected.[19]
To the extent that there is a distinct national interest in the highway system, it applies more clearly to roads that primarily serve long-distance and interstate rather than local travelers. Although Interstate System planners rationalized the inclusion of urban segments on the grounds that interstate traffic often originates or terminates in urban areas, urban expressways probably have a limited claim to federal aid, since their design is largely dictated by peak-hour local commuting traffic.
Perhaps the strongest argument for a federal role is in the areas of highway research and demonstration projects. Research on pavement durability, highway planning techniques, and highway safety measures is of potential benefit to all states. Since no single state captures all the benefits, there is little incentive for a state to fund research alone. The federal government, however, can consider the benefits to all states in designing its research program.

He also wrote a section on Mass Transit

The Federal Rationale
The rationale for federal involvement in urban mass transit shares many of the weaknesses of the rationale for federal aid to urban highways. The argument most often cited in the early 1960s debates over the initial federal capital grant program was the need to counterbalance federal highway aid. The federal and state highway trust funds, all financed with dedicated gasoline taxes, were thought to have induced state and local governments to channel too much capital spending into highways and too little into mass transit. Transit had declined because of undercapitalization, the argument continued, and federal transit aid was needed to correct the imbalance.[47]
The failure of the transit investments of the 1970s to increase ridership significantly suggests that undercapitalization was probably not a major cause of the decline of mass transit patronage. Rising real household incomes, suburbanization of jobs and residences, and other demographic trends probably played more important roles in the postwar patronage losses. Even if local governments had seriously over-invested in highways and underinvested in transit, a massive new transit aid program may not have been the correct answer. By subsidizing both the highway and transit modes the federal government might reduce the balance between transit and highways only at the risk of overcapitalizing transportation in general. Reducing or eliminating the federal highway aid program might have encouraged more balanced spending on all forms of transportation.

Notes
18. Gifford, “The Federal Role in Roads”; Burch, Highway Revenue and Expenditure continue
Policy ; and John B. Rae, The Car and the Road in American Life (Cambridge, Mass.: MIT, 1972).
19. Rae, The Car and the Road , pp. 173-82.
47. For examples of this argument see Lyle C. Fitch and Associates, Transportation and Public Policy (San Francisco, Calif.: Chandler, 1964); Thomas E. Lisco, “Mass Transportation: Cinderella in Our Cities,” The Public Interest no. 18 (1970): 52-74. The contrast between the overcapitalization and the demographic hypotheses was shown most clearly in George W. Hilton, “The Urban Mass Transportation Assistance Program,” pp. 131-44 in Perspectives on Federal Transportation Policy , ed. James C. Miller, III (Washington, D.C.: American Enterprise Institute, 1975); and George W. Hilton, Federal Transit Subsidies (Washington, D.C.: American Enterprise Institute, 1974).