More Stop-and-Go Financing of Highway Trust Fund

Last week, Congress voted in favor of a two-month extension of the Highway Trust Fund (HTF), which will allow the Department of Transportation to continue funding the repair and construction of highways and mass transit. Highway Trust Fund spending authority was scheduled to expire at the end of the month, but policy makers acted to extend the deadline to allow the fund to continue to meet its obligations until July 31, which is the high season for roadway construction and repair work.

In passing another short-term extension, Congress missed an opportunity to provide long-term certainty to the funding of the HTF. The HTF has a structural imbalance between revenues and spending, and has faced recurring funding shortfalls. In the last six years, lawmakers have passed 33 stop-gap measures that have allowed the trust fund to continue disbursing money. However, elected officials have not addressed the fund’s long-term problems: the Congressional Budget Office (CBO) projects the HTF will have a deficit of $168 billion over the next 10 years.

The lack of a long-term solution for federal funding for transportation creates uncertainty, which is disruptive for the planning of construction projects. Our transportation infrastructure plays a critical role in moving goods and people around the country, and should not be subject to stop-and-go policymaking. Congress should work to develop a bipartisan plan that provides a more permanent solution to the structural mismatch between revenues and expenditures in our transportation programs.

WHAT IS THE FINANCIAL OUTLOOK FOR THE HIGHWAY TRUST FUND?

The Highway Trust Fund was established in 1956 to provide a dependable source of funding during the construction of the interstate highway system. Today, it is comprised of three accounts: the highway account, which is largely devoted to construction and maintenance of highways and bridges; the mass transit account, which is used to make capital or capital-related expenditures on buses, rail, subways, ferries, and other modes of public mass transit; and the much smaller Leaking Underground Storage Tank Trust Fund.

The HTF faces recurring funding shortfalls due to an imbalance between the fund’s revenues and spending. Over the last 10 years, the HTF has spent $52 billion more than it has collected. Over the next 10 years, CBO estimates that the funding shortfall will be $168 billion.

Lawmakers have been reluctant to correct the HTF’s structural mismatch and have instead opted to address funding shortfalls with temporary stop-gap measures that transfer funds — mostly from the Treasury’s general fund — to the HTF. Those transfers do not bring in any new federal revenues, but they allow this infrastructure spending to increase under current law. As a result, they add to current-law federal deficits and debt and do nothing to stabilize our nation’s overall fiscal outlook.

WHERE DOES THE HIGHWAY TRUST FUND GET ITS FUNDING?

The Highway Trust Fund receives the vast majority of its revenues — 87 percent in 2014 — from excise taxes on motor fuel, commonly known as the "gas tax." The gas tax is currently 18.4 cents per gallon for gasoline, and 24.4 cents per gallon for diesel. The remaining income for the fund is comprised of taxes on tires, truck sales and heavy vehicle use.

The federal gas tax has not been raised since 1993, and it is not tied to inflation. Consequently, the purchasing power of its revenue has eroded over time — 18.4 cents buys nearly 40 percent less today than it did in 1993. In addition, cars are becoming more fuel-efficient and Americans are beginning to drive somewhat less. As a result, revenues from the gas tax have grown slowly. Over the same period, construction costs have continued to rise, and the needs of the aging highway system have grown. Looking forward, CBO projects that spending will exceed revenues for the next 10 years.

Safe, efficient, and well-maintained transportation infrastructure is a driver of economic growth. Yet, by many measures, the current system is not meeting America’s needs. According to the World Economic Forum, the United States ranks 16th in road quality, and 16th in overall infrastructure quality. Traffic congestion alone costs Americans over $121 billion in wasted time and fuel in 2011, according to a study by Texas A&M.1

DISAGREEMENT ON FUNDING SOLUTIONS

Political leaders from both parties recognize the overall importance of efficient and safe infrastructure. However, ideological and regional differences have impeded progress toward finding solutions.

A primary obstacle is the broad resistance among members of both parties to raising the gas tax. The gas tax is considered unpopular, making an increase politically difficult. In addition, it affects rural households more than urban ones because the number of miles driven is often greater in these areas.

Lawmakers also disagree over how much responsibility the federal government should have over transportation funding. Though many legislators support the current system, some believe that the federal government should spend less and give more latitude (and responsibility for funding) to state and local governments. Currently, state and local funding makes up approximately two thirds of highway and transit funding.

Finally, lawmakers disagree over how much should be spent on highways versus mass transit. Some believe that transit funding should be cut down or eliminated, claiming that it is unfair to make highway users pay gas taxes for transit projects that they may not use. Transit advocates, on the other hand, argue that mass transit projects benefit highway users by reducing congestion.

WHAT OPTIONS EXIST?

Lawmakers should work to shore up the structural mismatch between revenues and expenditures to put transportation funding on a sustainable path. In order to create long-term stability for the Highway Trust Fund, lawmakers must reduce spending, increase revenue, or some combination of the two. Options include:

• Raising the gas tax: Lawmakers could increase the gas tax and tie it to inflation. Some advocates point out that now is an opportune time for raising the gas tax, given the recent decline in gas prices. CBO estimates that a 10 to 15 cent increase beginning in 2015 would be sufficient to make the HTF solvent.
• Raising revenue in other ways: Lawmakers could supplement the gas tax with another revenue source. For example, both Democrats and Republicans have advanced various proposals for funding transportation costs by taxing corporate overseas profits through changes in "repatriation" rules. The proposals raise revenue by encouraging companies to return their foreign earnings to the United States, where the earnings would be taxed (but at rates that are lower than under current law). Although the proposals would raise revenues in the short run, concerns have been raised that some repatriation proposals would reduce revenues in the long run because of the reduced tax rates on foreign earnings.
• Reducing spending: Lawmakers could reduce spending so that it remains in line with the fund’s level of revenues. Under this approach, CBO projects that funding for the highway account would need to be cut by approximately 30 percent, while transit account spending would have to be cut by approximately 65 percent.2 Higher levels of spending by state and local governments could offset some of this decline, and some state governments have already begun to raise their gas taxes. Rather than reduce spending across-the-board, some have suggested that costs could be reduced by eliminating programs for transportation alternatives like bike paths and walking trails, and by repealing the Davis-Bacon Act, which sets minimum wage requirements for construction workers on federally-funded projects.

CONCLUSION

The next funding challenge for HTF is expected to arise in late July, when the current stop-gap agreement expires. The lack of agreement on a structural solution for financing highways and mass transit creates periodic funding crises for the program, raises uncertainty about the federal commitment to transportation and puts the infrastructure system at risk. Highways and mass transit play an important role in our economy and should not be subject to stop-and-go funding. Congress and the Administration should work together to develop a bipartisan plan that provides a long-term solution to the structural challenges facing our transportation programs.

1Texas A&M Transportation Institute, 2012 Annual Urban Mobility Report, 2012. (Back to citation)

2The percentage cut is larger for the transit account because the gap between its projected spending and revenue is larger than it is for the highway account. (Back to citation)