Budget Explainer: Highway Trust Fund

Sep 5, 2014

What is the Highway Trust Fund?

The Highway Trust Fund (HTF) was established in 1956 to provide a more dependable source of funding during the construction of the interstate highway system, which has been called "The Greatest Public Works Project in History."1 The HTF is comprised of two principal sub-funds: the Highway Account, which is largely devoted to construction and maintenance of highways and bridges; and (beginning in 1983) 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.2

While the majority of spending on surface transportation comes from state and local governments, funding from the HTF plays an important role in facilitating many projects. Sometimes, federal assistance comes in the form of grants and other direct contributions, and other times it comes in less direct forms. For example, the federal government provides credit assistance, which allows states to finance projects on more favorable terms. Because the interest paid on municipal bonds is exempt from federal income taxes, this type of debt financing for new roads and bridges is less costly than using bonds paying taxable interest.

SOURCE: The Pew Charitable Trusts, Funding Challenges in Transportation Infrastructure, May 2014. Compiled by PGPF. NOTE: Data are from state FY 2011.

In 2011, federal transportation assistance totaled $46.4 billion to state governments and $10.6 billion to local governments.

How does the financial condition of the Highway Trust Fund affect our long-term fiscal outlook?

The HTF faces recurring funding shortfalls due to the imbalance between the Fund’s revenues and spending. Over the last 10 years, the HTF has spent $52 billion more than it has collected. The Congressional Budget Office estimates that if spending continues at its current rate, HTF revenues will fall short of projected spending by $157 billion cumulatively over the next 10 years.

SOURCE: Congressional Budget Office, An Update to the Budget and Economic Outlook: 2014 to 2024, August 2014. Compiled by PGPF.

Lawmakers have been reluctant to address the mismatch between HTF revenues and spending. Instead, they have opted to address funding shortfalls by transferring funds — mostly from the Treasury’s general fund — to the HTF. Those transfers do not bring in any new federal revenues, but they allow infrastructure spending to increase under current law. As a result, they add to current-law federal deficits and debt and do nothing to improve our nation’s overall fiscal outlook. With the August 2014 stopgap agreement, these transfers total $65 billion since 2008.3

The next funding challenge for HTF is expected to arise in May 2015, when the stopgap agreement expires. The lack of agreement on a structural fix for financing highways and mass transit creates periodic funding crises for the program. These crises force states to scramble for funding, interrupt construction, or even abandon projects — putting the infrastructure system at risk.

Where does the Highway Trust Fund get its funding?

The Fund’s revenue sources, the specific programs that it funds, and the amount of money that each program receives depend on the authorization legislation currently in place. The most recent long-term authorization bill, passed in 2012, is called the Moving Ahead for Progress in the 21st Century Act, or MAP-21.

The HTF receives the vast majority of its revenue — around 87% in 2014 — from excise taxes on motor fuel, commonly known as the "gas tax." Since 1993, fuel tax rates have been fixed at 18.4 cents per gallon for gasoline, and 24.4 cents per gallon for diesel. Taxes on heavy vehicles (trucks) make up the rest of the Fund’s income. (For more information about federal trust funds, see the PGPF Budget Explainer: What Are Federal Trust Funds?.)

SOURCE: Congressional Budget Office, The Status of the Highway Trust Fund and Options for Financing Highway Spending, May 2014. Compiled by PGPF. NOTE: Vehicle tax denotes an annual use tax on heavy trucks.

However, the federal gas tax has not been raised since 1993, and it is not pegged to inflation. Consequently, the purchasing power of the revenue has eroded over time — 18.4 cents buys nearly 40 percent less today than it did in 1993. Further, as construction costs rise with inflation and the needs of the aging highway system grow, the spending levels required to keep up with the transportation system’s needs are increasing. In addition, cars are becoming more fuel-efficient and Americans are beginning to drive slightly less, causing the revenues collected by the gas tax to stagnate over the next 10 years. All of these factors have combined to create a structural fiscal problem for the HTF.

SOURCE: Bureau of Labor Statistics, CPI Databases, May 2014. Compiled by PGPF. NOTE: Prices were deflated using the Consumer Price Index — All Urban Consumers.

Why is it so difficult to close the funding gap?

Politicians from both parties recognize the overall importance of efficient and safe infrastructure, however, ideological and regional differences have impeded progress.

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. Some of the most politically conservative lawmakers believe that the federal government should not be involved in the financing of transportation projects at all.

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.

Why is infrastructure funding important?

Regardless of the source of funding, safe and efficient infrastructure is a driver of economic growth. Yet, by many measures, the current system is not meeting America’s 21st century needs.

According to the World Economic Forum, the U.S. ranks 18th in road quality, and 19th in overall infrastructure quality. Considering the importance of infrastructure in transporting goods and people in the economy, this puts the U.S. at an economic disadvantage. Traffic congestion alone costs Americans over $121 billion in wasted time and fuel in 2011, according to a study by Texas A&M University.

What options exist to address the Federal HTF imbalances?

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:

Raise the gas tax: Lawmakers could increase the gas tax and peg it to inflation. CBO estimates that a 10-to-15 cent increase beginning in 2015 would be sufficient to make the HTF solvent. One current bipartisan proposal would raise the tax by 12 cents over two years, however the revenue gains in that proposal are offset by extending a number of expiring tax cuts.

Raise revenue some other way: Lawmakers could supplement or replace the gas tax with another revenue source. The Obama Administration, for example, has proposed funding transportation costs by reducing corporate tax breaks. Others have proposed a Vehicle Miles Traveled (VMT) tax, which would charge highway users based on how many miles they drive.

Reduce spending: Lawmakers could reduce spending so that it remains in line with the Fund’s existing level of revenues. Under this approach, CBO projects that Highway Account funding would need to be cut by approximately 30%, and Transit Account funding by approximately 65%. Higher spending by state and local governments could offset some of that decline, but those governments would still have to finance the additional spending in some way. Rather than reduce across-the-board spending, 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.

1https://www.fhwa.dot.gov/interstate/homepage.cfm (Back to citation)

2The HTF also supports a third, smaller trust fund, the Leaking Underground Storage Tank (LUST) Trust Fund via a 0.1 cent tax on each gallon of motor fuel sold. (Back to citation)

3H.R. 5021, the Highway and Transportation Funding Act of 2014, was signed into law on August 8, 2014. The bill authorizes HTF spending through May 31, 2015. (Back to citation)

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