August 21, 2014

A Bad Bipartisan Idea: Funding Highways From Short-Term Corporate Tax Revenue

House Ways and Means Chair Dave Camp (R-Mich.) remarked recently that there are some similar ideas in the tax reform proposals that he and President Obama have suggested. Normally overlap between Republican and Democrat ideas is a welcome occurrence.

But at least one feature in the Camp and Obama tax reform plans is an exception: Their plans to shore up the Highway Trust Fund by using one-time revenue from changes to the corporate tax system.

Unless lawmakers do something, later this year the largest part of the Highway Trust Fund -- the Highway Account -- will be unable to meet all of its obligations. The Congressional Budget Office recently projected that the entire trust fund will become insolvent in 2015.

While lawmakers need to come up with a solution, using short-term revenues from tax changes on unrelated corporate profits earned abroad is not a good approach and would only delay needed action to give the trust fund long-term solvency.

To keep the trust fund solvent through 2021, Camp’s proposal relies on $126.5 billion in revenue from a one-time tax on international corporate profits.

As part of a 4-year plan to increase transportation spending, President Obama’s proposed budget would use $150 billion in transitional revenue from preventing corporations from shifting profits overseas and ensuring that foreign businesses operating in the U.S. are paying their taxes. The President’s plan would also re-organize the fund as the Transportation Trust Fund.

Finding offsets for new highway spending is laudable and better than simply transferring unspecific general revenues to the highway fund. However, using revenue from an unrelated and temporary source is not the best way to fund transportation projects. They need a reliable source of funding so multi-year projects can be completed without costly delays.

Moreover, the source of funding for a federal trust fund should come from taxes or fees directly tied to the purpose of the fund. Otherwise, the concept of having a dedicated trust fund is lost.

A better alternative to the Camp and Obama plans would be to raise the motor fuels tax on gasoline, the main source of revenue for the Highway Trust Fund. The gas tax is an 18.4 cent levy on each gallon of gasoline that oil producers make, a cost that is passed on to consumers. The tax has not been increased since 1993.

Because the tax has not kept up with inflation, in 1993 terms it is worth only 11.5 cents today. That inflation, stronger fuel efficiency standards, and lower fuel consumption due to the recession and slow recovery have limited revenue from the tax, exacerbating the trust fund’s projected deficits. Overly optimistic economic forecasts by the government that projected higher vehicle usage and fuel consumption led many to believe the current tax would be sufficient.

In the next decade, improving fuel economy standards will continue to erode the tax base of the motor fuels tax. Policymakers will need to implement reforms to the tax -- like indexing it to inflation -- or find an alternative source of funding to provide consistent and reliable revenue for the Highway Trust Fund.

With the possibility that the trust fund may start delaying payments this summer, the clock continues to tick towards insolvency. This could leave Congress with little time to either increase the motor fuels tax or find a fiscally responsible alternative to pay for transportation projects.