December 22, 2014

Lawmakers Running Out of Time to Fix Highway Trust Fund

In a move that many saw as inevitable unless lawmakers acted, the Department of Transportation announced recently that the dwindling Highway Trust Fund would have to begin delaying payments to state governments in August.

In a press release, Transportation Secretary Anthony Foxx said “there is still time for Congress to act on a long-term solution,” adding that he hoped “Congress will avert this crisis before it is too late.”

Delayed payments would mean financial difficulties for the states, postponement of planned highway projects, and delays on the projects that are already underway. Yet Washington lawmakers continue to struggle over how to replenish the trust fund.

Foxx also said Tuesday there is “no good option when we're talking about a trust fund that is running short in supply of dollars.” He noted that his department had warned Congress since January that the trust fund would be unable to meet all of its obligations beginning in August.

The Congressional Budget Office (CBO) says lawmakers need to find $8 billion for the trust fund to meet all of its obligations this year. And without further action, next year the fund will only have enough money to pay for existing highway and transit projects; nothing else will be available, causing delays or cancellations of projects that have been planned for years but not yet started.

In addition, lawmakers must re-authorize spending on highway and other transit programs by September, when the current transportation law, known as “MAP 21,” expires. Both highway and transit programs are financed by the Highway Trust Fund through two accounts, the highway account and the transit account. If lawmakers are unable to reauthorize these programs, the federal government will be unable to pay for highway and transit programs after September 30.

Lawmakers are trying to decide how to fund these programs over the next several years. Many of the programs are financed by the Highway Trust Fund, but it is projected to fall far short of being able to fully fund them in the future.

The trust fund’s problems have been years in the making. CBO estimates there will be an imbalance between spending and dedicated revenues for transportation projects of $167 billion over the next decade. This assumes spending at the current level plus inflation.

CBO says this imbalance could not only damage the nation’s finances but “makes it more difficult for state and local governments and for private contractors.”

Motor fuels taxes, consisting of the 18.4-cent gasoline tax and 24-cent diesel fuels tax, are the trust fund’s dedicated revenue source. Lawmakers have not raised them since 1993 and revenue has come up woefully short of fully funding transportation programs. The taxes bring in $34 billion a year while the government spends close to $50 billion on transportation projects.

Lower fuel consumption due to the recession, changing driving habits by younger as well as older Americans, and improving fuel efficiency have reduced the amount of revenue the fuels taxes take in. In addition, the gasoline tax today is equivalent to only 11.5 cents in 1993.

Instead of dealing with this shortfall, Congress has simply transferred over $50 billion in general revenue to the trust fund in recent years. Using general revenues subverts fiscal discipline and undercuts the idea of having a dedicated funding source.

Lawmakers have only have a few weeks to prevent a serious blow to the nation’s economy, one that could also reduce highway safety and increase driving times around the nation. Unfortunately -- to use a mid-summer baseball metaphor -- lawmakers have been unwilling so far to step up to the plate.

Elected officials should quickly find adequate, sustainable funding sources that are related to transportation spending.

CBO estimates it would take a raise of 10 to 15 cents a gallon of motor fuels taxes over the next decade to pay for transportation projects at the current spending level plus inflation. Coincidentally, that would raise the motor fuels tax to around where it would be if it had been pegged to inflation two decades ago.

Policymakers could limit spending to current revenue but this would severely limit federal investment in transportation infrastructure despite growing needs. Some GAO reports have recommended transportation spending be done more effectively, and the government should always be evaluating how to best support the country’s infrastructure.

However, limiting spending to current revenues would decrease the highway account’s capacity to make new obligations by 30 percent and the transit account by 65 percent. This would adversely affect the construction industry and eventually other businesses that rely on the nation’s transportation system. A reduction in the federal government’s ability to fund new projects over the next decade would be a major setback for the country’s infrastructure.

Senators Bob Corker (R-Tenn.) and Chris Murphy (D-Conn.) recently introduced a bill to raise the 18.4 cent tax on a gallon of gasoline by 12 cents over the next two years and then index it to inflation. This affirms the idea that Congress should use a dedicated funding source related to transportation. Unfortunately, however, the bill would also increase the deficit by extending several unrelated tax breaks.

If lawmakers raise fuel taxes, they should not feel obligated to reduce revenue elsewhere. An increased fuels tax would simply cover the gap between revenue and current spending levels.

A proposal in the House by Rep. Earl Blumenauer (D-Ore.) is the best plan introduced so far to stabilize the trust fund’s finances. His proposal is similar to one put forward in the Simpson-Bowles deficit-reduction plan, raising the motor fuels taxes -- both gasoline and diesel levies -- by 15 cents over three years.

Blumenauer also suggests eventually replacing motor fuels taxes with a vehicle-miles traveled tax (VMT). Some experts say that would be a better approach in the future due to improving fuel economy standards and changing driving habits.

Other proposals to close the immediate shortfall and provide long-term funding have been misguided and fiscally irresponsible.

A House bill would cut Postal Service spending to provide $18 billion to the Highway Trust Fund over two years. But the Post Office is facing its own funding difficulties.

Senate legislation to stave off the trust fund’s impending insolvency, sponsored by Finance Chairman Ron Wyden (D-Ore.), would transfer  $9 billion to the trust fund and offset this with revenue from greater tax compliance and and savings from various other government programs.

Neither bill has received much support from other lawmakers.  

Both President Obama and House Ways and Means Chair Dave Camp (R-Mich.) have proposed closing corporate tax loopholes to help pay for highway spending. But lawmakers have been reluctant to follow through on their rhetoric about closing tax loopholes, and in any case relying on such unrelated one-time measures would not be the best way to fund transportation projects.

It is clear lawmakers must show some political courage and act to stabilize the Highway Trust Fund’s finances. There is little time left to do so before payments are delayed, so this should be considered a top issue for Congress to resolve this summer.