The Highway Trust Fund provides the financing structure for federal investment in transportation projects. It consists of two accounts: the highway account, which supports projects for the interstate system and other roads, and the transit account, which supports light rail and other mass transit projects across the country.
Motor fuels taxes serve as the primary dedicated revenue source for the fund. These taxes -- on gasoline and diesel -- provide most of the fund’s revenue.
The trust fund finances about one-quarter of all public highway and mass transit spending across the country. Yet the fund continues to face insolvency because lawmakers have failed to achieve consensus on a long-term funding solution.
Legislation passed in early December increases spending on highway and transit projects and delays insolvency through 2020 but, like previous measures, relies on unrelated revenue sources and budget gimmicks.
Despite claims that the measure provides financial stability, it fails to secure an adequate and sustainable revenue source to support the trust fund and responsibly pay for transportation work that lawmakers in both parties want.
What’s Causing the Trust Fund’s Financial Problems?
For several years there has been a gap between the trust fund’s revenue and spending, annual shortfalls that have been closed primarily with short-term measures. The bill signed into law in December covers those shortfalls only until 2020; afterwards they would return and start growing again, putting the trust fund on a short road towards insolvency.
According to the Congressional Budget Office (CBO), from 2021 to 2026 trust fund revenue is projected to total $243 billion, but outlays will amount to $364 billion, resulting in an imbalance of $121 billion. Each year during this period, the trust fund to face shortfalls of between $19 billion to $23 billion. Higher spending in the latest transportation bill has increased these projected shortfalls. This assumes spending at the current level plus inflation. If the trust fund is unable to make payments to states, projects would be halted, endangering improvements to road safety and congestion as well as thousands of construction jobs.
Motor fuels taxes, consisting of the 18.4-cent per gallon tax on gasoline and 24-cent per gallon tax on diesel fuels, are the trust fund’s main dedicated revenue source. Taxes on the sale of heavy vehicles, truck tires and the use of certain kinds of vehicles bring in smaller amounts of revenue for the trust fund.
If lawmakers indexed motor fuels taxes to inflation when they were last increased in 1993, the tax on a gallon of gasoline would be roughly 30 cents today, while the tax on diesel would be 39 cents. Lower fuel consumption due to the recession, changing driving preferences by younger as well as older Americans, and improving fuel efficiency in vehicles have also reduced the revenue from fuels taxes.
Lawmakers have enacted a series of mostly short-term measures that have supplemented the trust fund with general federal revenues. Including the 5-year legislation agreed to in December, Congress has now transferred $143 billion to the trust fund since 2008, some of it accompanied by “offsets” that are nothing more than scoring gimmicks.
Using unrelated government revenue to fill deficits in the trust fund subverts fiscal discipline and undercuts the whole point of having a dedicated funding source. Moreover, short-term patches make it more difficult for state and local governments and private contractors to plan transportation projects and do little to boost their confidence that the federal government will be willing to support projects over the long term.
How Did Congress Address Recent Brushes with Insolvency?
Due to the unwillingness of lawmakers to address the long-term shortfall facing the trust fund, they have passed a series measures providing temporary relief, accompanied by a combination of unrelated revenue increases and spending cuts, some of which have been outright budget gimmicks. The five-year legislation enacted in December continues this misguided practice.
In each of the last two years, lawmakers faced mid-summer deadlines to replenish the Highway Trust Fund. Both brushes with insolvency threatened to delay transportation projects across the country and add to federal costs in the long run.
In 2014, the Department of Transportation (DOT) announced in July that the dwindling trust fund would have to begin delaying and cutting payments to state governments in August. Just days before the deadline to act, Congress staved off insolvency by transferring $11 billion to the fund. Most of this money came from a budget gimmick euphemistically known as “pension smoothing,” (see footnote) which is not related to transportation investment and can actually worsen the government’s long-term budget problems.
In late May of this year, Congress passed a two-month re-authorization of highway and transit programs. Even though the $11 billion revenue transfer expired at the end of May, the Department of Transportation said the trust fund had enough revenue to keep functioning normally until July 31, which allowed lawmakers to extend the programs while once again delaying finding a long-term solution the trust fund’s dire finances.
Throughout the summer, lawmakers floated a number of proposals to reauthorize transportation for several years, but struggled to pay for their plans.
In hearings in late June, members of the House Ways and Means and Senate Finance committees said their goal was to pass a 6-year transportation bill, but were vague on the details of paying for it.
The Congressional Budget Office estimated at the time that dedicated revenue for the trust fund will fall short of projected spending by nearly $90 billion over six years, leaving lawmakers with a large shortfall to eliminate if they want a 6-year extension of transportation programs.
The Senate Environment and Public Works Committee passed a 6-year reauthorization of highway programs but that panel, too, omitted how to fill the gap between spending and revenue.
With only days left until the trust fund would have to begin cutting payments to state and local governments, Congress transferred $8 billion to the trust fund from the Treasury’s general fund and agreed to extend transportation programs for three months, the 34th such short-term measure over the past six years. Like many times before, after passage of the measure lawmakers hoped the extra time will allow them to find a longer-lasting source of revenue.
Lawmakers worked throughout the rest of the summer and fall to reach an agreement on a multi-year transportation bill. Congress passed several weeks-long extensions of transportation programs to ensure payments to states would not stop. Negotiations did not start in earnest until November, after the House passed a 6-year transportation measure similar to the Senate bill approved during the summer. Facing another possible short-term extension of highway and transit programs in early December, lawmakers reconciled the two versions, and approved legislation guaranteeing federal highway and transit funding for 5 years, which President Obama signed into law.
The legislation promises $70 billion in revenue in addition to motor fuels taxes collections to cover projected trust-fund shortfalls through Fiscal 2020. The $70 billion will supposedly come from various offsets, the largest of which siphons off certain funds from the Federal Reserve, a move decried Fed Chair Janet Yellen as a “bad precedent” for using Fed funds to support government programs. Despite being a multi-year bill, it does not include a longer-lasting revenue source lawmakers hoped to find. Instead the bill marks the latest occasion that lawmakers postponed enacting necessary structural reforms to the trust fund.
With passage of the 5-year bill, lawmakers once again will be transferring general revenue to the trust fund to stave off insolvency paid for with obscure offsets. Lawmakers should not continue to use general revenue to plug the trust fund’s growing deficits; nor should they mask the cost of doing so. This is fiscally irresponsible and delays the action needed for long-term solvency. The only solution for lawmakers is to move past their false starts and find a long-term solution to the funding problem.
Ideally, plans to fix the trust fund should close the shortfall by raising more revenue from a dedicated funding source and by instituting reforms to improve the cost-effectiveness of federal transportation investments.
Most proposals put forward by lawmakers, however, have primarily relied on tax revenues from unrelated sources, such as corporate profits earned overseas. Former Ways and Means Chairman Dave Camp endorsed this idea in his comprehensive tax reform plan released in 2014, and President Obama uses a similar approach in his proposal to replenish the trust fund for six years. Other lawmakers, including Senators Barbara Boxer (D-Calif.), ranking member of the Environment and Public Works Committee, and Rand Paul (R-Ky.), Senators Chuck Schumer (D-N.Y.) and Rob Portman (R-Ohio), and a group of Senate Finance Committee members have also proposed using revenue from repatriated corporate profits.
Using short-term revenues from tax changes unrelated to transportation infrastructure is a poor approach. It severs the traditional link between trust fund spending and dedicated revenue. In the case of the Highway Trust Fund, its revenue traditionally has come from the drivers and businesses that use the country’s transportation system. Motor fuels taxes creates a “user pays” system, so those who travel on highway and transit systems pay for their upkeep and improvements.
What Are the Options for Eliminating the Trust Fund’s Long-Term Shortfall?
To resolve the trust fund’s financing issues, lawmakers need to close the gap between spending and revenue. Below are a few of the options they could choose to help close the gap. The options are:
Try to Limit Spending to Existing Revenues
Achieve Greater Efficiency in Highway and Other Transit Programs
Raise Motor Fuels Taxes
Find a New Funding Source
A. Try to Limit Spending to Existing Revenues
Lawmakers could simply try to limit transportation spending to what the current motor fuel raises. This would require significant cuts in projected spending that would likely be difficult for elected officials to sustain.
According to a CBO analysis done before passage of the most recent transportation legislation, eliminating the trust fund shortfall solely through spending cuts would decrease the highway account’s funding over the next decade by more than 30 percent while cutting the transit account’s spending by roughly 60 percent. This would harm the businesses that rely on the nation’s transportation system, disrupt the economy and hurt state and local governments.
Some lawmakers have proposed eliminating the mass transit account and shifting its revenue to the highway account. Eliminating the transit account would not fully close the gap between spending and revenues and would likely meet with intense political resistance, particularly in parts of the country that rely heavily on mass transit. In addition, proponents of this approach have not specified how to pay for transit projects the government is currently supporting or has promised to support. The transit account, like the highway account, supports projects that can take years to complete.
B. Achieve Greater Efficiency in Highway and Other Transit Programs
The Government Accountability Office (GAO) has recommended the elimination of overlapping or contradictory goals in the federal programs charged with maintaining the country’s infrastructure. Changes could ensure that funding goes towards projects that best support national interests rather than purely local concerns.
Congress could better define the federal role and responsibilities for maintaining the country’s highways, including developing measurable goals for highway programs. Programs that have little relation to supporting highway and transit systems could also be reconsidered.
Major transportation legislation passed in 2012, known as “MAP-21,” made some progress in efficiency by requiring a portion of the state funding to be set aside for road repairs if a state’s bridges and interstate highways fail to meet certain performance goals for pavement conditions and traffic flow and safety.
Four Republican House members last March introduced legislation to eliminate programs they believe solely support local interests or are unrelated to strengthening the highway system, such as “transportation alternatives” like walking trails and bike paths. Others, however, argue that such alternatives can help reduce road congestion and stretch transportation dollars further.
Lawmakers must find the right balance between an equitable division of funding among states and ensuring appropriate support for nationally significant projects. A merit-based approach to identify projects that have major national or regional importance could help set priorities.
Additionally, Congress could consider directing a greater proportion of the available funds towards maintenance of existing roads. Analyses by the Brookings Institution and several others have suggested that this could save money and improve the return on federal investment. While more transportation revenue would likely still be needed, this emphasis on maintenance could strengthen critical infrastructure in a fiscally responsible way.
C. Raise Motor Fuels Taxes
A straightforward way to address the trust fund’s shortfall would be to raise the motor fuels taxes. CBO estimates that raising them by 10 to 15 cents a gallon over the next decade would pay for transportation projects at the current spending level plus inflation. This would lift these taxes to around where they would be if they had been indexed to inflation two decades ago.
The bipartisan National Commission on Fiscal Responsibility and Reform (Simpson-Bowles) recommended a 15-cent increase in fuel taxes over three years. A 2013 proposal by former House Ways and Means Transportation and Infrastructure Highway Subcommittee Chairman Tom Petri (R-Wis.) and Ways and Means member Earl Blumenauer (D-Ore.) followed the Simpson-Bowles recommendation.
Senators Bob Corker (R-Tenn.) and Chris Murphy (D-Conn.) introduced a bill last June to raise the 18.4 cent tax on a gallon of gasoline by 12 cents over two years and then index it to inflation. This would affirm the idea that Congress should use a dedicated funding source related to transportation. Unfortunately, the bill would also increase the deficit by extending several unrelated tax breaks.
With fuel prices at their lowest levels since 2010 and continuing to fall, now would be an opportune time for policymakers to consider an increase in motor fuels taxes because consumers would not be as sensitive to it.
State lawmakers seem to have embraced this logic. In response to congressional inaction and a growing backlog of infrastructure projects, several states have raised their gas taxes since 2013.
D. Find a New Funding Source
Past resistance to raising motor fuels taxes has led some to call for a new dedicated funding source for transportation investments.
Rep. Blumenauer has suggested eventually replacing motor fuels taxes with a vehicle-miles traveled tax (VMT). This would charge drivers a fee for each mile they travel. Some experts say that would be a better approach in the future due to improving fuel economy standards. The National Surface Transportation Infrastructure Financing Commission -- created by the 2007 highway bill to find solutions to the trust fund’s long-term financing problems -- called the VMT the most viable long-term option.
One benefit of a VMT is it can be adjusted to more accurately reflect the cost of using specific segments of the country’s infrastructure and encourage greater efficiency throughout the highway system. The tax would also be consistent with the “user pays” principle.
Some barriers to enacting a VMT include: administrative and privacy concerns over collecting revenue, and opposition to having it support non-highway transportation.
The transportation financing commission also recommended a number of possible alternatives that Congress could look towards. These include a national vehicle registration fee, a drivers license surcharge, a carbon tax, a vehicle sales tax, taxing local transit fares, and expanded use of tolls.
One promising idea to force consideration of these alternative options is a proposal introduced in April by House Ways and Means members Jim Renacci (R-Ohio) and Bill Pascrell (D-N.J.), alongside Transportation and Infrastructure Committee members Dan Lipinski (D-Ill.) and Rep. Reid Ribble (R-Wis.). The Bridge to a Sustainable Future Act would ensure that highway and transit spending is fully funded over the next ten years while encouraging lawmakers to consider all possible options to finance transportation spending over the long term.
Their plan would immediately index motor fuels taxes to inflation and use the 10-year savings up front to extend trust fund solvency for almost two years, according to the bill’s authors. The legislation would also establish a commission tasked with finding a sustainable revenue source to support future investment in the nation's transportation infrastructure. If Congress does not enact the commission’s proposed funding solutions -- or pass another plan that achieves trust fund solvency for at least three years -- by Dec. 31, 2016, motor fuels taxes would automatically be increased to cover transportation spending for the next three years. If lawmakers still could not agree on a long-term financing mechanism by the end of that 3-year period, fuel taxes would again be raised by an amount sufficient to close the gap between trust fund spending and revenue for the remaining five years.
This approach would shift lawmakers' focus towards resolving the trust fund's long-term problems and away from gimmicks and temporary patches that would only keep the fund afloat for a few months at a time. The plan would ensure at least 10 years of reliable highway and mass transit funding without increasing the deficit over the next decade, all while maintaining the "user-pays" principle and giving lawmakers opportunities to find alternative funding mechanisms. Lawmakers should strongly consider this proposal as they contemplate how to replenish the trust fund before revenue dries up later this summer.
Moving Forward on Appropriate Legislation
None of the solutions presented above can make a difference unless lawmakers decide to enact them. Congress over the last six years has repeatedly adopted short-term funding extensions rather than resolving the trust fund’s chronic financial problems. To change the pattern, congressional leaders should allow a meaningful debate among lawmakers on the options to fix the trust fund over the long term.
Congressional leaders can do this by enacting a little-known legislative process called “Queen of the Hill.” Under this process, lawmakers debate and vote on several different ideas to address an issue, and the one with the most support passes the chamber. Instead of forcing lawmakers to accept a flawed proposal, “Queen of the Hill” gives them a range of options to consider.
Fixing the Trust Fund’s Budget Classification
Lawmakers should also address the trust fund’s confusing budget classification. Highway trust fund spending is classified as a mix of discretionary and mandatory spending. This hybrid classification creates opportunities to avoid budget-enforcement mechanisms such as spending caps and pay-as-you-go (PAYGO) rules. That’s because mandatory and discretionary spending are scored differently and are governed by different enforcement mechanisms.
The Simpson-Bowles commission said this situation “results in less accountability and discipline for transportation spending.” President Obama’s budget requests have addressed this concern with a proposal mirroring recommendations made by Simpson-Bowles. These recommendations could make highway spending more transparent by classifying all transportation spending as mandatory spending and making it subject to PAYGO rules.
Lawmakers must act to put the Highway Trust Fund’s finances on a sustainable long-term path. Despite eliminating trust fund shortfalls through 2020, the fund’s long-term structural imbalance between spending and revenue remains. Lawmakers must fix this imbalance through a combination of spending restraint, greater efficiency and new revenue. Numerous options are available for elected officials to consider, and several could be combined in some fashion.
Lawmakers should not continue to rely on one-time, short-term measures. Instead they should determine how the government can efficiently invest in worthwhile transportation projects that can be reliably supported by a dedicated funding stream.
Pension smoothing at least temporarily reduces the amount of money that corporations must contribute to their pension funds. This boosts their incomes and, consequently, their federal taxes. Later, however, corporations may need to increase their tax-deductible pension contributions, lowering their taxes. Pension smoothing also increases the risk that pension plans will eventually run short and require bailouts from the Pension Benefit Guaranty Corporation, the government agency that insures private pensions.