Budget Blog

Federal funding for important investments in our surface transportation system primarily comes through the Highway Trust Fund. Unfortunately, revenue coming into the Highway Trust Fund has not kept pace with the overwhelming need for transportation infrastructure projects to repair bridges and ease congestion on our country’s clogged highways. The Highway Trust Fund could reach insolvency as soon as this summer, according to recent projections from the Department of Transportation (DOT) and the Congressional Budget Office (CBO).

A shortfall in the Highway Trust Fund would hurt workers who depend on jobs on highway construction and public transportation projects, and it would add to the uncertainty that states and local governments already feel in planning for future transportation projects. Both Democrats and Republicans have put forward proposals to resolve a Highway Trust Fund crisis, including plans to use revenues from corporate and international tax reform, to address the shortfall. At this critical stage, with less than three months before a crisis, failing to act in Congress to shore up the Highway Trust Fund would be damaging for families, businesses, and the economy. 

Transportation infrastructure spurs job creation and economic growth

Infrastructure creates the building blocks for businesses to grow and communities to thrive. People need a safe, effective transportation system to commute to work, visit and care for their family, and travel around their communities and across our country. Businesses rely on a strong infrastructure network to get supplies and deliver their products to market. If companies encounter delays or unpredictable delivery times, it adds costs and drains profits.1 An efficient and reliable transportation network is essential for the economy to function, and it is foundational for growth.

In particular, building and repairing highways has a high return on investment. The Federal Reserve Bank of San Francisco found investments in federal highway spending in 2009 boosted economic activity both in the short term and the medium term. For every dollar a state received in federal highway grants, its gross state product (GSP) rose by two dollars.2 Construction projects also spur job creation. According to DOT, $1 billion in federal funds spent on highways and public transportation can support an estimated 13,000 jobs for a year.3

These factors point to why preserving the solvency of the Highway Trust Fund – the nation’s dedicated source of funding for highway and transit projects – is so important. 

How the Highway Trust Fund works and why the fund is reaching critically low levels

In 1956, Congress established the Highway Trust Fund as a dedicated funding source for highway construction and maintenance projects. Today, the Highway Trust Fund is the primary funding source for federal highway, transit, and transportation safety programs across the country. However, both CBO and DOT forecast that the current funding in the Highway Trust Fund is unsustainable. Balances in the highway account of the Highway Trust Fund are projected to reach critically low levels by July and, according to DOT, to reach zero before the end of this fiscal year.4  The Mass Transit Account of the Highway Trust Fund, which has provided funding for public transportation since 1983, faces a similar situation. The balances in the transit account are projected to reach critically low levels in the first quarter of fiscal year 2015.5 Facing similar circumstances in the past, Congress has transferred $54 billion from the general fund to the Highway Trust Fund since 2008.6

One of the reasons for the impending insolvency of the Highway Trust Fund is that spending has outpaced revenue coming into the fund since 2000. Revenues into the Highway Trust Fund have traditionally followed a “user-fee” approach whereby spending on surface transportation programs is paid for by the user of the system.  For example, receipts from the gasoline tax, which has not been increased since 1993, now constitute almost two-thirds of the Highway Trust Fund’s total revenues. Because the Highway Trust Fund is primarily funded by a tax on each gallon of fuel purchased, the rate at which Americans drive greatly influences the solvency of the fund.  Between the 1960s and 2008, the number of miles driven in the U.S. increased every year.  The economic downturn slowed this growth, as Americans cut back on personal and work-related travel.  At the same time, the cars and trucks we drive are continuing to become more efficient, which means Americans need to buy fewer gallons of fuel in order to travel the same distance.7 But the need to fund projects to repair and build roads and bridges and improve public transportation assets at the state and local level has not slowed down.8 

Projects funded by the Highway Trust Fund are paid for through a system of reimbursement.  That is, the Highway Trust Fund does not pay for projects directly. Instead, states initially pay for projects using state funds, and then DOT reimburses states for eligible expenses from the trust fund.  While requests for reimbursement from states for infrastructure projects can come at any time, DOT usually reimburses states on the same day they submit a voucher for repayment.  The Department forecasts the rate at which it will have to make reimbursements, but certain events outside of the Department’s control can alter the rate and amount of outlays.  For example, payments tend to be higher during the summer months, which is peak construction season. Outlays can also vary because of an unexpected event that requires unusually large outlays (for example, a natural disaster).  To make sure that there are adequate balances on hand to cover all cash outlays in a timely manner, DOT considers it prudent to keep at least $4 billion in the highway account and $1 billion in the transit account at any given time.9  Those amounts represent a peak month cash outlay from each account.10  

One reason DOT carefully manages outlays from the trust fund is because, by law, the trust fund cannot borrow from the General Fund of the Treasury or incur negative balances.11  The moment that trust fund balances reach zero, DOT must halt reimbursements to states.  As a result, DOT has said that once the trust fund reaches critical levels, it may take certain cash management measures, including delaying payments to states.12  This occurred in 2008 when DOT announced that trust fund balances fell below a level needed to reimburse states for bills as they came due.13 After just a few days of implementing cash management measures, Congress stepped in to secure more funding for the Highway Trust Fund so that reimbursements to states would not be delayed. 

What uncertainty in the Highway Trust Fund means for families, businesses, the economy and the federal budget

Uncertainty in the Highway Trust Fund hinders states’ ability to plan for projects in the near-term, as well as for the long-term

Uncertainty in the Highway Trust Fund means states and cities can’t invest in the kinds of infrastructure projects that will benefit families, businesses, and the economy. In fact, many states are already planning for a worst-case scenario, in which the Highway Trust Fund isn’t able to reimburse them for construction projects. Arkansas, for example, has delayed 10 projects, including construction to widen highways and repair bridges.14 State officials in Missouri have stopped adding new projects to its five-year construction budget, with state officials citing uncertainty in future federal funding among the reasons.15 Public transportation officials have recently testified that steady federal funding is essential to maintaining the nation’s aging transit infrastructure to ensure it remains available for commuters.  In Philadelphia, the average age of the Southeastern Pennsylvania Transportation Authority’s rail bridges is more than 80 years old, with 103 bridges that are more than 100 years old.16 In Cleveland, Ohio, 100 percent of the Greater Cleveland Regional Transit Authority’s heavy rail vehicles are 30 years old.17 Without reliable federal investment, transit managers may be unable to commit to long-term rehabilitation programs or place orders for much needed replacement buses and rail cars. 

This uncertainty also has negative consequences for the long term. The constant crisis in federal funding discourages states from undertaking large infrastructure projects that require a steady upfront financing stream.18 According to National Governors Association Executive Director Dan Crippen, having states “try to plan a project now that might take eight years when the funding might last eight weeks is difficult and it’s really an impediment to state activity.”19

The Highway Trust Fund crisis would stymie job growth and make transportation more costly and less safe for families and businesses

Delaying or canceling transportation projects has serious implications for workers, especially those in the construction industry. As states consider dialing back highway construction projects, construction companies will hire far fewer workers to repair and improve roads and bridges around the country. According to an analysis from DOT, if states are not able to enter into new construction contracts because of a Highway Trust Fund crisis, as many as 700,000 jobs could be at risk.20

The construction sector was particularly hard hit by the recent economic downturn. In fact, 21 percent of job losses from December 2007 to December 2009 came from the construction industry, particularly because the real estate market collapsed during this time.21 As the economy has recovered, hiring in construction has not kept pace with other sectors of the economy. Only a fifth of the jobs lost have been restored.22 Allowing the Highway Trust Fund to dip to critically low levels would deliver another blow to the construction industry as it struggles to recover.

In addition, a construction slowdown, triggered by a Highway Trust Fund crisis, would hurt families and businesses. Poor road conditions and clogged highways – the very kinds of problems that funds from the Highway Trust Fund can address – increase costs for commuters. In 2011, public transportation saved travelers 865 million hours of delay and 450 million gallons of gas, but drivers still wasted an average of $818 on gasoline while stuck in traffic.23 Drivers incur other costs because deteriorated roads cause damage to vehicles, and lost time and productivity while traveling.24 Driving on roads in need of repairs accelerates deterioration of vehicles and depreciation, causing drivers to lose an estimated $377 every year.25

A slowdown in spending could also make our roads less safe. Every year, more than 30,000 people die in motor vehicle accidents on our roads.26 Without Highway Trust Fund spending, states will have to make difficult choices about the projects that can be funded. Important highway safety projects could be impacted or delayed. Further, the Highway Trust Fund supports vital state and local programs to reduce motor vehicle injuries and fatalities – like programs to combat drunk and distracted driving. These programs could also be at risk.

The United States is in need of investments to ensure the nation’s roads and bridges are safe and efficient for businesses and for families. These are exactly the kinds of investments that are supported by the Highway Trust Fund.

The Highway Trust Fund and its budgetary implications

As we consider the Highway Trust Fund and its impact on our nation's growth and economy, we should also consider what it means to our overall federal budget. For instance, it is important to understand that the Congressional Budget Office’s baseline projections for highway spending already assume that obligations incurred by the trust fund will be paid in full, and, further, that the current rate of highway and transit spending will continue into the future. In other words, the CBO’s baseline projections include ordinary levels of highway and transit spending, regardless of the status of the trust fund itself. Furthermore, the CBO’s projections do not include any offsetting spending reductions elsewhere in the budget to account for the continued highway spending, nor do they include any offsetting revenue increases.27

What this means, in practice, is that any solution to the current crisis that allows the Highway Trust Fund to pay reimbursements as usual will codify some assumptions made already by CBO in its baseline and therefore will have no effect on CBO’s projections of federal highway and transit spending. Furthermore, solutions that include spending reductions in other accounts or revenue increases will not be deficit-neutral relative to the current CBO baseline.

Proposals for averting a crisis in the Highway Trust Fund

Democrats, Republicans and independent groups have proposed both user-fee and general fund proposals to address the shortfall in the Highway Trust Fund.  Senator Patty Murray has pointed out that both Democrats and Republicans have proposed using revenue from corporate and international tax reform to invest in the Highway Trust Fund and avoid a crisis. Alternatively, Senator Murray has noted that this revenue could come from closing wasteful tax loopholes that members of both parties have proposed eliminating.

Democrats have proposed increased investments in infrastructure to make critical repairs to roads, bridges, and transit systems

This spring, the Obama Administration released a plan called the Generating Renewal, Opportunity, and Work with Accelerated Mobility, Efficiency, and Rebuilding of Infrastructure and Communities throughout America, or the GROW AMERICA Act. The legislation would provide a $302 billion, four-year reauthorization of transportation investments.  In May, Senator Barbara Boxer (D-CA), who chairs the Senate Environment and Public Works Committee, reached a bipartisan agreement to provide long-term funding levels for the federal highway program. The proposal passed the EPW Committee unanimously, garnering support from Democrats and Republicans.28

To address the shortfall in the Highway Trust Fund and pay for increased infrastructure spending, the GROW AMERICA Act would supplement the existing gas tax and other highway-related taxes with an infusion of $150 billion in revenue generated during the transition to a reformed corporate and international tax system. The Administration has indicated such “transition” revenues could be raised by addressing the estimated $2 trillion of untaxed profits U.S. multinationals have accumulated overseas, or through other policies which would generate less revenue in the second decade than the first (e.g., lengthening depreciation schedules) and which therefore should not be used to pay for permanent tax rate reductions.29

House Ways and Means Chairman Dave Camp’s tax reform plan proposes to use revenue from corporate and international tax reform to address the shortfall in the Highway Trust Fund

Congressman Dave Camp (R-MI), who chairs the House Ways and Means Committee, has also proposed using corporate revenue to avoid a Highway Trust Fund crisis. His discussion draft on comprehensive tax reform released earlier this year proposes to dedicate $126.5 billion to the trust fund, which he says would help maintain its solvency through 2021. Chairman Camp’s proposal would generate this revenue by placing a one-time tax on U.S. multinationals’ accumulated untaxed foreign profits as part of a transition to a reformed international tax system that would generally exempt future foreign profits from U.S. tax.30

The Congressionally-mandated National Surface Transportation Financing Commission proposed several user-fee based revenue proposals for the Highway Trust Fund

The 2005 highway bill established the National Surface Transportation Infrastructure Financing Commission to study future highway and transit needs, as well as to analyze the finances of the Highway Trust Fund, and with making recommendations regarding alternative ways to finance transportation infrastructure.31  In the final report entitled “Paying Our Way:  A New Framework for Transportation Finance” the Commission proposed, among other things, raising gasoline and diesel fuel taxes, converting existing taxes to sales taxes, and increasing taxes on heavy vehicles and freight as well as annual registration fees on vehicles.32 Many of these proposals, or a combination thereof, would permanently address the shortfall in the Highway Trust Fund in keeping with the traditional user-fee model of financing surface transportation. 

The Congressional Budget Office has identified a reduction of spending on transportation projects, an increase of revenue from the gas tax, or a combination of those measures, to shore up the Highway Trust Fund

In testimony to the Senate Finance Committee last month, Joseph Kile, the assistant director for microeconomic studies at CBO, outlined options for lawmakers to keep the trust fund solvent, including cutting obligations financed through the Highway Trust Fund, significantly increasing revenues available to the trust fund, or continuing to rely on infusions from the Treasury’s general fund.33

In his testimony, Kile said that if Congress chose to rely solely on spending cuts to keep the Highway Trust Fund solvent, Congress would need to bring spending authority down to zero from the highway and transit accounts of the trust fund in fiscal year 2015. From 2015 to 2024, the account for highways would need to be reduced by 30 percent and the transit account would need to be decreased “by about 65 percent, compared with CBO’s baseline projections.”34 To avoid those spending cuts, Kile also laid out an option to increase revenue raised through the tax on gasoline. As established by law in 1993, the gas tax stands at 18.4 cents per gallon and 24.4 cents per gallon on diesel fuels. To meet projected obligations for the trust fund through gas tax revenue alone, Congress would have to raise the tax on motor fuels by between 10 cents and 15 cents per gallon, beginning in fiscal year 2015.35

In addition to amending the spending authority in the Highway Trust Fund, the revenue generated from the gas tax, or some combination of the two, in his testimony, Kile also pointed to a general fund transfer from the U.S. Treasury. To do so, CBO projects a transfer of $18 billion would be needed in 2015.36



Endnotes:

[1] Boston Consulting Group, “The Global Infrastructure Challenge,” July 2010.

[2] Federal Reserve Bank of San Francisco, “Highway Grants, Roads to Prosperity,” November 26, 2012.

[3] Federal Highway Administration, U.S. Department of Transportation, “Employment Impacts of Highway Infrastructure Investment,” accessed May 12, 2014.

[4] Department of Transportation, “Highway Trust Fund Ticker,” accessed May 22, 2014.

[5] Department of Transportation, “Highway Trust Fund Ticker,” accessed May 22, 2014.

[6] Kile, Joseph, Testimony before the U.S. Senate, Committee on Finance, May 6, 2014.

[7] Congressional Research Service, “Funding and Financing Highways and Public Transportation,” April 2014.

[8] American Society of Civil Engineers, “2013 Report Card For America’s Infrastructure,” March 2013.

[9] Congressional Research Service, “Funding and Financing Highways and Public Transportation,” April 2014.

[10] Congressional Research Service, “Funding and Financing Highways and Public Transportation,” April 2014.

[11] Congressional Budget Office, “Projections of Highway Trust Fund Accounts Under CBO’s April 2014 Baseline,” accessed May 21, 2014.

[12] Congressional Research Service, “Funding and Financing Highways and Public Transportation,” April 2014.

[13] Government Accountability Office, “Highway Trust Fund: Improved Solvency Mechanisms and Communication Needed to Help Avoid Shortfalls in the Highway Account,” February 2009.

[14] Arkansas State Highway and Transportation Department, “AHTD Suspends Planned Construction Projects Due to Uncertainty in the Future Status of the Highway Trust Fund,” March 19, 2014.

[15] Missouri Department of Transportation, “Bleak Financial Forecast for MDOT,” January 23, 2014.

[16] Casey, Joseph, Testimony before the U.S. Senate, Committee on Banking, Housing & Urban Affairs, May 22, 2014

[17] Carter, Dorval, Testimony before the U.S. Senate, Committee on Banking, Housing & Urban Affairs, May 22, 2014

[18] Carew, Diana and Mandel, Michael, “Infrastructure Investment and Economic Growth: Surveying New Post-Crisis Evidence,” March 2014.

[19] “NGA Leader: Uncertainty Over Highway Money Shows D.C. Failing States,” Politico Pro, April 16, 2014.

[20] The White House, “The Economic Importance of Investing in Our Infrastructure,” accessed June 2, 2014.

[21] Department of the Treasury with the Council of Economic Advisors, “A New Economic Analysis of Infrastructure Investment,” March 23, 2012.

[22] Norris, Floyd, “Feeble Hiring in Construction Is a Stubborn Drag on Growth,” December 13, 2013.

[23] Texas A&M Transportation Institute, “Urban Mobility Report 2012,” December 2012.

[24] American Society of Civil Engineers, “Failure to Act: The Impact of Current Infrastructure Investments on America’s Economic Future,” 2013.

[25] TRIP, “Bumpy Roads Ahead: America’s Roughest Rides and Strategies to Make our Roads Smoother,” October 3, 2013.

[26] National Highway Traffic Safety Administration, “Quick Facts 2012,” accessed June 3, 2014.

[27] Kile, Joseph, Testimony before the U.S. Senate, Committee on Finance, May 6, 2014.

[28] U.S. Senate Committee on Environment and Public Works, “Senators Boxer, Vitter, Carper, and Barrasso Announce Markup for Bipartisan MAP-21 Reauthorization Bill,” May 8, 2014.

[29] Department of the Treasury, “General Explanations of the Administration’s Fiscal Year 2015 Revenue Proposals,” accessed May 22, 2014.

[30] Ways and Means Committee, “Tax Reform Act of 2014 Discussion Draft Section by Section Summary,” accessed May 22, 2014.

[31] Department of Transportation, “National Surface Transportation Infrastructure Financing Commission,” accessed May 29, 2014.

[32] National Surface Transportation Infrastructure Financing Commission, “Paving Our Way: A New Framework for Transportation Finance,” February 26, 2009.

[33] Kile, Joseph, Testimony before the U.S. Senate, Committee on Finance, May 6, 2014.

[34] Kile, Joseph, Testimony before the U.S. Senate, Committee on Finance, May 6, 2014.

[35] Kile, Joseph, Testimony before the U.S. Senate, Committee on Finance, May 6, 2014.

[36] Kile, Joseph, Testimony before the U.S. Senate, Committee on Finance, May 6, 2014.