NEWS

Looming Highway Trust Fund Insolvency

24 Feb 2020

 

 

The Highway Trust Fund is the federal fund for road and bridge maintenance and repair. It once built the Interstate Highway System and helped keep our roads safe and smooth. Now, it is under the shadow of looming insolvency, with revenue failing to keep pace with spending.

The Fund was set up as independent from the general tax revenue so that critical infrastructure was not subject to partisan and political gridlock. It was also created as a user-pay system, so that its revenue was derived from use of the roads. This makes it an independent and somewhat closed system for tax revenue and spending. Over time, however, this supposedly independent and closed system failed to support itself.

From 2008 to 2018, Congress had to allocate over $140 billion from the General Fund. This will be necessary again in 2021 if something is not done to address the crisis. But rather than continued bailouts, the system can be reformed within the closed world of transportation, with road-based revenue being reestablished and transportation spending being narrowed back to its original limits.

The problem, then, is twofold: both revenue and spending.

 

Revenue

The Highway Trust Fund is supported for the most part through the motor fuel excise tax. That tax has not been raised or adjusted for inflation since 1993. Over those nearly 30 years, innovation has led to great strides in fuel efficiency, naturally leading to declining per-gallon revenue.

More stark of an issue is that the fuel tax was devised as a user-pay system so that it was impossible to use the roads without paying. Electric vehicles (EVs), however, have innovated their way out of that tax and currently drive the roadways without paying the federal tax to support maintenance and repair.

Far from a criticism of electric vehicles, this is a failure of policymakers. Congress unintentionally created a dormant efficiency loophole decades ago, allowing vehicles to  innovate out of the user-pay system.

Even though the fuel tax incentivizes and rewards efficiency and moving toward hybrids and electric vehicles, it would not be a punishment to levy a tax or surcharge specifically on those vehicles to make up for fuel tax shortfalls. In fact, that would be a realignment with the user-pay system, at least in the short term.

Less critical, but relevant, is that electric vehicles are actually heavier than internal combustion engine vehicles due to heavy batteries and stronger frames. So by paying no maintenance and repair user-fee tax, EVs fail to bolster the fund and actually create a slightly disproportionate impact on the roads due to their weight.

Read our latest report to learn more. 

Rather than single out EVs for their weight, it is also worth noting that all vehicles are packing pounds as safety features, more technology, and stronger materials are incorporated. So the fuel tax has been missing out on per-gallon revenue as fuel economy advances, and the tax rate was set when vehicles weighed less and resulting road maintenance, at least in theory, cost less.

These issues in isolation do not present an insurmountable challenge. But combined, they demonstrate that a static per-gallon fuel tax cannot support the Highway Trust Fund. Revenue into that fund declines as vehicles use less fuel. Revenue is not being captured by some not using the taxed fuel at all. And inflation robs the purchasing power of that weak revenue stream, all while maintenance costs increase.

 

Spending

The Highway Trust Fund was created in 1956 to collect and disburse motor fuel tax revenue to the states for the Interstate Highway System project. Naturally, this meant the only objective was highways.

In 1982, the Fund split in two, creating The Highway Account and the Mass Transit Account. This means that the revenue being collected from motor fuels does not all go back into road maintenance. Instead, the ever-weaker stream of revenue from the failing fuel tax goes to a range of general transportation purposes. Lack of dedicated revenue, and splitting that road-derived revenue has even led to the two accounts having different levels of solvency.

Another issue is that projects are often approved and begun before they have the revenue in hand. This is because Congress approves critical projects that are sometimes years-long endeavors. Expected revenue justifies committing to these projects, but expected revenue does not always pan out.

Committing outlays on the basis of expected revenue is a recipe for disaster. This allows the potential (and reality) of spending exceeding revenue. If this is done enough years in a row, we arrive at insolvency. The unchanged fuel tax helped set up the revenue side of this imbalance. And governance and spending decisions set up the other side of the imbalance. Together, they set up a race for insolvency.

Spending not only needs to be reduced, but reforms must go into place to safeguard against deficits. At the same time, conversations must be had about whether using motor fuel revenue for non road purposes is appropriate. One way to immediately boost solvency for the Highway Account is to direct all highway-derived revenue into it. This might sacrifice the Mass Transit Account, however. Further, narrowing Fund resources to road and bridge maintenance and repair rather than things like sidewalks, bike and walking trails, median beautification, and more is another option. These are transportation-related causes, but they are not road maintenance and repair purposes.

Importantly, reassessing the allocation of tax revenue does not mean mass transit or bike lanes are not important. It means that our roads and bridges are in disrepair and the revenue designed to address them is not being applied to them. So finding new revenue or drawing resources from different sources for mass transit and other projects may be desirable.

 

Two-Sided Crisis

As it stands, the Highway Trust Fund is going broke because of both revenue and spending. It faces enemies to solvency in both directions. That means both fronts must be engaged. Revenue must be bolstered and spending must be reformed.

On the revenue side, that means collecting user-fees from everyone using the road. All vehicles, regardless of their fuel type of efficiency should pay proportionate fees for using the road. This means the fee should account for vehicle weight, number of tires, and actual miles driven. The fuel tax cannot do any of these. It simply uses fuel as a ham-handed proxy for road use and impact.

Current proposals offer a solution in the form of Vehicle Miles Traveled (VMT) or Road Usage Charging (RUC). These are being implemented as pilot programs across America…

Learn more in our latest report.

 

Written by Benjamin R. Dierker, Director of Public Policy