Out of Gas: The Highway Trust Fund

Policy Reports | Taxes

No. 370
Tuesday, September 08, 2015
by Lloyd Bentsen IV

Executive Summary

The federal Highway Trust Fund is running on empty, despite $34 billion in annual revenues from taxes on gasoline, diesel and other fuels dedicated to pay for the Interstate Highway System and other transportation projects.

Due to inflation, the diversion of funds to nonhighway programs and poor government policies, the Highway Trust Fund consistently spends more than it receives in gas tax revenue, resulting in a $1 billion deficit in 2015 alone.1 The trust fund was intended to pay for 90 percent of the highways’ costs, with states funding the other 10 percent. The Congressional Budget Office estimates the shortfall in the Highway Trust Fund will require an additional $167 billion in revenue over the next decade to maintain existing highways and bridges. 

To fill the funding gap until a more comprehensive plan is written, Congress passed a short-term extension of spending authority through October 29, 2015, and put $8 billion in the trust fund. In the fall, Congress is expected to debate a long-term transportation bill. During this debate, Congress could consider either changing the method of funding highways, or eliminating the federal gas tax and leave the stewardship of the interstate system to the states.

The federal gas tax clearly requires major reforms to work efficiently
again. Some proposed reforms include:

  • Eliminating the Mass Transit Fund and all other non highway funding through the Department of Transportation, saving $16 billion annually that could be used for additional highway funding.
  • Raising the federal gas tax to compensate for inflation since it was last raised in 1993, and adjusting for future inflation, which would bring in 40 percent more, or $10 billion a year.
  • Repealing the Davis-Bacon Act, saving $11 billion annually in construction costs.

In 2014, Senator Mike Lee (R-Utah) and Representative Tom Graves (R-Ga.) introduced the Transportation Empowerment Act (TEA) to virtually eliminate the federal gasoline tax over a five-year period and devolve the responsibility of funding roads and transit to the states. The TEA would completely transform the current highway funding program. It aims to open up the transportation system to greater state control, better targeted projects, and more efficient maintenance and improvement of the nation’s infrastructure. If it had passed in 2014, TEA would have reduced funding for the federal aid highway program more than 80 percent by 2019, from $45 billion to less than $8 billion. It would have eliminated the $8 billion federal transit program that supplies more than 43 percent of the capital spending for state and local public transit agencies.

State gas taxes are the largest source of transportation revenue under the control of state lawmakers, accounting for roughly 30 percent of highway funding. As of 2003, 30 states restricted the use of their gas tax revenues to highways only. Other states, however, use gas tax revenues for mass transit projects, under the assumption that highway users benefit from the congestion-reducing effects of mass transit. Twenty four states have gone more than a decade without
raising their gas tax rate, and 16 states have gone two decades or more without an increase. 

Several state gas tax reforms have been proposed, including:

  • Linking state gas tax rates to construction cost inflation, the general inflation rate or gas prices.
  • Reforming the state gas/transportation tax and spending structure for state highways or roads only.
  • Changing from an excise tax to a mileage-based tax system.

Previous failures by the federal government in its management of fuel taxes leave two major choices: to dramatically reform and amend the way highways are funded or to eliminate the federal gas tax and leave the stewardship of the interstate system to the states.

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