NCPA - National Center for Policy Analysis

DEDICATED FUND RAISES SPENDING

May 28, 1997

The carefully crafted budget deal between Bill Clinton and Congress nearly collapsed in a dispute over highway funding. In the House, Congressman Bud Shuster (R-PA), chairman of the House Transportation and Infrastructure Committee, tried to add $12 billion for highway funding, losing by an extremely narrow 216 to 214 vote. A similar effort in the Senate by Senator John Warner (R-VA) was equally close, losing by just a 51 to 49 vote.

Both Warner and Shuster argued that increasing federal highway spending would actually cost nothing because they would only authorize spending of funds already dedicated exclusively to highway construction in the Highway Trust Fund. Opponents argued that the amendments would increase the deficit and jeopardize the entire budget agreement.

The seeds of this dispute were sown in 1956, when the federal government established the Highway Trust Fund. Revenue from the gasoline tax was dedicated to the fund, which could not be used for any purpose other than highway construction and repair. This year the Highway Trust Fund is expected to take in $26.3 billion and spend $23.5 billion, leaving a surplus of $2.8 billion. Similar surpluses are expected in the future.

The problem is that the federal government ultimately lumps all of its spending and revenues together to determine the budget deficit. Thus a surplus in the Highway Trust Fund still reduces the deficit by an equal amount.

Historically, economists have condemned the practice of setting up artificial trust funds for various purposes and earmarking specific revenues to them. They view them as attempts to protect the beneficiaries of specific government programs.

Such earmarking is inefficient because it builds rigidity into the budget. No matter how pressing other concerns may be, large portions of the budget are dedicated to priorities that may have been set many years earlier and are no longer valid. Earmarking is also wasteful because it effectively removes trust funds from budgetary review. In the case of the Highway Trust Fund, for example, the existence of a surplus is an open invitation for spending on low-priority or pork barrel projects.

Nevertheless, earmarking is popular because it creates support for tax increases that would not exist for general budgetary purposes. When projects are funded by general revenues, special interests must compete against each other for a piece of the pie. And if they lobby for higher taxes, the extra revenue may not go to their priorities. But if a tax is dedicated to a specific purpose, special interests have a very strong incentive to lobby for higher taxes because they will get all the benefits.

The result of earmarking is higher overall taxes and spending. Dedicating a specific revenue to a specific purpose simply reduces the use of general revenues for that purpose, allowing them to be spent elsewhere. Congress and the president need to set spending priorities. Earmarking is a practice that ought to be discontinued.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, May 28, 1997.

 

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