Government Issues

Will Federal Officials Fix the Trust Fund or Just Play Games?

Posted on February 24, 2015 by Cliff Henke

By now, it is common knowledge both the Highway Trust Fund (HTF), and the Mass Transit Account within it — the
latter established by the 1982 surface transportation bill that was signed by President Ronald Reagan — will run out of money this year, even if the law that governs these funds didn’t expire on May 31. These are no longer “what ifs” being chewed over in policy circles.

Nor is the range of options of what to do about it. Some have argued for simply letting the trust fund run out, while others are proposing a range of “bailouts” and longer-term fixes. Still, others are pointing to a series of measures, such as new bond funding and other financing ideas, that go beyond a trust fund fix.

How we got here
This has been a problem that members of Congress have known about for many years, and several blue-ribbon panels have been organized to address the challenge. Now, the reckoning has come. Put simply, both the Highway Trust Fund and Mass Transit Account are nearing insolvency — for the latter, that point legally comes when the account’s balance goes below $2 billion. However, members of Congress refuse to raise the HTF’s revenues — mostly taxes on gasoline and other fuels — sufficiently to pay for how much we want to spend on highway, public transportation and other surface transportation programs.

Each year since about 2006, Americans have driven less than the year before. A recent study by the Pew Foundation showed the trend really started in all but a handful of states in the 1990s, dispelling the notion that somehow the trend would reverse itself when the economy finally started getting better.

Even if their driving had not peaked, however, U.S. cars and trucks have been consuming less fuel, thanks to regulations and technology. That, of course, means less gas taxes paid and less HTF revenue. This long-term challenge will worsen even further when the fuel economy standard the Obama Administration negotiated with auto manufacturers kicks in, which will push fuel efficiency well above 50 miles per gallon for new cars and light trucks sold in the next decade.

At the same time, demand for new and repaired transportation infrastructure has grown. According to the World Economic Forum, the U.S. is now ranked 18th for the condition of its transportation network, which drags its overall competitiveness ranking downward further each year. America now only spends a paltry 1.5% of its gross domestic product on infrastructure, a rate that is one-half of what it used to be several decades ago; the U.S. now ranks in the mid-30s in infrastructure spending as a share of its economy and its ranking continues to drop with the issuance of each report.

Hampered by concern about mounting federal debt and annual deficits, members of Congress and presidents of both parties have tried to address the issue with record nominal levels of funding in the various authorization bills that have been passed, but none of them since the Transportation Equity Act for the 21st Century that was passed in 1998 have come with new gas tax increases to pay for them. Even the 1990s-era tax increases began as deficit reduction, and then, were transferred to the HTF later when deficit reduction cooled as an issue.

At the same time, states and local jurisdictions through direct referenda began to accelerate spending on roads and public transportation faster than the federal government. More than 70% of such measures have passed each year, a trend that began in the 1990s and continues to this day, according to data compiled by the Center for Transportation Excellence.

The Great Recession produced another bipartisan call for more surface transportation spending, but the consensus has ended as to how to pay for it on any sustainable basis. Several histories of the Obama Administration’s response to the crisis with the Recovery Act of 2009 note that pushing the stimulus money through existing surface transportation programs — which also meant a deficit-financed bailout of the HTF — was the only way to meet the Recovery Act’s goals of “timely, targeted and temporary” spending. While that approach succeeded in pushing through the programs what former FTA Administrator Peter Rogoff called “an extra year of spending” in those fiscal years, has since worsened the hole in the HTF and increased the “bailout need,” even if funding is to remain constant, Rogoff and others explain.

Conservative thoughts
Some conservatives, such as former Nixon transportation official Ken Orski as well as Sen. Mike Lee (R-UT), have argued that the time has come for simply ending the HTF. While a fringe wants to end the federal programs altogether, a line of thinking that was defeated before in the mid-1990s, most in this camp simply want to have Congress pay for any spending on a year-to-year basis. After all, they argue, since the HTF is basically broken, the arguments for how the HTF’s “contract authority,” which allows state officials to contract with the private sector ahead of the grants’ actually arriving, is breaking down anyway.

Other conservatives say this is nihilistic and not really even conservative. For example, Pete Weyrich and former Virginia Gov. Jim Gilmore, who now heads the Free Congress Foundation, say that such devolution of the federal highway and transit programs is not consistent with conservative principles of restraint and long-term planning based on realistic assumptions. Others, like current House Transportation and Infrastructure Committee chairman Bill Shuster, have said that ending any long-term federal commitment ignores the country’s founding principles of federal leadership in building the nation and promoting and regulating commerce. He also likes to quote political philosopher Adam Smith, who argued for a governmental role in infrastructure with fees on the users as necessary to the health of capitalism.

Courtesy the White House
President Obama’s FY 2016 budget, announced at press time, calls for a mandatory 14% repatriation fee to fund a variety of programs, including a six-year, $478 billion surface transportation reauthorization proposal.
Courtesy the White House
President Obama’s FY 2016 budget, announced at press time, calls for a mandatory 14% repatriation fee to fund a variety of programs, including a six-year, $478 billion surface transportation reauthorization proposal.

Ideas for solutions abound
Even conservative Senators James Inhofe (R-OK), chair of the Environment and Public Works Committee, and Orrin Hatch (R-UT), chair of the Finance Committee, respectively in the Senate, are warming to the idea of a gas tax increase, with possibly an indexation provision raising it with inflation increases in future years. Although President Obama has not supported such an increase in the past, some have said he might do so if it were in the context of a tax reform package.

However, the tax increases proposed by Inhofe and Hatch would only erase the hole in the funds and allow some short-term program spending increases, and no one except liberal Congressman Earl Blumenauer (D-OR) and Sen. Bernie Sanders (I-VT.) support tax increases to pay for long-term trust solvency. Such proposals amount to well more than a dollar per gallon tax increase.

What appears to be gaining traction at press time are ideas for “repatriation” of cash held by U.S.-based multinational corporations overseas to avoid U.S. taxes. Congressman John Delany (D-MD) has proposed a scaled-down version of his infrastructure repatriation bond fund idea that he introduced in the last Congress. This year’s version would dedicate $120 billion of an estimated $170 billion that would come from a one-time repatriation tax rate of 8.25% to fill the Highway Trust Fund with $70 billion, including the traditional 20% designated for the Mass Transit Account, for the next six years, but also put another $50 billion to the creation of an American Infrastructure Fund, which would provide loans and other financing tools to states and cities for a gamut of infrastructure projects, from sewer improvements to broadband access. The rest of the $170 billion repatriation would be used in corporate tax reform.

A similar idea was announced in the Senate at press time. The unlikely duo of U.S. Sens. Barbara Boxer (D-CA) and Rand Paul (R-KY) have introduced their own Highway Trust Fund solvency bill with repatriation of overseas corporate revenues, now. Their proposal calls for a repatriation rate of 6.5%.

“I hope this proposal will jumpstart negotiations on addressing the shortfall in the Highway Trust Fund, which is already creating uncertainty that is bad for businesses, bad for workers and bad for the economy,” said Boxer during the idea’s press announcement. She also pledged to work with Chairmen Inhofe and Hatch, with whom she had a productive relationship when they worked together to craft MAP-21.

Still other ideas abound for repatriation and infrastructure financing, including resurrection of the Recovery Act’s successful Build America Bonds, a National Infrastructure Bank, expansion of existing or new state infrastructure banks with tax-preferred investment incentives as part of a tax reform package, or even the creation of a government-sponsored enterprise for transportation investment similar to the mortgage-backed enterprises Fannie Mae and Freddie Mac. None of those ideas, however, have gained much traction, particularly the last, in the wake of the financial crash of 2008, and certainly not nearly the traction recently gained by repatriation in the wake of tax reform.

Expiration focuses attention
Ironically, lawmakers seem to be gravitating toward the ideas floated by the Obama Administration in their recent budgets. The president has called for tax reform and using money from winding down the Middle East wars to pay for a HTF bailout and a national infrastructure bank. His FY 2016 budget, announced at press time, calls for a mandatory 14% repatriation fee to fund a variety of programs, including a six-year, $478 billion surface transportation reauthorization proposal.

The real short-term challenge looms as we get nearer to the end of May, the expiration deadline. Most experts, including some members of Congress, privately expect to see a short-term extension while longer-term legislation is worked out. While no one will admit it, the deal will likely be very similar to the president’s proposals.

Some have said that ever since his opposition party took over the House majority, the president is most successful when he allows others to craft the bill ultimately adopted. Surface transportation funding looks increasingly likely to be one of those instances this year.    

Cliff Henke is an assistant VP and senior analyst with Parsons Brinckerhoff. Any views expressed herein are solely his own.

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