The Federal Highway Trust Fund: Past, Present, and Future

The Federal Highway Trust Fund: Past, Present, and Future

Infrastructure  | Research & Analysis
May 16, 2014  | 7 min read

Every driver that purchases fuel pays an excise tax of 18.4 cents per gallon of gasoline or 24.4 cents per gallon of diesel. Proceeds from these taxes go into the federal Highway Trust Fund (HTF) — the primary financing mechanism for the nation’s surface transportation system. This fund provides support for a variety of highway and transit programs, including formula-based state grants and specific projects and programs as directed by Congress. The HTF faces a myriad of problems including insufficient revenues relative to spending and lack of spending prioritization.

Background and Current Policies

Before the 1950s, investments in federal highway and other transportation programs came out of the general Treasury. To address the nation’s growing highway needs and support development of the interstate highway system, President Eisenhower signed the Federal Aid Highway Act in 1956, establishing the HTF — a user-based finance mechanism based primarily on a $0.03 tax on gasoline with a variety of other excise fees.

The HTF’s tax rates and structure remained virtually unchanged until President Reagan signed the Surface Transportation Assistance Act of 1982, raising the gasoline tax to $0.09 per gallon and creating two separate accounts within the HTF: (1) a highway account that received $0.08; and (2) a new Mass Transit Account that received $0.01 per gallon of the gas tax. Since that time, Congress has increased fuel taxes on only two occasions, in 1990 and 1993, when the gas tax was raised to its current rate. Initially, 4.3 cents of the 18.4 cents per gallon was dedicated to deficit reduction but was later redirected to the HTF in the Taxpayer Relief Act of 1997. According to CBO estimates, HTF revenues and interest will total about $38 billion in 2014.

Since 2001, the HTF’s receipts have consistently fallen below expenditures. As a result, the HTF has been teetering on the edge of insolvency since 2008. Since then, Congress has transferred a total of $54 billion from the nation’s general revenues to keep the HTF solvent. The HTF’s balance totaled only $6 billion at the end of fiscal year 2013. By the end of fiscal year 2014, the CBO estimates that the balance of HTF’s highway and transit accounts will fall to $2 billion and $1 billion, respectively.  Based on existing revenue levels, the HTF’s balance will be insufficient to meet all of its obligations in fiscal year 2015 with no money being available to cover new project commitments going forward .The Department of Transportation (DOT) has already indicated the possibility of having to delay payments from the HTF to states. At current spending levels, the HTF would be $172 billion in the red by 2024. By law, however, the HTF can’t carry a negative balance, so spending will need to be cut, new revenue found, or both.

How the HTF Differs from Other Federal Programs

HTF-funded programs are exempt from many of the budget control rules to which other federal programs are subject, making them more prone to waste. Because they are considered discretionary (i.e., subject to appropriation, rather than being legally required), HTF programs may not factor into the implementation of any sequestration mechanisms which may be triggered under current law. However, because the budget authority for HTF programs is classified as mandatory (i.e., legally required), these programs are exempt from the statutory spending caps that normally apply to discretionary programs.  According to a recent CBO report, this split budgetary treatment increases uncertainty among both lawmakers and stakeholders, making it more difficult for them to understand the budgetary implications of federal transportation legislation and leading to poor spending choices.

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Major changes to the HTF are needed

The looming bankruptcy of the highway trust fund undercuts a vital taxpayer asset — the nation’s transportation system. To support a 21st century transportation system, as well as mitigate growing congestion and bring more accountability to taxpayers, a number of important criteria should dictate how the nation’s transportation system is funded:

  • Program should be completely self-financing. Whether Congress opts to rely on the current gasoline tax or switches to an alternative funding source or a hybrid of both, spending from the HTF should match the incoming revenues. No future transfers from general tax revenues.
  • User pays/user benefits principle should be preserved. A primary advantage of the current funding system is that a driver who uses the roads more (usually, save for owners of highly efficient vehicles) pays more in gasoline tax. Though the link between use and payment could be strengthened (for example: a tax directly on miles driven, with higher charges for driving when roads are more congested), the user pays principle is essential and should be preserved under any future funding schemes.
  • Eliminate waste, prioritize spending. Congress should seek to eliminate wasteful spending on lower-priority or unnecessary projects and develop incentives to ensure that every dollar spent goes to projects that will have the greatest local, state, and national benefit. Congress should incentivize the maintenance of existing infrastructure and penalize states that do not keep their roads and bridges at a minimum level of good repair. 
  • Allow and encourage revenues from additional sources. Under existing federal policy, states are not permitted to toll existing highway miles, though many of our nation’s interstates have reached their 50-year life expectancy and need to be completely rebuilt. Tolling existing lanes could provide a huge transportation funding boost, especially if the tolls collected are required to be spent on transportation projects and not diverted to a states’ general fund. In addition, states should be encouraged to utilize public-private partnerships where applicable; a prudent increase in funding for the TIFIA program, which helps leverage private dollars for transportation projects, should be implemented; and opportunities for creative financing should be expanded.