Our recent paper Trust or Bust: Fixing the Highway Trust Fund called on lawmakers to identify a long-term fix to the funding gap in the Highway Trust Fund (HTF). Unfortunately, it appears unlikely that there is sufficient time to enact a fix before funds fall too low and disrupt construction this summer. A short-term patch can be enacted by transferring funds from general government revenue. To be fiscally responsible, however, this transfer should be fully offset elsewhere in the budget.
Previously, we discussed long-term options to restore highway solvency by cutting spending, raising more from current highway taxes, and raising new taxes. Below are tax, spending, and other options that could pay for upfront general revenue transfers to shore up the HTF in the short-term, although they leave the HTF's chronic imbalance in place. These options can buy time, but they do not replace the need to identify a long-term solution to bring dedicated revenue and spending in line.
|Options To Offset a Transfer of General Revenue|
|Policy||Ten-Year Savings||Trust Fund Extension|
|Dedicate one-time "deemed repatriation" tax to the HTF||$125 billion||8 years|
|Dedicate temporary transition revenue from repealing LIFO to the HTF||$90 billion||6 years|
|Repeal certain oil and gas tax preferences^||$35 billion||30 months|
|Eliminate tax exclusion for new private activity bonds||$30 billion||24 months|
|Require filers to have a SSN to file for a refundable child tax credit||$20 billion||16 months|
|Eliminate Amtrak subsidies*||$15 billion||12 months|
|Eliminate "Capital Investment Grants" for the rail system*||$15 billion||12 months|
|Reduce farm subsidies||$15 billion||12 months|
|Close Section 179 "luxury SUV loophole"||$10 billion||8 months|
|Reduce Strategic Petroleum Reserve by 15 percent||$10 billion||8 months|
|Increase sequestration by $1 billion/year||$10 billion||8 months|
|Repeal tax deduction for moving expenses||$10 billion||8 months|
|Clarify worker classification||$5 billion||4 months|
|Prevent "double dipping" between unemployment & Social Security Disability||$5 billion||4 months|
|Allow drilling in ANWR and the Outer Continental Shelf||$5 billion||4 months|
|Reduce federal research funding for fossil fuels and nuclear energy*||$5 billion||4 months|
|Repeal or phase-out tax credit for plug-in electric vehicles||$1.5 - $5 billion||1 - 4 months|
|Require inherited IRAs to be paid out within 5 years||$4 - $5 billion||3 - 4 months|
|Extend current Fannie/Freddie fees through 2021||$4 billion/year||3 months|
|Extend customs fees through 2024||$4 billion||3 months|
|Deny biofuels credit for black liquor (retroactively)||$3 billion||3 months|
|Increased mortgage reporting||$2 billion||~2 months|
|Require the IRS to hire private debt collectors||$2 billion||~2 months|
|Enact federal oil and gas management reforms in the President's Budget||$2 billion||~2 months|
|Devote mandatory aviation security fee to deficit reduction through 2024||$1.5 billion||~1 month|
|Make coal excise tax permanent||$1.5 billion||~1 month|
|Make Travel Promotion Surcharge permanent||$1.5 billion||~1 month|
|Clarification of statute of limitations on overstatement of basis||$1.5 billion||~1 month|
|Close the "gas guzzler" loophole||$1 billion||~1 month|
|Revoke passports for seriously delinquent taxpayers||< $0.5 billion||<1 month|
Sources: CBO, OMB, JCT, and CRFB calculations
All numbers are rounded and calculated by CRFB based on a variety of sources.
*These discretionary changes would need to be accompanied by reductions in the discretionary spending caps.
^Includes expensing for exploration and development as well as the “percentage depletion allowance”
Transition Revenue from Tax Reform
Since business tax reform is likely to raise more revenue in the first decade than over the long-term, several proposals have suggested using this "transition revenue" to help fund the HTF. President Obama, for example, would devote $150 billion of temporary revenue from business tax reform to fill the highway shortfall and temporarily increase infrastructure spending for four years. Although his budget did not specify the source of the $150 billion, a few business tax proposals in his budget generate temporary revenue; for example, about $90 billion of the $105 billion of revenue raised from repealing LIFO accounting is temporary. Chairman Dave Camp's (R-MI) tax reform draft also has several temporary revenue sources, including a one-time "deemed repatriation" tax which raises about $125 billion, which the draft deposits in the HTF (though it double-counts the funds toward rate reduction).
In identifying potential offsets for transportation spending, many policymakers prefer to focus on policies related to transportation. On the revenue side, one option would be to close the "luxury SUV loophole" of Section 179, which allows some businesses to purchase certain vehicles for personal use, while "expensing" them as a business cost. Closing this loophole could raise $10 billion over ten years, representing an 8-month extension of the life of the HTF. Policymakers could raise an additional $1 billion by closing a separate loophole for SUVs and related vehicles which exempts them from what's called the "gas guzzler" tax. Other transportation options include repealing or reducing the credit for plug-in electric vehicles, which could save up to $5 billion, or repealing the tax deduction for moving expenses, which would save about $10 billion.
On the spending side, one option would be to reduce or eliminate the discretionary funding that subsidizes Amtrak's budget, saving up to $15 billion. They could also trim or eliminate the Capital Investment Grants for railroad improvements given to states, local governments, and railroad companies, saving up to $15 billion. Claiming savings from either of these policies would require also reducing discretionary spending caps by the expected savings, or else appropriators would likely use the savings to increase other discretionary spending.
There are also fuel-related options to finance general revenue transfers. Eliminating two of the biggest oil and gas tax preferences raises $35 billion, extending the HTF by about 30 months. Those two provisions allow companies to deduct intangible costs related to drilling and deduct a percentage of their income as a business cost, rather than using the actual lower cost of their investment. Allowing drilling for oil in the Arctic National Wildlife Refuge (ANWR) and the Outer Continental Shelf, on the other hand, would raise approximately $5 billion, extending the HTF by about 4 months. Selling about 15 percent of the oil in the Strategic Petroleum Reserve would raise about $10 billion, buying about 8 months. Lawmakers could also repeal retroactive credits for "black liquor," a loophole where paper companies were able to claim biofuel credits for a byproduct of the manufacturing process. Black liquor credits were restricted after 2010, but companies with credits from previous years are still able to claim them.
On the spending side, reducing federal funding for fossil fuel and nuclear energy research within the Department of Energy would finance a 4-month HTF extension with $5 billion of savings – assuming it was accompanied by a reduction in the discretionary caps. Enacting oil and gas management reforms in the President's budget would save $2 billion, which would not buy much time but could contribute to a bigger package.
The recent proposal from Chairman Wyden (D-OR) largely pays for a transfer to the HTF through compliance measures to reduce the under collection of taxes. Increasing the information reported about mortgages could raise over $2 billion, clarifying the rules regarding how long taxpayers can be liable for overstating their basis could raise $1.5 billion, and requiring the State Department to revoke passports of people owing at least $50,000 of delinquent taxes could raise another $400 million. These three policies from the Wyden proposal would extend the life of the trust fund by about 3 months. An additional proposal requiring the IRS to use private debt collectors for back taxes could raise an additional $2 billion. Another clarifying the rules around classifying employees as independent contractors could save $5 billion.
Extending Existing Policies
Lawmakers could also extend a variety of expiring fees. Extending customs fees (which expire in 2023) by one year would raise $4 billion, buying about 3 months for the HTF. Extending mortgage guarantee fees paid to Fannie Mae and Freddie Mac could raise about $4 billion for every year they are extended. Lawmakers could also raise $1.5-$2 billion by either extending an excise tax on coal that expires in 2018 or the Travel Promotion Surcharge, a $10 fee on foreign visitors that expires in 2015. They could raise another $1.5 billion by extending the aviation security fee increased in the Ryan-Murray budget agreement. The increase is currently devoted to deficit reduction, but only through 2023.
Lawmakers could turn to many offsets that have been proposed but not utilized in the past. Taxing the interest income from private activity bonds, as suggested in Chairman Camp's discussion draft, would save $30 billion, extending the life of the trust fund by over 2 years. Requiring a Social Security number to claim the refundable portion of the child tax credit would save $20 billion, buying more than one year for the trust fund. Reducing farm subsidies as proposed in the President's budget could save $15 billion. Requiring inherited IRAs to be paid out within 5 years, also proposed in the President's Budget, could save $4 or $5 billion. Lawmakers could increase sequestration, which affects most defense and nondefense spending. Preventing people from "double dipping" and claiming money from both unemployment insurance and Social Security disability would save about $5 billion.
The offsets identified above can buy lawmakers time for deliberation. Unfortunately, none of them solve the structural imbalance in the HTF. Because they use ten years of future savings to pay for an immediate general revenue transfer, all of them would increase short-term deficits.
To be sure, fully offsetting the costs of a general revenue transfer – even over ten years – is far more responsible than deficit-financing one (or using gimmicks to fake an offset). But policymakers should move quickly to put transition funding in place and begin to consider options to improve the fund's long-term outlook by either cutting spending, raising more from current highway taxes, and/or raising new taxes on a more permanent basis.