Other Spending_Transportation_Highway

Carper's Highway Plan Responsibly Fixes Trust Fund But With a Catch

Aug 11, 2015 | Other Spending| Taxes

The three-month highway law that passed last month was intended to buy time for a more lasting solution for the Highway Trust Fund's finances, so it is encouraging to see Sen. Tom Carper (D-DE) propose a plan to do exactly that. His TRAFFIC Relief Act would gradually raise fuel taxes by 16 cents (bringing the gas tax to 34.4 cents and the diesel tax to 40.4 cents) and index them to inflation. However, the bill falls into the same trap as some other plans by double-counting the revenue going to the trust fund to pay for other tax cuts.

The bill would gradually increase fuel taxes by 16 cents over the next four years and index them to inflation once the 16 cent increase fully phases in. No official revenue estimate is available, but we estimate the fuel tax increases would raise around $200 billion over ten years, enough to fully close the Highway Trust Fund's projected $165 billion shortfall over that period and cover the spending authorized by the Senate highway bill that was considered in July. Importantly, because revenue would continue to grow each year, it would ensure a more lasting solution since revenue would be better able to keep up with spending if it grew with inflation. Because the tax increase is phased in, it would seem to require another revenue source in the short term, although presumably money could be loaned from the general fund and repaid in later years when trust fund revenue will exceed spending.

Although the plan responsibly ensures Highway Trust Fund solvency, it then double-counts the revenue and uses it to "offset" several tax cuts: extending the refundable credit expansions that are set to expire in 2017, expanding the Earned Income Tax Credit (EITC) for childless workers, indexing the Child Tax Credit (CTC) to inflation, and making the EITC easier to claim for those who qualify. Even if it were legitimate to count fuel tax revenue for the purpose of offsetting the cost of tax cuts, it does not appear that the increase would raise enough revenue to offset the tax cuts. The revenue would only seem to cover the 2017 expansions, which cost $200 billion, while leaving the EITC expansion ($65 billion) and the CTC indexation (upwards of $100 billion) unoffset.

More importantly, though, the revenue going into the Highway Trust Fund should not be counted for other purposes since it is ultimately needed to fund the higher spending that would be allowed as a result of increasing trust fund balances. The Congressional Budget Office is required to assume in their budget baseline that the HTF spends as projected even after the trust fund is exhausted and is not legally allowed to spend beyond incoming revenues, meaning that increasing revenues into the trust fund to allow spending to continue at current levels appear costless, even though in reality that allows higher spending than would otherwise be the case. This is why the FY 2016 budget resolution contained a rule that would score transfers to trust funds as a cost: the money can only be spent once. We previously referred to this double-counting as something to avoid in our budget gimmicks chartbook, and the Better Budget Process Initiative recommended a permanent rule change to count the higher spending allowed by legislation increasing trust fund balances as costs.

 

Sen. Carper's plan would raise the revenue needed to keep the Highway Trust Fund solvent at its current spending levels, and by indexing the tax rates to inflation, he would make it much less likely that revenue would fall short in future years. But by using the revenue already dedicated to the trust fund to offset other tax cuts, the plan would be irresponsible for the overall budget.