CBO Releases Options to Shore Up Highway Trust Fund
Several of the country’s most important trust funds are rapidly headed toward insolvency and will run out of reserves sooner than projected due to the current pandemic and economic crisis. The Congressional Budget Office (CBO) recently published a report focused on options to address the impending insolvency of the Highway Trust Fund (HTF). Under current law, the authorization for highway and transit programs expires on September 30. CBO's pre-COVID projections show the trust fund itself will be depleted by 2022, or perhaps sooner.
Most federal transportation spending is paid for out of the Highway Trust Fund, which is funded mainly from dedicated revenue (along with several general fund transfers). Funding comes mainly from an 18.4-cent-per-gallon gas tax (and 24.4-cent-per-gallon diesel tax) that has not been increased, even in nominal dollars, since 1993. Meanwhile, spending has risen at the rate of inflation or faster, leaving a rising structural imbalance between spending and revenue. While one-time general revenue transfers have kept the trust fund afloat despite this disconnect, CBO projects those funds to run out in 2022 – leaving too little revenue to fund expected highway costs.
The Highway Trust Fund Is Headed Toward Insolvency
Source: Congressional Budget Office
The actual insolvency date could come sooner. Driving is down significantly due to recently-imposed social distancing measures, and gas tax revenue is down as well. Preliminary figures suggest a revenue drop of 15 percent or more in March and April compared with the previous year. If revenue remains depressed - even with a significant recovery – the Highway Trust Fund could run out of reserves in 2021 instead of 2022.
Fortunately, options exist to shore up the trust fund's finances and close the structural imbalance between spending and revenue. CBO's report outlines several choices.
CBO's Policy Options to Save the Highway Trust Fund
|Policy||Ten-Year Cost (-)/Savings||% of Ten-Year Shortfall*|
|Increase gas & diesel tax by 15 cents per gallon in 2021 and index to inflation thereafter||$329 billion||174%|
|Impose a Vehicle Miles Traveled (VMT) tax on all vehicles||$35 billion per 0.1 cent||18% per 0.1 cents|
|Impose a VMT tax on commercial trucks||$25 billion per cent||13% per cent|
|Impose a freight tax of 30 cents/mile for trucks and 12 cents/mile for rail||$360 billion||190%|
|Limit federal highway spending to Highway Trust Fund revenue (require states to cover difference)||$120 billion||63%|
|Fund all highway projects in which benefits exceed costs||-$200 billion||-106%|
|Set spending to maintain current highway conditions and performance||-$30 billion||-16%|
Source: Congressional Budget Office, CRFB calculations.
*The Highway Trust Fund faces a ten-year cumulative shortfall of $189 billion.
On the revenue side, the most straightforward option would be to raise the gas tax. As an example, CBO estimates that increasing the gas and diesel tax by 15 cents per gallon in 2021 and indexing to inflation thereafter would raise an additional $329 billion of revenue over the 2021-2030 budget window, enough to eliminate the fund's shortfall and provide $140 billion of additional spending or deficit reduction through 2030.
Alternatively, policymakers could levy a new tax on vehicle miles traveled (VMT). If imposed on commercial trucks, a VMT could raise $25 billion (13 percent of the shortfall) per 1 cent tax; if imposed on all vehicles, it could raise $350 billion (180 percent of the shortfall) per 1 cent tax. This implies policymakers could replace all existing revenue and fully fund the HTF with a 2 cent VMT tax on all vehicles; or with a 1.8 cent tax on personal vehicles and 3.6 percent tax on commercial vehicles. A third alternative would be to impose a tax on freight traveling by highway, similar to the tax levied on freight transported by plane or ship. CBO estimates a tax of 30 cents/mile for trucks and 12 cents/mile for rail would raise $360 billion - enough to close 190 percent of the trust fund's shortfall.
CBO also looks at several spending options, including limiting federal highway spending to revenue, funding all highway and infrastructure projects in which projections of benefits exceed costs, or increasing funding to maintain current conditions and performance of the highway system.
The agency also discussed options to establish a Tax Credit Bond program for states, raise the cap on Highway Qualified Private Activity Bonds (QPABs), expand Transportation and Infrastructure Finance and Innovation Act (TIFIA) programs, and allow states to collect tolls on interstate highways.
Of course, these are just some of many options to shore up the highway trust fund. Our Budget Offsets Bank includes roughly three dozen options to fund or more efficiently spend on infrastructure. And we've published many more policy options over the years.
CBO's projections and our shortfall estimates are based on CBO's March budget projections and January economic projections, neither of which account for the impact of the COVID-19 public health emergency. As we explained earlier, gas tax revenue is significantly lower than these projections and could remain so. At the same time, spending may also be lower as states continue to suspend highway projects; and if infrastructure funding is included in subsequent emergency legislation, that too could depress spending from the trust fund. CBO has not estimated the net impact of the pandemic on the Highway Trust Fund.
Regardless, policymakers will need to act in the next four months to enact at least a temporary solution to the expiration of the highway bill. And soon after that, they will need to identify appropriate revenue and spending changes to assure highway funding can responsibly continue.