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Transportation Revenue Needs
Current Federal Highway Trust Fund Revenues
One of the questions Congress directed the Commission to assess was what are the current revenues flowing into the Highway Trust Fund. According to the U.S. Treasury, Federal Highway Trust Fund revenues grew from $22.2 billion in 1995 to $37.9 billion in 2005, a 10-year increase of 70 percent. In 1998, fuel tax revenues from the 4.3 cent increase passed in 1993 for deficit reduction was recaptured by the Highway Trust Fund. This is one of the factors which explain the significant increase in revenues over this period. In 2005, $24.5 billion in revenues came from gas taxes and $8.9 billion from diesel taxes. So 88 percent of revenues came from fuel taxes. The remaining $4.5 billion came from commercial vehicle taxes and fees, of which the sales tax on trucks, buses, and trailers at $3 billion generated the largest component. Trust Fund revenues are forecast to increase from $37.9 billion in 2005 to $46.9 billion by 2015, a 10-year increase of $9 billion, or 23 percent, if no changes in rates are made.
The problem facing the program is two-fold. Because fuel tax rates are set as a fixed number of cents per gallon, they lose purchasing power as program costs increase. This has been the pattern for the past 50 years. To deal with this problem Congress has periodically adjusted fuel tax rates (Figure 2). To fund the Interstate Highway System, President Eisenhower signed bills increasing fuel taxes from two to four cents in the late 1950s. Twenty-five years later after the Highway Trust Fund lost 62 percent of its purchasing power, President Reagan successfully urged Congress to raise fuel taxes by 5 cents. In 1990, President Bush, Sr. agreed to sign a bill increasing fuel taxes 5 cents, and in 1993, President Clinton persuaded Congress to increase fuel taxes by 4.3 cents. The last two increases were enacted to help reduce the deficit, but revenues were later recaptured by the Highway Trust Fund. The time is approaching when Congress will have to face the need to adjust the fuel tax rate again to restore the program’s purchasing power.
Figure 2. Gas Tax History
Federal Gasoline Tax Rate in Real 2004 Dollars
The second challenge poses an even more imminent threat to the programs supported by the Trust Fund. When Congress authorized SAFETEA-LU at $286.5 billion in 2005, it was expected that revenues flowing into the Highway Trust Fund would be sufficient to support the program through the sixth and final year of the program. To meet the country’s needs, Congress was urged to spend down the resources generated by the Highway Trust Fund to the absolute maximum extent possible. While it was expected that outlays would exceed revenues over the course of the bill by approximately $5 billion, it was estimated that the program would remain solvent long enough for other measures to generate the revenues necessary to sustain the program at the levels authorized in SAFETEA-LU.
The Highway Program’s Immediate Crisis
It now appears that the tipping point expected to hit in fiscal year 2010 may occur sooner. Based on the information provided in the President’s budget for fiscal year 2008, the highway program faces a funding crisis beginning in fiscal year 2009 and accelerating dramatically in fiscal year 2010. Current Highway Account revenue projections for 2009 show a shortfall of $200 million in revenue. That shortfall will require an obligation reduction in the highway program of just under $800 million since it takes a reduction of just under $4 in obligations to save $1 in spending. In 2010 the deficit dramatically increases to $5.7 billion and would require an obligation limit reduction of $18.2 billion from the 2009 obligation level, a 42 percent reduction.
The following chart (Figure 3) illustrates the impending crisis situation faced by the Highway Account expressed in highway program obligation levels.
Figure 3. $18 Billion Cut in Federal Highway Program Obligations
If Congress Takes No Corrective Action
Public Transportation Funding Faces a Crisis in the Near Term
The Federal public transportation programs could suffer similar shortfalls and require major program cuts beginning in 2012 as a result of current-law revenues that are inadequate to cover outlays. A cut of 32 percent from $10.3 billion in 2009 under SAFETEA-LU down to $7.0 billion in 2012 is currently estimated.
Figure 4 shows that with a three-cent fuels tax increase the dramatic $18 billion highway program cut will be averted, and a modest growth in the highway program would be possible.
Significant cutbacks in SAFETEA-LU obligation levels followed by several years of reduced Federal funding are not acceptable approaches to solving the immediate and short-term funding crises that face surface transportation programs.
Figure 4. Federal Highway Program Obligations Possible with 3-Cent Fuels Tax Adjustment
Therefore, revenues sufficient to preserve full funding of SAFETEA-LU authorizations must be provided promptly. To ensure a minimum acceptable Highway Account balance, the infusion of up to $5 billion would be required in 2010—equivalent to a 3 cent Federal fuels tax increase (assuming the current HTF revenue allocations between the Highway Account and the Mass Transit Account are maintained).
Recommendation
The Commission should urge Congress to provide revenues sufficient to preserve funding of the highway and transit programs at the levels authorized by SAFETEA-LU—$43.6 billion for highways and $10.3 billion for transit.
Restoring the Purchasing Power of Federal Assistance
AASHTO estimates that between 1993, the year in which Federal fuel taxes were last adjusted, and 2015, construction costs will have increased by approximately 70 percent. (Figure 5.) To restore the purchasing power of the program, Federal highway funding will have to be increased from $43 billion in 2009 to $73 billion by 2015. Over the past 15 years the Federal share of highway capital spending has been 45 percent, and the state and local share 55 percent. To sustain their share at 55 percent of the total in 2015, state and local governments would have to increase their investment to $89 billion.
Figure 5. Percentage Increases in Construction Costs 1993–2015
To put into perspective whether such an increase is possible, consider the history of the past two decades. In 1981, highway capital investment was $19.7 billion, $11.5 billion Federal and $8.2 billion state and local. By 2005, it had increased to $75 billion, up 280 percent; $33 billion Federal, up 187 percent; and $42 billion, state and local, up 412 percent. If state and local investment increases at the same annual rate for the 10 years between 2005 and 2015, as it did for the 24 years between 1981 and 2005, it will increase to $89 billion. To restore the system’s purchasing power overall, the Federal government will also have to fund its share of the increase needed.
Adjusting Federal Fuel Tax Rates to Restore Program Purchasing Power
The Federal gas tax rates have remained static since 1993 when the rate was increased to 18.3 cents with 4.3 cents dedicated to the General Fund. The Highway Trust Fund did not receive any investment benefit until 1998. AASHTO’s estimate of what it would take to restore the program’s purchasing power is calculated to coincide with the recapture of the 4.3 cents revenue in 1998 under TEA-21 (Figure 6). Inflation has and will continue to dramatically decrease the purchasing power of current revenues due to a lack of rate adjustments.
Figure 6. Federal Highway Program Funding Needed to Restore Program Purchasing Power
Because of the rising costs of construction, the value of the 18.3 cents Federal gas tax rate will decline 55 percent or to 8.3 cents between 1998 the end of 2015 if corrective action is not taken to preserve Federal capital investment. (Figure 7.) The rate will have to increase by 3 cents or its equivalent in 2009 to sustain the program at the level guaranteed in SAFETEA-LU. Between 2010 and 2015, it would have to increase by another 7 cents to restore the program’s purchasing power.
Figure 7. Federal Fuel Tax Rate Adjustments to Restore Purchasing Power
To restore the purchasing power of the transit program, Federal funding will have to be increased from $10.3 billion in 2009 to $17.3 billion in 2015. To sustain their share at 55 percent of total spending in 2015, state and local governments would have to increase their investment to $21.1 billion.
Recommendation
Congress should provide the revenues necessary by 2015 to restore the purchasing power of the highway and transit programs. There are three alternative scenarios AASHTO would recommend that the Commission consider.
Summary of Alternative Scenarios for Restoring Purchasing Power
Table 2. Scenario Summary
Scenario 1: Modest Restoration of Purchasing Power
Scenario 1 proposes to identify revenues sufficient to support a modestly higher level of capital investment during 2010–2015 for both highways and transit, based on average annual program growth during SAFETEA-LU. This scenario requires additional Highway Trust Fund annual revenues of about $15 billion—equivalent to a five-cent Federal fuels tax increase in 2010 (on top of the 2009 revenue increase of 3 cents). In addition, in order for transit spending to keep pace with highway program growth, this scenario requires additional General Fund contributions for public transportation programs of about $7 billion during 2014–2015 to ensure Mass Transit Account solvency through 2015. By 2015, the investment generated by this scenario closes about 21 percent of the current $27 billion highway annual funding gap and about 38 percent of the current $7 billion transit annual funding gap.2
Scenario 2: Gradual Restoration of Purchasing Power
Scenario 2 assumes revenues equivalent to a Federal fuels tax increase of 11 cents phased in (at about 1.8 cents per year) from 2010–2015. This results in additional Highway Trust Fund revenues of about $9 billion in 2010 for both highways and transit, increasing to over $27 billion by 2015 (on top of the 2009 revenue increase of 3 cents). Under this scenario, the enhanced investment closes about 44 percent of the current $27 billion highway annual funding gap and about 59 percent of the current $7 billion transit annual funding gap by 2015.
Scenario 3: Immediate Restoration of Purchasing Power
Scenario 3 assumes the identification of another $19 billion per year for the Highway Trust Fund for both highways and transit—equivalent to an increase in the Federal fuels tax of 7 cents in 2010 (on top of the 2009 revenue increase of 3 cents). This infusion fully restores the purchasing power of the Federal fuels taxes immediately at the 1993 levels. This more aggressive scenario enables about 59 percent of the current $27 billion highway annual funding gap and about 73 percent of the current $7 billion transit annual funding gap to be closed by 2015.
