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The Highway Program’s Immediate Crisis
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.
It now appears that the tipping point expected to hit in FY 2009. Based on the information provided in the Treasury Departments’ Midsession budget Review forecast for FY 2008, the highway program faces a serious funding crisis beginning in fiscal year 2009. Current Highway Account revenue projections for 2009 show a shortfall of $4.3 billion in revenue. That shortfall will require an obligation reduction in the highway program of about $16 billion, since it takes just under $4 to save $1 in spending.*
The following chart (Figure 3) illustrates the impending crisis situation facing the Highway Account expressed in highway program obligation levels.
The federal transit program could suffer similar shortfalls and require massive 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.
Fuels tax increase, or its equivalent in other revenue, the dramatic $18 billion highway program cut will be averted, and modest growth in the highway program would be possible. The alternative of a significant cutback in 2010, followed by several years of reduced Federal funding for both highways and transit, is not acceptable.
Figure 3. $18 Billion Cut in Federal Highway Program Obligations
If Congress Takes No Corrective Action
Revenues sufficient to preserve full funding of SAFETEA-LU authorizations must be provided. In order to ensure a minimum acceptable Highway Account balance, this essential fix requires the infusion of up to $5 billion in 2010—equivalent to a 3-cent Federal fuels tax increase.
Restoring the Purchasing Power of Federal Assistance
Commodity prices for steel, concrete, petroleum, asphalt, and construction machinery increased dramatically in 2004 to 2007. As a result, it is our estimate that between 1993, the year in which federal fuel taxes were last adjusted, and 2015, construction costs will have increased by at least 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.
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 for deficit reduction. (Figure 7.) The Highway Trust Fund did not receive any investment benefit until 1998 when the 4.3 cent was recaptured. Our estimate of what it would take to restore the program’s purchasing power is calculated to coincide with the level of revenue in 1998 under TEA-21. Inflation has and will continue to dramatically decrease the purchasing power of current revenues due to a lack of rate adjustments.
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 and the end of 2015, if corrective action is not taken to preserve Federal capital investment.
Figure 4. Percentage Increases in Construction Costs 1993–2015
Figure 5. Federal Highway Program Possible:
with 3-Cent Fuels Tax Adjustment or Equivalent in 2009
with Additional 7-Cent Adjustment or Equivalent Through 2015
The Solution
Between 2009 and 2015, federal fuel taxes would have to be increased by a total of 10 cents or its equivalent: 3 cents or its equivalent in 2009 to sustain the program at the level guaranteed in SAFETEA-LU, and another 7 cents or its equivalent in 2010 to restore the program’s purchasing power. (Figure 6.)
Historical Background on Federal Fuel Tax Rate Adjustments
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. 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 H.W. George Bush 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. (Figure 7.) 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 6. Gas Tax History
Federal Gasoline Tax Rate in Real 2004 Dollars
* Dollars committed to be paid out from the Highway Trust Fund begin with a payout of 27 cents on the dollar in the first year of commitment. Therefore in order to save $1 in payouts it is necessary to reduce the commitments (obligation limitation) by $4 to generate the necessary savings.
