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Short-Term Federal Revenue Options for the Highway Trust Fund (2010–2025)

There are several options to accomplish the dual objectives of sustaining the program at the levels authorized by SAFETEA-LU and then restoring the program’s purchasing power. (Table 5.)

Table 5. Highway Trust Fund Options to Increase Revenues

  1. A 10-Cent Rate Increase. The first option is to increase federal fuel taxes by the equivalent of 10 cents by 2010. To avert a major cut in the highway program in 2009 and to sustain the program after that would take the equivalent of a 3-cent fuel tax increase. To restore the purchasing power of the program would take the equivalent of an additional 7-cent fuel tax increase in 2010. If the gas tax were increased by 10 cents to a total of 28.4 cents, the diesel tax would have to be increased by13 cents to a total of 37.4 cents. Most of the other commercial vehicle fees supporting the Highway Trust Fund are levied based on a percentage of price so they already rise with inflation. Our analysis shows that by 2021 the revenues made possible by this 10 cent increase could support a highway program of $75 billion.

  2. Index to the Consumer Price Index. The second option is to index fuel tax rates to the consumer price index (CPI) from 2010 and beyond. Indexing federal rates to the CPI is similar to the practice being followed in Florida. According to our analysis, if the highway program could grow to $73 billion by 2015 with the revenue generated through a 10-cent increase in gas taxes, indexing rates to the CPI from 2010 forward could generate enough revenue to increase the highway program to $82 billion by 2021.

  3. Five Percent Federal Sales Tax on Motor Fuels. A third option would substitute for the first. Instead of increasing fuel tax rates by 10 cents per gallon for gasoline and 13 cents per gallon for diesel, keep the current fuel tax rate and impose a federal sales tax on motor fuels at a rate that generates the equivalent amount of revenue. Assuming gas and diesel wholesale prices of $2.00 per gallon, an equivalent amount of revenue could be generated by a 5 percent sales tax on gasoline and a 6.5 percent sales tax on diesel fuel. This would result in a tax structure at the national level similar to that in California. California levies a motor fuel excise tax of 18 cents per gallon, and a state sales tax on motor fuels of 7.25 percent.  One of the benefits of a sales tax is that it is based on a percentage of price rather than set as a fixed number of cents per gallon. If during the six years from 2015 to 2021, fuel prices increased by 4 percent annually, having a 5 percent sales tax in place would increase revenues to the point that the highway program could increase to $85 billion by 2021.

  4. Replace the 18.4-Cent Federal Fuel Tax with a 14.2 Percent Federal Sales Tax on Gasoline and Replace the 24.4-Cent Federal Tax on Diesel with a 18.7 Percent Federal Sales Tax on Diesel. Assuming gas and diesel wholesale prices of $2.00 per gallon, a sales tax rate of 14.2 percent generates revenues equivalent to a fee per gallon of 28.4 cents. An 18.7 percent sales tax on diesel generates revenues equivalent to a fee per gallon of 37.4 cents. Converting the entire federal fuel tax to a percentage rather than just the 10-cent portion, would make it even more responsive to fuel prices. A floor would have to be imposed so that revenue generation is not adversely affected if wholesale prices dropped below a given rate such as $2.00 per gallon. If during the six years from 2015 to 2021, fuel prices increased by 4 percent annually, revenues would rise accordingly and enable the highway program to increase to $95 billion by 2021.

  5. Index the Heavy Vehicle Use Tax to 2010 or 1997. The Heavy Vehicle Use Tax is for heavy vehicles over 55,000 pounds. Revenues from this user fee go into the Highway Account of the Highway Trust Fund. The fee, with the maximum rate set at $500, has remained constant for more than two decades. This option assumes that this fee would be adjusted for inflation starting in 2010. Cumulative revenues from 2010 to 2015 are estimated at approximately $1 billion. If this change were made retroactive by indexing the change in rate to 1997, to gain half the purchasing power lost since 1984, this would produce approximately $17 billion over six years.

  6. A Commission to Adjust Rates. While the need for adjusting federal fuel tax rates is technically quite clear, the political challenge remains. We should also bear in mind that the past two times federal fuel tax rates were adjusted, it was done for deficit reduction rather than explicitly to increase transportation funding or restore the program’s purchasing power.

    There is a mechanism which seems to work well in the field of military base closing which might be a model for what is needed for the Highway Trust Fund. The Base Realignment and Closure Commission (BRAC) is convened periodically to review the needs of the Department of Defense and to recommend base closures where facilities are no longer needed. An appeal period is provided. However, once the final list is submitted to Congress it is considered on an up or down vote. No amendments are allowed.

    If Congress chooses not to index rates or impose a sales tax, there is an alternative which might help. Congress could create an impartial board called the Transportation Revenue Advisory Commission (TRAC). Its mission would be to periodically review whether the rates of federal fuel taxes and other fees supporting the Highway Trust Fund are set at levels sufficient to sustain the program at the levels needed. Once the Commission’s recommendation is made, and after an established review period, the recommendation would take effect unless Congress voted during the review period to reject it.

 

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