The federal Highway Trust Fund for fuel and excise taxes used to reimburse states for highway improvements on the national system is projected to go broke sometime in August, but states could begin feeling the pinch sooner, federal and state officials say.
The lack of funding could delay needed projects while also causing economic drag as fewer construction workers are hired. Many states have already developed contingency plans to prepare for the possible reduction in federal transportation funding.
“We are soon going to be faced with not getting our bills paid that we are submitting to the Federal Highway Administration because they will run out of money,” John Schroer, Tennessee’s commissioner of transportation, said Thursday at the American Association of State Highway and Transportation Officials (AASHTO) annual spring meeting in Washington.
Congress is holding hearings as it prepares to draft a multi-year reauthorization bill for surface transportation programs, including the $40 billion federal-aid highway program for states. House and Senate leaders have stated their intent to build on the policy reforms — program consolidation, performance measures, development of a national transportation strategy, taking inventory of highways frequented by freight — in the short-term MAP-21 bill that expires Sept. 30.
Barbara Boxer, chairwoman of the Environment and Public Works Committee, who is spearheading the legislative effort in the Senate, last week said she hopes to finish writing a bill in April and send it to the floor for a vote. Her counterpart in the House, Rep. Bill Shuster of the Transportation and Infrastructure Committee, said he wants to complete a bill by early summer.
Both leaders spoke at the AASHTO conference.
But the elephant in the room, which was avoided two years ago, is how to pay for rehabilitating infrastructure that is nearing the end of its design life and to add new capacity to relieve congestion. Last week, President Barack Obama and Rep. David Camp, chairman of the House Ways and Means Committee, released proposals to address the shortfall in the HTF, both of which centered on tapping a windfall from tax reform legislation.
The problem facing Congress is that highway user fees are not keeping up with states’ needs. The Highway Trust Fund, managed by the Department of Transportation, faces a crisis because outlays have outpaced receipts. The HTF’s cash balance has already dwindled to $8.3 billion, despite a $9.7 billion transfer last fall from the government’s general pot of taxpayer money, and the balance could be zero by late summer. The current system pegs taxes to gasoline consumption, but more efficient vehicles prevalent today mean there is less tax to collect. The other primary reason for the shortfall is that fuel taxes are not indexed to inflation, which means the HTF has lost substantial purchasing power since taxes were last raised in 1993, officials have said. The HTF would not be nearing insolvency if the gas tax had been tied to inflation, as many provisions are in the tax code, experts say.
The United States has slipped 20 places in the past decade in the quality of its infrastructure relative to other countries, right behind Barbados, according to the World Economic Forum.
The Congressional Budget Office projects that revenues in fiscal year 2014 through September will total about $33 billion, while outlays will total about $46 billion. Without $50 billion in bailout money pledged from Congress in the last few years, the HTF would have already gone into the red. But further unpaid infusions are not likely given the current political impetus towards deficit reduction in Washington.
The HTF balance come July is expected to be about $4 billion, which equals the cash cushion the DOT says it needs to make all payments. At that point, the DOT is expected to start making weekly, instead of daily, payments to states.
“There’s a good chance we’ll be telling our contractors, ‘Ain’t got no money for that,’” Schroer said. Funding uncertainty has dogged states for several years, as Congress has had to pour money into the HTF or pass extensions after the transportation bill prior to MAP-21 expiring.
“It’s a challenge for project sponsors to make long-term plans when Washington is giving short-term funding solutions,” Transportation Secretary Anthony Foxx told the state transportation leaders. The administration estimates that 700,000 jobs “lie in the balance” if HTF payments dwindle, he added.
Foxx said the challenge needs to be addressed through a combination of revenue and increased efficiency at the federal and state level by using industry best practices such as streamlining the permitting process, and using pre-fabricated bridge trusses or warm-mix asphalt, which doesn’t require as much energy to heat and is estimated to save $3.6 billion over the next eight years. That will enable the DOT to squeeze more projects out of the available funds.
The Obama administration, for example, has increased the number of categorical exclusions for environmental impact reviews to limit the paperwork burden for certain projects. Projects can be granted categorical exclusions under the law if they do not have a significant effect on the environment. Exclusions are being used, for example, in cases where an asset has previously had an environmental assessment and is now being retrofitted or expanded.
The trust fund “is threatened with extinction, so to me, failure is not an option,” Boxer said.
Shuster said the principles that will guide his writing of the bill are maintaining fiscal responsibility, ensuring that the DOT follows through on policy prescriptions in MAP-21, and expanding freight mobility.
Many political observers question whether Congress can meet the ambitious timetables set by Boxer and Shuster, or even whether a bill can be completed this year because of lawmakers’ focus in the fall on mid-term elections and the unwillingness of many to agree to any new spending or taxes that might open them up to charges of hurting middle-class Americans in the pocketbook.
Boxer echoed comments by Rep. John Mica, the former chairman of the T&I Committee, that there is little support in Congress for raising the gas tax. Creative ways will have to be found to raise new revenues, she said.
Boxer and Shuster, however, only have responsibility for authorizing programs and spending. The revenue-raising portion of any bill will have to go through the Senate Finance and House Ways and Means committees. Camp, R-Mich., on Wednesday released a comprehensive tax reform package after nearly five years of work that attempts to make the tax code more simple, flatter and fair. Included within his plan is a $126.5-billion infusion to shore up the HTF that would come from revenues generated by new tax collections over eight years.
His plan specifically targets corporate profits trapped overseas that companies are unable or unwilling to bring home because of high U.S. tax rates. Under Camp’s plan, the tax rate would be significantly reduced in stages from its 35-percent level to 8.75 percent in hopes of encouraging companies to repatriate their profits and the taxes generated would be deposited in the HTF.
The Camp proposal bears some resemblance to a bill introduced last year by Rep. John Delaney, D-Md., that would give U.S. companies favorable tax terms for bringing home profits earned overseas and using the proceeds to capitalize a $50-billion infrastructure fund. For every dollar companies invested in bonds issued by the infrastructure bank, they would get to return a dollar tax free, up to a certain cap. The bank would then provide loans or loan guarantees to states and municipalities to capitalize $750 billion worth of public-private projects. Delaney’s plan seeks to supplement today’s low investment levels, but doesn’t fix the HTF.
“I applaud Chairman Camp for adopting the framework of using the record levels of overseas capital to fund much-needed investments in our nation’s infrastructure. There’s growing agreement among Republicans, Democrats and Independents that this is the right approach. That’s why over 30 members of each party, Republicans and Democrats, liberals and conservatives, have endorsed my Partnership to Build America Act. It is now clear that a consensus is forming around this core concept that we pioneered, and I’m going to continue my efforts to galvanize support around this straightforward solution,” Delaney said in a statement.
The president proposed a four-year, $302 billion reauthorization bill with $150 billion of it coming from restructuring the tax code, including $63 billion for the HTF. The administration would raise money by slowing down some recovery of business expenses and closing other tax loopholes. The plan includes a Race-to-the-Top-type program designed to reward states for efficiency, Foxx told reporters.
Asked why Obama only offered a four-year plan versus the five or six years preferred by many, Foxx said, “The tax reform spins off a finite amount of money. So you try to maximize the number of dollars that are available and if you spread it too far, it has less of an impact.”
Shuster was asked after his speech if he would prefer a more permanent fix for the HTF.
“It’s eight years. I’ll take it,” he said of the Camp proposal.
There are new dynamics to navigate in the Senate, where Ron Wyden recently became chairman of the Finance Committee after Max Baucus left to become U.S. ambassador to China. Wyden has taken an interest in infrastructure investment in the past and has signaled his intention not to wait until the last minute to find a solution.
Tax reform covers so many aspects of the economy and potentially impacts so many entrenched interests that any legislation could take a year or more to get passed, if at all, according to analysts. In the short term, legislators and staff members say, Congress will likely pass an extension of MAP-21 and use some general fund revenues to keep the HTF afloat if a long-term bill is not completed before reaching the fiscal cliff. And the Camp proposal would not bring in enough in the first year — an estimated $5 billion compared to almost an $18-billion shortfall in 2015 — to put the HTF in the black. Legislators may test whether it’s possible to get more money up front or raise the tax rate in the Camp proposal once negotiations begin.
Nonetheless, transportation officials and legislators say the recent activity demonstrates both chambers of Congress and the White House recognize the importance of the federal highway program and its need for additional funding.
“We need to do more than stabilize the trust fund. We should put it on a course where there is more investment in infrastructure, more jobs being created” and better mobility “so America can restore its place as the preeminent transport system in the world,” Foxx said.