Ideas. Action. Results.

The Highway Trust Fund Has a Numbers Problem

By Jake Varn

Friday, May 24, 2019

For 63 years, the federal Highway Trust Fund has supported the construction and maintenance of our nation’s highways and transit systems. But it’s going broke (again). Congress has failed to ensure the fund’s long-term sustainability, opting instead to pursue a handful of accounting gimmicks and one-time measures to plug gaps between the fund’s declining revenues and ever-higher infrastructure needs. As a result, the trust fund faces a cash flow crisis and will run dry between 2021 and 2022.

On both sides of the balance sheet, the Highway Trust Fund faces a series of both existing and emerging challenges that threaten the fund’s sustainability. As Congress once again gears up to reauthorize trust-fund-supported programs, it must face the unavoidable truth that without structural reform, the future of the fund is bleak.

The problems with the trust fund stem from two underlying flaws in how the money comes in, and the growing challenges of how (and how much) needs to be spent.

Revenue Problem #1: A Diminishing Gas Tax

Federal trust funds are essentially accounting mechanisms to track incoming receipts (such as tax revenues) that are earmarked for a specific spending purpose (termed outlays or expenditures). The gas tax, the Highway Trust Fund’s primary revenue source, was last raised in 1993, set to 18.4 cents per gallon of unleaded gasoline and 22.4 cents per gallon of diesel, but was not indexed to keep pace with inflation. As such, the gas tax has actually lost over 40 percent of the purchasing power that it had in 1993, as everything else gets more and more expensive.

Source: Congressional Budget Office, January 2019

Previous highway program reauthorization bills, beginning with TEA21 and SAFETEA-LU, did little to put the fund on the right fiscal path. Respectively passed in 1998 and 2005, they salvaged the fund with short-term fixes, but enabled the slow decoupling of the fund’s spending from incoming revenue. As a direct result, since 2008, the Highway Trust Fund has received $140 billion in bailouts from the Treasury Department’s general fund to cover revenue shortfalls. In effect, this has a) let federal lawmakers off the hook for fixing the fund’s core problems, b) increased the nation’s debt, and c) opened the door for more bailouts when the unraised gas tax routinely proves to be insufficient.

Further complicating matters, relying on the gas tax as a source of revenue has always had one inherent weakness—incoming trust fund revenues fluctuate unpredictably with the price of gas. As most drivers know too well, the price of gas varies a lot. Nationally, gas prices fluctuate an average of five cents per gallon every week. Dramatic swings can affect an individual driver’s purchasing and travel habits, which impacts the revenue going into the Highway Trust Fund. For example, when driving habits changed during the 2001 recession it resulted in a $4.5 billion shortfall in revenue.

Highway trust fund implications: A static gas tax, unadjusted to keep pace with inflation, can meet fewer infrastructure needs over time and will put increasing pressure on Congress to find offsets in the budget or increase the deficit. Without raising the gas tax and indexing it to inflation, or transitioning to an entirely different source of dedicated revenue, the trust fund will increasingly rely on bailouts, eroding the utility of a user-generated trust fund.

Revenue Problem #2: Rising Fuel Efficiency and Electric Vehicles

In 2018, over 650,000 vehicles were sold in the United States with some form of electric or hybrid engine capacity. Plug-in and battery electric vehicle sales jumped 63 percent from 2017 to 2018. Despite the recent growth, they are still a relatively niche choice for the average car purchaser, making up only 2 percent of all light vehicles sold in 2018. Estimates on how this will change in the future vary, but electric and hybrid vehicles could comprise more than 60 percent of the purchase market by 2030. The results from a recent survey from AAA appear to support this trend, reporting that 20 percent of Americans are considering an electric vehicle for their next purchase.

Hybrid electric vehicles typically use less fuel than similar conventional vehicles by employing electric-drive technologies to boost efficiency. Plug-in hybrid electric vehicles and all-electric vehicles are both capable of being powered solely by electricity, which is produced in the United States from a variety of sources—natural gas, domestic coal, nuclear energy, and renewable resources.

In terms of gas vehicles, policymakers have also promoted higher fuel efficiency standards to reduce emissions. While increasing fuel efficiency standards at the federal level has proven to be politically divisive, California has sought to require manufacturers to meet progressively higher minimum standards for fuel efficiency. California’s rules are an effort to continue the Obama administration’s fuel efficiency goal of new vehicles averaging 50 miles per gallon by 2025. Twelve other states and the District of Columbia have also adopted similar policies, and together, these states annually account for nearly 40 percent of new vehicle purchases.

Overall, these new vehicles models will continue to pay less or nothing for gas at the pump.

Source: EPA (*Other sources include buses, motorcycles, pipelines, and lubricants) 

Recognizing that the transportation sector generates the largest share of greenhouse gas emissions (followed by electricity production and industry), buying fully-electric vehicles is viewed as increasingly critical to any holistic response to the climate crisis. However, ownership rates would need to increase much more dramatically if the United States is to meet the United Nations’ timetable for reducing carbon emissions—it set a 2030 deadline to stay under a global average of 1.5 degrees of warming. As of 2018, for every 100 light-duty vehicles sold in the United States, 98 of them were still powered by traditional gasoline engines. Importantly, electric vehicle use could be accelerated if policymakers prioritize meeting emissions goals and find room in the federal budget to bolster incentives and other supportive policies.

Some members of Congress have sought to do just that. For example, one newly introduced, bipartisan bill would triple the number of available tax credits for electric vehicle purchases from 200,000 to 600,000 vehicles. Some of the bill’s budgetary cost would be offset by reducing the value of the credit from $7,500 to $7,000. Notably, a recent study found that existing federal income tax credits resulted in a 29 percent increase in electric vehicle sales, but 70 percent of the credits were obtained by households that would have bought an electric vehicle anyway. As such, there may also be a bipartisan appetite for policies that improve the tax credit’s targeting and effectiveness, stimulate more demand, and get the most fuel inefficient vehicles off our roads.

However, the credit also has some strong opposition from key Republicans, including President Trump, who has proposed eliminating the credit in the administration’s annual budget request. The chairman of the Senate Committee on Environment and Public Works, Sen. John Barrasso (R-WY), has also questioned the fairness of awarding credits to vehicles that use federal highways but do not pay into the Highway Trust Fund through the gas tax. Instead, he has proposed a “Fairness for Every Driver Act” that would impose a new federal highway user fee on alternative fuel and electric vehicles that funnels into the Highway Trust Fund, while repealing the electric vehicle tax credit. This underlines a key issue for Congress to consider: how to reconcile incentivizes for the adoption of new, more fuel-efficient vehicles with the trust fund’s reliance on a user-pay model.

Alternatively, other politicians have voiced support for transitioning from the gas taxes to a user charge based on miles traveled for all vehicles, regardless of fuel and engine type. There are currently a few state-led pilots experimenting with such a replacement. However, even the largest of these pilots—in California and Oregon—have each had fewer than 5,000 participants. More work would need to be done before this model could be a fully viable option at a national scale.

Source: Alliance of Auto Manufacturers and EVAdoption

Highway trust fund implications: While electric and hybrid vehicles are still only a fraction of all purchases and transitioning to an all-electric vehicle fleet on the road will likely be a many decades-long process, electric vehicle purchases are on the rise in every state. With growing concern about our changing climate, states and some members of Congress are championing incentives to bolster electric vehicle ownership. Yet there are key policy disagreements around such efforts, particularly how to harmonize supporting electric vehicle ownership and a system of dedicated highway spending dependent on a user-paid gas tax. With or without new federal incentives, consumers are replacing gas-powered vehicles with electric, hybrid, and more fuel-efficient vehicles. This will continue to reduce demand for gas at the pump and erode revenues to the Highway Trust Fund.

Outlay Problem #1: Deferred Maintenance

The physical condition of our highways is getting increasingly worse. The majority of the Interstate Highway System’s 47,000 miles has already exceeded its design life or will do so within the next 20 years.

From 2005 to 2016, the percentage of highway miles with poor pavement conditions rose from 6 percent to 11 percent. Poor pavement conditions can damage vehicles, increase travel times and congestion, and increase the rate of crashes. In 2015, poor road conditions were estimated to cause drivers an extra $120.5 billion in repairs and operating costs, or an equivalent of $533 per driver. According to the federal Department of Transportation, there is currently a nationwide backlog of $420 billion in deferred highway maintenance and rehabilitation projects.

While transit projects are a smaller portion of the Highway Trust Fund’s outlays, there is similarly a $100 billion backlog of transit maintenance projects that are needed to bring transit systems to a state of good repair. At current funding levels, the transit backlog is expected to increase by 36 percent by 2032.

Meanwhile, highways are more trafficked than ever before. Americans drove a record-setting 3.2 trillion miles on highways in 2017. If highway travel continues to increase as the population grows, transportation agencies will need to invest an average of $15 billion more per year to keep up with new drivers. Highway usage by commercial freight vehicles has also increased as Americans are buying and shipping more goods online than ever before. Between 2000 and 2016, miles traveled by large commercial trucks increased by nearly 30 percent. From 1990 to 2017, the total miles traveled by all types of trucks on highways nearly doubled from 94 billion to 181 billion miles.

Source: U.S. DOT, Bureau of Transportation Statistics

Highway Trust Fund implications: Core transportation infrastructure assets have been neglected for decades and will now require vast sums to be restored to a state of good condition. Yet this comes at a time when our roads are more trafficked than ever, necessitating additional investments in new capacity in our highway and transit systems. This puts new pressure on policymakers to increase outlays from the Highway Trust Fund or face the negative consequences of underinvestment—increased congestion, jeopardized safety, and diminished economic potential.

Outlay Problem #2: Damages from Climate Change

While the political debates on climate change continue, our nation’s highways are already dealing with increased extreme weather and disasters. Across the country, there is roughly $3.4 trillion worth of highways, and from 2011 to 2018, damages from disasters required them to receive $6.4 billion in emergency relief appropriations (on top of the existing $100 million annually allotted for emergency repairs). As climate change fuels more frequent and more severe disasters, both inland and coastal highway assets are at risk of further damage. Without reductions to emissions, the EPA estimates that by the end of the century, 190,000 inland bridges across the country will be structurally vulnerable as a result of climate change.

While direct damage from a storm is typically covered by supplemental funding and doesn’t necessarily threaten the solvency of the trust fund, climate change is also increasingly inflicting small-scale damage that increases the need for routine highway maintenance.

Highway Trust Fund implications: As our climate changes, more frequent disasters and extreme weather events will inevitably damage highways, increasing repair and maintenance costs. Avoiding increased risks and mitigating damage requires using more resilient materials and designs, but those inevitably come with higher price tags. These mounting costs will further increase demand on the Highway Trust Fund amid declining revenues.

Shifting Transportation Priorities

As vehicle miles have increased dramatically in recent years without a significant change to our transportation systems, congestion has skyrocketed. Traditionally, policymakers have looked to reduce congestion by expanding highways, but recently researchers have discovered that those projects are not achieving the desired effect. Instead, the phenomenon of “induced demand” can occur—where, as more lanes are added to a highway, more people are encouraged to drive along that route, and, in the end, congestion remains the same. New York City has taken a new approach. Instead of building more lanes, the city plans to implement a congestion pricing model that directly increases the cost of driving in congested areas. In addition to the hopes of reducing congestion, a significant portion of proceeds will directly support the infrastructure of transit alternatives.

Similarly, while driving remains fundamental to the way of life for a most Americans, a growing number of cities and states are holistically examining past land use decisions as they plan future projects. Along with setting emission and congestion reduction goals, the series of health risks associated with living near highways are being taken into consideration. In an overall effort to reduce or eliminate the day-to-day necessity of driving a car, some urban centers are going so far as to tear down large segments of highways and replace them with better infrastructure for pedestrians, bicycles, and transit systems.

Highway Trust Fund Implications: If efforts to reduce driving are successful, it will be directly reflected by a decline in the revenue collected by the gas tax (barring the introduction of an equivalent transit or bicycle tire tax). While today only a handful of cities and states are prioritizing infrastructure projects and policies that directly aim to reduce driving, these developments could represent an early warning sign that views on the role of highways are shifting. If so, the Highway Trust Fund’s entire structure and mission would need to be reformed in order to support the divergence in transportation needs of urban and rural communities.

Reform is Needed

The economy and transportation networks of the United States are designed around the Interstate Highway System. The Highway Trust Fund that supports this network is in a troubled state, built on the back of a fuel tax that has remained stagnated and one that repeatedly fails to engender political support. Meanwhile, America’s highways are both being used more today, and are more at risk of disaster damage, than at any point in history. As such the need for maintenance and repair has reached similar unprecedented levels.

Simply raising the gas tax would go a long way in addressing the trust fund’s balance sheet problems. However, without any further reforms, the future of the fund looks bleak. The current structure and mission of the trust fund are not designed to withstand several of the emerging technological and policy trends, from the potential shift to electric vehicles, to the impetus to radical transformations as necessitated by climate change.

A larger conversation around the funding and function of the Highway Trust Fund will be required for the program to both stay relevant and to be a part of the solution rather than part of the problem.