Future Funding Options: Gas Tax Versus General Funds

Future Funding Options: Gas Tax Versus General Funds
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BY Joshua L. Schank
President & CEO
Eno Center for Transportation

In post-election Washington, DC, there is little talk of anything but fiscal cliffs and budget deals. Within transportation circles, there is discussion about how transportation policy might be impacted by budget negotiations, particularly a “grand bargain” in which tax increases and spending cuts are packaged together to effectively tame the debt and deficit. Given that surface transportation has faced its own personal budget deficit since 2008, when general fund revenues were first used to bail out the Highway Trust Fund (HTF), there is hope that perhaps the long-term financial sustainability of the federal transportation program could be addressed as part of such a grand bargain.

It is often assumed that the way it should be addressed is by increasing the federal gas tax. In fact, the Simpson-Bowles deficit reduction commission recommended a 15-cent gas tax increase with revenues dedicated to transportation. The gas tax has stood at 18.4 cents since 1993, when it was increased as part of a larger budget deal. Prior to that it was increased in 1990, also as part of a deal to reduce the deficit. In neither case was the gas tax increased exclusively because of a recognized need to fund transportation; it was used as a mechanism for deficit reduction. Transportation benefitted mostly as an afterthought.

The key difference between those last two gas tax increases and the current situation is that the HTF was not then in crisis. There was no need to raise the gas tax in order to fund transportation – we just happened to benefit from the way the deal to reduce the deficit was accomplished. If we want to solve transportation’s funding problems as part of this debt deal, we must hope that Congress or the President sees the wisdom in spending scarce political capital on increasing a tax that is dedicated to transportation. In the context of a highly partisan environment where incomes tax rates and entitlements are on the table, this remains unlikely.

A gas tax increase may be unlikely, but other long-term funding alternatives for surface transportation would be a major break from history, as we have relied on a dedicated fuel tax to fund surface transportation for over half a century. While we have relied more and more on general fund revenues over the last five years, this has been done by default rather than as a specific policy choice. However, this policy could potentially be made more explicit. Perhaps, instead of simply bailing out the HTF every few years, Congress will commit to relying on general fund revenues for an increasing portion of transportation spending going forward.

It is therefore important to consider which of these two alternatives – an increased and dedicated gas tax increase, or dedicated general revenues – would be better for transportation. Some of the tradeoffs are examined below:

Funding Protection. The HTF offers some measure of protection for surface transportation funding because user fees fund it. User funding is the reason that the transportation committees – Transportation and Infrastructure in the House and Environment and Public Works, Banking, and Commerce in the Senate – have jurisdiction over spending. It is also the reason the federal government can provide the states with contract authority, allowing them to make decisions on investments knowing that funding will continue to flow. A lack of user-based financing, under current federal law, would mean that transportation would be subject to annual appropriations. On the other hand, most of our competing peer nations do not have trust funds for their transportation expenditures, and yet they tend to spend a greater percentage of GDP on transportation investment than we do. Due to the unwillingness of elected officials to increase the gas tax, this funding protection may currently be serving as not just a floor on transportation investment, but also a ceiling on investment. This is not necessarily a benefit.

Sustainability. As long as Vehicle-Miles-Traveled (VMT) was increasing and gas prices were low, the user-funded HTF provided adequate funds for our transportation investment needs plus a reserve balance. With neither of those things still true and Congress having spent down the balance in the HTF several times, the existing gas tax no longer provides sustainable funding. It could in theory provide sustainable funding for many years were it to be increased and then indexed. Our inability to do this is what prevents it from being sustainable. While it is true that greater fuel-efficiency and a hopeful transition away from gasoline powered vehicles will eventually kill the sustainability of any size gas tax, these issues are not what is preventing us from using the gas tax for sustainable funding right now and in the near future. Nonetheless, a commitment to dedicated general funds could potentially be more sustainable than the gas tax in the long run because of these pending problems. It is shaky ground to depend on funding from the taxing of a commodity when we ultimately want to discourage consumption of that commodity.

Modal Divisions. Highway users pay into the HTF, but the money is used to build many things besides highways such as mass transit, bicycle paths, and sidewalks. This has caused two major problems over the years. One is that there is occasional fighting within the transportation community, or more recently just within Congress, about whether that money should go back exclusively to highway users. For example, just last year the House of Representatives tried to solve the funding gap in part by taking mass transit out of the HTF. This is the kind of fight that used to go on within transportation before a truce was called, but a battle could erupt again should funding continue to diminish. The second problem is that our entire federal program is set up by mode – U.S. DOT, Senate Committees, and Appropriations all go out to specific modes in a top-down manner, instead of flexibly funding a transportation network. This emphasis on modes detracts from our ability to maximize the effectiveness of the network, and leaves us stuck in arguments from another era. It is unlikely this problem will go away as long as we depend only on highway users to fund federal transportation. Moving away away from user-based funding could potentially curtail this problem, reduce modal divisions, and move us towards more multimodal investments.

Donor Donee. The issue of how much money a state gets back compared to what it contributes in gas taxes has plagued federal transportation policy for decades. The so-called “donor-donee” issue not only tends to delay legislation, but it hinders funds from potentially being directed towards the wisest investments by focusing instead on spreading money around. The existence of a separate user fee for transportation is a large part of the reason for this issue’s persistence. The gas tax is completely transparent in terms of how much each state contributes, and the fact that all gas taxes are dedicated to transportation means that the spending side is equally obvious. This issue would not change, and could perhaps be exacerbated by a transition to a dedicated VMT-based user fee. While arguments about states subsidizing each other pervade all federal policy areas to a degree, it is worse in transportation in large part because of the use of a dedicated gas tax. For example, if a portion of the income tax were dedicated to transportation, legislators would still argue for more funding for their states. But it would be very challenging for them to do so effectively based on how much they contribute in income tax given how many other things are funded with that tax.

Long-Term Planning. In theory, the existing system is very effective in providing certainty. Transportation is not subject to annual appropriations, thus allowing grantees to make long-term planning and funding decisions without worrying that their expected grants will be cut. The concept of “contract authority” permits this to function, and it depends on the fact that there is a user fee dedicated to the HTF. However, in recent years this ability to make long-term planning decisions has been curtailed by numerous last-minute program extensions, funding crises, and now a two-year instead of a six-year bill. These problems are all directly related to the use of a fuel tax and the fact that Congress finds it such a challenge to index or increase it. A different funding source could potentially avoid the pitfalls of the gas tax. However, this would also necessitate developing a new method of ensuring long-term planning capability, which could be very complicated and challenging.

User-Pay Principle. One of the oft-cited positive benefits of the gas tax is that it is a “user-fee” and thus adheres to the user-pay principle of transportation finance. Economists like the user-pay model for transportation because 1) It provides a signal to users that modifies behavior and 2) It provides a demand signal to policymakers about how much to reinvest in the network. Unfortunately the existing fuel tax does neither of these things. It is much too low and opaque to provide a signal to users – the price of gas regularly fluctuates more than 18.4 cents in a year (or less). And policymakers are not reading those demand signals because they keep spending more than they are collecting. So while the principle of user-pay might work in theory, it is not working as currently practiced. On the other hand, a different source of funding could exacerbate the problem. Congress could, if freed from user fees, choose to spend much more or much less than what is “needed” on transportation. Given our current fiscal environment, chances are that it would be much less.

Conclusions

The transportation community has been reliant on dedicated user fees for so long that we often forget that much of the government, and much of transportation funding in the rest of the world, functions without them. Now that some kind of “grand bargain” on the deficit may be at hand, it is time to strongly consider whether we want our funding to continue to be tied to a dedicated user fee. The fact that it has been this way for a long time and existing stakeholders favor such a system is not a good enough reason to keep it this way. Perhaps we will find, after strong consideration, that continuing to use the fuel tax (and perhaps, eventually, a VMT-based user fee) is our best option. But so far, there has been limited work analyzing true alternatives to a user-financed system. We must give these options ample consideration, because as the analysis above shows, they could bring substantial benefits.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of The Eno Center for Transportation.

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