60 Years Ago Today – Eisenhower Requests First Highway Trust Fund Bailout

60 Years Ago Today – Eisenhower Requests First Highway Trust Fund Bailout

September 09, 2019  | Jeff Davis

On this day 60 years ago – September 9, 1959 – the White House announced that President Eisenhower was requesting a bailout of the Highway Trust Fund – a $359 million “repayable advance” appropriation from the general fund of the Treasury. Without it, the Trust Fund would run out of money and be unable to pay its bills in October 1959.

To celebrate this inauspicious anniversary, ETW has published a series of three in-depth articles, based on original documents from the Eisenhower Presidential Library and the records of the Commerce and Treasury Departments, the Bureau of the Budget, and the House Ways and Means Committee at the National Archives. The articles explore how the Trust Fund was spent into near-insolvency and how Congress and the Eisenhower Administration fixed it.

Part 1, published August 21, explored how year-to-year cash shortages were always part of the initial plan for the Trust Fund, as passed by the House of Representatives in 1956, and their bill allowed for “repayable advances” from the general fund to the Trust Fund, to be repaid (with interest) once revenues recovered. But the Senate added the “Byrd Test” pay-as-you-go provision that forced automatic cuts in Interstate funding apportionments each year if it appeared that the Trust Fund would hit a zero balance during the upcoming fiscal year. The implicit conflict between these provisions was never resolved, and both were enacted into law.

The Byrd Test forecast in January 1958 called for the Interstate apportionments to be made in July 1958 to be reduced by $600 million, but a sharp economic recession was in progress, and neither the Administration nor Congress thought it wise to pull that construction money out of the economy at that time. So Congress passed, and President Eisenhower reluctantly signed, legislation waiving the Byrd Test for fiscal years 1959 and 1960 and actually increasing Interstate authorizations by $800 million above what had been provided in the 1956 Act (spread over three years). At the time, Eisenhower and his Cabinet agreed that they would request a revenue increase to pay for that spending once the economy had recovered.

Part 2, published September 2, reveals how the President chose a middle ground between competing proposals – the Budget Bureau wanted a 1.5 cent per gallon increase for 13 years to cover not only immediate shortfalls but also long-term Interstate cost escalation, the Commerce Department wanted a 1.0 cent increase for two years (the bare minimum necessary to fix things for one budget cycle), and the Bureau of Public Roads wanted the Highway Trust Fund to be able to issue its own revenue bonds. Eisenhower chose to request a 1.5 cent per gallon increase for five years, and included it in his annual budget request in January 1959.

The public reaction was negative. House Speaker Rayburn, Senate Majority Leader Johnson, and House Ways and Means chairman Mills all pronounced the tax plan dead, and 29 state governors urged Congress to reject any increase in federal motor fuels taxes. Most highway stakeholder groups rejected the proposed gas tax increase and said that any further tax increases should not be borne by highway users. Accordingly, the Eisenhower Administration said that it would obey the law (the Byrd Test) and that this would result in zeroing out all new Interstate construction contract authority for FY 1961 and then would cut FY 1962 apportionments from $2.2 billion to $500 million. Congress began clamoring instead for the diversion of existing excise taxes on automobiles and auto parts, which were then deposited in the general fund, to the Trust Fund. But in 1959, trust funds were effectively off-budget, so any diversion of existing taxes from the general fund to a trust fund showed up in the budget looking just like a tax cut, and Eisenhower’s proposed budget was so close to overall balance that diverting general fund revenues to the trust fund, or issuing a repayable advance appropriation, could single-handedly throw the entire budget out of balance.

Accordingly, Eisenhower kept insisting that Congress fix the problem with new, real, tax revenues, not diversion of existing taxes, and not borrowing. The tax committees took no action, but a test vote on the Senate floor in late June saw the President’s gas tax increase fail, 33 yeas to 46 nays. So the Administration settled on a strategy of starving state highway departments into compliance. Not only would the entirety of the $2.5 billion in new Interstate construction contract authority, due to be apportioned to states in July 1959, be withheld indefinitely, but unless real tax revenues were raised, the Bureau of Public Roads would also impose a 9-month moratorium on new construction contracts and right-of-way purchases, and BPR would also have to begin delaying reimbursements of states for highway work already completed, starting in fall 1959.

Part 3, published today, involves a struggle for dominance between the House Public Works Committee and the House Ways and Means Committee. Ways and Means, at the end of July 1959, adopted a plan for the Highway Trust Fund to issue $1 billion in revenue bonds (outside the public debt limit), to divert a portion of the automobile excise tax from the general fund to the Trust Fund, and to downsize annual apportionments consistent with the Byrd Test and thus stretch out construction of the Interstate system over a longer period. Public Works rejected this plan and instead approved a $10 billion spending increase, with no way to pay for it. Ways and Means then passed a new proposal adopting a 1 cent per gallon gas tax for two years, followed by partial diversion of the auto and parts taxes to the Trust Fund beginning when the temporary gas tax expired in July 1961, and no waivers of the Byrd Test. The President agreed to accept this compromise as a temporary expedient.

But Public Works again voted to reject the Ways and Means proposal, in part because Public Works chairman Buckley was holding out for an unrelated bill to force the federal government to reimburse states (principally New York) for the construction cost of their already-built roads that had incorporated in the Interstate system in 1956. Speaker Rayburn personally brokered a compromise for a 1 cent tax increase for one year followed by revenue diversion and a Byrd Test waiver, which Public Works Democrats then reluctantly agreed to, but the Ways and Means Committee, by a 12 to 13 vote, rejected the Speaker’s proposal and instead authorized its chairman to take their legislation directly to the House floor (which they could do in those days, bypassing the Rules Committee and the Speaker).

Public Works then reluctantly accepted the Ways and Means plan, which was brought to the House under a closed rule and which passed by a 243-162 vote on September 3. The Senate Finance Committee (under chairman Harry Byrd, for whom the Byrd Test had been named) chose not to amend the gas tax or revenue diversion provisions, and the Senate rejected an amendment by Sen. Al Gore to strike the gas tax from the bill by a vote of 35-50. The bill then passed the Senate, 70-11, and the House accepted the Senate amendments quietly on the morning of September 9.

Once the White House got word that the House had cleared the tax bill for the President’s signature, they announced on September 9 that they were requesting an immediate $359 million general fund “repayable advance” appropriation to the Trust Fund. (The White House had refused to request the advance until the tax bill was settled.) Since fiscal years at that time ran from July 1 to June 30, and since the highway payment schedule is seasonal and payments are highest in July-October of each year, the bailout was necessary to meet day-to-day cash requirements at the Bureau of Public Roads, but the money was to be repaid to the general fund by the end of the year, as tax receipts exceeded expenditures in the winter and spring months. The appropriation was quickly passed by Congress as part of the last bill that went through each chamber prior to adjournment in the wee hours of September 15.

President Eisenhower signed the gas tax bill into law on September 21, but warned that it was a temporary expedient, and that a slowdown of Trust Fund cash flow would still be necessary, even with the “repayable advance.” Accordingly, in early October 1959, the first-ever “contract controls” were issued – the forerunner of the impoundments used by President Johnson and Nixon which have since been transformed into statutory annual obligation limitations.

How does the 1959 HTF insolvency situation compare to the 2008-present HTF insolvency (chronicled here)?

  • Similarity – intentional overspending. In both instances, Congress passed, and the President signed, laws (in 1958 and 2005) that clearly set the Trust Fund on a road to insolvency by setting spending levels significantly above what could be supported by the tax levels extended by those laws. In both cases, Congress had to overcome the Byrd Test in order to do so – in the 1958 law, the test was specifically waived for a two-year period, but the 2005 SAFETEA-LU law permanently neutered the test by changing the calculation to compare unfunded authorizations four years worth of future tax receipts, ensuring that the Trust Fund could hit a zero balance without running afoul of the test. (It did, three years later.)
  • Difference – presidential intent. However, in 1958, President Eisenhower and his advisors repeatedly said (behind the scenes) that they would be requesting real highway user tax revenue increases to pay for the increased spending, once the economy was no longer in recession. And they were true to their word, requesting a 50 percent increase in gasoline and diesel excise taxes in January 1959. In 2005, on the other hand, President Bush was implacably opposed to highway user revenue increases, before, during, and after he signed SAFETEA-LU into law.
  • Difference – timing of the crisis. Even if George W. Bush had not been completely averse to any highway user tax increase, he might not have been able to request one at the time that the Trust Fund ran out of money in early September 2008. In addition to 1959 not being an election year and 2008 being a Presidential election year, the economic situation in early September 2008 was shaky. In spring-summer 2008, most economists agreed that the U.S. economy had entered a recession, but a slow-rolling financial crisis was also in progress – the Bear Stearns bailout had happened on March 17, the IndyMac collapse on July 11, and enactment of the subprime mortgage assistance bill on July 30. Transportation Secretary Peters made the announcement of imminent Trust Fund insolvency on September 5, 2008 – two days before the federal takeover of Fannie Mae and Freddie Mac, and ten days before the collapse of Lehman Brothers and the associated stock market slide. Eisenhower himself probably would not have requested a tax increase facing a similar economic and financial outlook.
  • Difference – no mechanism in place in 2008. For some reason, when the Ways and Means Committee codified the old Highway Revenue Act of 1956 into the Internal Revenue Code in 1982, they dropped the provision allowing for repayable advances to the Trust Fund (probably because it had not been used since 1966). Accordingly, when the Trust Fund ran low in 2008, the only choices available were immediate new tax revenues or a permanent, non-repayable transfer of funds.
  • Difference – willingness to shut down the program. President Eisenhower and his senior officials demonstrated a remarkable willingness to temporarily suspend the Interstate program, and to starve state highway bureaus of cash, for as long as it took to let pressure build on Congress to provide real tax revenue increases for the Trust Fund. Eisenhower had the law (the Byrd Test, and the associated provisions of law they interpreted to allow contract controls to be implemented) on his side, but neither Presidents Bush or Obama expressed any willingness to starve state DOTs of their reimbursement dollars in order to pressure Congress to fix the Trust Fund.
  • Difference – non-unified budget. Federal budgets between FY 1936 and FY 1970 used the “administrative budget” as its primary presentation. This excluded transactions with federal trust funds (Highway, Social Security, Unemployment, etc.) and with government-sponsored enterprises. This meant that transactions between the general fund and a trust fund showed up as part of the budget just like transactions between the general fund and non-government entities. A repayable advance from the general fund to the HTF (as authorized under the 1956 Act) would look just like an appropriation directly to a state, a company, or a foreign government. And the diversion to a trust fund of any existing tax that was being deposited in the general fund would look just like a net federal tax cut. If every dollar of the $144 billion in bailouts of the Trust Fund enacted from 2008-2015 had been added to the federal deficit immediately upon appropriation, the political calculus could have been different, and the drive to find real revenues (or cut spending) stronger. But under the unified budget in use since 1970, transfers between the general fund and a trust fund account are treated as “intragovernmental transactions” and have no budget score, meaning that Congress can transfer limitless amounts of money to the Trust Fund without those transfers ever, technically, adding to the federal deficit.
  • Difference – attitudes towards fiscal responsibility. It is safe to say that your average member of Congress in the late 1950s cared a lot more about fiscal responsibility than the average member does today. The political norms of the time emphasized a balanced federal budget unless something really unusual (a war or a recession) was going on, and under Eisenhower the budget had run small surpluses in 1956 and 1957, small deficits in 1954, 1955 and 1958, a big deficit in the recession year of 1959, and was almost exactly balanced when the books were closed on FY 1960 ($301 million surplus). Politicians were averse to deficits and actually planned on paying down the national debt from time to time (in nominal terms, not just as a percentage of GDP). And it was Republicans who insisted that real taxes on highway users be increased to keep the overall budget in balance – Democrats, for most of the 1959 Congressional session, instead tried to borrow from the general fund or divert existing taxes away from general revenues (either of which would have thrown the entire federal budget into deficit) or else borrow a billion dollars via a bond issuance, increasing total federal debt. 60 years later, deficits in the high hundreds of billions of dollars per year have become the norm, and the overall federal debt load is now thought of by elected officials kind of like the Yellowstone supervolcano – a problem so large that fixing it is beyond human agency, so there’s no sense in worrying about it. (Of course, politicians were allowed to stop caring about deficits and debt because they were selected by voters who don’t seem concerned about deficits and debt either, which is also a change from earlier generations.)

The Congressional Budget Office predicts that the Highway Trust Fund will run out of money – again – sometime in the summer of 2021, under current spending and revenue trends.

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