May 5, 2016

Since the construction of the Interstate Highway System began to wind down in the 1980s, most reauthorization cycles for the federal-aid highway program have featured fights between “donor states” (those that contribute more money in excise taxes to the Highway Trust Fund than they receive in highway funding) and the “donee states” that receive more money than they pay.

Beginning with the “minimum allocation” program under section 150 of the 1982 surface transportation law, subsequent reauthorizations focused on increasing the “rate of return” ratio of state gas tax payments to the Highway Account of the HTF to the “below the line” highway funding amounts for each state (formula money plus certain earmarked projects).

After the HTF went bankrupt in 2008, the 2012 MAP-21 law cleverly defused the issue by switching the donor state guarantee calculation from comparing shares of total Highway Account tax payments to actual tax dollar amounts paid. (Since the HTF was being propped up by general fund transfers, it was anticipated that few states would actually pay more actual taxes than they receive in funding, and with the only state to exceed the threshold so far was Texas in 2014.)

But despite the fact that the only real donor state these days (to quote one longtime ETW reader) is the People’s Republic of China, the donor-donee issue keeps popping up during reauthorization debates, and if the HTF is ever put back on a sound user-tax-supported basis, it will no doubt pop up again. Therefore, it is fitting that this week, we mark the 100^th anniversary of the donor-donee dispute.

On May 8, 1916, the Senate passed an amended version of the first federal-aid highway bill (H.R. 7617, 64^th Congress) that had earlier been passed  by the House. The bill provided $75 million over five years for formula aid to states for road construction (in $5, $10, $15, $20 and $25 million installments over fiscal years 1917-1921). The money was to be apportioned by a three-part formula: one-third in the ratio of state land area, one-third in the ratio of state population, and one-third in the ratio of state route-miles of rural delivery and star route postal roads.

This debate occurred before the first federal gasoline tax was implanted in 1932, and 40 years prior to the creation of the Highway Trust Fund, so the money came from the general fund of the Treasury. At that time, the income tax was a new creation, and it only applied to households with an annual income over $3,000 (which is equivalent to about $65,000 today). Also, corporate income taxes were a higher share of total government income than it is today.

As a result, the wealthy states like New York paid a huge share of total income taxes to the general fund. This led to the first recorded donor-donee dispute, on May 8, 1916.

Immediately before the Senate voted on final passage of the bill. Sen. Henry F. Lippitt (R-RI) took to the floor to complain that the whole highway program was just a massive redistribution of wealth from a few Northeastern states to the rest of the country. He submitted for the Record a table showing how each state’s share of a $25 million highway apportionment under the bill would compare to each state’s share of $25 million of general fund personal and corporate income tax payments.

Lippitt said that his table showed that:

36 States receive more than they would pay, and that 13 states pay more than they would receive. Of those 13 states that pay more than they receive, the States of Massachusetts, New York, and Pennsylvania will pay $12,948,7850, or more than 50 percent of the entire amount…It seems to me that under the showing of that table that this bill is a ‘pork-barrel’ proposition that makes the most extravagant river and harbor bill look like an infant industry. I think that if the conditions were reversed, and 36 States paid more than they received, and those 3 States received more than 50 percent of the benefit, it would be as difficult to get this bill through this body as under the present conditions it is easy.

In response, Sen. Knute Nelson (R-MN) said:

What has enabled these States to pay these income taxes? Why, they have been drawing them from the whole country. If we penned up Massachusetts or New York or Rhode Island and shut them off from the rest of the country, they would not have any big incomes. What enables them to pile up money in these Eastern States and in tie large cities but the fact that they have the whole country to draw upon? … We consumers in the: West have helped you to pile up: those: fortunes; and why should you parade them before us and say that you are paying more than your share? You are simply paying back, in the form of taxes, a part of that which we have enabled you to put in your pockets. That is all there is to it.

The Senate then passed the bill by voice vote and postponed the donor-donee fight to another day. (Ed. Note: In one of those wonderful ironies of history, Senator Lippitt, the spokesman for the oppressed donor states that were not getting their “fair share” of highway funding under the 1916 formula, was the great-uncle of future Senator John H. Chafee (R-RI), who chaired the Environment and Public Works Committee during debate on the 1998 TEA21 highway bill and who fought vigorously against the donor states on behalf of present-day donee states like Rhode Island, who now get far more money from the Trust Fund than they pay in excise tax payments.)

ETW has prepared a table which takes the raw dollar amounts from Senator Lippitt’s table and converts it to shares and rates of return that will be familiar to current readers. According to Lippitt’s information, New York received a rate of return of just 15 cents on the dollar in the 1916 highway bill for its tax payments, while the biggest donee state, New Mexico, received almost $25 in highway money for every dollar of tax payments (on a percentage share basis). (Take that, Alaska and your measly modern-day 5.87 to 1 rate of return for FY 2014.)