House Transportation Bill Would End “Donor State” Debate, Possibly Forever
This morning, with the release of the House Ways and Means Committee’s title of the House’s surface transportation reauthorization bill (title VIII of Division M of this document), it became clear that the reauthorization bill to be considered by the House will not have any transportation user tax revenue increases. Instead, section 90803 of the House simply transfers another $106.7 billion from the general fund of the Treasury to the Highway Account of the Highway Trust Fund and an additional $38.6 billion from the general fund to the Mass Transit Account of the Trust Fund. (That’s $145.3 billion in total transfers.)
This makes it possible to compare the proposed highway and transit funding to be provided by the bill with the “baseline” Trust Fund tax revenue estimates (since the bill does not change current tax rates, budget scorekeepers are forced to use the baseline estimates of current law receipts). The inescapable conclusion is that because the spending increases in the House bill are so large, and because there are no user tax increases, the days of Trust Fund “donor states” would be ended by this bill (at least through 2025, and possibly forever).
The Congressional Budget Office’s May 2020 Highway Trust Fund cash flow baseline lumps real tax revenues in with interest earned by the Trust Fund on previous bailouts and with a small amount of annual safety fines and penalties. But the tax-only portion can be found in the CBO revenue baseline under the “Excise tax” tab and it is not much work to allocate the Mass Transit Account’s share and then deduce the remaining Highway Account share.
Highways. According to technical assistance estimates provided by FHWA to Capitol Hill, the 50 states and D.C. collectively would receive $284.0 billion in formula apportionments of highway contract authority over the fiscal 2021-2025 period – but CBO estimates that total user tax payments into the Highway Account would only total $188.3 billion, so the highway users nationwide would have a “rate of return” of $1.51 in formula highway aid for every dollar of highway user tax payments.
We can’t know precisely how much of that total $188.3 billion in taxes would be attributed to highway users in each state in the future, but we were able to get the actual FY 2018 state shares of total Highway Account tax payments from the latest FHWA Table FE-9, and we just multiplied these actual 2018 shares times the five-year baseline revenue total to produce a state-by-state table. The table shows that even Texas (which has been the only state to trigger the 95 percent “donor state minimum” adjustment in the last decade) would receive $26.4 billion in highway formula funding over 2021-2025 but would only make an estimated $21.4 billion in user tax payments to the Highway Account, for an account surplus of $5.0 billion, or a rate of return on $1.23 in highway formula aid for every dollar of highway user tax payments. Every other state had a rate-of-return ratio higher than Texas, up to D.C.’s $11.56.
(It’s not quite an apples-to-apples comparison, but FHWA keeps track of cumulative apportionments and allocations out of the Highway Account all the way back to its inception in July 1956 through the end of fiscal 2018 in Table FE-221, and Texas’s Eisenhower-to-President debt status out of the Highway Account (which was the entire Trust Fund from inception to FY 1983) is only $1.2 billion ($87.1 billion in lifetime tax payments versus $86.0 billon in apportionments and allocations), so no matter what the FY 2019 and 2020 differentials are, the House bill would most certainly wipe clear the lifetime highway donation slate of Texas and every other state.)
Mass transit. Funding from the Mass Transit Account of the Trust Fund is, by nature, much more targeted to large cities with high population density, which creates a much different state-by-state funding distribution than the traditionally more rural-focused highway program. We took a FTA projection of formula aid from the Transit Accounts aggregated by state (ignore the table on the T&I Committee website because FTA has sent up an updated estimate since then) that shows an estimated $73.2 billion in highway formula apportionments from 2021-2025 out of the Mass Transit Account versus CBO’s estimated $25.9 billion in estimated tax payments – a $47.3 billion difference, for a nationwide rate of return of $2.83 cents to the dollar. (This is possible because the House bill gives mass transit funding a much higher percentage increase above current levels than it gives highways.)
We then followed the same methodology as above to allocate estimated future state shares of that tax money and generated another state-by-state table, and found that under the House bill, there would still be eight Mass Transit Account “donor state” over that period (Alabama, Arkansas, Mississippi, Nebraska, North Dakota, Oklahoma, South Carolina, and Wyoming. Their rates of return would range from 75 cents on the dollar (Mississippi) to North Dakota (99 cents on the dollar). (Even Texas, which has long complained about the very existence of the Mass Transit Account, would get $1.25 in transit formula aid for every dollar of highway user taxes paid by Texans into the Mass Transit Account over 2021-2025.)
But even for these states, they get so much more highway money than they pay in Highway Account taxes that, when you add the two accounts together, each state’s projected Mass Transit Account “donor” status over five years would be swamped by its “donee” status on the Highway Account side so that, together, they would get far, far more money back than they paid in:
|Donee Status||Donor Status||Donee Status|
(We don’t have cumulative Mass Transit Account state-by-state allocations and payments back into the past, sadly.)
Combined. When we combine the state-by-state income and outgo of both accounts into a single table, the 50 states and D.C. as a whole will receive $357.1 billion in formula aid out of the Trust Fund but are estimated to only pay $214.2 billion into the Trust Fund over that period, for a nationwide “donee” status of $142.9 billion, or a rate of return of $1.67 in formula money for every dollar of highway user tax payments. The state with the lowest total rate of return would be South Carolina, at $1.23. Alaska would get $7.97 back in formula aid for every dollar of highway user tax payments, and the District of Columbia would get $24.38 in formula aid for every dollar of tax payments.
(D.C. is an outlier both on the spending side because of all the federal interest there but also on the tax side, because gentrification has closed a lot of gas stations inside the city limits that have never reopened.)
Uncertainty. Yes, states certainly won’t keep making tax payments into the Trust Fund in the exact same shares they made in FY 2018. But remember – these total tax revenue numbers are based on the CBO baseline before coronavirus. In real life, the overall tax payments into the Trust Fund over 2021-2025 are going to be at several billion dollars less than than the CBO March baseline projections, so every state’s rate of return is guaranteed to be higher than the numbers discussed in this article and in our table, because the drop in total tax revenues in 2021 will more than make up for any minor variations in state shares of total tax payments.
Post-INVEST. If Congress decides to take the approach outlined in the INVEST Act – five more years of Trust Fund spending, significant funding increases, paid for entirely by general fund bailouts (a.k.a. borrowing on the bond market) instead of user tax increases, then this of course increases the size of the eventual user tax increase you need to make in 2025 in order to make funding in FY 2026 and thereafter possible. We don’t have precise numbers but you would probably need close to a 25 cent motor fuels tax increase up front in 2026 (were you to fill the revenue gap entirely through fuel taxes) or some equivalent.
But size of the revenue hole you would need to fill at that point would be north of $40 billion per year. Every tax increase you postpone today increases the size of the tax increase you will need tomorrow – unless you just give up on raising taxes. And if we couldn’t raise highway user taxes to fix the Trust Fund when it ran out of money in 2008, or 2010, or 2012, or 2015, or today, why should we assume that Congress will suddenly be willing to increase highway user taxes in 2025?
One thing is for certain – until Congress starts debating a reauthorization bill that fills the Trust Fund’s revenue gap with highway user tax increases, we should hear no more of the words “donor” and “donee” in the debate – because (as Mort Downey says), the only donor state these days is the People’s Republic of China.
Reminder: the PDF of all the state-by-state tables can be viewed here.