May 2, 2012
Federal highway and mass transit programs are financed largely by a variety of transportation-related excise taxes. The largest share of the revenues comes from the federal tax on gasoline, including gasoline that is blended with ethanol. Revenues from those taxes are credited to the Highway Trust Fund, and most of the spending for those programs is attributable to that fund. Because the gasoline tax is set as a fixed amount per gallon (currently 18.4 cents), policies that are designed to reduce gasoline consumption would decrease the amounts credited to the fund.
In a study released today, CBO examines how a proposed rule to tighten fuel economy standards for cars, pick-up trucks, and other light-duty vehicles would affect cash flows of the Highway Trust Fund.
What Is The Proposed Rule?
In 2011, the National Highway Traffic Safety Administration and the Environmental Protection Agency jointly proposed a rule that would tighten corporate average fuel economy (CAFE) standards for light-duty vehicles (including cars, sport utility vehicles, pickup trucks, minivans, and crossover utility vehicles) manufactured from 2017 through 2025. (The standards for model years 2022 through 2025 are subject to review by the agencies to ensure that they are technologically and economically feasible.) By the end of that period, the proposed standards are expected to raise the average fuel economy of the new-vehicle fleet from 34.1 miles per gallon (mpg)—the average anticipated for 2016 and beyond under current standards—to 49.6 mpg. The proposed rule also would require gradual reductions in greenhouse gas emissions from light-duty vehicles, which would be accomplished primarily through reduced fuel consumption.
What Would Happen to Fuel Consumption and Gasoline Tax Revenues Under the Rule?
The proposed CAFE standards eventually would cause a significant reduction in in fuel consumption by light-duty vehicles. That decrease in fuel consumption would result in a proportionate drop in gasoline tax receipts: CBO estimates that the proposed CAFE standards would gradually lower gasoline tax revenues, eventually causing them to fall by 21 percent. That full effect would not be realized until 2040 because the standards would gradually increase in stringency (only reaching their maximum level in 2025) and because the vehicle fleet changes slowly as older vehicles are replaced with new ones.
How Would the Proposed CAFE Standards Affect the Highway Trust Fund?
To illustrate the effect that the standards would eventually have on the trust fund’s cash flows (in 2040 and beyond), CBO examined how a 21 percent reduction in gasoline tax collections would alter the agency’s current budget projections for the trust fund, which span the period from 2012 through 2022. CBO estimates that such a decrease would result in a $57 billion drop in revenues credited to the fund over those 11 years, a 13 percent reduction in the total receipts credited to the fund.
How Could Policymakers Mitigate the Effects of the Proposed Standards on the Fund's Cash Flows?
The proposed rule would exacerbate existing cash shortfalls in the trust fund. Although the fund’s balances were stable for many years, its outlays have exceeded receipts for much of the past decade. In recent years, the shortfall has been covered by transfers from the U.S. Treasury’s general fund.
Policymakers could consider several options to avoid adding to a shortfall in the Highway Trust Fund, including the following:
- Reducing spending on highways and mass transit,
- Transferring additional money from the Treasury's general fund to the Highway Trust Fund, and
- Increasing the gasoline tax or raising revenues from other sources to provide receipts to the trust fund.
This study was prepared by Terry Dinan and David Austin of CBO's Microeconomic Studies Division.