Reauthorizing Federal Highway Programs: Issues and Options
CBO discusses choices about revenues and spending that lawmakers face in addressing the shortfall in the Highway Trust Fund as well as options for subsidizing state and local governments’ financing of highway projects.
Federal spending on highways (or, synonymously, roads) totaled $46 billion in 2019. Most of those outlays were for grants to state and local governments to support their spending on capital projects. (Those governments typically spend roughly three times as much of their own funds on highways each year, not only on capital projects but also to operate and maintain roads.) That $46 billion also includes spending for federal programs that subsidize state and local governments’ borrowing for highway projects; other subsidies for state and local borrowing are provided through the tax code.
Most federal spending for highways is paid for by revenues credited to the highway account of the Highway Trust Fund, largely from excise taxes on gasoline, diesel, and other motor fuels. For more than a decade, those revenues have fallen short of federal spending on highways, prompting transfers from the Treasury’s general fund to the trust fund to make up the difference. If the taxes that are currently credited to the trust fund remained in place and if funding for highway and transit programs increased annually at the rate of inflation, the shortfalls accumulated in the Highway Trust Fund’s highway and mass transit accounts from 2021 to 2030 would total $189 billion, according to the Congressional Budget Office’s baseline budget projections as of March 6, 2020. Those projections, which are based on the economic forecast that CBO completed on January 7, 2020, do not account for the changes to the nation’s economic outlook and fiscal situation that have stemmed from the 2020 coronavirus pandemic.
The current authorization for federal highway programs expires on September 30, 2020. As they consider reauthorization, policymakers have many decisions to make about federal highway programs, including how to pay for those programs, how much to spend on them and how to direct that spending, and how much to subsidize borrowing by others to finance highway projects.
Revenues Credited to the Highway Trust Fund
The Highway Trust Fund is an accounting mechanism in the federal budget with two accounts—one for highways and the other for mass transit—to which certain fuel and other vehicle-related excise tax collections are credited. According to CBO’s March projections, if the excise taxes are continued at their current rates and current funding for highway and transit programs increases annually at the rate of inflation, the revenues and accumulated balances of the Highway Trust Fund will be insufficient to cover spending from the transit account starting in 2021 and spending from the highway account beginning in 2022. In those projections, revenues credited to the Highway Trust Fund in 2020 total $44 billion, and outlays exceed revenues by about $14 billion.
Policymakers have a number of options to increase the resources available in the Highway Trust Fund:
- Increase the existing fuel taxes. The tax on gasoline has been 18.4 cents per gallon, and the tax on diesel 24.4 cents per gallon, since October 1993. One option is to increase those taxes by 15 cents per gallon in 2021 (bringing them up to roughly the rates they would be if they had increased with inflation) and to adjust them for inflation thereafter. CBO and the staff of the Joint Committee on Taxation (JCT) estimate that such a change would raise $329 billion more in revenues for the Highway Trust Fund from 2021 to 2030 than projected in CBO’s March baseline. An increase of that amount would eliminate the fund’s shortfall and provide $140 billion for additional spending by 2030. However, that increase in fuel taxes would reduce taxable business and individual income, resulting in reductions in income and payroll tax receipts that would partially offset the increase in fuel tax receipts.
- Institute new taxes. Policymakers could institute new taxes on vehicle miles traveled (VMT), on freight shipments carried by trucks, or on electric vehicles. If, for example, a VMT tax of 5 cents per mile traveled by trucks had been in place in 2017, it would have raised about $13 billion that year—about $1 billion more than the fund’s shortfall for the year. The costs of implementing such a tax and ensuring compliance could, however, be substantial. Alternatively, a tax on freight transported by highway could also reduce the shortfall, depending on the specifics of the tax, but implementing such a tax would require establishing new mechanisms for assessing and collecting it, which could be an expensive and time-consuming process. A tax on electric vehicles would probably not have a substantial effect on the trust fund’s shortfall because the number of such vehicles remains small.
- Transfer money from the Treasury’s general fund. Under this option, the federal government would, in effect, pay for a portion of highway spending in the same way that it funds other programs and activities.
Federal Spending for Highways
The share of total economic output that federal spending for highways has accounted for has been relatively stable for several decades, though real (inflation-adjusted) federal spending has increased in recent years. Almost all of that spending, which takes place primarily through grants to state and local governments, is for capital projects rather than for operation and maintenance and is restricted to federal-aid highways, which consist of the Interstate Highway System and most other roads except for local roads. Federal highway funds are distributed to states on the basis of formulas that depend on how much states received in earlier years, so federal spending does not necessarily go to the projects that would produce the greatest net benefits.
Lawmakers have many options for determining the amount of money spent on highways, including these:
- Fund all projects for which the expected benefits meet or exceed the costs. In CBO’s estimation, that option would require increasing federal spending (which was $46 billion in 2019) to an average of at least $71 billion per year—nearly 40 percent more than projected in CBO’s baseline from 2021 to 2030. That estimate is based on analysis from the Federal Highway Administration (FHWA) and would be applicable only if state and local governments increased their spending for federal-aid highways proportionally. Implementing that option would require identifying sources of funding for the additional spending.
- Maintain the current conditions and performance of the highway system. Accomplishing that objective would require the federal government to spend at least $54 billion per year, on average, CBO estimates using FHWA data—nearly $4 billion more than the average annual spending in CBO’s 10-year baseline projections. To realize the conditions in FHWA’s model, state and local governments would also need to increase their spending for federal-aid highways.
- Set spending to match revenues. Policymakers could set spending to match the revenues projected to be credited to the highway account of the Highway Trust Fund. Under that option, nominal federal spending on highways would average $39 billion per year through 2030—an average of $12 billion (or about 25 percent) less each year than the amounts in CBO’s baseline projections.
In addition to determining how much to spend on highways, policymakers could adopt a different set of criteria for allocating that spending, such as directing federal highway funds to programs or projects on the basis of expected net benefits. Distributing funds in that manner would produce spending patterns that differed from those observed in recent years, when funds were distributed to states on the basis of formulas and states selected projects according to their own criteria and program requirements. Compared with actual spending in 2014, if spending were directed according to expected net benefits, a smaller share of spending would go to expanding non-Interstate roads in rural areas, and a larger share would go to rehabilitating non-Interstate federal-aid highways in urban areas. Furthermore, a larger share of spending than allocated in 2014 would go to rehabilitating rural and urban bridges on Interstate highways, and less would go to rehabilitating the Interstates themselves.
Federal Programs to Subsidize State and Local Borrowing for Highways
The federal government also supports investment in highways by state and local governments through several financing programs that subsidize the cost of borrowing to pay for that spending—that is, the federal government incurs costs to lower state and local governments’ borrowing costs. From 2007 to 2016, the federal government subsidized an average of $20 billion (in 2019 dollars) per year of new financing for highways that state and local governments obtained through tax-preferred bonds, direct loan and loan guarantee programs, and funds that were to be used to capitalize state infrastructure banks (SIBs). Tax-exempt bonds accounted for about three-quarters of that borrowing.
Federal policymakers could offer new programs or expand current programs to subsidize borrowing by state and local governments to build more roads. For instance, they could introduce a tax credit bond program. Depending on its design, such a program could subsidize the same amount of borrowing by state and local governments as tax-exempt bonds at a lower cost to the federal government by effectively eliminating some of the benefits of tax-exempt bonds that go to higher-income bondholders. Policymakers could also expand opportunities for state and local governments to use federally subsidized financing by authorizing state and local governments to issue more tax-exempt bonds to fund projects undertaken primarily by private entities or by extending more loans to those governments to finance transportation projects. In addition, policymakers could allow states to collect tolls on Interstate highways, which would offer states an additional revenue stream to borrow against.
A Note About the Possible Effects of the Coronavirus Pandemic on the Estimates
Several changes arising from the current public health emergency and resulting decline in economic activity will have offsetting effects on the balance of the highway account of the Highway Trust Fund. Revenues from fuel taxes will be lower than CBO projected in March because people have been driving less since the coronavirus pandemic began. If all other factors underlying CBO’s projections remained unchanged, the reduction in revenues would increase the annual shortfall in the trust fund’s highway account. But spending from the Highway Trust Fund may also decrease, because states, whose fiscal outlooks have worsened as a result of the decline in economic activity, may have to suspend highway projects for an extended period. Reductions in spending from the trust fund would, all else equal, decrease the annual shortfall. CBO has not yet assessed those changes to determine their net effect on the size of the shortfall in the Highway Trust Fund or to update the agency’s projections of when the fund’s balances will be insufficient to cover its outlays without delays.
In addition, if federal lawmakers respond to the economic downturn by providing funds for infrastructure projects outside the Highway Trust Fund, as they did in the American Recovery and Reinvestment Act of 2009, spending from the trust fund may decrease as it did in 2010.