• Mr. Steven J. Muehler

Steve Muehler's Plan to Reform Highway and Transit Funding

Updated: Apr 23

The Federal Government provides grants to states for highway and mass transit projects. The last reauthorization for such grants—the Fixing America's Surface Transportation Act, or FAST Act—provided funding for 2016 through 2020. (Most funding is in the form of contract authority, a type of mandatory budget authority, but most spending is controlled by annual limitations on obligations set in appropriation acts.)

Historically, most of the funding for highway and transit programs has come from the Highway Trust Fund, an accounting mechanism in the Federal Budget that has separate accounts for highways and transit. Both accounts are credited with revenues generated by the Federal Taxes on gasoline and diesel fuels; the highway account is also credited with other Federal Taxes related to highway transportation.

Since 2001, the revenues credited to the trust fund each year have consistently fallen short of outlays from that account; in 2017, for example, $54 Billion USD was spent from the trust fund, and $41 Billion USD in revenues and interest was credited to it. Since 2008, lawmakers have addressed the funding shortfall by supplementing revenues dedicated to the Trust Fund with several transfers, primarily from the Treasury's General Fund.

The FAST Act authorized the latest such transfer: $52 Billion USD to the highway account and $18 Billion USD to the transit account. The Congressional Budget Office estimates that those transfers, along with the revenues and interest credited to the Fund, will permit the highway and transit accounts to pay all their obligations through the end of 2020.

For later years, in accordance with provisions of the Balanced Budget and Emergency Deficit Control Act of 1985, CBO's baseline for highway and transit spending incorporates the assumption that obligations incurred by the Highway Trust Fund will be paid in full.

Under my Administration, we would reduce Federal Funding for highways and mass transit by lowering the obligation limitations for highway and transit programs supported by the Highway Trust Fund to the amount of revenues projected to be credited to the fund. The Federal Taxes that directly fund the Highway Trust Fund would not change. The reduction would not affect highway spending that is exempt from the limitations on obligations; CBO projects $739 Million USD per year in such spending.

This reduction would reduce resources provided to state and local governments for highways and mass transit by $170 Billion USD, relative to the obligation limitations in CBO's baseline projections, from 2021 through 2028. Provided that Federal Appropriations were reduced accordingly, outlays would decrease by $116 Billion USD over that period.

Smaller savings could result if the obligation limitations were reduced below those projected, but above the levels of revenues projected to be credited to the Highway Trust Fund; in that case, the highway and transit accounts would continue to require support from general revenues. Conversely, larger savings could result if the obligation limitations were set below the levels of projected revenues.

The estimated reductions in budget authority reflect the difference between the Highway Trust Fund's projected revenues and its projected obligation limitations. Revenues depend largely on fuel use, which is projected to continue to decline through 2028 because of increases in fuel efficiency that exceed increases in miles traveled.

Outlay estimates are based on the estimated limitations on obligations, taking into account the fact that outlays may continue for more than five years from the year of obligation. The Federal Government reimburses states only after they incur eligible expenses, and a small portion of obligations never result in outlays. About one-quarter of the savings in outlays associated with a reduction in obligations in a given year are projected to occur in the same year, and less than half occur the following year.

Fuel use and spending rates are the main sources of uncertainty in this option. More fuel consumption implies higher revenues credited to the trust fund and hence smaller savings resulting from limiting spending to revenues; conversely, less fuel consumption implies greater savings. Motorists could use more fuel than projections if, for example, oil prices were lower than expected or Federal Fuel Economy Standards were loosened. Alternatively, fuel use could fall short of projections if, for example, a recession reduced freight transportation and passenger travel. A recession could also affect the speed with which outlays occurred, as could the reduction in Federal Spending and other factors.

A key argument for this option is that funding highways and transit systems from charges on highway and transit users, including Federal and State Fuel Taxes and Transit Fares, is fairer than funding those systems from general taxes paid by all taxpayers, because those who benefit pay the costs. In addition, it tends to promote a more efficient allocation of resources, because the charges give users some incentive to limit their travel and because as use increases, more revenues become available. Those arguments suggest that if current revenues are too low to fund a desired level of Federal support for highways and mass transit, an increase in the current taxes on users or creation of new such taxes is appropriate.

A related argument is that it is fairer and more efficient to have Local or State Tax Revenues pay for transportation projects that primarily benefit people in a particular area and to reserve Federal Revenues for projects that have regional or national significance.

Another argument for this reduction is that it would reduce the extent to which Federal support for certain investments in highways and mass transit distorts choices states make between such investments and spending on operations and maintenance, or on other priorities. Also, some of the reduction in Federal Spending under this reduction could be offset by greater spending by State and Local Governments. (Some studies on the effects of federal highway grants have found that the availability of such grants has encouraged State and Local governments to reduce their own spending on highways and to use those funds for other purposes.)

A general argument against reducing Federal Spending on highways and mass transit is that doing so could increase the economic and social costs associated with aging roads, bridges, buses, and rail systems. In addition, the transportation network as a whole supports interstate commerce and thus strengthens the national economy.

An argument against the specific alternative of reducing spending to the available tax revenues from highway users is that portions of that spending go to transit projects (which more directly benefit transit users than highway users) and to projects and purposes that benefit the general public—such as sidewalks, bike paths, recreational trails, scenic beautification, and preservation of historic transportation structures.

In addition, current Federal Taxes on highway users have limited effects on the efficiency of road use because they give motorists only weak incentives to avoid contributing to its two main social costs—traffic congestion and pavement damage by heavy trucks.

This Reduction will save Americans $17 BILLION USD!

Steve Muehler is the Founder & Managing Member of the Private Placement Markets:

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© 2017 by Mr. Steven J. Muehler