Thursday, October 30, 2014

The US will start running out of money for roads in August. Here's why.

This about sums it up. John B. Carnett/Getty Images

The United States is less than a month away from yet another transportation crisis.

By the end of August, the highway portion of the Highway Trust Fund is expected to run out of money. If that happens, the federal government will have to start cutting back on the money it sends to states for transportation projects. (Once the fund is depleted, incoming revenues will be insufficient to cover all of federal spending.)

As a result, many states are likely to halt or delay planned work on roads and highways across the country. (A separate fund for mass transit is scheduled to be depleted in October.) By one estimate, some $47 billion in state projects are at risk. And the Obama administration has warned that the cutbacks could imperil some 700,000 jobs.

Congress could avert these cuts by simply replenishing the Highway Trust Fund. But there's a lot of disagreement about how to do so. Traditionally, revenues from the federal gas tax were enough to finance federal transportation spending. But gas-tax revenues have declined of late, and many politicians are unwilling to raise the tax to compensate. So Congress is discussing convoluted ways to scrounge up the money — from scaling back Saturday postal deliveries to fiddling with tax rules for corporations.

Below is a primer on the highway funding mess — as well as some of the proposed solutions:

Wait, why is the Highway Trust Fund in trouble?

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It all starts with gasoline. Miguel Villagran/Getty Images

The federal gas tax is no longer sufficient to cover federal spending on transportation projects — and Congress hasn't been able to agree on how to plug the gap.

Traditionally, transportation projects in the United States have been financed by a mix of federal, state, and local governments. The federal government currently provides about 27 percent of that overall funding — or about $55 billion per year.

Congress approves this spending through transportation bills every few years, and most of the money is used to match state and local spending on specific projects (about 80 percent goes to roads, the rest to transit). The money for the federal share all comes from the Highway Trust Fund.

But the Highway Trust Fund is perpetually facing a cash crunch. Historically, the trust fund was financed by the federal gas tax, which was last raised to 18.4 cents per gallon back in 1993. Trouble is, inflation has eroded the value of the gas tax. What's more, Americans are driving less and buying more fuel-efficient cars.

As a result, gas-tax revenue has fallen in the last decade:

Gas_tax_revenue

Pew Charitable Trusts

At the same time, federal highway spending has been growing — and Congress shows no sign of cutting back.

Add it all up, and the federal gas tax now covers only two-thirds of federal highway spending. Since many politicians are unwilling to raise the gas tax, they have to keep scrounging together other sources of funding. In 2012, Congress shifted some money from other funds and pension plans to keep the Highway Trust Fund solvent for another two years. But now the fund is nearly depleted — and will likely be empty by August.

What happens if the Highway Trust Fund runs out of money?

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Doomsday. Christian Science Monitor/Getty Images

The federal government will automatically cut back on transportation spending, and states are expected to shelve some of the projects they have planned.

The Department of Transportation projects that the portion of the Highway Trust Fund devoted to roads, bridges, and highways will be depleted by August 31. A separate fund for public transportation, the Mass Transit Account, won't be depleted until October.

Once these trust funds run out, the federal government can only spend what it takes in gas taxes (which aren't enough to maintain current spending levels). That would mean cutting back by about $19 billion in fiscal year 2015 — and more in the years ahead.

In a recent letter, Transportation Secretary Anthony Foxx warned that highway cuts could begin as soon as August 1. "As we approach insolvency," Foxx warned, "the Department will be forced to limit payments to manage the reduced levels of cash." Cuts to states will be apportioned according to a set formula.

Trust_fund_depletion

The Department of Transportation projects the highway portion of the Highway Trust Fund to be depleted by the end of August. Department of Transportation.

States, for their part are expected to cut back on some transportation projects if federal funding vanishes. The group Transportation for America has been documenting some of the big projects at risk here. Some examples:

  • Idaho was planning to replace a bridge in downtown Boise that has "the lowest structural rating of any bridge in the state." But if the Highway Trust Fund runs out, that could put $10.4 million of the $11.2 million in funding at risk.
  • Tennessee is already halting work on new projects because of uncertainty in federal funding. If federal funding does dry up, the state will focus "exclusively on the maintenance of our existing pavement and bridges rather than new projects."
  • Arkansas has halted 10 bridge replacement, road repair, and highway expansion projects that were set to go forward this summer because of uncertainty over federal funding.

All told, Transportation for America estimates that a loss of $19 billion in federal funding in fiscal year 2015 would threaten around $47 billion in projects (since federal funds are often used to supplement existing state and local funds).

To get a sense for which states might be most heavily impacted, here's a map showing which states are most reliant on federal funding for transportation projects:

Federal_share_transportation_funding

Pew Charitable Trust

So how could Congress avoid a transportation crisis?

Congress can either put more money in the Highway Trust Fund or make orderly decisions on how to cut back on highway spending in the years ahead. There are a couple of proposals out there from different politicians. Most likely, the fourth option — a hasty short-term funding fix — is the one to bet on:

1) Raising the gas tax: This one's pretty straightforward. The federal gas tax, currently at 18.4 cents per gallon, hasn't been raised since 1993 and wasn't indexed to inflation. So one way to plug the funding shortfall would simply be to raise the gas tax.

Last year, the Congressional Budget Office estimated that raising both the gasoline tax and diesel tax by 10 cents per gallon each — and then indexing the taxes to inflation — would be eliminate all current funding shortfalls.

A few politicians have expressed interest: Sen. Chris Murphy (D-CT) and Sen. Bob Corker (R-TN) have a proposal to hike the gas tax by 6 cents per gallon in 2015 and another 6 cents in 2016. The gas tax would then be indexed to inflation so that it didn't decline over time. This move would raise some $164 billion for infrastructure — although the senators would offset it with equally large tax cuts elsewhere. (That last move is a bit odd, as Danny Vinik points out, this bill would essentially use the gas-tax revenue to pay for two different things at once — infrastructure and corporate tax cuts.)

The problem? Raising the gas tax is wildly unpopular among politicians. Even the Obama administration has shied away from supporting a gas tax hike.

2) Cutting transportation spending. This is another conceivable option. Rather than simply run out of money, Congress could cut back on federal spending for roads, bridges, and transit in an orderly fashion. The problem? This seems to be wildly unpopular. Indeed, House Republicans tried to cut transportation spending sharply in 2012, and ended up backing down under criticism from state officials, Democrats, and even a few members of their own party.

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President Barack Obama delivers remarks on infrastructure in the United States at the Washington Irving Boat Club on May 14, 2014 in Tarrytown, New York. Andrew Burton/Getty Images.

3) The Obama administration's plan: The Obama administration, for its part, has put forward a proposal to spend $302 billion on infrastructure over the next four years. The funding shortfalls would be made up through a corporate income tax hike that would raise $150 billion.

That proposal would also make a number of other changes to the transportation system — such as allowing state governments to establish tolls on interstate highways in order to generate additional revenue. (This money wouldn't go into the Highway Trust Fund, it would be kept separate.) The proposal would also shift a bit more money into mass transit.

One problem? This proposal has no chance whatsoever of passing Congress. Republicans in the House are simply not going to agree to a massive corporate tax hike in order to boost transportation spending.

4) Short-term fixes and patches. That leaves the most likely solution: Congress will come up with some way to patch over the hole in the Highway Trust Fund through various funding gimmicks for a short while — at least until after the November midterms.

There are lots of options here. Some House Republicans have talked about shifting money away from the US Postal Service by cutting back on Saturday deliveries, raising about $10.7 billion and keeping the Highway Trust Fund solvent until May 2015. That, the theory goes, would give Congress time to contemplate longer term solutions.

In the Senate, meanwhile, Sen. Ron Wyden (D-OR) has suggested transferring $9 billion from the general fund to keep things moving through the end of the year. Money would be raised through a variety of tax tweaks, including increasing fees on heavy highway vehicles and cracking down on people delinquent on child support. This, too, would only be a stopgap until a longer-term solution could be found.

Whatever the method, the Congressional Budget Office estimates that Congress will need to raise about $8.1 billion to avoid transportation cutbacks between now and December 31.

Further reading: The US highway funding crisis, in six charts

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