The United States will start running out of money for roads in August. So Congress is scrambling to come up with a short-term fix that will postpone the crisis — but only until next May.
On Tuesday afternoon, the House approved a bill to transfer $10.8 billion into the Highway Trust Fund and keep federal transportation funding going uninterrupted until May 31, 2015. The vote was 367 to 55.
The bill would raise that money by taking money from another trust fund set aside to clean up underground storage tanks, by extending customs fees, and by allowing corporations to contribute less to their pensions in the short term (thereby boosting tax revenue) — a move known as "pension smoothing."
The Obama administration has endorsed the bill, although it still has plenty of critics in the Senate. Even if the bill does pass, however, Congress will just have to revisit this whole issue again next spring. So here's a primer on what's going on:
Why is the United States running out of money for roads?
To recap: The federal government is responsible for about 25 percent of all spending on highways, roads, and bridges in the United States — and that money comes from the Highway Trust Fund.
But the trust fund is now running low, not least because the 18.4-cents-per-gallon federal gas tax, last raised in 1993, is no longer enough to cover all spending. Inflation has eroded its value by 39 percent, and many Americans are driving less and buying more fuel-efficient cars.
Once the highway portion of that trust fund runs out in August, the US federal government will have to scale back the payments it makes to states by about one-third. Billions of dollars worth of state transportation projects could get put on hold.
That's why the House and Senate are racing to figure out ways to make up the shortfall. Many politicians prefer a short-term fix for now: They'd have to scrounge up at least $8.1 billion to fill the fund and maintain transportation spending through December 31. But after that, Congress would need to come up with a longer-term fix.
What does the House bill do?
House Republicans crafted a bill in the Ways and Means Committee to transfer $10.8 billion into the Highway Trust Fund — enough to push back the funding crisis until May 31, 2015.
The House raises that money in three ways:
1) About $1 billion comes from a different trust fund that was set aside to deal with leaking underground storage tanks at gas stations and elsewhere. That fund is financed by a 0.1-cent-per-gallon tax on motor fuels and is currently running a $1.3 billion surplus.
2) Another $3.5 billion would be raised through fees on travelers who use US customs facilities. (These fees have been in effect since 2012, with the money going toward transportation.)
3) Finally, the bill would raise $6.4 billion over 10 years by extending "pension smoothing" — a provision that was first enacted in the 2012 transportation bill to plug the trust fund shortfall. This move basically allows companies to delay contributions to their pension plans. Since those contributions are tax deductible, this increases the amount of revenue that companies pay to the federal government, at least in the short term.
What are the criticisms of the bill?
1) It's only a short term patch: Critics of the House bill have raised a couple of different objections. For one, the House bill would only avert the crisis until next May — and doesn't address the underlying structural problems with the Highway Trust Fund.
Some Democrats would prefer to deal with the highway problem this December, in the lame-duck session right after the midterm elections. But Rep. Dave Camp (R-MI), the chairman of the Ways and Means Committee, is against this approach. "We all know what lame-duck deals look like, and more importantly, how they come together," Camp said last Thursday. "They are not done in this room and they are not done by the members of this committee."
2) "Pension smoothing" is a bad gimmick: Other tax experts have criticized the "pension smoothing" provision. As Len Burman points out, the move may not actually raise any money: Yes, companies can reduce their pension contributions now under the rules. But the amount those companies will eventually owe in pensions doesn't change — which means they'll have to increase their contributions later (and tax revenues will fall).
Meanwhile, the Bipartisan Policy Center argues that the move increases the odds that companies will underfund their pensions.
3) It further severs the link between gas taxes and transportation. As my colleague Matthew Yglesias points out, highways, roads, and bridges have long been funded by gas taxes. There was a logic behind this — the people who use roads should pay for them. In recent years, however, federal gas taxes have been insufficient to pay for federal transportation spending, so Congress has sought out revenues elsewhere.
4) It locks in lower levels of transportation spending. Some Democrats oppose the House bill because it locks in current levels of transportation spending — which would mean no new project funding for next year."An extended bailout getting the Highway Trust Fund into the middle of next year has profound consequences," Rep. Earl Blumenauer (D-OR) told USA Today.
5) Those revenues should be used for unemployment insurance. Senate Democrats had hoped to use some of the revenues in the House transportation bill to pay for a five-month extension of long-term unemployment insurance. Extended long-term compensation for the unemployed had expired back in December and the Senate was trying to restore those benefits retroactively.
What are alternatives to the House bill?
1) A long-term transportation bill: Congress could, instead, pass a long-term highway funding bill. Back in April, Sen. Barbara Boxer (D-CA) and Sen. David Vitter (R-LA) passed a bill out of the Senate Environment and Public Works Committee to do just that with a six-year transportation bill.
That bill would essentially keep federal transportation spending at current levels for the next six years, adjusted for inflation (current federal spending is around $55 billion per year). The bill only makes a few small changes to current transportation policy, like providing a bit more money to address bottlenecks around freight construction.
The problem? The bill punts on how to pay for all that spending — especially since gas-tax revenues are declining. So that brings us to...
2) Raise the gas tax. Another approach would be to address the long-term shortfall in the Highway Trust Fund by raising the gas tax. The logic is that federal transportation spending has traditionally been paid for by federal gas taxes — and Congress should bring back that system.
Sen. Corker and Sen. Chris Murphy (D-CT) have a proposal to hike both the gas tax and diesel tax by 6 cents per gallon each in 2015 and another 6 cents per gallon 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 over the next 10 years — essentially eliminating the shortfall in the Highway Trust Fund.
There's a catch, however. The senators' proposal would also use the money to make permanent a number of tax breaks on corporations that Congress tries to renew every year. That last move is a bit odd: as Danny Vinik points out, the Murphy-Corker bill would essentially use the gas-tax revenue to pay for two different things at once — infrastructure and corporate tax cuts.
3) Do nothing and let spending fall. There's, of course, another conceivable option here: Congress could simply do nothing and let transportation spending drop, starting in August, once the Highway Trust Fund runs out.
Once the Highway Trust Fund is exhausted, the government can only use existing gas-tax revenues to pay for spending — which would lead to a roughly 28 percent cut in federal payments to states. That would mean a 7 percent cut in total US transportation 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.