Federal Highway Trust Fund: Running Out of Gas?

On Wednesday last week, the House of Representatives passed the Highway and Transportation Funding Act of 2014, H.R. 5021, an appropriation bill that diverts approximately $11 billion from the General Fund of the U.S. Treasury to the Highway Trust Fund.

The Highway Trust Fund is a transportation fund created in 1956 in the Highway Revenue Act for the purpose of funding federal highway construction and repair. Later the fund was also used to supply the Mass Transit Account, which would use the funding for construction and repair of public transportation. The fund was financed by a federal tax (by the gallon). Originally the tax was three cents per gallon, but rose eventually to 18.4 cents per gallon for gasoline and 24.4 cents per gallon for diesel fuel in 1993, where it has remained for the past 21 years. There have been previous attempts to both raise and suspend the tax since 1993, but none have made it through Congress, including one plan to suspend the tax during the summer by former Republican Presidential candidate John McCain.

This isn’t the first time that the fund has faced insolvency. Between 2008 and 2010, Congress allocated $35 billion to be transferred from the U.S. Treasury to the Highway Trust Fund to ensure that it didn’t declare bankruptcy. In January of 2012, the Congressional Budget Office (CBO) projected that the fund would run out of money in 2014. Despite the early warning, Congress failed to pass any bills that would supply the Highway Trust Fund, including a $109 billion bill from the Senate and a $260 billion bill from the House.

At 5:00 pm on July 15th, the House passed the appropriation bill 367 votes in favor to 55 votes against. The bill ensured that a little less than $11 billion would be used to fund the Highway Trust Fund from September 30, 2014 to May 31, 2015. The money was raised in an accounting tactic called “pension smoothing.” Pension smoothing reduces pension contribution requirements for companies in the US. This leads to a higher income for companies, which leads to more tax revenue. However, in the long run, pension contribution requirements will need to be raised again, which will lower income and tax revenue.

This bill is only a temporary solution. The bill provides funding only until next May. Then the Highway Trust Fund will risk insolvency again and will force Congress to make another decision to either find a permanent solution bail it out temporarily. Congress must not remain inactive. It would be best for Congress to work in a bipartisan effort now to draft a legislative policy that addresses the issue instead of kicking the can down the road. In addition, the “pension smoothing” accounting trick being used to “create” the $11 billion will only lead to lower tax revenues in the future, another area that will have to be addressed by Congress in order to lower the national debt. At best, this is a temporary solution for the fund; at worst, this spells doom for the fund if bipartisanship in Congress cannot find a solution.