The Highway Trust Fund: Politics and Permanent Solutions
March 5th 2015

Washington, DC , the Highway Trust Fund’s shortfall has been hot topic lately. Increased spending and the erosion of the gas tax has led to an ongoing deficit, which is estimated to accumulate a $168 billion shortfall over the next decade. Unless something is done to fix it, the trust fund will run dry by mid-year 2015.

Lawmakers on both sides of the aisle have put forth permanent solutions that either cut trust fund spending or increase revenue. However, due to political differences, lawmakers will likely opt to pass poor temporary policy such as pension smoothing or compulsory or voluntary taxes on multinationals’ offshore earnings in order to keep the trust fund from going broke this May.

If lawmakers decide to look for revenue instead of cutting trust fund spending, their source of revenue should be long-term and should connect drivers as closely to the cost of funding the roads as possible, according to the latest report from the nonpartisan Tax Foundation.

One option is to increase the gas tax, adjust it to inflation, and offset that increase by reducing another tax by the same amount of revenue. Besides being revenue neutral, there are good policy reasons for this swap:

Unlike some other taxes, the gas tax is relatively less distortive. It doesn’t significantly impact economy or reduce the incentive to invest. By lowering more distortive taxes, such as the capital gains tax, and raising the same amount of revenue from non-distortive taxes, not only would the Highway Trust Fund have enough revenue, but the economy would grow as a result.
Although the gas tax isn’t perfect, it more effectively connects government revenue to related expenditures than, say, the individual income tax.
By closing the funding gap in the Highway Trust Fund, lawmakers would have additional time to focus on bigger questions, such as: To what extent should the federal government be involved in infrastructure spending? How much should the federal government spend? What alternative funding mechanisms for the trust fund would best ensure its long-term solvency?

The foundation’s report examines the option of increasing the gas tax by about $168 billion over the next decade ($15 to $17 billion annually) and offsetting the costs with one of five different tax cuts. Using the Taxes and Growth Model, the paper illustrates the impact these tax changes would have on the U.S. economy.

“Our model reveals a number of tradeoffs in this swap” said Tax Foundation Economist Kyle Pomerleau. “If Congress would like to make this change pro-growth, one option would be to lower the capital gains tax rate. If Congress would like to address distributional concerns with the gas tax but aren’t concerned with economic growth, an option would be to expand the earned income tax credit. If Congress would like to maintain neutral distribution and growth while fixing the trust fund, one option would be to expand the standard deduction.”

Full report: Options to Fix the Highway Trust Fund