The Broken Federal User-Pay System Jeff Davis Senor Fellow Eno - - PowerPoint PPT Presentation

The Broken Federal User-Pay System

Jeff Davis Senor Fellow Eno Center for Transportation

1919 – First U.S. State Gas Taxes

• 1916 – Federal-aid highway program created – states needed

to raise their 50% matching funds.

• Western states were first to tax gasoline for roads. Gasoline

tax chosen as alternative to property tax.

• Oregon – Feb. 25, 1919 – 1 cent per gallon (equal to 15¢/gal.

today).

• New Mexico (1¢), Colorado (2¢), North Dakota (1¢) later that

year.

• North Carolina: 1921 (1¢)

1919 1919-1929: All 48 States Adopt

1932: Depression Forces Congress to Tax Gasoline

200 400 600 800 1,000 1,200 1,400 1927 1928 1929 1930 1931 1932 Million Dollars

Federal Revenue Sources vs. State Gas Tax Receipts, FY 1927-1932

• Fed. Indiv. Income
• Fed. Corp. Income
• Fed. Other Internal
• Fed. Customs

State Gasoline

Feds Slow to Adopt User-Pay

• 1932 – Federal gasoline tax for general revenues only.
• 1934 – Federal Hayden-Cartwright Act (hypocritically)

penalized states that diverted highway user tax revenues for non-highway purposes.

• 1952 – Congress enacts a law expressing sense that “each

service or thing of value provided by an agency…to a person…is to be self-sustaining to the extent possible.”

• Budget Bureau/OMB begins to promote user-pay concept

under every President since Truman.

User Taxes into Trust Funds

Three steps:

• 1. Levy excise taxes or user fees on a sector or group.
• 2. Deposit those tax receipts into a special trust fund, not the

general fund.

• 3. Enact a law providing that the only allowable

appropriations from that trust fund are for programs that provide direct benefit to those who paid the excise taxes.

Transportation Goes User-Pay

• 1956 – Highway Trust Fund.
• 1970 – Airport and Airway Trust Fund.
• 1978 – Inland Waterways Trust Fund.
• 1982 – Mass Transit Account added to Highway Trust Fund

(after Congress rejected stand-alone Mass Transit Trust Fund in 1978 and 1980).

• 1986 – Harbor Maintenance Trust Fund.

User-Pay Based on Cost Allocation

• Ideally, a user-pay, user-benefit system will be based on cost

allocation that does two things:

• Determine the costs that each class of system user incurs on the

system (direct costs like pavement and bridge wear-and-tear but possibly also “externalities” like congestion, safety, noise and air quality), and

• Tailor the revenue scheme so that the taxes and fees paid by each

class of user matches up with the costs they incur.

• It is also very important that the type of user tax be as

reliable and non-volatile as possible.

Highway User-Pay Model: Broken

• The whole point of a trust fund is to synchronize special

(non-general) tax receipts with the spending on programs that give special benefit to those taxpayers.

• Congress last raised gasoline/diesel taxes in 1993 and those

taxes were transferred to the HTF in FY 1999.

• Since 2000, HTF revenues have grown an average of 1.2%

per year, but Congress has enacted laws to allow new HTF funding commitments that grow an average of 3.5%./year.

Highway User-Pay Model: Broken

0.0 10.0 20.0 30.0 40.0 50.0 60.0 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Billions of Dollars

Highway Trust Fund, FY 2000-2018

Tax Receipts New Spending Commitments

Highway User-Pay Model: Broken

STEIN’S LAW: “Things that can’t go on forever, don’t.”

• -Herbert Stein, chairman, Council of Economic Advisers under President Nixon.

Highway User-Pay Model: Broken

• HTF ran out of money in September 2008.
• Since then, Congress has been unable to cut spending below

prior year levels but has also been unable to increase excise taxes on road users.

• Result: $140 billion in bailout transfers from general

revenues have been made since 2008.

• The last bailout ($70 billion in Dec. 2015) will run out, at

current spending levels, in summer 2021.

Highway User-Pay Model: Broken

100 200 300 400 500 600 700 800

Billions of Nominal Dollars

Highway Trust Fund FY 1957-2007

Tax Receipts Outlays Interest/Penalties 100 200 300 400 500 600 700 800

Billions of Nominal Dollars

Highway Trust Fund FY 2008-2020

Tax Receipts Outlays Interest/Penalties Bailouts

Highway User-Pay Model: Broken

• 2.0%
• 1.0%

0.0% 1.0% 2.0% 3.0% 4.0%

FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY26 FY27 FY28 FY29

Growth/Shrinkage Rate Per Year

HTF Tax Receipts at Current Rates, FY 2019-2029 (CBO Jan. 2019 Forecast)

Gasoline Diesel Trucking

Highway User-Pay Model: Broken

0.0 5.0 10.0 15.0 20.0 25.0 30.0 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY26 FY27 FY28 FY29

Billions of Dollars

HTF Tax Receipts at Current Rates, FY 2018-2029 (CBO Jan. 2019 Forecast)

Gasoline Diesel Trucking

Highway User-Pay Model: Broken

0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY26 FY27 FY28 FY29

Billions of Dollars

HTF Receipts vs Outlays, FY 2018 – FY 2029 (CBO May 2019 Forecast)

Receipts Outlays

Highway User-Pay Model: Broken

• At CBO baseline tax/spending levels, HTF will run a $12.1

billion deficit in FY19, rising steadily to $25.9 billion in FY29.

• HTF tax increase/bailout cost of baseline 6-year bill for FY

2021-2026: $102 billion.

• HTF tax increase/bailout cost for 10 years (to FY 2029): $176

billion.

Revenues – Nominal Rates

5 10 15 20 25 30 35 40 45 1921 1923 1925 1927 1929 1931 1933 1935 1937 1939 1941 1943 1945 1947 1949 1951 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Nominal Cents per Gallon

Gasoline Excise Tax Rates (Nominal), 1921-2019

North Carolina United States

Revenues – Lost Buying Power

10 20 30 40 50 60 70 80 90 100 1956195819601962196419661968197019721974197619781980198219841986198819901992199419961998200020022004200620082010201220142016

2017 Cents per Gallon

Gasoline Excise Tax Rates (2017 ¢ Using BEA Producer Price Indices), 1956-2017

North Carolina United States

New User Tax Revenues Needed

• Keeping total HTF solvent for a 6-year reauthorization bill at

current (FY18 plus inflation) spending levels would require an immediate (Oct. 1 2019) gas/diesel tax increase of 9 cents per gallon.

• Or other revenues. Or more bailouts.
• Additional increases needed for post-2026 solvency and any

desired program growth.

Highway Cost Allocation – Broken

• No federal cost allocation study since 1997.
• No attempt to adjust federal excise tax structure to match

cost allocation since 1982.

• 1997 study said pickup trucks/SUVs slightly overpaid,

heaviest trucks underpaid by thousands of dollars each.

• New developments since 1982 – hybrids pay less and EV’s

pay zero towards their wear-and-tear, congestion, safety costs.

Gas Tax Stil ill Best Short-Term Option

• At the federal level, despite future rate of decline, motor

fuels taxes are still the best user-pay option for the next 20 years.

• Fewer than 2,000 points of collection (wholesale tank farms).
• Moving to vehicle or driver-based taxation would increase number
• f IRS tax collection points over 100,000-fold.
• Fuels taxes could be supplemented by heavy truck fees and EV

user fees for better cost allocation, if desired.

Highway-Transit Spli lit: Broken

• ”Treaty of 1982” – every penny of 1982, 1990 and 1993

gas/diesel increases split 80-20 between Highway Account and Mass Transit Account.

• Congress has allowed transit spending to get farther ahead
• f its dedicated revenues than highway spending.
• HTF Highway Account needs 80% of an immediate 8.5 cent

gas/diesel tax increase to stay solvent for 10 years.

• HTF Mass Transit Account needs 20% of an immediate 13.5

cent increase to stay solvent for 10 years.

Bailouts Not Reflected in in Fed. Policy

• No reason highways are entitled to 80% of bailout money

drawn from income taxes, Customs duties, bond borrowing.

• HTF bailout money fungible with fuel tax money – killed

share-based “rate of return” arguments.

• If bailouts continue, no reason not to make HTF spending

more multimodal, less stovepiped.

Reliability of NC’s Funding Share

• Under the FAST Act, NC is guaranteed 2.66 percent of each

year’s federal-aid “formula” highway funding each year through FY 2020.

• Why 2.66 percent?
• Because federal-aid highway funding distribution has been

stuck in time for over 10 years – state shares of total funding are essentially frozen at the FY 2009 levels, which was the last year of the 2005 highway bill.

NC’s FY 2009 Federal Funding

NC Total U.S. Total NC Share Factor-Based Formulas (Lane-miles, VMT, population, fatalities, bridge cost, safety, etc.) $697.4 million $26,205.5 million 2.6612% Equity Bonus to get NC to 92% gas tax rate

• f return (% in vs % out)

$316.4 million $9,591.8 million 3.2986% SAFETEA-LU Earmarks $66.5 million $4,450.7 million 1.4941% EQUALS $1,080.3 million $40,248.0 million 2.6841% FY14 adjustment to get TX to 95% rate of return ($$ in vs $$ out) –.0209% NC guaranteed share for FY 2015-2020 2.6632%

NC’s FAST Act Federal Funding

NC Share Times U.S. Total Equals Base TX 95% Adjust.? NC Final FY 2015 2.6632% $37,798.0 million $1,006.6 million none FY 2016 2.6632% $39,727.5 million $1,058.0 million none $1,058.0 million FY 2017 2.6632% $40,547.8 million $1,079.9 million

• $7.0 million

$1,072.9 million FY 2018 2.6632% $41,424.0 million $1,103.2 million

• $5.3 million

$1,097.9 million FY 2019 2.6632% $42,358.9 million $1,128.1 million

• $1.7 million

$1,126.4 million FY 2020 2.6632% $43.369.8 million $1,155.0 million ????? ?????

• If the next authorization brings back real needs-based

formulas, this share could change (possibly for the better).

• Big “if.”

User-Pay Should Be Mended…

• To continue the user-pay, user-benefit model:
• Spending levels should be roughly synchronized with user

tax/fee receipts, either through increasing spending or cutting taxes/fees.

• User taxes and fees should periodically be analyzed to

ensure that costs are fairly allocated to different classes of system users and between system users and the federal government.

…Or Ended

• User-pay trust funds have historically been exempted from

most restrictions in the federal budget process.

• If the Highway Trust Fund can’t be mended (by reconciling

spending and user taxes and thus ending the need for more bailouts), a strong argument can be made for ending the trust fund – or at least ending its exemptions from spending caps, sequestration, etc.