Blog Post

This Is the Time for a Long-Term Solution to Highway Funding

May 22, 2015 | Alan J. Krupnick, Virginia McConnell, William Raich

In this series of blog posts, RFF researchers take a look at the current state of the Nation’s transportation infrastructure and evaluate various policies for financing the Highway Trust Fund.

Facing a May 31st deadline to extend surface transportation funding, Congress is opting for a two month extension, the 33rd short-term measures to shore up the Highway Trust Fund in the last 6 years. The Fund faces insolvency at the end of this very short time frame, forcing a discussion about a much-needed long-term solution to the Fund’s continuing deficit.

The Fund was established in 1956 to launch the Interstate Highway System and finances roughly one quarter of all roadway spending nationwide, including highway and bridge expansion and maintenance. The major sources of revenue for the Fund are taxes on gasoline and diesel fuels. The per-gallon tax rates on these fuels, 18.4 cents for gasoline and 24.4 cents for diesel, have remained unchanged since 1993. In real terms, the value of these taxes has decreased by nearly 40% since that time.

Offsetting the effect of inflation on Highway Trust Fund revenue, gasoline consumption steadily rose from 1990 to 2007. Figure 1 shows that the Fund’s expenditures and revenues matched quite well during this period. In 2008, however, the Great Recession marked declines in both economic activity and miles driven. Following the first decline in vehicle miles traveled in 20 years, gasoline sales and Highway Trust Fund revenues have remained low.

Yet, federal spending for roads and bridges continued its upward trajectory. Over the past twenty years, Highway Trust Fund outlays have been growing at about 2.5% a year, roughly on pace with the growth rate in economic activity. The widening gap between expenditures and revenues, displayed in Figure 1, has increased the need for a long-term funding solution.

Figure 1. Highway Trust Fund Outlays and Revenues (current dollars)

highway fund chart 2

With no surface transportation funding bill since 2005 lasting longer than two years, Congress has continually propped up the Fund with transfers from federal funds -- totaling $62 billion since 2008. Despite these infusions, the United States has dropped from eighth to sixteenth globally in road infrastructure quality during that time (World Economic Forum 2008, 2014).

Without Congressional fixes – whether short or long term – these troubling trends are likely to continue, even with a recovering economy. New Corporate Average Fuel Economy (CAFE) standards starting at the 2012 model year will gradually require much better fuel economy from all cars through the 2025 model year. With vehicles using less gasoline, the Fund will generate decreased revenue. Despite low oil prices and a rebounding economy, the Federal Highway Administration projects that it is unlikely that vehicle miles traveled will reach the high growth seen in the 1990s and early 2000s.

Given these trends, CBO sees shortfalls reaching $168 billion by 2025, with annual shortfalls over the next decade increasing from $13 to $22 billion. Without a departure from current policy, this deficit will need to be addressed by either continued General Fund transfers or significant cuts to federal surface transportation funding—an unattractive proposition given the poor state of our roads and bridges.

In the two months leading up to the July 31st deadline for Congressional action, we will continue the debate on how to address the Nation’s crumbling infrastructure and the Highway Trust Fund’s precarious financial situation. In next week’s blog post here on Common Resources, we will discuss the poor state of roads and bridges in the United States. After outlining the need for highway funding, we will discuss various funding mechanisms in subsequent posts.