If Paid For By Motor Fuels Taxes, DeFazio Bill Would Double Federal Gas Tax

The ambitious surface transportation reauthorization bill unveiled this week by House Transportation and Infrastructure chairman Peter DeFazio (D-OR) would increase new funding levels from the Highway Trust Fund by $99 billion over the next five years over the current (fiscal 2020) enacted levels, adjusted for inflation. But the Trust Fund is already projected to run out of money next year, and this increased spending will mean more money will be needed to keep the Trust Fund solvent.

If Congress decides to pay for the Trust Fund deposits needed to support the bill, and if Congress took that revenue increase entirely from increasing federal gasoline and diesel fuel taxes (two big “ifs”), the DeFazio bill would require the federal gas tax to be doubled over five years (from the current 18.3 cents per gallon to 36.6 cents per gallon in 2025), and the diesel tax would need to be increased by 18.3 cents per gallon, from the current 24.3 cents to 42.6 cents. This additional revenue would need to be split 72 percent to the Highway Account of the Trust Fund and 28 percent to the Mass Transit Account.

Those are some big tax increases – and Democratic leaders have been very careful not to commit to any particular type of “pay-for” – but they assume that Congress will pay for the bill, and that the payment will come from highway users, and that the highway users will pay entirely by increased fuel taxes. Let’s take those assumptions in order.

Question the First: Do we pay for this at all? The Highway Trust Fund falls into a bizarre loophole in budget law – Congress can transfer infinite amounts of money from the General Fund to the Highway Trust Fund and that money does not get recorded as federal spending. And if it’s not recorded as spending, it doesn’t really have to be paid for. (There used to be a rule that applied only in the House of Representatives that “deemed” that transfers from the GF to the HTF be recorded as new spending in the year the transfer occurs, but Democrats repealed that rule when they took the House back in January 2019.) The $34.6 billion in GF to HTF transfers enacted through the 2008-2010 period were not offset in any way. Congress could, hypothetically, just transfer another $140 billion from the general fund and pay for the DeFazio bill that way.

Question the Second: If we pay for this, should surface transportation system users have to pay? Once the GOP took Congress in January 2011, the $105 billion in GF to HTF transfers made in the 2012-2015 period were offset, at least on paper, by tax or user fee increases scheduled to be collected by the government up to a decade after the date of a transfer. (If those offsets never materialize, that’s the General Fund’s problem, not the Trust Fund’s problem.)

But Republican opposition to gas tax increases, which dates back at least to George H.W. Bush’s 1990 “read my lips” pledge violation and which was then deemed a political winner for them after the 1993 Clinton budget face-off, meant that any real increase in highway user revenues to fill the Trust Fund’s gap was a political non-starter. As a result, Congress offset the GF to HTF transfers from a variety of sources, almost none of which had anything to do with transportation. here is the “pay-for” list for the FAST Act’s $70 billion transfer in December 2015 (along with a few non-transpo spending items in that bill):

Summary of the 10-Year (FY16-FY25) Value of Funding Offsets and Direct Spending Increases In the FAST Act Conference Report
Source: Congressional Budget Office
Sec. “Pay-for” provision Bil. $
24410 Increase NHTSA civil penalties 0.423
32101 Passport revocation for tax scofflaws 0.395
32102-3 Allow the IRS to hire private tax collectors 2.408
32201 Index COBRA 1985 Customs fees for inflation 5.188
32202 Federal Reserve surplus account transfer 53.334
32203 Federal Reserve dividend payment reduction 6.904
32204 Sell 66 million barrels of SPR crude oil 6.200
32301 ONRR royalty overpayment fix 0.320
Total ten-year value of “pay-fors” 75.172
31201 Minus $70.0 billion in GF to HTF transfers -70.000
32205 Minus cost of repeal of crop insurance reform -3.038
43001 Minus cost of AMRF MAP-21 offset repeal -0.595
Minus other miscellaneous spending increases -0.026
Minus rev. lost from more tax-exempt bonds -0.035
Equals 10-year deficit reduction under House scoring of GF to HTF transfers as real money 1.478

The FAST Act of 2015 was largely enabled by Mitch McConnell (R-KY), who was then (as now) the Senate Majority Leader, and who then formed an unlikely (but fruitful) alliance with Senator Barbara Boxer (D-CA) to get that bill through the Senate in what seemed like record time. So McConnell has a history of paying for Highway Trust Fund spending increases with non-user revenues. This could well happen again.

Question the Third: If surface transportation users pay for the bill, how much of that should come from motor fuel taxes? Motor fuels taxes have always been the mainstay of the Highway Trust Fund, bringing in 82 percent of total Trust Fund revenues last year. The three trucking excise taxes (the sales tax on new trucks, buses and trailers, the heavy tire tax, and the annual heavy truck use tax) collectively brought in $7.1 billion to the Trust Fund last year. No matter what else happens, the tax committees are expected to start charging some kind of user tax or fee on electric vehicles in the next reauthorization bill as a condition for the use of Trust Fund money to build charging stations. And other kinds of user taxes are certainly possible.

But the fuels taxes are so broadly based, and so easy for the IRS to administer, that there’s really no substitute for them at this point. A hypothetical national mileage fee would be as broadly based, but implementation of that could not possibly come soon enough to pay for the DeFazio bill. So, if this bill is to be paid for by transportation users, the bulk of that money would have to come from a motor fuels tax increase.

How much would motor fuels taxes have to be increased to pay for the DeFazio bill? The Congressional Budget Office’s March 2020 baseline for Highway Trust Fund cash flow projected that the Trust Fund would need an additional $74 billion or so in revenues, or outside transfers, to stay solvent until the end of 2025 ($46.5 billion for the Highway Account, plus the standard $4.0 billion cash cushion (what’s a cash cushion?), and $22.4 billion for the Mass Transit Account, plus the standard $1.0 billion cash cushion). Those numbers don’t take into account reductions in tax revenue related to coronavirus, which struck after the baseline’s economic forecast was locked, but we go with the numbers we have. (The real need will certainly be higher than $74 billion.)

We then took the increase in the highway obligation in section 1102 of the DeFazio bill above baseline levels, and the increase in total Mass Transit Account obligations above baseline levels, and used the standard CBO annual outlay percentages for those accounts. (Those annual outlay percentages might change a little when CBO scores the bill, but until then, we use the numbers we have.) We don’t have outlay models for highway and motor carrier safety accounts, but that spending should add at least a billion in extra Highway Account outlays as well. That modeling shows the DeFazio bill would increase the Trust Fund revenue gap to almost $140 billion by the end of 2025 ($132 billion, plus $5 billion cash cushion, plus $1 billion or so for safety not shown in the model, round up to $140).

FY20 FY21 FY22 FY23 FY24 FY25
Highway Account    
Baseline Start-of-FY Balance 24.7 15.3 1.7 -18.8 -42.4 -67.6
Baseline Revenues & Interest 38.2 38.1 37.8 37.7 37.5 37.3
“Flex” Transfer to Transit -1.2 -1.2 -1.2 -1.2 -1.2 -1.2
Baseline Outlays -46.4 -47.0 -47.8 -48.8 -49.7 -50.9
Est. Extra Outlays from Bill 0.0 -3.5 -9.4 -11.2 -11.9 -12.4
End-of-FY Balance from Bill 15.3 1.7 -18.8 -42.4 -67.6 -94.8
Mass Transit Account
Baseline Start-of-FY Balance 8.3 3.7 -1.6 -8.8 -17.3 -26.9
Baseline Revenues & Interest 5.4 5.3 5.2 5.2 5.1 5.1
“Flex” Transfer from Highways 1.2 1.2 1.2 1.2 1.2 1.2
Baseline Outlays -11.1 -11.2 -11.4 -11.6 -11.8 -12.0
Est. Extra Outlays from Bill 0.0 -0.6 -2.2 -3.4 -4.1 -4.8
End-of-FY Balance from Bill 3.7 -1.6 -8.8 -17.3 -26.9 -37.4
Unified HTF Total
Baseline End-of-FY Balance 19.0 4.2 -11.9 -29.4 -48.2 -68.8
End-of-FY Balance from Bill 19.0 0.1 -27.6 -59.7 -94.4 -132.2

The CBO March baseline revenue detail spreadsheet has an Excise Taxes tab that shows Trust Fund tax receipt projections. Dividing the gasoline tax receipts by 18.3 cents per gallon (current HTF rate) and the diesel tax receipts by 24.3 cents per gallon shows that every penny of motor fuel tax is projected to yield $1.84 billion to the Trust Fund in 2021 (though the per-penny yield is projected to drop to $1.71 billion by 2030 because of ever-increasing fuel efficiency). That makes it simple to throw increased tax rates around and get their projected Trust Fund impact.

After some playing around, an immediate 13 cent-per-gallon increase in the gas and diesel taxes, plus a additional penny per year increase in 2022, 2023, 2024, and 2025 left us just $2 billion short of our end-of-2025 goal. So we took the 2025 tax increase from 1 cent per gallon to 2.3 cents per gallon, and that gave us the exact amount of necessary revenue, with $0.3 billion to spare. Coincidentally, this would represent a total 18.3 cent per gallon tax increase by the end of 2025, which would exactly double the current gasoline tax rate.

FY20 FY21 FY22 FY23 FY24 FY25
Hypothetical Fuels Tax Increase +13.0¢ +1.0¢ +1.0¢ +1.0¢ +2.3¢
Beginning-of-FY Balance 32.9 19.0 24.0 21.8 16.8 10.6
Unified HTF Baseline Deposits 43.6 43.4 43.1 42.8 42.6 42.4
Hypothetical Revenue Increase 23.9 25.5 27.1 28.6 32.4
Baseline Plus DeFazio Outlays -57.5 -62.2 -70.8 -75.0 -77.4 -80.2
End-of-FY Balance 19.0 24.0 21.8 16.8 10.6 5.3

(You could change the initial phase-in around – say, 10 cents in 2021, 5 cents in 2025, and a penny a year thereafter – but it would only make de minimis changes in the cumulative tax increase needed by the end of 2025.)

What would the highway-transit split of new revenues have to be? The existing imbalance between the tax receipts dedicated to the Mass Transit Account (12.2 percent of total revenues in 2019) and new Transit Account spending (17.3 percent of total new contract authority in 2019) would be exacerbated, on the spending side, by the DeFazio bill, which would give the Transit Account 20.0 percent of new Trust Fund contract authority over 2021-2025). Accordingly, the traditional 80-20 split of new highway user tax revenues, used in the 1982, 1990 and 1993 fuels tax increases, is already broken and would be broken even further by the DeFazio bill.

We calculate that the Mass Transit Account would need 28 percent of the $135.2 billion in increased gas and diesel tax revenues under this scenario in order to end fiscal year 2025 with a safe, prudent $1.1 billion projected balance. This would leave the Highway Account with an end-of-2025 (retroactive) balance of $4.2 billion, just above the recommended $4.0 billion level.

FY20 FY21 FY22 FY23 FY24 FY25
Highway Account
Baseline Start-of-FY Balance 24.7 15.3 18.9 16.8 12.7 8.1
Baseline Revenues & Interest 38.2 38.1 37.8 37.7 37.5 37.3
New Revenues 0.0 17.2 18.4 19.5 20.6 23.3
“Flex” Transfer to Transit -1.2 -1.2 -1.2 -1.2 -1.2 -1.2
Baseline Outlays -46.4 -47.0 -47.8 -48.8 -49.7 -50.9
Est. Extra Outlays from Bill 0.0 -3.5 -9.4 -11.2 -11.9 -12.4
End-of-FY Balance from Bill 15.3 18.9 16.8 12.7 8.1 4.2
Mass Transit Account
Baseline Start-of-FY Balance 8.3 3.7 5.1 5.0 4.1 2.6
Baseline Revenues & Interest 5.4 5.3 5.2 5.2 5.1 5.1
New Revenues 6.7 7.1 7.6 8.0 9.1
“Flex” Transfer from Highways 1.2 1.2 1.2 1.2 1.2 1.2
Baseline Outlays -11.1 -11.2 -11.4 -11.6 -11.8 -12.0
Est. Extra Outlays from Bill 0.0 -0.6 -2.2 -3.4 -4.1 -4.8
End-of-FY Balance from Bill 3.7 5.1 5.0 4.1 2.6 1.1

Caveats to the methodology used above:

  1. The baseline tax rates and yields don’t reflect coronavirus. The drop in travel demand will definitely put a huge dent in the revenue projections used above in fiscal 2020 and 2021. Beyond that, will the behavior changes lead to permanently reduced demand because of measurably greater telecommuting? Who knows. But this uncertainty means that the needed revenue increase to fund the DeFazio bill will be greater than shown above, not lower.
  2. We don’t have the resources to model demand elasticity. Gasoline and diesel demand is normally very inelastic – small fluctuations in the price don’t affect total volume purchased in any measurable way. If you increase the tax enough, you will eventually start affecting demand in some measurable way, but we don’t know how much. But this uncertainty means that you would have to raise tax rates even more than shown above in order to bring in the same amount of dollars to the Trust Fund.
  3. Any time the government takes money out of the economy via an excise or payroll tax, that means that someone, somewhere, will have less income, and this will reduce the amount of income taxes they pay by some amount. CBO and the Administration used to use a standard 25 percent offset figure, but the 2017 tax cuts have lowered that to somewhere in the 20-21 percent range, depending on the year. This means that, for a $137 billion excise tax increase over five years, general fund income tax receipts will also be scored as being reduced by somewhere in the $25-30 billion range. This is a budget scorekeeping problem for the bill, but it’s the general fund’s problem, not the Trust Fund’s problem, and Congress could always declare the GF revenue hit an off-budget emergency and just ignore it.

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