February 10, 2016

The most prominently hyped part of President Obama’s final budget (at least where transportation and infrastructure is concerned) is a massive plan to increase the U.S. Department of Transportation Highway Trust Fund’s spending on surface transportation by $303 billion over 10 years, above and beyond the levels called for in the just-enacted FAST Act. This spending, the “21^st Century Clean Transportation Initiative,” would be paid for by a new fee/tax on crude oil of $10.25 per barrel, indexed to inflation, to be phased in over five years – but even that would not be enough money to pay for the whole thing, so the budget also proposes the Administration’s old standby of “proceeds from pro-business tax reform” to supplement the proceeds of the crude oil charge.

(A big reason that the oil fee/tax does not cover the cost of the spending is that when you tax crude oil at the refinery, then the refiner has two choices. The refiner can eat the whole cost of the tax/fee, in which case the refiner has lower profits and pays less corporate income tax, or the refiner passes some or all of the fee downstream, with the result that someone, somewhere downstream has less income and pays less income tax. All excise taxes (or fees that act like excise taxes) result in lower income tax receipts, and though the normal rule of thumb is to guesstimate a 25 percent income tax loss, Treasury is apparently figuring 31 percent loss for this tax/fee.)

Because a per-barrel tax or fee on crude oil inevitably gets passed on to consumers, many of whom are low-income, the budget proposes to “dedicat[e] 15 percent of gross oil fee revenues over ten years to assist families with burdensome energy costs, including a focus on supporting households in the Northeast as they transition from fuel oil for heating to cleaner forms of energy” (it will bear the charming name of the Family Emergency Assistance Fund). Cost: $65.4 billion over 10 years.

Republicans, of course, wasted no time in condemning the crude oil tax/fee (even though crude oil prices have bottomed out in recent months and led to a significant decrease in gasoline and diesel costs). The particular types of spending emphasized in the President’s plan are also not exactly in the GOP wheelhouse (more on that below). Democrats, meanwhile, are of two minds. Some, including House Minority Whip Steny Hoyer (D-MD), have endorsed the oil charge and the proposed spending. But a number of other Democrats, including many who support the spending initiatives in the proposal, are wondering (not for attribution, of course): where was this willingness to get out front and advocate an increase in taxes/fees on petroleum to pay for transportation when the Democrats ran Congress in 2009-2010? Or even in the 2011-2015 period as Congress tried and failed twice to produce legislation that would reconcile Highway Trust Fund receipts with user charges and produce long-term solvency for the Trust Fund?

In addition, ETW readers will of course remember that Congress just spent the better part of 2015 laboring over the FAST Act, which was signed into law just two months ago. Enacting the President’s new plan will require reopening the FAST Act, redefining the Highway Trust Fund, and reigniting the fights over which states get what money via formula and who gets to sign off on discretionary projects. Even a lot of Members of Congress who favor the kind of spending proposed by the White House have do not have the inclination to re-open the deals struck by the FAST Act so soon (and those that do have the inclination do not have the ability to do so).

But even though this plan is almost certainly dead on arrival on Capitol Hill, it’s our job to analyze it anyway. The plan has several components. First, there is money for new programs on top of the currently existing USDOT surface transportation programs:

At first glance, it certainly appears like a win for highways – the Federal Highway Administration gets almost half of the money. But a closer look at the programs indicates that a lot of that FHWA money won’t go to highways. It is impossible to discern how much because there is a near-complete absence of details in the budget. The $17.9 billion total for FY 2017 gets just one paragraph of proposed legislative language in the budget:

“Contingent upon enactment of multi-year 21st century clean transportation plan investments authorization legislation, for the payment of obligations incurred in this account in carrying out the Future Freight System Program, Climate-Smart Performance Formula Funds Program, 21st Century Regions Grant Program, Clean Communities Grant Program, Resilient Transportation Grant Program, Rapid-Growth Area Transit, Transit Formula Grants, Rail Service Improvement, Motor Carrier Safety Operations and Programs, Motor Carrier Safety Grants, and Autonomous Vehicle Development programs in such legislation, $17,935,000,000 to be derived from the Transportation Trust Fund in fiscal year 2017 and to remain available until expended…”

That’s it. There is no word yet on whether or not DOT will actually submit legislative language implementing this proposal. But here are some brief summaries of the proposed new FHWA programs from FHWA’s detailed budget estimates:

• Climate-Smart Performance Formula Funds ($2b FY17, $16.5b 10-yr): “incentive funds would be awarded to States which demonstrate a 2 percent reduction in CO2 emissions coming from mobile sources compared to baseline emissions…to encourage States to make the specific types of investments that are demonstrated to reduce greenhouse gas emissions, such as rail infrastructure, infrastructure that supports compact transit-oriented development, and bicycle and pedestrian facilities.”
• 21^st Century Regions Grant Program ($1b FY17, $61b 10-yr): “Grants would be awarded to metropolitan planning organizations (MPOs) or regional planning organizations (RPOs) to support integrated strategies to expand transportation alternatives and multimodal networks, enhance ‘last mile’ connectivity, decrease congestion, increase pedestrian and bike infrastructure, provide data and tools to improve transit and travel efficiency, and coordinate transportation and land use planning.”
• Clean Communities Grant Program ($1b FY17, $14.5b 10-yr): “a new competitive grant program for local governments to encourage climate-smart development and achieve regional GHG and VMT reduction goals. Eligibility for funding would be contingent on communities implementing climate-supportive policies across transportation modes to support transit oriented development, complete streets, brownfield clean-up and in-fill activities, and bicycle, pedestrian, and transit infrastructure and services.”
• Resilient Transportation Grant Program ($1.5b FY17. $7.5b 10-yr): “encourages local and State governments to propose specific projects that address the impacts of climate change on all types of transportation systems and surrounding communities. Cutting-edge projects should incorporate resilience strategies, such as adaptive materials, risk-sensitive design, and next generation transportation and logistics technology.’
• Future Freight System Program ($2b FY17, $10b 10-yr): “provide targeted, competitive grants to State and local agencies by funding innovative rail, highway, port and intermodal projects…will offer targeted competitive grants, to State and local agencies aimed at, among other things: Developing alternative fuel stations and electric vehicle recharging stations along designated freight corridors; Converting local delivery or service fleets to electricity; Converting long-range freight delivery systems or fleets (maritime, rail, long-distance trucking) to alternative fuels; Converting large volumes of freight movements from high emissions to low emissions transportation modes..”

While many of these programs may address worthwhile goals, they pretty far removed from FHWA’s core competency (unless you view FHWA’s only core competency as giving away lots of money). By contrast, the $68 billion in new transit spending proposed over ten years – $61 billion flows through the existing Federal Transit Administration formula grants program with little change (the budget also proposes another version of the bus rapid transit program proposed in GROW AMERICA which Congress declined to enact).

The $225 billion also includes $42.6 billion for new intercity passenger rail service. Section 11202 of the FAST Act authorized an appropriation of up to $190 million for “consolidated rail infrastructure and safety grants” per 49 U.S.C. §24407. The Administration’s proposal would provide $3.68 billion for section 11202 grants in FY 2017, or 19 times the authorization level. $1.55 billion of that money would go for new high-speed rail corridors and $1.25 billion would go for PTC compliance. (Ed. Note: The Obama Administration gave the California high-speed rail money out under a different program, 49 U.S.C. §24402, but the FAST Act also amended §24402 to require that mega-HSR projects only fund complete operating segments, not parts that are useless on their own. This may be why the Administration proposes giving HSR money now through the §24407 program instead of the §24402 program.)

The $225 billion also includes $3.9 billion over ten years for pilot projects to demonstrate autonomous vehicle technology “large-scale deployment pilots to test connected vehicle systems in designated corridors throughout the country, and work with industry to ensure a common multistate interoperability framework…” and there is $150 million per year for motor carrier safety upgrades.

That is $225 billion in new contract authority and obligation limitations from the Highway Trust Fund (which would be renamed the Transportation Trust Fund, as under the GROW AMERICA proposal). But wait, there’s more! The FY 2017 budget also resurrects the proposal, rejected by Congress on a bipartisan basis on several occasions, to reclassify several existing programs that have heretofore been funded out of the general fund through discretionary appropriations and switch them over to Trust Fund contract authority. These accounts are TIGER grants, FTA new starts and administrative expenses, National Highway Traffic Safety Administration vehicle safety, and Amtrak grants.

Those account together totaled about $4.3 billion in FY 2016, all of which was subject to the Budget Control Act’s overall cap on non-defense discretionary appropriations (which was $518.5 billion in 2016 and will be roughly the same in 2017). The Administration would get those accounts out from under the budget cap and then increase their spending drastically – from $4.3 billion in 2016 to $7.0 billion in 2017 – and then provide them with ten years of contract authority from the Trust Fund:

Again, Congress rejected this reclassification just two months ago, and there is little reason to believe they will resurrect it in an election year. In addition, the TIGER program, which has been getting $500 million or so per year, is now supplemented with an $850 million per year “megaprojects” program funded by the FAST Act started in 2016 which is also at the discretion of the Secretary of Transportation, so to ask for an extra $750 million per year in discretionary money on top of that is not likely to be approved by Congress.

Under the President’s plan, all of these spending promises would be drawn on the renamed Transportation Trust Fund. When last we left the Highway Trust Fund, it had been given another $70 billion in bailouts from the general fund by the FAST Act, which was projected to be enough to support the FAST Act’s spending levels through sometime in spring 2021, but the Trust Fund would hit a zero balance and result in a program shutdown soon after that. The extra money under the President’s new proposal would obviously accelerate that insolvency schedule, so the President’s plan does several things to keep the Trust Fund solvent.

First, 85 percent of the gross proceeds of the $10.25 per barrel crude oil fee/tax are deposited in the Trust Fund directly. (Well, not technically directly, but as directly as current law gasoline and diesel taxes are deposited.) Because the crude oil fee/tax is phased in over five years, it only brings in $6.5 billion to the TTF in FY17, $14.8 billion in FY19 and $22.7 billion in FY20. The budget documents then say that “One-time transition revenues from business tax reform [will] ensure that: Transportation Trust Fund solvency is not impacted as the Plan’s investments ramp up and the oil fee is phased in; the proposal is fully paid for over time (i.e., oil fees plus business tax reform revenue covers the total outlays from the proposal over the full life of the initiative, including outlays outside the ten-year window); and the Transportation Trust Fund solvency gap in years 5-10 of the budget window is eliminated and] the Plan generates a sustainable revenue level for the TTF going forward.”

This would take the form of another $59.1 billion in general fund bailout deposits of the Trust Fund over the four-year 2017-2020 period, to be offset by the to-be-named-later business tax reform proceeds.

ETW has painstakingly assembled what we think is a close-to-accurate projection of the 10-year finances of the TTF under the Administration’s plans and assumptions. (This is the point where we chastise OMB, who included a 10-year HTF/TTF forecast in the Analytical Perspectives volume of last year’s budget to accompany the GROW AMERICA proposal but did not include one in this year’s budget. Bad, bad OMB.)

A tax or fee on a barrel of crude oil is not and will never be a “user fee” on surface transportation because so much of a barrel of oil goes to the plastics industry, heating oil, aviation and marine propulsion, etc. But it is a permanent revenue stream that can legitimately be dedicated to a federal trust fund account to support long-term spending. However, the proposed per-barrel oil charge still does not raise enough money to support all of the spending that the Administration wants to add to the Trust Fund, so more general fund bailouts will be required. (Under the Administration plan, dedicated excise taxes deposited in the Trust Fund would finally once again exceed Trust Fund outlays – starting in the year 2026.)