House Republicans Introduce Temporary Highway Funding Bill

July 14, 2015

Yesterday we wrote about a proposal from Representative Tom Rice (R-SC) that would raise the gas tax by 10 cents and adjust it for inflation going forward in order to close Highway Trust Fund’s ongoing deficits. The plan would also not raise taxes on net by offering a $133 per-person income tax credit. Although it is a reasonable way to fix the Trust Fund’s shortfall, it faces political difficulties.

The House Republicans have introduced another plan, but a more temporary one. This proposal would raise $8 billion in additional revenue by extending the TSA fee for airline passengers and by changing a few rules related to the Estate tax.

This proposal would keep the Highway Trust Fund from depleting its reserves on July 31st, but would only provide temporary relief. If this passes, the Highway Trust Fund would still deplete its reserves next year absent any intervention from Congress.

Ways and Means Chairman Paul Ryan (R-WI) stated that this proposal is meant to be temporary to provide lawmakers time to devise a long-term solution for the Highway Trust Fund.

When lawmakers start looking at a long-term solution for the Highway Trust Fund, they should avoid considering unsound tax policy such as taxing multinational corporations’ offshore earnings to fund the Highway Trust Fund. Instead, they should pursue permanent policy that conforms to the benefit principle of taxation on which the Trust Fund is based. This principle states that the taxes one pays to the government should be connected to the benefits one receives. This principle is seen as an equitable way to finance government projects—in this case, roads and infrastructure.

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. There are good policy reasons to raise more revenue from the gas tax in exchange for lowering the revenue received from other taxes.

  1. The gas tax is a relatively less distortive tax. The gas tax is an excise tax, which falls mostly on consumption, assuming businesses can pass the tax onto consumers. Consumption taxes do not significantly impact the economy or reduce the incentive to invest. Comparatively, the capital gains income tax falls squarely on capital and thus has a significant negative effect on the economy. Lowering more distortive taxes and raising the same amount of revenue from non-distortive taxes would lead to a larger economy.
     
  2. The gas tax conforms to the benefit principle more closely than other taxes levied by the federal government. Although not perfect, the gas tax is better aligned with related government spending than, for example, the individual income tax, which is not associated with any specific benefit. Lowering taxes that do not conform to the benefit principle of taxation and raising the gas tax is an opportunity to connect government revenue to related expenditures.
     
  3. Closing the funding gap in the Highway Trust Fund would grant lawmakers additional time to focus on other priorities. Rather than trying to search for the next temporary fix for the trust fund, lawmakers could focus on bigger questions: 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?

Read more on the Highway Trust Fund here and here.

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