Federal government investments in highways, mass transit, and other modes of transportation are crucial to facilitate the economic activity of the nation. As policymakers turn their attention to federal infrastructure investment, it may be helpful to review the background, funding mechanisms, and status of the four federal infrastructure trust funds presently in use.
In general, trust funds serve a single long-term purpose and are user-fee financed. This structure largely conforms to the benefit principle of taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. ation: The taxes one pays to the government should be connected to the benefit one receives from the government. Thus, user feeA user fee is a charge imposed by the government for the primary purpose of covering the cost of providing a service, directly raising funds from the people who benefit from the particular public good or service being provided. A user fee is not a tax, though some taxes may be labeled as user fees or closely resemble them. s are an equitable way to fund government projects.
However, trust funds do not always conform to this principle; for example, they may not disburse funds in an equitable manner, or they may only apply taxes or fees to certain users and thus reduce economic efficiency. Additionally, some of the taxes that support trust funds are temporary and Congress must repeatedly extend them; this is troublesome policy as it introduces uncertainty into decision-making processes of businesses and individuals.
Lawmakers should review the positive aspects of the current infrastructure funding mechanisms and build upon them to fund further infrastructure projects, while avoiding, or eliminating, the negative aspects.
Highway Trust Fund
The Highway Trust Fund (HTF) was established through the Highway Revenue Act of 1956 to create the interstate highway system. Then, in the Surface Transportation Assistance Act of 1982, lawmakers added a mass transit account to the trust fund. Federal motor fuels taxes primarily fund both highway account and transit account spending, though three smaller, nonfuel taxes also support the HTF: a retail sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. on heavy highway vehicles, a manufacturers’ excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. on heavy vehicle tires, and an annual heavy vehicle use tax.
Currently, gasoline is taxed 18.4 cents per gallon and diesel is taxed 24.4 cents per gallon; however, 0.1 cents per gallon of each fuel tax flows into the Leaking Underground Storage Tank (LUST) fund, which is not part of the HTF and is reserved for the Environmental Protection Agency’s use. The transit account receives 2.86 cents per gallon of fuel taxes, and the remainder flows into the highway account. Of the HTF taxes, all but 4.3 cents per gallon of the fuel taxes are temporary and set to expire in September of 2022 and September 2023, though historically Congress extends these taxes. Since 1956, motor fuel taxes have been increased four times: in 1959, 1982, 1990, and 1993.
In 2001, HTF revenues stopped growing faster than outlays. And since the fund’s surplus ran out in 2008, Congress has transferred a total of $143.6 billion from the Treasury to keep the fund solvent. In 2016, for example, the highway account received $36 billion in revenues and interest but spent $44 billion. CBO projections show revenues will be insufficient to meet obligations by 2021, resulting in highway account balances reaching zero by 2022, with shortfalls cumulating to $138 billion by 2027.
Transfers from the general fund erode the benefit principle because taxpayers who do not use the transportation system, or use it less frequently, subsidize those who do use it. Unless Congress adopts a permanent solution to make the HTF solvent, it is likely that lawmakers will continue the pattern of transfers observed over the past ten years.
Airport and Airway Trust Fund
The Airport and Airway Revenue Act of 1970 created a trust fund for a variety of aviation programs, including capital improvements and operations of airports and airway systems in the United States. The Federal Aviation Administration (FAA) is responsible for the Airport and Airway Trust Fund (AATF), which is supported by several major excise taxes on passenger air travel.
Most AATF excise taxes are temporary and Congress must regularly vote to extend the them. Nine different taxes flow into the trust fund, with the largest source of revenue coming from taxes related to the transportation of passengers. Other sources include taxes on aviation fuel and air cargo.
An additional funding option, known as the Passenger Facility Charge (PFC), allows commercial airports to charge a fee of up to $4.50 per passenger. Airports do not remit this fee to the government, but instead they retain it to fund specific infrastructure projects. Unlike many of the AATF taxes, the PFC is not indexed to inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. and thus its purchasing power erodes over time.
The nine AATF taxes support five aviation-related accounts, and in 2016 they generated $14 billion in revenues. These 2016 revenues funded nearly 80 percent of FAA operations as well as three other FAA accounts, while other Treasury revenues covered the $2 billion in remaining expenses.
As is the case with the Highway Trust Fund, transfers from the Treasury reduce the connection between who pays taxes and who benefits from expenditures. Additionally, reliance on federal spending programs is often cumbersome and inefficient, and many of the projects funded by AATF taxes do not benefit the average commercial passenger — particularly because passenger traffic from the largest airports generates the most revenue, but aviation programs ultimately do not benefit these passengers as funds flow to other airports. The PFC, on the other hand, is a direct means of funding airport infrastructure improvements and satisfies the benefit principle.
Inland Waterways Trust Fund
The Inland Waterways Trust Fund (IWTF) was created as part of the Inland Waterways Revenue Act of 1978 to finance the construction and rehabilitation of inland waterways. An 11-member board of industry representatives oversees the fund and makes recommendations to Congress and the Secretary of the Army on spending priorities. Notably, trust fund revenues do not automatically fund projects, but instead, Congress must first authorize projects before they become eligible for funding.
Commercial users of the nearly 11,000 taxable miles of the inland waterways system pay a 29 cent per gallon tax on barge fuel to fund the IWTF. This is a permanent tax. Revenues from the barge fuel tax are deposited in the IWTF and generally used to fund 50 percent of the cost of inland navigation projects each year as authorized. The remaining 50 percent of costs and the costs of operation and maintenance come from other sources. In 2016, the IWTF had a beginning balance of $54 million, collected $110 million in revenues, and transferred $108 million to be used for projects, leaving a year-end balance of $57 million.
IWTF projects experience delays associated with waiting for congressional authorization. Additionally, the IWTF tax only applies to certain users of inland waterways and it likely reduces the volume of cargo transported on waterways. This in turn increases pollution and congestion, and leads to other negative externalities as users switch to alternative modes of transportation.
Harbor Maintenance Trust Fund
Congress established the Harbor Maintenance Trust Fund in the Water Resources Development Act of 1986. The Harbor Maintenance Tax (HMT) funds the trust fund and is a permanent 0.125 percent tax on the value of imported and domestic waterborne cargo and cruise tickets typically assessed at coastal or Great Lakes ports. HMT revenues finance all dredging costs at shallower ports and half the dredging costs at deeper ports. Congress must appropriate HMT revenues before use in operations or maintenance projects.
Since 2003, HMT revenues have far exceeded appropriations for harbor maintenance. In recent years, little more than half of annual HMT collections have been spent on maintenance, and as of December 2017, the fund had a balance of $9.5 billion. However, the Army Corps of Engineers estimated in 2011 that full channel dimensions at the nation’s busiest 59 ports are available less than 35 percent of the time, indicating a backlog of maintenance needs.
The busiest ports generate exceptional amounts of HMT revenue, but receive only a small portion of HMTF expenditures, indicating a breakdown in the benefit principle. Rather than operating as a user fee, the largest ports effectively subsidize smaller ports through the Harbor Maintenance Tax. Further problems include a lack of published expenditure reports.
As lawmakers explore funding mechanisms for additional federal infrastructure investment, they should focus on permanent, sustainable, and transparent options that conform to the benefit principle. The federal motor fuels taxes and the Passenger Facility Charge are good examples of user-based financing for governmental projects. If lawmakers made user fees such as these permanent, and appropriately adjusted them to restore and maintain their purchasing power, they would serve as ideal revenue sources for federal infrastructure investments.Share