Policymakers broadly agree that investments by the federal government in highways, mass transit, and other modes of transportation are crucial to facilitate the nation’s economic activity, but they can’t seem to agree on how to fund such investments. The current debate is over corporate income taxes, and therein lies the problem. The standard approach long utilized by the federal government is to fund infrastructure with user fees, such as gas taxes, with spending and revenue organized into distinct infrastructure trust funds—that approach deserves renewed attention.
One advantage of the user-fee approach is that it largely conforms to the “benefit principle” of taxation: the taxes or fees one pays to the government should be connected to the benefit one receives from the government. Another advantage is user fees act as a pricing mechanism for using roads and other public infrastructure, which can help moderate overuse and reduce traffic while raising revenue for the federal government. In this sense, user fees are a fair and efficient way to distribute the cost of infrastructure.
While user fees are regressive, meaning they do tend to fall more heavily on lower- and middle-income households, regressivity is offset by other parts of the federal tax system, like the individual income tax, to result in a progressive structure on the whole.
Infrastructure investment financed by user fees is ideal, but the current system falls short. It relies on temporary and outdated taxes that must regularly be reauthorized and which are insufficient to cover current spending levels, let alone the nation’s infrastructure investment backlog.
Perhaps the most well-known of the infrastructure funds is the Highway Trust Fund (HTF). The HTF was established in 1956 to create the interstate highway system (the highway account) and in 1982 a mass transit account was added. Both accounts are primarily funded by federal taxes on motor fuels, while three smaller non-fuel taxes also support the HFT: a retail sales tax 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 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. .
Since 1993, gasoline has been taxed at 18.4 cents per gallon and diesel at 24.4 cents per gallon. Absent increases since then, the taxes have lost some of their real value; tax rates would need to be increased to approximately 34.6 cents for gasoline and 46.3 cents for diesel to account for 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. since 1993. The mass transit account receives 2.86 cents per gallon of fuel taxes, a fund for the Environmental Protection Agency receives 0.1 cents per gallon, and the remainder flows into the highway account. All but 4.3 cents per gallon of the fuel taxes are scheduled to expire on September 30, 2022. Congress regularly extends them.
The revenue from federal motor fuel taxes has not been sufficient to cover transportation expenditures since 2008. For example, in 2019, the highway account had $45.6 billion of outlays and $38.9 billion of revenues and interest. The Congressional Budget Office (CBO) estimates that highway account balances will reach zero by 2022 and that over the next decade spending will outpace revenues by $195 billion. Given the absence of a gas taxA gas tax is commonly used to describe the variety of taxes levied on gasoline at both the federal and state levels, to provide funds for highway repair and maintenance, as well as for other government infrastructure projects. These taxes are levied in a few ways, including per-gallon excise taxes, excise taxes imposed on wholesalers, and general sales taxes that apply to the purchase of gasoline. increase since 1993, highway funding has increasingly been paid for by the federal government’s general fund, which weakens the benefit principle.
For revenue to match current spending levels, federal lawmakers would need to increase the gas tax and adjust it regularly for inflation to maintain its spending power over time. For example, raising gas taxes by 15 cents per gallon and indexing to inflation would raise $26 billion in the first year. Alternatively, given improvements in fuel economy and the growth of electric vehicles, policymakers may also want to explore a Vehicle Miles Traveled (VMT) tax.
In addition to the Highway Trust Fund, three other transportation trust funds support federal infrastructure investments:
- Excise taxes and fees on airline travel go into the Airport and Airway Trust Fund (AATF) and a Passenger Facility Charge directly supports specific aviation-related infrastructure investments. Most of the excise taxes are temporary, and Congress must regularly vote to extend them. Several aviation excise taxes were suspended during the coronavirus pandemic, and Congress authorized a general fund transfer of $14 billion to the fund in the Consolidated Appropriations Act, 2021. Over the next decade, the CBO estimates $189 billion of revenues will be credited to the trust fund, maintaining a positive and growing cash balance over the decade.
- A permanent 0.125 percent tax on the value of imported and domestic waterborne cargo and cruise tickets funds the Harbor Maintenance Trust Fund. Since 2003, HMT revenues have far exceededappropriations for harbor maintenance, but recently Congress has begun targeting higher levels of appropriations—in 2019, 91 percent of receipts, totaling $1.54 billion in spending, was appropriated, but the fund still maintained an unspent balance of more than $9 billion.
- Commercial users of the inland waterways system pay a permanent 29 cent per gallon tax on barge fuel to fund the Inland Waterways Trust Fund. In 2020, the fund had a beginning balance of $69 million, collected $118 million of revenues, and ended the year with a balance of $131 million. Similar to the HMT, IWTF spending has not kept up with revenues—the Inland Waterways Users Board 33rd Annual Report states: “The Board again notes, this time with growing concern that, overall, the end-of-year balance in the IWTF is gradually increasing and urges the Corps to fully employ IWTF resources to optimize the construction productivity of those resources while continuing to operate in a fiscally-sound manner.”
As lawmakers explore funding mechanisms for additional federal infrastructure investment, they should focus on permanent, sustainable, and transparent revenue options that conform to the benefit principle. Permanent 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, appropriately adjusted to restore and maintain their purchasing power, would serve as ideal revenue sources for federal infrastructure investments.
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