Should the U.S. Implement a New 'Value-Added Carbon Tax' to Replenish the Federal Highway Trust Fund?
The Federal Highway Trust Fund (HTF) provides revenue to enable States’ to maintain and upgrade many U.S.-wide highway and road systems. The primary source of HTF revenues come from Federal excise taxes on petroleum gasoline and diesel on-road motor fuels. Due to a combination of not increasing this Federal excise tax since 1993, increasing needs for highway/road infrastructure expenditures and construction/maintenance cost inflation, growing HTF deficits could substantially curtail critically needed future infrastructure projects. Could implementing a new Federal ‘value-added carbon tax’ (VACT) on petroleum motor fuels be the ideal solution to providing future needed HTF revenues? Such a policy could also help benefit the environment. And, what other feasible options should Congress seriously consider to better balance future HTF investments with available revenues?
Federal Highway Trust Fund History – The HTF was created in 1956 to directly fund construction of U.S. interstate highway systems and secondary roads. Funding revenues were supposed to be primarily generated by establishing adequate Federal excise taxes on petroleum gasoline and diesel motor fuels. Historically, the HTF excise tax revenues covered roughly 90% of Congress approved highway and roads projects. The balance of funding came from the general Federal tax revenues, which must be routinely approved by Congress. Re. ‘Other Receipts’ in the recent DOT HTF financial data balances. Over the years the HTF has been used for additional transportation projects including safety and expanded renewable fuels. While most of the different programs supported by the HTF have benefited the Public overall, available Federal excise taxes have increasingly become inadequate to meet infrastructure funding commitments approved by Congress.
The HTF motor fuels excise tax increased from 3 cents per gallon (cpg) in 1956 up to 18.4 cpg for gasoline and 24.4 cpg for diesel today. These excise taxes have not changed since 1993. Over the years individual States have also added excise taxes to motor fuels. Unlike the Federal motor fuels taxes that have remained constant for 20 years, many States have significantly increased their levels of excise taxes over the years. Today total State + Federal gasoline excise taxes vary from 32.9 cpg (NJ) up to 68.9 cpg (NY); with a U.S. average of 49.3 cpg. Average U.S. total diesel excise tax is 54.5 cpg. Total State + Federal excise taxes collected today (2013 basis) are between $80-90 Billion annually. Despite these very large annual excise taxes, the CBO estimates up to $18 Billion of addition revenue will be needed to maintain HTF solvency through 2015. The imbalance of fully funding the HTF is due to Congress over committing available revenues. Many States’ also run roads maintenance deficits by increasingly dedicated their individual State excise taxes to other local political, non-road maintenance/construction priorities.
Over the years the majority States have received significantly greater funds from the HTF than collected from instate Federal motor fuels excise taxes. States that receive less HTF funding than their instate contributions are known as “donor” States, and States that receive more than their contributions are known as “donee” States.
Factors that Negatively Affect Federal Highway Trust Fund Revenues – Current-past Congresses and Presidents have avoided addressing HTF funding shortages other than approving relatively short-term, general tax fund transfers. Is it time for the Federal Government to more seriously consider longer term HTF deficit solutions such as possibly increasing Federal motor fuels taxes and possibly implementing other revenue-expense balancing solutions? Factors that continue to deplete available HTF revenues include:
Inflation – Federal excise taxes are fixed at constant ‘cents per gallon’ (cpg) of motor fuels purchased. While the cost of highway construction and maintenance has inflated continuously over the years, total excise tax revenues are only proportional to total on-road motor fuels consumption volumes.
Reduced Fuel Consumption – Motor fuels consumption has been constrained by increasing CAFE standards. Annual CAFE standards’ compliance is achieved by increased ICE vehicle fuel efficiency, and the development of alternative fueled vehicles including HEV’s and EV’s. Successful CAFE regulations have and will reduce past-future petroleum consumption volumes and available excise tax revenues. Since the 2007-09 recession increased motor vehicle efficiencies and reduced ‘vehicle miles traveled’ (VMT) have reduced total petroleum motor fuels consumption and associated excise taxes by over 10%.
Deteriorating Road Infrastructures – The combination of increased number of vehicles and VMT, and deferring road maintenance over the years (inadequate State and HTF investment) have led to growing infrastructure deterioration. Deferred infrastructure maintenance or lack of adequate preventative maintenance ultimately leads to substantially higher future infrastructure repair costs.
Congress HTF and States Projects Approvals – Despite HTF revenue shortages Congress continues to approve total projects that require more revenues than generated by past and current Federal excise taxes. Many States have also increasingly either diverted their excise tax revenues to non-road priorities and/or borrowed money (issued bonds) for road infrastructure projects that contribute to increasing in-state transportation related future expenses.
Options to Increase Highway Trust Fund Revenues – A number of feasible actions to increasing HTF excise taxes or reducing expenditures have been identified and debated in recent years as following:
Increased Federal Excise Taxes and/or Reduced HTF Expenditures – Although raising any taxes can be politically risky, it’s time to seriously reconsider increased excise taxes or accept reducing the level Congress approved HTF expenditures.
Change the Federal Excise Tax Structure – Since 1993 average gasoline and diesel prices increased over $2.00 per gallon while Federal excise taxes per gallon remained constant. Federal excise taxes could be made proportional to motor fuels retail costs similar to ‘sales taxes’ (% per gallon) or could be continuously ‘inflation adjusted’.
Shift More Maintenance Responsibilities to the States – Rather than just redistributing greater revenues to individual ‘donee’ States from a revenue short HTF, Congress could consider shifting increased highways/roads maintenance responsibilities back to individual States.
Increase Toll Roads and Private Ownership of Major Highways – The need for HTF revenues can be decreased significantly by creating more inter-/intra-state ‘toll roads’. Having the ability to contract out the operation and maintenance to Private Parties shifts the responsibility for highways and associated infrastructure maintenance costs from State and Federal Governments to the Private sector.
New VMT Tax – An option to just increasing Federal motor fuels excise taxes is to create a new roads usage tax based on the number of VMT by each vehicle owner. Each vehicle owner could be charged a road usage fee added to their annual vehicle registration fees based on actual total VMT. This vehicle road usage tax strategy can also address the lost excise tax revenues from higher fuel efficiency or alternative fuel vehicles including HEV’s and EV’s.
New ‘Value Added Carbon Tax’ (VACT) – Many individuals and organizations have increasingly advocated carbon taxes as a means to encourage the transition from petroleum fuels to lower carbon alternative or renewable fuels. Implementing a $10 per metric ton (MT) VACT would effectively increase current petroleum gasoline and diesel motor fuels cost-taxes by only 8 and 10 cents (US) per gallon respectively. This could increase current HTF revenues by over $10 Billion per year; nearly equivalent to projected HTF annual deficits.
Restoring the Federal Highway Trust Fund Solvency – The HTF balance sheet is rapidly declining and changes are immediately required to avoid revenue-expenditure deficits that can negatively impact infrastructure projects needed to maintain U.S.-States’ highways/roads systems. Without adequate transportation infrastructure investment future Public safety, and the efficient and reliable flow of inter-/intra-State Commerce could be negatively impacted. These Public and Economic risks can be mitigated by properly implementing one or more of the legislative options previously covered; and possibly other alternative actions.
For a number of ideological or political reasons neither the current Administration nor either Party within Congress appears to be supportive of directly increasing HTF excise taxes to cover current and projected deficits. Instead, the Administration and Congress continue to propose various Federal general tax revenue funding schemes not directly related to the Transportation Sector. In addition, many of the proposed Federal general tax fund revenue generating schemes appear to just add to current and risk future-added Federal deficit spending. Such actions could merely shift the increased debt burden to future Generations.
To avoid increasing Federal deficits, both current or future, either the amount of HTF spending needs to be reduced to the level of available transportation tax revenues or the level of HTF revenues needs to be increased. Reducing highways/roads infrastructure projects, of course is strongly opposed by most (State and Federal) Interests due to the need to delay or cancel numerous projects; resulting in lost jobs, further maintenance delays, and other negative economic/potential safety impacts. Even though many States could readily shift their current motor fuels taxes more fully in support of needed highway/road projects, their Governors strongly prefer shifting or keeping the tax burdens at the Federal level.
Another option not currently being considered by the current Administration or Congress is implementing a new petroleum motor fuels ‘value added carbon tax’ (VACT). Value added or consumption taxes are fairly common in numerous countries such as within the EU. By implementing a new VACT, the U.S. would take advantage of the synergy between maintaining and improving highways/roads infrastructures and addressing the apparent need to reduce U.S. carbon emissions.
Those who support the need to reduce U.S. carbon emissions should also be strongly in support of a new VACT policy. As previously covered, gasoline and diesel VACT’s of 8 and 10 cpg (respectively) should provide sufficient funds for at least the next several years. Future years’ roads maintenance inflation and continuously increasing vehicle petroleum fuel efficiencies will eventually require future VACT increases or other transportation related tax increases.
A very viable alternative to just increasing excise taxes or VACT revenues would be to consider implementing another value added or consumption tax such as a VMT road-use tax. Implementing VMT taxes should probably be delayed for some period of years in support of developing significantly greater penetration levels of HEV’s, EV’s and other alternative fuel vehicle technologies (fuel cells, LNG, renewables, etc.). At some point the implementation of a VMT tax will probably be needed and justified, and not a significant barrier to alternative fuel/electric vehicles’ development.
One proposed means to collecting VMT data for new taxes is the use of GPS monitoring systems on all individual vehicles. This proposal, however, has been strongly opposed by those who believe such a technology could violate One’s privacy. The solution to this concern is pretty simple. All vehicles could be required to have their annual mileage verified at ‘smog inspection’ station visits commonly found in many States today. Not only would annual VMT be accurately recorded and billed accordingly, but such a policy could also help further mitigate-reduce potentially harmful vehicle tailpipe emissions.
In Conclusion: All Political Decisions Have Benefits and Risks – The HTF revenue shortage is not a new problem and the consequence of raising most any tax is not without political risk. Rather than continuing to just pass short-term solutions for needed HTF revenues or proposing that added revenues will come from highly questionable general or income tax related schemes, perhaps it’s time to develop real longer term solutions that are consistent with properly and continuously balancing the Federal HTF. This involves obtaining transportation related funding (taxes) and sustainably balancing expenditures with available revenues. By possibly implementing a new VACT on all on-road petroleum motor fuels, needed HTF revenues can be provided to support all critical highway and road infrastructure projects in the short and long terms. As the combination of reduced fuel consumption (increased fuel efficiency) and maintenance costs (inflation) potentially increases the need for additional fuel consumption related excise or new VACT taxes, other funding options such as a new VMT tax should be strongly considered.
What other Federal HTF revenue generation strategies do you believe will best meet the U.S. needs for supporting future required highway and roads infrastructure projects?
Energy Consultant, Researcher and Professional Engineer. 35 years experience in the petroleum & energy businesses. Education: Chemical Engineering/Chemistry/Business degrees. Experience: energy process design/operations & management, projects development & management, energy business/policies developments & research, and optimizing energy facilities and supply ...
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