The Highway Trust Fund
The previous sections have only peripherally mentioned the Highway Trust Fund (HTF). This has been intentional. The fact that the HTF is the source of funds for the Federal-Aid Highway Program (FAHP) has a limited impact on the financial procedures under which the highway program operates. The use of the Trust Fund provides two direct benefits to the highway program: (1) It allows the program to operate with contract authority through the 1974 Budget Act, and (2) it provides the opportunity for revenue aligned budget authority (see discussion under "Appropriations"). The following section briefly describes the operation of the HTF.
Before 1956, the year Interstate System authorizations were greatly increased, the HTF did not exist. Cash to liquidate previously incurred obligations for the FAHP came from the General Fund of the Treasury. Budget authority came through the granting of contract authority, as it does now. Although taxes on motor fuels and automobile products were in existence, they were not linked to funding for highways. At the time, financing for the highway program and revenues from automobile and related products were included under the public finance principle of "spend where you must, and get the money where you can." Aside from this, the program operated in terms of authorizations, obligations, appropriations, and reimbursements—much as it does now.
The Federal-Aid Highway Act of 1956, coupled with the Highway Revenue Act of that same year, increased authorizations for the Federal-aid Primary and Secondary Systems, authorized significant funding of the Interstate System, and established the HTF as a mechanism for financing the accelerated highway program.81 To finance the increased authorizations, the Revenue Act increased some of the existing highway-related taxes, established new ones, and provided that most of the revenues from these taxes should be credited to the HTF. Revenues accruing to the HTF were dedicated to the financing of Federal-aid highways. The passage of the Highway Revenue Act of 1956 also increased the political acceptability of the additions in the user taxes and provided dedicated revenues to finance the larger highway program.
The imposition of the taxes that are dedicated to the HTF, as well as the authority to place the taxes in the HTF and to expend from the HTF all have expiration dates which must be extended periodically. The 1956 Highway Revenue Act provided for the imposition of the taxes that support the HTF through June 30, 1972, and the transfer of such taxes to the HTF and the payment of refunds through June 30, 1973. Expenditures from the HTF were authorized through June 30, 1972. The life of the HTF has been extended several times by subsequent legislation, most recently by the SAFETEA-LU, which extended the imposition of taxes and the transfer of the taxes to the HTF through September 30, 201182. Payment of fuel tax refunds is extended through June 30, 2012. The SAFETEA-LU authorized expenditures from the HTF through September 30, 2009.
The HTF was created as a user-supported fund. Simply, the revenues of the HTF were intended for financing highways, with the taxes dedicated to the HTF paid by the users of highways. This principle is still in effect, but the tax structure has changed since 1956. Major revisions occurred as a result of the Surface Transportation Assistance Act (STAA) of 1982 and the Deficit Reduction Act of 1984. Those acts increased the motor-fuel taxes for the first time since 1959. The 1982 STAA also established a special Mass Transit Account in the HTF to receive part of the motor-fuel tax.83
Then, another increase of 5 cents per gallon (bringing the Federal gasoline tax to 14.1 cents per gallon) was enacted as part of the Omnibus Budget Reconciliation Act of 1990 (OBRA 90). That increase was effective December 1, 1990. The act also established a "first" for the HTF. One-half of the revenues derived from the 5cent increase went to the General Fund of the Treasury for deficit reduction. Before that time, virtually all revenues from Federal motor-fuel (and other highway-related Federal excise taxes) had been credited entirely to the HTF.84 The General Fund portion of the tax was imposed on a temporary basis and was scheduled to expire on October 1, 1995.
Another fuel tax increase of 4.3 cents per gallon was enacted effective October 1, 1993, by the Omnibus Budget Reconciliation Act of 1993 (OBRA 93). The increase brought the gasoline tax to 18.4 cents per gallon and the entire amount of the increase was directed to the General Fund of the Treasury for deficit reduction. This tax increment has no expiration date. The legislation also provided that the temporary General Fund fuel tax imposed by OBRA 90 would be extended and that it would be directed to the HTF effective October 1, 1995, except in the case of certain alcohol fuels.85
The Taxpayer Relief Act of 1997 redirected the 4.3-cents General Fund tax to the HTF effective October 1, 1997.
The Surface Transportation Extension Act of 2004, Part V (STEA 04-V) redirected to the Highway Trust Fund the portion of the gasohol tax that had continued to be deposited in the General Fund under the provisions of OBRA 90 and OBRA 93. This redirection was effective for the period October 1, 2003 through September 30, 2004.
The American Jobs Creation Act of 2004 (AJCA 04) made the STEA 04-V redirection permanent. It also eliminated gasohol's partial exemption from the gasoline tax, enacted as an incentive to alternatives to petroleum fuels in 1979, providing instead a credit to be paid from the General Fund.
The SAFETEA-LU extended the HTF taxes through September 30, 2011, thus extending the fiscal "life" of the HTF.
Table 4 shows the types of taxes placed in the HTF and the rates currently in effect. Appendix L shows the history of the highway fuel tax rates since the creation of the HTF.
|Tax Type||Tax Rate|
|Gasoline and gasohol||18.4 cents per gallon|
|Diesel||24.4 cents per gallon|
|General rate||18.4 cents per gallon|
|Liquefied petroleum gas||18.3 cents per gallon|
|Liquefied natural gas||24.3 cents per gallon|
|M85 (from natural gas)||9.25 cents per gallon|
|Compressed natural gas||18.3 cents per 126.67 cubic feet|
|Tires: (maximum rated load capacity)|
|0-3,500 pounds||No Tax|
|Over 3,500 pounds||9.45 cents per each 10 pounds in excess of 3,500|
|Truck and Trailer Sales||12 percent of retailer's sales price for tractors and trucks over 33,000 pounds gross vehicle weight (GVW) and trailers over 26,000 pounds GVW|
|Heavy Vehicle Use||Annual tax: Trucks 55,000 pounds and over GVW, $100 plus $22 for each 1,000 pounds (or fraction thereof) in excess of 55,000 pounds (maximum tax of $550)|
The HTF has additional sources of revenue. Since October 30, 1984, the proceeds from fines and penalties imposed for violation of motor carrier safety requirements are deposited in the Highway Account of the HTF.86 Effective October 22, 2004, the proceeds of certain penalties imposed by the Internal Revenue Code related to highway-user taxes are deposited in the Highway Account of the HTF. 87
Most of the excise taxes credited to the HTF are not collected by the Federal government directly from the consumer. They are, instead, paid to the Internal Revenue Service by the producer or importer of the taxable product (except in the cases of the tax on trucks and trailers, which is paid by the retailer, and the heavy vehicle use tax, which is paid by the heavy vehicle owner). As a result, most of the Federal fuel taxes come from a handful of States, those where major oil companies are headquartered, and most tire taxes are paid from Ohio, the home of the U.S. tire industry. Of course, these taxes become part of the price of the product and are ultimately paid by the highway user.
User taxes are deposited in the General Fund of the Treasury and the amounts equivalent to these taxes are then transferred to the HTF. Transfers are required to be made at least monthly on the basis of estimates by the Secretary of the Treasury and later adjusted on the basis of actual tax receipts.88 Amounts in the HTF in excess of current expenditure requirements are invested in public debt securities. Until October 1, 1998, the securities were interest-bearing and interest from the securities was credited to the fund. Since that time, the HTF balance has been invested in non-interest-bearing securities.89
Since there is considerable interest in the amount of contributions to the HTF made by each State, estimates are made of the amount of taxes paid by the highway users of each State on the basis of data reported by State motor-fuel tax agencies. Highway users in some States pay more in user taxes than those States receive back in Federal-aid highway apportionments and allocations. In an effort to compensate for this, the SAFETEA-LU included a provision, called the Equity Bonus, which distributes additional funds to the States. This provision is described in detail in the "Financing Procedures" section of this book.
Another important characteristic of the HTF is that it was set up as a pay-as-you-go fund. When the creation of the HTF was under consideration, there were concerns that the proceeds of the taxes dedicated to the HTF might prove insufficient to make reimbursements when claims were made. The bill under consideration was amended to require a comparison of current and future resources with existing and projected unpaid authorizations and to adjust the amounts apportioned for highways if the two are out of balance. This comparison is referred to as the Byrd Amendment or the Byrd Test.90 The exact requirements of the Byrd Test have changed several times since it was established in 1956, most recently in SAFETEA-LU.91
Under the Byrd Amendment, as modified by the SAFETEA-LU, unfunded authorizations (unpaid commitments in excess of amounts available in the Highway Account of the HTF) at the end of the fiscal year in which the apportionment is to be made must be less than the revenues anticipated to be earned in the following 48- month period. For example, to determine the status of FY 2006, at the close of FY 2005 the Secretary of the Treasury must determine if the balance of the Highway Account of the HTF as of September 30, 2005, plus the anticipated income in FYs 2006 through 2010, will be greater than the sum of the authorizations to be distributed for FY 2006 and the authorizations distributed, but not paid, as of September 30, 2005. If a shortfall in funds is projected, then all Highway Account funded program apportionments for FY 2006 would be reduced proportionately.92
In the HTF's history, the Byrd Amendment has been triggered twice, resulting in the reduction in the Interstate System construction apportionments for FY 1961 and all Highway Account apportionments for FY 2004. No Byrd Amendment reductions are anticipated for the foreseeable future.93 The Mass Transit Account is subject to the same, but separately calculated, test known as the Rostenkowski test.
Expenditures. As stated before, the HTF exists to support the highway, highway and motor carrier safety, intermodal and transit programs. Even though the programs do, for the most part, have contract authority, the cash to reimburse the States for the Federal share of project costs still must be released from the HTF by an appropriations act. In other words, the Federal government does not have the ability to pay the State without an appropriation of cash from the HTF. Any amounts that have been appropriated but not used during the year can be carried over for use in the next fiscal year. Conversely, legislation providing additional liquidating cash is enacted when the amounts appropriated in the annual DOT Appropriations Act are insufficient.94
Transfers. Taxes on gasoline and special fuels used in motorboats are dedicated to the Sport Fish Restoration and Boating Trust Fund95 with $1 million of that amount annually transferred to the Land and Water Conservation Fund. Tax receipts from gasoline used in small engines, such as lawnmowers and chain saws, are also dedicated to the Sport Fish Restoration and Boating Trust Fund. As such uses cannot be determined from the fuel tax returns filed by taxpayers (typically oil companies), the receipts are initially deposited in the HTF along with the highway fuel taxes. The Treasury Department estimates the portion of the taxes deposited in the HTF derived from such uses and transfers the tax receipts to the appropriate Trust Fund.96
Refunds and credits. In some cases, the motor-fuel tax has already been paid by the producer/distributor or retailer on motor fuel that will ultimately be used by an exempt user or for an exempt purpose. In most such cases, the end user purchases fuel at a price that includes the tax and must apply for a refund of the tax. In other cases, for example sales of diesel fuel to State and local governments, the retailer (the ultimate vendor) sells the fuel to the end user at a price excluding the tax and applies for the refund. Refunds and credits amounting to $1,007 million were paid from the HTF in FY 2005.
Balance of the Highway Trust Fund
The balance of the HTF has long been a point of controversy. Because of the nature of a reimbursable program like the FAHP, there may be cash in the fund that is not needed for immediate use. It is important to understand that this is not necessarily excess cash but will be needed to reimburse the States as vouchers are submitted.
Perhaps a comparison of the HTF operation to a personal financial situation can help clarify this point. If a person has a checking account balance of $500, that amount cannot be considered excess if he or she has at the same time outstanding monthly bills of $1,000, but neither is the account in a deficit situation if he or she will receive $1,200 in a paycheck at the end of the month.
The HTF operates in the same manner. Although there was a cash balance of $10.6 billion in the Highway Account of the HTF at the close of FY 2005 (see Table 5), there were also, at the same time, unpaid commitments (authorizations already apportioned/allocated to the States or others) against the HTF totaling $79.8 billion. Therefore, the $10.6 billion balance was not excess cash.
|Highway Account||Mass Transit Account||Total|
|Opening balance, 10/1/2004||10,805||3,776||14,581|
|Transfers to other funds||383||53||435|
|Net tax receipts||32,893||4,984||37,877|
|Fines, penalties, and other receipts||15||0||15|
|Closing balance, 9/30/2005||10,502||1,950||12,542|
The difference between commitments and income through the termination of the fund is the amount that truly reflects the status of the fund and must be considered when any new commitments (additional authorizations) are proposed. It also must be recognized that this status is based on revenue projections that can change from time to time. The projected commitments can also change, either by legislation authorizing additional funds or when programs, such as the Equity Bonus, exceed estimated authorizations.