Statement of
Donna McLean, Assistant Secretary for Budget and Programs and Chief Financial Officer
United States Department Of Transportation
Before the
Committee on Transportation and Infrastructure
Subcommittee on Highways and Transit
United States House of Representatives
Hearing on Ensuring the Integrity of the Highway Trust Fund
March 20, 2002
Mr. Chairman and Members of the Subcommittee, thank you for the opportunity
to testify today on Ensuring the Integrity of the Highway Trust Fund. I would
also like to thank you for your leadership in scheduling this hearing and others
in preparation for the reauthorization of the surface transportation program. We
at the Department of Transportation are looking forward to working with this
Subcommittee and with Congress to shape reauthorization proposals. Working
together, we can meet the transportation challenges facing our Nation and
support a transportation system that meets the safety, environmental and
economic needs of the American people.
Establishment of the Highway Trust Fund
The Highway Trust Fund was established by the Highway Revenue Act of 1956 in
part to finance the increased authorizations Congress provided for the
construction of the Interstate System. While Federal highway user taxes existed
prior to that time, they were deposited in the General Fund of the Treasury and
there was no tie between revenues collected and Federal funding for highways.
Although a 40,000-mile National system of Interstate Highways was authorized to
be designated in 1944, little progress had been made on the system until
President Eisenhower signed the Federal-aid Highway Act of 1956, to which the
Revenue Act was a companion, thereby increasing annual funding for this national
system from $175 million in 1956 to $1.17 billion in fiscal year (FY) 1957 and
rising to $2.2 billion in FY 1960. To finance this massive public works project,
the Revenue Act increased some of the existing highway user taxes, established
new ones and provided that the revenues from most of these taxes would be
credited to a Highway Trust Fund.
From its inception, the Highway Trust Fund was not used exclusively to fund
the construction of the Interstate System, but has supported other highway
programs as well. In fact by the mid 1970s, over one-half of the funds from the
Highway Trust Fund went toward non-Interstate System programs. In 1973, eligible
Trust Fund uses were increased to permit States to use a portion of their
highway funds on transit projects. The
Surface Transportation Assistance Act of 1982 raised the fuel tax by 5 cents
per gallon, from 4 cents to 9 cents-the first increase in 23 years-to fund
an expanded highway and transit program. The 1982 Act also established the
separate Mass Transit Account within the Highway Trust Fund, dedicating to it 1
cent per gallon of the 9 cent Federal fuel tax. By this time, work on the
Interstate System-the original impetus for establishing the Highway Trust
Fund-was 95.3 percent complete. Yet Congress recognized that increased Federal
investment in surface transportation supported by dedicated user fees in the
Highway Trust Fund continued to be important and necessary.
Since that time, the gasoline tax has been increased twice, most of which was
for deficit reduction, but these deficit reduction levies have since been
redirected to the Highway Trust Fund providing increases to both the Highway and
Mass Transit Accounts. Currently, the gasoline tax is 18.4 cents per gallon with
all but 0.1 cent dedicated to the Highway Trust Fund. It was the redirection of
the deficit reduction taxes that increased the Highway Trust Fund revenue stream
and enabled the 40 percent increase in authorizations for highway and transit
programs in the Transportation Equity Act for the 21st Century
(TEA-21).
The Highway Trust Fund has been a reliable and stable source of funding for
surface transportation for 45 years. The Trust Fund concept of dedicating motor
vehicle fuel and truck taxes to transportation needs has enjoyed wide public
support as a fair and prudent way to fund transportation improvements. This
dedicated revenue source has given the Federal Government and, in turn, State
and local governments, the ability to plan for transportation needs in the
future.
New Budgetary Treatment in TEA-21
TEA-21 enhanced the link between highway user tax receipts and surface
transportation funding by legislating the guaranteed funding concept. This
guarantee provided assurance that the set amounts, based on estimated tax
receipts, would be available for obligation. For the highway program, the
guaranteed level is adjusted each year to reflect the latest information on
actual and projected receipts to the Highway Account of the Highway Trust Fund.
This adjustment is usually referred to as revenue aligned budget authority or
RABA. To date, these adjustments have added over $9 billion to the highway
program above the original TEA-21 guarantees. The recent downturn in the economy
resulted in the first negative adjustment of $4.4 billion to the original
TEA-21 guaranteed level for FY 2003.
Even with the negative outcome for FY 2003, the RABA adjustment process has
been beneficial to the highway program with a cumulative net gain for the
highway program of $4.7 billion since the beginning of TEA-21. Linking
highway spending to Highway Account receipts is an important principle of
TEA-21, but a modification in the formula for calculating the RABA adjustments
to the guaranteed level for highways would help avoid large year-to-year swings
in funding. We are examining alternatives to the current adjustment formula and
will include our recommendations in the Administration's proposal for the
reauthorization of the surface transportation programs. Guaranteed funding is
one of TEA-21's biggest success stories and should be retained and refined in
reauthorization. We want to work with you in this effort.
Future Highway Trust Fund Receipts
As has been recently demonstrated, the receipts to the Highway Trust Fund
generally reflect the economy at large. The Administration's current economic
forecast anticipates steady growth in Highway Trust Fund receipts on the
expectation that the recession will end early this year and that a strong
recovery will be underway later in the year.
The economy and the related travel demand are not the only factors that
influence Trust Fund receipts. Concerns about air quality and dependence on
foreign oil have resulted in legislative measures, including tax reductions and
credits aimed at encouraging the purchase of alternative fuel vehicles and use
of alternative fuels, as well as laws to promote automobile fuel efficiency.
Some of these measures reduce fuel tax income to the Highway Trust Fund by
reducing fuel consumption, encouraging use of fuels that are taxed at lower
rates or fuels that are not taxed at all.
Alternative fuels have remained a small part-about 0.2 percent-of the overall
motor fuel supply. A number of the alternative fuels, such as liquefied
petroleum gas (propane), liquefied natural gas, and methanol fuels are taxed at
rates that are comparable to gasoline when the energy content of the fuel is
considered, so increased use of these fuels has no impact on Trust Fund
receipts. Compressed natural gas is taxed at a low rate and hydrogen or
electricity used as motor fuel is not taxed at all. The Administration is
supportive of increased use of alternative fuels, and we do not anticipate that
their use will grow fast enough to be a problem for Highway Trust Fund revenue
during the coming reauthorization period.
Gasohol-a blend of gasoline and ethanol-presents a different situation.
Gasohol can be used in the same vehicles that use gasoline. The ethanol content
serves as a fuel oxygenate that reduces motor vehicle tailpipe emissions, an
octane enhancer, and extends the automotive fuel supply with a renewable,
non-petroleum fuel. Gasohol can be used to meet Clean Air Act requirements for
the use of reformulated gasoline or oxygenated gasoline used to reduce ozone or
carbon monoxide pollution. Because of these desirable characteristics, there are
tax incentives that serve to make gasohol price-competitive with gasoline. These
incentives are in the form of an income tax credit or a partial exemption from
the gasoline tax. The President's National Energy Policy calls for the extension
of the ethanol incentives beyond their current sunset date.
There is a second receipt impact from the use of gasohol. The General Fund of
the Treasury receives 2.5 cents of the tax proceeds from each gallon of gasohol.
This is a remnant of a deficit reduction levy of 2.5 cents per gallon on
all highway fuels that began in December 1990. The proceeds of the 2.5
cents per gallon on other highway fuels were redirected to the Highway
Trust Fund in October 1995, but the 2.5 cents per gallon from gasohol have not
been redirected.
Future of the Highway User Tax Structure
The Administration is working on its reauthorization proposals related to the
Highway Trust Fund, but at this point we are not envisioning moving from the
basic user-tax structure that has served the highway and transit programs so
well.
Motor vehicle fuel taxes are the lifeblood of our highway revenue programs,
with taxes on gasoline and diesel providing roughly 88 percent of projected
receipts flowing into the Highway Trust Fund over the next 10 years. Fuel taxes
are relatively easy to administer and they provide a reasonable way to charge
vehicles in rough proportion to highway use. Even though we think motor fuel
taxes will remain a major source of highway finance in the foreseeable future,
we also recognize that a number of factors, such as fuel tax evasion,
alternative fuels, and more fuel-efficient vehicles could affect the revenue
productivity of our current motor fuel tax structure. Vehicle mileage taxes and
vehicle registration fees have been suggested as possible future supplements to
or replacements for Federal fuel taxes. These alternatives have important
revenue implications, which we believe must be examined during the next
reauthorization period to prepare us to ensure the long-term revenue needed for
surface transportation programs. It is too early at this time to predict the
future path of these alternatives, such as determining which alternative fuels
will be winners in the marketplace. The only certainty is that we will need to
adapt our fuel tax provisions in the future to account for these changes.
I have presented data today on the revenue effects of various changes in fuel
usage to help establish a clear factual record of the status of the Federal
Highway Trust Fund. I want to clarify that my statement does not represent an
Administration endorsement of any tax increase or any new tax.
Mr. Chairman, this concludes my prepared remarks. I look forward to working
with you on surface transportation reauthorization. I would be pleased to answer
any questions you have.
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