Policy

To Fix the Highway Trust Fund, Why Not Raise the Gas Tax?


A section of highway in Brooklyn, riddled with potholes

Photograph by Spencer Platt/Getty Images

A section of highway in Brooklyn, riddled with potholes

Congress and the White House are looking under every seat cushion for money to replenish the national Highway Trust Fund without raising taxes on gasoline and diesel fuel. One concept backed by Senators Harry Reid and Rand Paul is to use the proceeds from a windfall of taxes on repatriated corporate profits. An even less likely idea from House Speaker John Boehner is to cut back on mail delivery and put the savings into the trust fund.

Both ideas have drawbacks, and they fight the founding principle of the Highway Trust Fund, which is that construction and maintenance of highways and bridges should be paid for by the people who use them. The straightforward way to replenish the fund is to raise taxes on gasoline and diesel fuel, which haven’t gone up since 1993. They’re 18.4 cents a gallon for gasoline and 24.4 cents a gallon for diesel. In 1993 the federal tax accounted for 17 percent of the retail price of a gallon of gasoline. Now it’s just 5 percent.

Another alternative, of course, is just to spend less money on fixing highways—let the potholes get a little bigger and the bridges a little rustier. But the American people don’t seem to like that option. A survey released June 10 by AAA, formerly known as the American Automobile Association, found that 68 percent of respondents thought the federal government should spend more on roads, bridges, and mass transit. And 52 percent said they would be willing to pay more in federal fuel taxes. Even the U.S. Chamber of Commerce, which generally dislikes taxation, has come out strongly in favor of higher federal fuel taxes.

There are environmentalists who think that higher fuel taxes would be justified even if the Highway Trust Fund weren’t nearly empty. The logic is that working and investing are good for America, while gasoline and diesel consumption is bad (global warming and all that). So it makes sense to tax income a little less and fuel a little more.

But even if you don’t think global warming is real, or you don’t mind an overheated planet, raising gasoline and diesel taxes seems quite a bit more sensible than the two ideas that are getting the most traction in Washington. The windfall-profit idea is the bipartisan Senate brainchild of Reid, the Democratic majority leader from Nevada, and Paul, the Kentucky Republican. They want to give companies a one-time tax break on profits that they are keeping overseas to encourage them to bring the money home. Even at a reduced rate, a tax on repatriated profits would generate about $20 billion over the first two years.

Over a full decade, though, a tax holiday would end up costing the government about $96 billion, the nonpartisan Congressional Budget Office estimated on June 6. “A second repatriation holiday may be interpreted by firms as a signal that such holidays will become a regular part of the tax system, thereby increasing the incentives to retain earnings overseas,” Joint Committee on Taxation Chief of Staff Thomas Barthold wrote in the estimate.

As for the USPS idea, Boehner last month outlined a plan to stop delivery of most mail on Saturday except packages and said it would save about $11 billion over 10 years. The savings could be devoted to highways, he said. “This is another case of Republicans saying it’s a zero-sum game,” Representative Xavier Becerra of California, chairman of the House Democratic Caucus, responded. “In order for one American to win, another American has to lose.”

It’s not just Republicans who are shy of raising fuel taxes. President Obama’s four-year, $302 billion highway-spending plan relies in part on $150 billion from collecting taxes on overseas earnings and closing loopholes that would normally let companies defer those obligations.

The reason for the crisis atmosphere is that Washington has stalemated over the Highway Trust Fund for so long that the need for funds is dire. The trust fund has been limping along with injections of $55 billion from general revenues since 2008, not including stimulus funding. It will be down to $1 billion by September. The White House estimates that an interruption in funding would affect more than 112,000 construction projects and the jobs of almost 700,000 workers over a year.

Coy_190
Coy is Bloomberg Businessweek's economics editor. His Twitter handle is @petercoy.

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