Capitol Hill Update: Time Running Short for Highway Funding

Current authorization for federal highway and transportation funding is set to expire on May 31. While there are proposed policy options, currently, there is not a clear path to providing a long-term solution.

Authorization Deadline Quickly Approaching

May 31 is the deadline for Congress to pass a eauthorization for federal highway and mass transit programs. With Congress set to be on recess from May 25 through May 29, time is running short for congressional action. In the case of a funding lapse, highway projects around the country would be put on hold until federal funding is restored. At the epicenter of the issue is the Highway Trust Fund, which for several years has been taking in less in revenues than outlays for highway projects (top graph). The current volume-based (as opposed to price-based) motor fuel tax structure has created challenges for the trust fund, as increased fuel efficiency has reduced the quantity of gasoline consumed (middle graph). The slower pace of revenue growth into the trust fund has set up a policy debate over how to fund a longer-term highway program. Congress has implemented a series of short-term patches to the program since 2008, and there seems to be a consensus that, if a short-term patch is utilized this time around, it should be a very short-term patch to buy time for a longer-term agreement.

Possible Policy Choices, but No Clear Direction

The main focus around the policy debate over the Highway Trust Fund is how to fund long-term federal highway (84 percent) and transit programs (16 percent). Under current projections, the trust fund would remain solvent until July, which would buy Congress more time to come up with a long-term solution, but a new authorization would still need to be passed in order for funding to continue. A number of ideas have been proposed, including a tax holiday on repatriated corporate profits, which would allow corporations to repatriate overseas profits at a discounted rate. The increased federal revenues would then be directed toward highway programs. However, this approach is opposed by several House members who would like to see the repatriation holiday put in place as part of a corporate tax reform proposal. Some members in the House are calling for the indexing of the federal gas and diesel tax to inflation, which would essentially raise the tax, which is a sticking point for many House members. Both ideas, a repatriation holiday and a gas tax increase, have not yet gained any traction, while time is running short.

Given that little time remains for Congress to act, our view is that there will likely be a short-term patch to the Highway Trust Fund to buy time for a longer-term deal. Some form of repatriation holiday is likely to be the primary mechanism to find additional funding for the trust fund, given the opposition around any increase in the gasoline tax rates. The tax reduction aspect of the proposal seems palatable to Republicans and is more or less consistent with the White House’s proposal and the proposal in the Senate. Regardless of the path selected, there should be some movement in the next week or two to advance the policy debate over future highway funding.