Two-Month Extension for Federal Highway and Transit Funding

The House of Representatives voted yesterday to extend federal funding for highways and transit for two months. The Senate is expected to pass similar legislation later this week. While transportation bills normally last for six years, this short-term action, which followed a ten-month extension last fall and a two-year extension in 2012, has proven necessary because no one has been able to rustle up a majority agreement on the federal role in transportation.

For those who haven’t followed the issue, the federal government collects about $34 billion a year in gas taxes and related highway user fees. Once dedicated to highways, an increasing share has gone for transit and other uses since the early 1980s. A 1998 decision to mandate that spending equal the projected growth in fuel taxes compounded the problem. When fuel tax revenues stopped growing in 2007, spending did not and thus annual spending is now about $13 billion more than revenues.

Under Congressional rules, Congress must find a revenue source to cover that deficit. My colleague at the Cato Institute, Chris Edwards, thinks that the simple solution is for Congress to just reduce spending by $13 billion a year. That may be arithmetically simple, but politically it is not. Too many powerful interest groups count on that spending who have persuaded many (falsely, in my opinion) that we need to spend more on supposedly crumbling highways.

Many Democrats, as well as some Republicans, propose another arithmetically simple but politically complex solution: raise gas taxes. Each penny of gas tax brings in slightly less than $2 billion, so an eight-cent increase should completely cover the deficit. However, tax watchdogs and tea-party groups vehemently oppose any tax increases, especially since they don’t trust Congress to spend fees collected from highway users on roads.

Then there are proposals to dedicate things like off-shore oil revenues for transportation. But any federal revenues spent on transportation will just mean less revenue for something else, and so won’t reduce the overall deficit.

Dedicating gas taxes to roads at least ensures that state highways are paid for by the people who use them. Yet for several reasons, the gas tax in an ineffective user fee: it isn’t indexed to inflation or increasingly fuel-efficient cars; most local governments don’t collect gas taxes and so must subsidize their roads with other funds; and fuel taxes do nothing to mitigate congestion. Raising the gas tax solves none of these problems in the long run; indexing them to inflation as Representative Jim Rinacci (R-OH) proposes solves only the first problem.

Mileage-based user fees, soon to be extensively tested in Oregon, can solve all of these problems. Such fees are supported by liberal Democrats such as Earl Blumenauer (D-OR) as well as tea-party Republicans such as Thomas Massie (R-KY). But they are also questioned by both liberals and conservatives worried about privacy and suspicious of new taxes. Since the technology needed to collect such fees without invading people’s privacy hasn’t been thoroughly tested, they are not going to solve the conundrum this year.

The real problem is that too many in Congress relish playing the role of Santa Claus, handing out federal funds to state and local governments and interest groups. The elimination of earmarks, which dominated transportation funding from about 1992 through 2010, has weakened but not eliminated this political factor.

Congress is thus divided into at least three factions: the Democrats who want to use transportation dollars as pork as well as social engineering by encouraging transit and discouraging driving; traditional Republicans who also like pork but who may not be as enthused about the social engineering; and fiscally conservative Republicans who want to end the pork and the social engineering. Before the tea parties emerged, pork barrel won out, but now neither side has a majority.

While Cato would like to see federal highway and transit programs devolved to the state and local level, there is no easy path to get there. It appears that we likely will be stuck with short-term extensions until one of these groups wins a majority or mileage-based user fee technology takes over highway funding. If the latter happens, the federal government could be shut out of transportation funding completely and transit agencies will need to beg state and local governments for continued support.