The five-year highway bill signed into law Dec. 4 by President Obama utilizes a variety of funding mechanisms that are unrelated to transportation. While t is a positive development that Congress was able to agree on a long-term package, providing the certainty needed for substantial investments in highway-related projects. The inability to find a way to make transportation projects in the United States self-sustaining, such as by increasing the motor fuels tax, ultimately could make finding a way to pay for highways even more difficult when the current bill expires in 2020.
Traditionally, the main source of transportation funding has been revenue that is collected by excise taxes on gasoline (18.4 cents/gallon) and diesel fuel (24.4 cents/gallon). The federal government typically spends approximately $50 billion per year on transportation projects, but fuels taxes only bring in approximately $34 billion annually. Essentially, the federal fuel tax rate has been shrinking for decades. It's been more than 20 years since Congress last raised the per gallon gas tax. The fuel tax is a fixed rate per gallon, making it impossible for funding levels to keep up with inflation. Since 1993, inflation has eroded the buying power of those 18.4 cents to just 11 cents. To a far lesser extent, gains in fuel economy erode the fuel tax, too. Better vehicle fuel economy means fewer taxes for every mile driven.
Unable to muster the collective political will to raise fuel taxes or develop an alternative self-sustaining funding mechanism (such as a vehicle-miles traveled tax), Congress resorted to extraneous means of generating revenue for transportation projects. Below is a brief overview of how transportation projects will be funded over the next five years:
Raiding the Federal Reserve: $60.2 billion
Congress developed two different mechanisms to divert money from the banking system to help pay for transportation programs.
First, the highway bill transfers $53 billion over five years from the Federal Reserve's capital account.
Former Federal Reserve Chairman Ben Bernanke has called this "a form of budgetary slight of hand" -- Federal reserve capital is the net value of bonds held by the Federal Reserve. The Federal Reserve has generally bought these bonds in the past with newly created money, remitting interest earned on the bonds to the Treasury. Thus, reducing the capital of the Federal Reserve will reduce the interest it can pay the Treasury in the future. It is tantamount to the Treasury borrowing money directly from the Federal Reserve. In other words, Congress simply decided to borrow additional money to pay for the highway bill, but to hide this from the public by using capital from the Federal Reserve rather than issuing new securities on which it would have to pay interest.
Second, the highway bill cuts the dividend rate the Federal Reserve pays to large banks by tying the rate, now at 6 percent, to a much lower floating rate for 10-year treasury notes.
Every time a bank joins the Federal Reserve, there's a buy-in equal to 6 percent of the bank's assets. That money goes to the central bank and is never returned. Banks are rewarded for this mandatory investment, however, with a 6 percent dividend. The highway bill cuts this dividend payment, and diverts the leftover money to the treasury for transportation payments. The dividend is reduced from the current 6 percent rate to a rate tied to the high yield of the 10-year Treasury note (but no higher than 6 percent).
Strategic Petroleum Reserve Sales -- $6.2 billion
The bill directs the Department of Energy to sell 66 million barrels of crude oil from the U.S. Strategic Petroleum Reserve between 2023 and 2025. Congress assumed that these sales would generate $94 per barrel (the current market for crude is approximately $40 per barrel).
Increase Customs User Fees -- $5.2 billion
The bill indexes certain Customs Services user fees to inflation. (Interestingly, Congress indexed unrelated customs user fees to inflation but was unwilling to index fuel taxes to inflation.)
Private Tax Collection -- $2.4 billion
The bill authorizes the I.R.S. to hire private tax collection contractors to collect outstanding inactive tax receivables.
Increase Motor Vehicle Safety Penalties -- $423 million
The bill lifts caps for maximum civil penalties for various violations of motor vehicle safety.
Revoke Passports for Tax Delinquencies -- $395 million
The bill gives the IRS discretion to prompt the State Department to revoke or deny passports to persons with "seriously delinquent tax debt."
End Interest Payments on Royalty Overpayments: $320 Million
The bill ends the requirement for the Office of National Resources Revenue to pay interest on overpayments it receives, which has led some lessees to deliberately overpay.
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