CBO

TESTIMONY

Statement of

Donald B. Marron

Deputy Director

Status of the Highway Trust Fund: 2007

before the

Subcommittee on Highways and Transit

Committee on Transportation and Infrastructure

U.S. House of Representatives

March 27, 2007

CONGRESSIONAL BUDGET OFFICE

SECOND AND D STREETS, S.W.

WASHINGTON, D.C. 20515

This document is embargoed until it is delivered

at 2:00 p.m. (EDT) on Tuesday, March 27, 2007.

The contents may not be published, transmitted,

or otherwise communicated by any print, broadcast, or electronic media before that time.
Note

Numbers in the text and tables may not add up to totals because of rounding.
Mr. Chairman and Members of the Subcommittee, I am pleased to be here today to

discuss the status of the Highway Trust Fund and to present the Congressional

Budget Office (CBO)’s projections of the fund’s revenues and outlays.

My testimony has four main conclusions:

B The revenues that finance the Highway Trust Fund have grown at a moderate

pace in recent years, increasing by an average of about 2 percent per year since

1998. Before that, from 1997 to 1998, revenues rose sharply, when receipts

from a portion of the gasoline tax were redirected from the Treasury’s general

fund into the trust fund. Spending from the trust fund has increased steadily

since 1998, by an average of about 4 percent per year. Spending began to outpace revenues in 2001 and since then has exceeded revenues by about $16 billion.

B If annual obligation limits are set at the levels authorized in 2005, CBO projects

that the highway account of the Highway Trust Fund will become exhausted at

some point during fiscal year 2009; the Administration also projects that the

balances in the highway account will be exhausted that year. CBO expects that

the mass transit account will have sufficient revenues to cover its expenditures

until 2012; the Administration estimates that the mass transit account will

become exhausted in 2011.

B Projections of trust fund revenues are subject to uncertainty. Changes in oil

prices, the economy, and the fuel efficiency of vehicles can all cause future revenues to differ from current projections. Consequently, the highway account

could exhaust its resources either before or after 2009.

B Fuel taxes provide a relatively stable source of revenues with generally low

collection costs and minimal evasion. However, fuel tax revenues do not grow

as rapidly as the economy. CBO projects that if fuel taxes are extended, revenues from them will grow about 1.5 percent per year from 2007 to 2017, less

than the nominal growth of the economy, at 4.6 percent. Fuel tax rates are fixed

in nominal terms, so revenue growth is driven by increased fuel use. Fuel use, in

turn, is driven by real economic growth, price changes, fuel economy, and the

types of fuel used.

Overview of the Highway Trust Fund

The Highway Trust Fund is an accounting mechanism in the federal budget. It

records specific cash inflows (revenues from certain excise taxes on motor fuels

and trucks) and cash outflows (spending on designated highway and mass transit

programs). The fund comprises two separate accounts, one for highways and one

for mass transit. By far, the largest component of the trust fund is the Federal-Aid

Highway program, which will account for about 90 percent of the fund’s outlays in

2007 (see Table 1).
2

Table 1.

Major Components of the Highway Trust Fund, 2007

(Billions of dollars)

Source: Congressional Budget Office.

Note: n.a. = not applicable.

a. Receipts are deposited in the highway and mass transit accounts but are not earmarked for 

specific components.

b. Obligation limitations enacted in appropriation acts limit the amount of budget authority 

available to most Highway Trust Fund programs. The amounts in this column are the sum of 

obligation limitations and budget authority that is not subject to any such limitations.

c. Includes only outlays from 2007 funds. Outlays from previous years’ funding were attributed to 

those years.

Spending from the Highway Trust Fund is not automatically triggered by the

collection of tax revenues. Authorization acts provide budget authority for highway programs, mostly in the form of contract authority (the authority to incur

obligations in advance of appropriations). Annual spending from the fund is

largely controlled by limits on the amount of contract authority that can be obligated in a particular year. Such obligation limitations are customarily set in annual

appropriation acts.

The most recent authorization law governing spending from the trust fund—the

Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for

Users (SAFETEA-LU)—was enacted in 2005 and is due to expire at the end of

2009. The law provides specific amounts of contract authority over the 2005–2009

period and authorizes appropriations for certain programs that are not funded

through contract authority. It also specifies annual obligation limitations, which

may be superseded each year by limitations set in annual appropriation acts.

Highway Account

n.a. 39.8 33.9

n.a. 0.5 0.5

n.a. 0.8 0.6

n.a. 0 0.3 ____ ____ ____

35.2 41.0 35.3

n.a. 0 0.1

n.a. 7.2 2.9

___ ___ ___

5.1 7.2 3.0

Total, Highway Trust Fund 40.2 48.3 38.3

Subtotal

Discretionary grants

Trust fund's share of transit programsc

Subtotal

Mass Transit Account

Federal-Aid Highway program

Motor carrier safety

Highway traffic safety

Other

Receiptsa Limitationsb

and Obligation Estimated

Outlays

Budget Authority

Estimated
3

In addition, the 2005 law includes a funding mechanism, known as revenuealigned budget authority (RABA), that is designed to strengthen the relationship

between the highway account’s revenues and spending. Under RABA, the Administration estimates revenues for the highway account and compares those estimates

with the revenue amounts anticipated in SAFETEA-LU and with the estimates

made the previous year. On the basis of that comparison, the Administration, as

part of the President’s annual budget request, is required to adjust contract authority for programs funded from the highway account. (If the current revenue estimates are higher than the revenue amounts anticipated in SAFETEA-LU, contract

authority is increased. If the revenue estimates are lower than the anticipated

amounts, contract authority is reduced, as long as the highway account balance is

less than $6 billion.) The obligation limitations set in appropriation acts, however,

do not necessarily reflect RABA adjustments.

History of the Highway Trust Fund’s Revenues

and Spending

Many changes have been made to the highway program, to the taxes dedicated to

the Highway Trust Fund, and to trust fund operations since 1983. One of the most

significant changes occurred in the Taxpayer Relief Act of 1997, which increased

amounts deposited into the trust fund by 4.3 cents per gallon of gasoline sold, in

addition to the 14.0 cents per gallon previously allocated to the fund.1 Spending

started increasing rapidly in 1999, resulting from changes enacted in the Transportation Equity Act for the 21st Century (TEA-21). TEA-21, which provided contract authority of $218 billion over the 1998–2003 period (an average of $36.3 billion per year), and SAFETEA-LU, which provided contract authority of $286

billion (an average of $57.2 billion per year) over the 2005–2009 period, represented significant increases in spending over previous authorizations.

Balances in the highway account were steady during the 1980s and the first half of

the 1990s, in the vicinity of $10 billion (see Figure 1). Receipts substantially

exceeded outlays from 1996 to 2000, and the unexpended balance in the highway

account (sometimes called the cash balance) grew from $10 billion in 1995 to a

peak of about $23 billion in 2000.2 Since then, spending, boosted by TEA-21, has

1. The total gas tax is 18.4 cents per gallon. Of that, 18.3 cents is deposited in the Highway Trust

Fund, and 0.1 cents goes to the Leaking Underground Storage Trust Fund.

The 1993 Omnibus Budget and Reconciliation Act increased the gas tax by 4.3 cents, but those

funds were not initially deposited into the trust fund, but into the general fund of the Treasury.

2. Section 901(e) of the Taxpayer Relief Act of 1997 allowed taxpayers to delay depositing estimated fuel tax liabilities that would otherwise have been required in August and September of

1998 until October 5, 1998—effectively delaying a deposit of about $5 billion to the highway

account and about $900 million to the mass transit account from fiscal year 1998 until fiscal

year 1999.
4

Figure 1.

The Highway Account, 1983 to 2010

(Billions of dollars)

Source: Congressional Budget Office.

Note: Receipts are adjusted to remove the effects of a legislated shift in payment dates that 

reduced receipts by $5 billion in 1998 and increased them by the same amount in 1999.

generally exceeded revenues, which fell sharply in 2001. As a result, unspent

balances fell over the next several years, to about $9 billion in 2006. In general,

balances in the mass transit account also have been falling since 2000, although at

a slower rate than those in the highway account. At the end of 2006, the balance in

the mass transit account totaled about $6 billion.

After declining in 2001, revenues have increased steadily, at an average rate of

about 5 percent per year through 2006. Revenue growth was especially strong in

2005, following changes in the tax treatment of certain fuels.3 Outlays have not

grown as rapidly, rising at about 3 percent per year from 2001 through 2006; nonetheless, they have generally exceeded revenues.

Projections of the Highway Trust Fund’s Revenues

and Spending

The status of the Highway Trust Fund is generally assessed by projecting the

balances in it, which indicate whether the expected revenues will be sufficient to

3. The American Jobs Creation Act of 2004 increased the fuel tax on ethanol to equal that on gasoline for the purpose of the Highway Trust Fund, and that law retained a tax subsidy for ethanol

production in the form of a tax credit paid from the Treasury’s general fund. The law also

included other provisions to increase revenues to the trust fund.

1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

-10

0

10

20

30

40

50

End-of-Year

Balances

Outlays

Receipts

Actual Projected
5

cover the anticipated spending. Those balances represent the cumulative difference between revenues and outlays over the life of the fund and indicate how

much the fund has available, at any particular time, to meet its current and future

obligations.

Highway Trust Fund Balances

CBO has estimated the trust fund’s future balances by projecting revenues and outlays independently of each other because they have different bases—revenues

depend on the collection of various taxes, and current-year outlays depend on the

obligation limitations set in appropriation acts as well as the timing of spending for

obligations that have been made in prior years. For those projections, CBO

assumes that policymakers will continue to control spending through such limitations. Further, the agency assumes that appropriation acts will set obligation limitations equal to the amounts specified in SAFETEA-LU plus any RABA adjustments. 4 As that adjustment for 2007, the Administration projects an increase of

$842 million and, for 2008, $631 million; for illustrative purposes, for 2009, CBO

has estimated an increase of about $250 million (however, the Administration is

responsible for preparing and implementing the adjustments of RABA). On the

basis of those assumptions, the amounts available for obligation from the highway

account would rise from about $38 billion in 2006 to $43 billion in 2009 (see

Table 2).5

Under SAFETEA-LU, the amounts available for obligation from the mass transit

account would rise from $8.3 billion in 2006 to $9.4 billion in 2009.6

Highway Trust Fund Revenues: Sources and Projections

The largest contributor of revenues to the Highway Trust Fund is the tax of

18.3 cents per gallon on gasoline and gasohol. Under current law, such taxes are

scheduled to expire in 2011. The gas and gasohol tax currently produces about

two-thirds of the fund’s total revenues (see Table 3). About 2.8 cents per gallon is

dedicated to the mass transit account. The second-largest source is the levy of 24.3

cents per gallon on diesel, which accounts for about one-quarter of the revenues.

4. That assumption differs from the one underlying CBO’s baseline budget projections, which are

governed by the rules set forth in the Balanced Budget and Emergency Deficit Control Act. In

its most recent baseline, CBO projected highway spending over the next decade by assuming

that the budget authority and obligation limitations in future years would equal those enacted in

the 2007 appropriation act for the Department of Transportation, adjusted for inflation. With

that projection method, baseline funding levels for highways are lower than the levels specified

in SAFETEA-LU.

5. The $43 billion obligation limit in 2009 is 1.5 percent above the amount projected in CBO’s

baseline.

6. The obligation limit in 2009 is about 8 percent above the amount projected in CBO’s baseline.
6

Table 2.

CBO’s Estimate of Funds Available for Obligation

from the Highway Trust Fund, 2006 to 2009

(Billions of dollars)

Source: Congressional Budget Office.

Notes: SAFETEA-LU = Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for 

Users; RABA = revenue-aligned budget authority.

a. Estimates assume funding levels authorized in SAFETEA-LU.

a. The figures shown as RABA adjustments in 2007 and 2008 come from the Administration, 

which is responsible for specifying them. The figure for 2009 is an illustrative estimate by the 

Congressional Budget Office.

b. CBO assumes that future appropriation acts will provide for SAFETEA-LU funding levels and any 

RABA adjustments.

c. The figures include about $1 billion annually that is transferred from the highway account to the 

mass transit account, through a mechanism known as “flexing.” 

Thus, taxes on motor fuels generate about 90 percent of the trust fund’s total revenues. The rest come from a 12 percent tax on the first retail sale of a truck or trailer

above a certain weight, taxes on truck tires for highway use, and an annual use tax

on heavy trucks. CBO projects all five of those revenue sources separately, along

with refunds on amounts paid by certain taxpayers, such as state and local governments, which are exempt from the taxes.

Revenues from the taxes on gasoline and diesel fuel are credited to the trust fund,

and then the highway account and the mass transit account receive shares.7 Revenues from the three different taxes on trucks are credited entirely to the highway

account. Currently, more than 85 percent of the revenues in the Highway Trust

Fund go to the highway account.

7. About 85 percent of the gasoline and gasohol revenues and about 90 percent of the diesel revenues are credited to the highway account. The remainder go to the mass transit account.

Total,

Actual 2006-

2006 2007 2008 2009 2009

35.6 38.2 39.6 41.2 154.6

0 0.8 0.6 0.3 1.7

0.7 0.7 0.7 0.7 2.9

1.3 1.3 1.2 1.3 5.2 ____ ____ ____ ____ _____

Total Funds Available for Obligationb 37.6 41.0 42.1 43.1 164.4

Obligation limitationc 8.3 8.3 8.9 9.4 34.8

Safety Programs (Obligation limitation)

Mass Transit Account

Federal-Aid Highway Program

Obligation limitation in SAFETEA-LU

RABA adjustments to obligation limitationa

Contract authority not subject to 

obligation limitation
7

Table 3.

Estimated Highway Trust Fund Revenues, 2006

Source: Congressional Budget Office.

If the current taxes are extended beyond their 2011 expiration date, revenues credited to the Highway Trust Fund will rise at an average annual rate of about 2 percent per year over the coming decade, CBO projects (see Table 4). Trust fund revenues are projected to grow from about $40 billion in 2006 to about $42 billion in

2009—at a slower rate than nominal GDP, which CBO expects to rise at an average annual rate of 4.6 percent over the next 10 years. In large part, the difference

exists because the fuel tax rates are fixed in nominal terms, so revenues depend on

the quantity of fuel consumed, not its dollar value.

Outlay Projections

CBO bases its estimates of trust fund outlays primarily on historical spending patterns, which reflect states’ multiyear projects to plan and build roads, bridges, and

other transportation infrastructure. In the case of the fund’s highway account, most

of the obligations involve capital projects on which money is spent over a number

of years. For example, the Federal-Aid Highway program typically spends about

27 percent of its budgetary resources in the year they are made available for spending and the rest over the next several years. The mass transit program typically

spends about 15 percent of budgetary resources in the first year. Most of the highway programs’ existing obligations will therefore be met using future tax revenues

because those obligations far exceed the amounts now in the account. At the end of

2006, the balance of the highway account stood at $8.9 billion, whereas the outstanding obligations of highway programs totaled about $45 billion. The mass

transit account had a balance of about $6.2 billion and outstanding obligations of

about $3 billion (see Table 5).

If the Congress sets obligation limitations at the amounts authorized in

SAFETEA-LU and adds RABA adjustments (as estimated), outlays from the trust

fund’s highway account will gradually increase from about $34 billion in 2006 to

25.5 65

9.7 25

3.5 9

1.4 3

0.5 1

-1.0 -3 ____ ____

Total 39.6 100

Tax on Truck Tires

Refunds

Revenue Source

Heavy-Vehicle Use Tax

Gasoline and Gasohol Tax

Diesel Tax

Retail Sales Tax on Trucks

Billions of Dollars

Percentage of Total

Trust Fund Revenues
8

Table 4.

CBO’s Current Projections of Highway Trust Fund

Revenues, 2006 to 2017

(Billions of dollars)

Source: Congressional Budget Office.

about $42 billion in 2009, CBO estimates. Those outlays would exceed revenues

by about $500 million in 2007, $3.5 billion in 2008, and $5 billion in 2009. In

addition, CBO anticipates that about $2 billion from the highway account will be

transferred to the mass transit account over that period.8 By CBO’s estimates, balances in the highway account will be exhausted during fiscal year 2009, falling

short of obligations coming due in that year by about $1.7 billion.

The exhaustion of the highway account does not mean that spending would end.

Annual spending would, instead, be limited to the amount of revenues flowing into

the account each year, and there would be limited funds for new projects. Such

balancing of spending and revenues could be accomplished by reducing future

obligation limitations and budget authority below the levels assumed in CBO’s

projections, by reducing the rate of spending on projects for which funds have

already been obligated (for example, by requiring states to delay the start or completion of projects), or a combination of the two.

Under SAFETEA-LU and with obligation limits adjusted for inflation after 2009,

the mass transit account will have sufficient resources to meet spending demands

until 2012, according to CBO’s estimates.9 Including transfers from the highway

account, the obligation limit for mass transit will grow from $8.3 billion in 2006 to

8. Under SAFETEA-LU, states are allowed to use some of their highway funds for transit

projects; the highway account transfers funds to the transit account when states choose to use

such flexibility.

9. The Administration estimates that the mass transit account will run out of cash one year earlier.

CBO and the Administration have made different estimates about how quickly spending from

the fund will occur.

2006 2007 2008 2009 2010 2007

25.5 25.8 26.2 26.6 26.9 1.1 1.4 1.2

9.7 9.9 10.1 10.4 10.6 2.1 2.3 2.0

3.5 3.7 3.8 4.0 4.2 3.9 4.3 4.1

1.4 1.4 1.4 1.5 1.5 2.3 2.8 2.6

0.5 0.5 0.5 0.6 0.6 2.4 2.8 2.6

-1.0 -1.0 -1.0 -1.0 -1.1 0.7 1.1 1.2 ____ ____ ____ ____ ____

Total 39.6 40.2 41.1 42.0 42.8 1.7 2.0 1.8

Percentage Change

2010-

Revenue Source 2017

2007-

Average Annual

2009

Gasoline and Gasohol Tax

Diesel Tax

Heavy-Vehicle Use Tax

Refunds

Tax on Truck Tires

Retail Sales Tax on Trucks
9

Table 5.

CBO’s Projections of Highway Trust Fund Balances,

2006 to 2010

(Billions of dollars)

Source: Congressional Budget Office.

Notes: n.a. = not applicable.

Estimates assume funding levels authorized in the Safe, Accountable, Flexible, Efficient 

Transportation Equity Act: A Legacy for Users.

a. States are allowed to use a certain portion of their highway funds for mass transit programs, 

resulting in transfers from the highway account to the mass transit account.

$9.4 billion in 2009. However, by CBO’s estimates, outlays will exceed revenues

by less than $500 million in 2008 and by about $1.5 billion in 2009.

The Uncertainty of Projections

Projections of the Highway Trust Fund’s revenues and spending face a variety of

uncertainties. For example, the Congress could choose to limit obligations from

the trust fund at different levels from those under SAFETEA-LU. In addition, a

number of factors could significantly affect the use of gasoline, which would, in

turn, affect the trust fund’s income. The economy could grow faster or more

slowly than expected. Oil prices could climb higher or fall substantially. Consumers might adjust more or less to changes in fuel prices (for example, by driving

fewer miles in the short term or purchasing more-fuel-efficient vehicles in the

longer term).

2006 2007 2008 2009 2010

Highway Account

Estimated outlays 33.9 35.7 39.4 41.5 42.8 193.3

Transfer to mass transit accounta 1.4 0.3 0.7 0.9 0.9 4.1

Estimated receipts 33.6 35.2 35.9 36.7 37.5 178.9 ____ ____ ____ ____ ____ _____

Difference -1.7 -0.8 -4.2 -5.7 -6.3 -18.7

Projected End-of-Year Balance 8.9 8.1 3.9 -1.7 -8.1 n.a.

Change from Previous Year's Balance -1.7 -0.8 -4.2 -5.7 -6.3 -18.7

Mass Transit Account

Estimated outlays 1.9 3.7 5.5 6.9 8.1 26.1

Estimated receipts 4.8 5.1 5.1 5.2 5.3 25.6

Receipts from highway accounta 1.4 0.3 0.7 0.9 0.9 4.3 ____ ____ ____ ____ ____ ____

Difference 4.3 1.6 0.3 -0.8 -1.8 6.1

Projected End-of-Year Balance 6.2 7.8 8.1 7.3 5.5 n.a.

Change from Previous Year's Balance 4.3 1.6 0.3 -0.8 -1.8 6.1

Total, 

2006–2010
10

Historical Analysis of CBO’s Revenue Projections

An analysis of CBO’s historical track record is one way to illustrate the sensitivity

of revenues to a variety of factors and the resulting uncertainty of the projections

of revenues for the Highway Trust Fund.10 In the 1990s, highway revenues tended

to exceed the projections because of unexpectedly strong economic growth and a

rapid increase in purchases of sport utility vehicles, which have below average fuel

efficiency. Conversely, projections of revenues made in the years just before 2002

generally turned out to be too high. The 2001 recession reduced revenues well

below expectations. The projections made since 2001 have been more accurate

than the average.

As noted earlier, CBO projects that, under current law, the highway account will

become exhausted before the end of 2009. CBO’s analysis of past forecast errors

indicates that if actual revenues fell short of projections to the extent that occurred

with CBO’s forecasts produced in and just before 2001, then the highway account

could run out of funds as early as 2008. However, if revenues exceeded the projections by amounts consistent with the 1990s deviations, then the highway account

could be in surplus until 2010 or 2011.

However, the historical performance of revenue projections may not be a good

indicator for the future. In particular, the increase in fuel prices in recent years has

persisted and may lie outside the range of experience. Also, alternative sources of

powering motor vehicles, not subject to taxes, may be developed. Those developments potentially introduce more uncertainty, especially in the longer term.

The Sensitivity of CBO’s Current Revenue Projections

The uncertainty of revenue estimates can also be assessed by looking at CBO’s

current revenue projections in more detail, especially by identifying the effects of

higher fuel prices. CBO projects that the fuel price increases of the past several

years will largely persist over the 10-year projection period. Relative to overall

prices in the economy, fuel prices over the next 10 years are projected to average

about 50 percent above their average over the 1984–2003 period. As a result, CBO

expects individuals to purchase vehicles with higher fuel efficiency and to drive

fewer miles, reducing gasoline use by amounts that become more significant over

a number of years. The effects of the higher fuel prices reduce CBO’s projection

of growth in highway revenues by about 0.4 percentage points per year, on average, over the next decade. Cumulatively over the 2008-2017 period, the higher

prices reduce projected revenues to the Highway Trust Fund by about $9 billion

(under an assumption that the taxes are extended beyond their scheduled expiration in 2011).

10. Statement of Donald B. Marron, Acting Director, Congressional Budget Office, CBO's Projections of Revenues for the Highway Trust Fund, before the Subcommittee on Highways, Transit,

and Pipelines, House Committee on Transportation and Infrastructure (April 4, 2006).
11

The projections of revenues are also sensitive to assumptions about the substitution of alternative fuel sources for gasoline, but CBO expects that factor to have a

limited effect on the trust fund over the 10-year projection period. The mandated

increase in the use of ethanol fuels affects revenues even though the tax rates on

gasoline and ethanol are the same for the purpose of the trust fund. Ethanol has a

lower heat content than gasoline and therefore reduces fuel efficiency compared

with gasoline. However, the effect on the trust fund is limited because ethanol is

expected to replace a relatively small share of gasoline use over the coming

decade. Other technologies, furthermore, may emerge to replace gasoline and ethanol. For example, if technological advances allow fully electric-powered vehicles

to become a significant share of the vehicle stock, then growth in the use of taxed

motor fuels would be reduced. However, CBO expects that such technological

changes will cause only small impacts on the trust fund over the 10-year period.

The tax rates on gasoline, ethanol, and diesel fuel are fixed in nominal terms and

thus do not rise with inflation, which contributes to a long-term decline in the purchasing power of the revenues accruing to the Highway Trust Fund. If the tax rates

rose with inflation, revenues to the Highway Trust Fund would be about $44 billion higher over the 2008–2017 period, according to estimates of the Joint Committee on Taxation. The lack of indexed tax rates explains about two-thirds of the

difference between CBO’s baseline projection of average annual growth in fuel tax

revenues (1.5 percent) and in nominal gross domestic product (4.6 percent) over

the next 10 years.

Fuel Taxes as a Highway Revenue Source

Issues in the use of fuel excise taxes to fund federal highways include the extent to

which the taxes are economically efficient, their costs of collection and ease of

ensuring compliance, the stability of the revenue stream that they provide, and the

growth of that revenue stream over time.

Economic Efficiency

Economic efficiency would require that highway users face the full resource cost

of driving. That resource cost includes not only the private costs of owning and

using a vehicle but also public costs such as the wear and tear that driving inflicts

on roads (which increases with vehicle weight and the distance traveled), delays

from traffic congestion and accident risks imposed on occupants of other vehicles,

and pollution and other external costs. Some of those public costs may be

accounted for through other means—tolls, for example, can address some costs of

road use and congestion, insurance premiums and liability rules can address some

accident risks, and emissions regulations may address some pollution costs. If

those other measures do an incomplete job of accounting for those costs, however,

it may be economically efficient to address them with fuel taxes.

Fuel taxes can only approximate those costs, though. Heavier vehicles and longer

trips generally require more fuel, but fuel costs and public costs are not closely
12

linked. A driver pays the same fuel tax for going a given distance at a given speed

whether driving on a busy urban highway or an empty rural highway, for example,

even though congestion costs are higher in the first case. Two vehicles with the

same gas mileage pay the same tax to travel a given distance, even though they

may differ in weight and thus impose different costs on the highway system.

Further complicating the issue, roads have high fixed costs, while the marginal

cost of adding a single vehicle is very low (except in those situations where

a road is very congested). Therefore, pricing vehicles’ use of the roads on a

marginal cost basis could make it difficult to recoup the cost of building and operating the system.

Compliance

Collection costs for fuel taxes are fairly low, and evading them is difficult.

Because the fuel excise taxes are levied on fuel producers (who then pass the

added costs on to consumers), tax authorities collect the revenues from only a

small, stable (and therefore easily monitored) group of taxpayers. Some difficulties posed by highway use of fuels intended for off-highway use (which are typically not taxed) have occurred but have been fairly well controlled, especially

since a requirement to dye off-road diesel and diesel-substitute fuel was implemented.

The Stability of the Revenue Source

Despite fluctuations in the economy and long-term improvements in fuel efficiency, fuel taxes have provided a relatively stable stream of revenues. In part, that

stability results because motor fuel use is not very sensitive to changes in price.

Annual growth in motor fuel use has varied less historically than has growth in the

income bases for the individual and corporate income taxes, which are affected

more by changing economic conditions.

Future Revenue Growth

Several factors could influence the long-term outlook for fuel revenues. Most

important, the tax rates are fixed in nominal terms and thus do not increase with

inflation. All else being equal, future revenues will grow only with future fuel use.

If the cost of building and maintaining highways rises in the future as it has in the

past, fuel tax revenues will support a declining amount of investment in and maintenance of the transportation infrastructure.

In addition, increased production of vehicles that run on alternative sources of

power that are taxed less or not at all (like fully electric cars) may reduce the tax

base provided by fossil fuels and fossil fuel blends. Even discounting the influence

of such vehicles, improvements in fuel efficiency will probably limit the growth of

fuel use—and thereby limit the growth of excise tax receipts.
13

However, increasing use of certain alternative fuels may also build the tax base.

Ethanol’s lower energy content than gasoline’s means that vehicles running on an

ethanol-blended fuel get fewer miles per gallon than they would using pure gasoline, increasing the fuel consumed for a given number of miles driven. Because

fuel taxes are levied on a per-gallon basis, substituting ethanol for gasoline

increases the trust fund’s revenues from the excise tax.11 Continued taxation on the

basis of volume (instead of energy content) will increase revenues if other alternative fuels contain less heat per gallon than gasoline.

Alternative Revenue Sources

Highway and mass transit programs could be financed in a variety of ways—

including other types of taxes and charges and financing from the Treasury’s general fund.

Road Usage Charges

Tolls can be used to raise prices specifically for busy roads, and congestion pricing

can adjust charges to motorists for travel on particular roads depending on the

amount of traffic. Technology is increasingly making possible the routine assessment of usage charges without the delays associated with toll booths in the past.

Those methods of revenue collection could be a major improvement over fuel

taxes in their ability to link the prices paid by drivers to travel distances and traffic

congestion.

Other Excise Taxes

The federal government currently levies excise taxes on the sale and use of heavy

trucks and trailers and on the manufacture and importation of tires for heavy vehicles. Like the fuel excise taxes, those taxes are collected from a relatively small

group of retailers and manufacturers, making the taxes relatively easy to collect

and difficult to evade. Although receipts from truck sales taxes have been highly

variable (owing partly to the price-basis on which they are levied), truck use taxes

and tire sales taxes have provided a revenue stream of comparable stability to the

one from fuel taxes. Those other excise taxes could be relied on more; for instance,

they could be increased or expanded to cover light trucks and cars. Such taxes vary

more directly with vehicle weight and miles traveled and can be made to mirror

even more closely those factors affecting public costs.

General Fund Revenues

Another approach is to finance road construction and maintenance with general

fund revenues, which may have a particular rationale for costs that cannot be

attributed to individual users. As a result of tax preferences provided to producers

of ethanol and other alternative fuels, several billion dollars a year are already

11. However, a credit for ethanol production (which is in place until the end of calendar year 2010)

draws from the Treasury’s general fund.
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directed, in effect, from the general fund to the Highway Trust Fund. Currently,

those producers get tax credits, the effect of which is to tax those fuels at a lower

rate and have transfers from the general fund make up the difference.

Extending and Indexing Current Taxes

Short of major overhauls of the financing mechanism, the existing motor fuel taxes

could be altered in a variety of ways. To achieve higher revenues, policymakers

could increase the per-gallon tax rates or index them to inflation. To tax fuels comparably, policymakers could apply rates consistent with the fuels’ energy content

and bring new fuels under this rubric as they emerge. For example, fully electric

cars, if they become practical alternatives to conventional vehicles, could somehow be taxed.