This is the first in a series of summaries over the next few weeks on the contents of the newly-passed five-year federal surface transportation authorization law, Fixing America’s Surface Transportation (FAST) Act. The next sections will focus on policy changes to highways, transit, and federal passenger rail programs.
The backbone of federal transportation funding is the motor fuels tax (gas tax), and these revenues are deposited in the protected Highway Trust Fund (HTF). Taxes on gasoline and diesel fuels for cars, trucks, and motorcycles, have been levied for many decades; however, the last time that the tax rate was raised was in 1993 — over 20 years ago. Since that time, federal spending on highways and transit programs has risen and the purchasing power of those dollars, as a result of rising construction and materials costs, has gone down.
While the newly-passed five-year federal surface transportation authorization law, Fixing America’s Surface Transportation (FAST) Act, increased investment, it did not pay for these funding increases through a gas tax hike. Instead, the law relied on a variety of items unrelated to transportation, specifically two large offsets dealing with the Federal Reserve (Fed).
Offsets for the FAST Act
The first Fed offset is one that was heavily opposed by banks. The provision would reduce what was a 6% annual dividend paid to banks on Fed stock that they bought when becoming members of the Federal Reserve system. The reduction would impact banks with over $10 billion in assets and cut the stock dividend pay-out to match the interest rate of the highest-yield 10-year Treasury note, which would likely be around 2% This provision raises nearly $6 billion for the FAST Act.
The second Fed-related offset is the largest one contained in the FAST Act and applies to the Feds capital surplus accounts. The Fed regional banks maintain various amounts of surplus cash, which totals $29 billion.
The FAST Act takes $19 billion from this account and leaves a $10 billion surplus cushion at the Fed. However, due to Congressional budget scoring procedures, the amount of money actually raised for the FAST Act by doing this $19 billion draw-down is about $53 billion. This is because Congress adds up all of the money that would have been in the account over a ten-year budget horizon.
Added together, these and other offsets amount to around $70 billion in new money for the HTF over the five-year life of the FAST Act. This means that at the end of the FAST Act, the HTF will have received over $140 billion in general fund transfers since it began experiencing fiscal trouble in 2008.
This also means that by the end of the Fixing America’s Surface Transportation Act, gas taxes and other transportation-related revenues will only be providing half of the dollars necessary to support investment levels, which could complicate the policy process in numerous untold ways.
For example, members of Congress may then ask: “Why should this program only fund roads and transit systems (which has historically been the case) if road users and transit riders are no longer the funding basis of a large amount of the program’s revenues?”
Funding Levels for the Fixing America’s Surface Transportation Act
The FAST Act provides $305 billion for highway, transit, and railway programs. Of that, $233 billion is for highways, $49 billion is for transit and $10 billion is dedicated to federal passenger rail. By the end of the bill’s five-year duration, highway investment would rise by 15%, transit funding would grow by nearly 18%, and federal passenger rail investment would remain flat.
Most of the percentage bump in investment will increase immediately with highways seeing a 5% jump and transit receiving a 9% jump in the first year. The funding then sees relatively flat, 2%t annual growth. The bill actually provides higher levels of funding than the Senate-passed DRIVE Act would have by over a cumulative $680 million over the life of the bill.
The bill also contains an HTF contract authority rescission of $7.5 billion at the end of the bill (September 30, 2020). This rescission would mean that states will have to return a certain amount of unobligated highway contract authority to FHWA.
It is likely that states will soon plan their programs accordingly in order to minimize the impact of this final-year budget cut.
Rescissions have become common in surface transportation authorization bills as a way to bring down spending levels at the end of the law, which helps reduce the overall cost of the program for Congressional budget scoring purposes. There will likely be an effort in 2020 to eliminate or delay the implementation of the rescission. The last rescission to take effect was for $8.7 billion in 2009.
Here are some funding highlights for highway and transit programs:
Highway Funding
- National Highway Performance Program: Annual increases of nearly $500 million;
- Surface Transportation Program: First-year increase of $1 billion and nearly $200 million on top of that annually thereafter;
- Highway Safety Improvement Program: Slight increase of $50 million annually;
- Congestion Mitigation & Air Quality Program: $50 million increase in the first year and slight increase thereafter;
- TIFIA Program: Heavy annual reduction from $1 billion per year to $275 million – $300 million annually throughout the bill;
- Highway Research & Development Program: Slight increase; however, new eligibilities added:
- $15 million annual Surface Transportation Funding Alternatives Studies program; and
- $10 million annual Performance Management Data Support program.
- (NEW) National Highway Freight Program: Approximately $1.2 billion annually; and
- (NEW) Nationally-Significant Freight & Highways Projects Program: Approximately $900 million annually.
Transit Funding
- Formula and Bus Grants: $800 million increase in the first year and $200 million on top of that annually thereafter. Within that:
- $90 million annual increase for Urbanized Area Formula Grants
- (NEW) $28 million for Research & Development Demonstration and Deployment grant (existing FTA R&D program reduced by $50 million annually)
- State of Good Repair: first-year $350 million increase and $40 million on top of that annual increase thereafter
- (NEW) Bus and Bus Facility Discretionary program: approximately $300 million annually
- (NEW) Fast Growth and High Density program: approximately $550 million annually.
- Capital Investment Grants: Initial $400 million funding increase which sustains for the life of the bill
- Positive Train Control Grants: $200 million provided in fiscal year 2017.
The FAST Act & Highway Trust Fund Projections
By the end of the bill, there would be approximately $8 billion left in the highway account of the HTF and about $2 billion left in the transit account. In the years following, the HTF deficit would grow to approximately $24 billion per year. This means that any attempt to fill the budget hole through an increase in the gas tax will require a bigger increase than has ever been needed.
In order to fill the recent, $15-billion annual shortfall, a 10-cent-per-gallon gas tax that was indexed to inflation was required. It can now be expected that any gas tax amount needed to fill the looming 2020 shortfall will have to be nearly double that amount, or close to a twenty-cent-per-gallon rate increase. Beyond filling the budget hole, as the Failure to Act economic study shows, increased investment is needed to modernize our surface transportation network.