Tax Insider

Highway Trust Fund in the Tax Reform Spotlight

Financially troubled since 2001, the Highway Trust Fund might get more than its typical Band-Aid fix with a proposed new funding source that could also kick off comprehensive tax reform.
By Annette Nellen, Esq., CPA, CGMA

The Highway Trust Fund supports roads and public transit. While it is funded by six transportation-related taxes, the majority of funding is from the gasoline excise tax. The current system has some structural problems. For one, revenue from the tax can’t keep up with project costs. The federal gasoline excise tax has been set at 18.3 cents per gallon since 1993. If it had been adjusted for inflation, it would be 30.2 cents today.

Another structural problem with the tax is that gasoline usage does not tie directly to road usage. For example, electric cars don’t use gasoline, so their use of the roads doesn’t generate funds for road maintenance. Finally, modernizing aging infrastructure requires increased funding.

This article provides a brief background on the Highway Trust Fund and its funding issues. A Senate Finance Committee (SFC) Tax Reform Working Group recommendation made in July 2015 is explained and critiqued.

The Highway Trust Fund’s funding shortfalls

The fund includes two accounts: highway and transit, which are funded by six taxes, two of which provide about 85% of its revenue. These taxes have not been increased since 1993 (18.3 cents per gallon on gasoline and 24.3 cents per gallon on diesel fuels). Specifically, according to data from the Congressional Budget Office (CBO), the percentages of current funding sources are shown in the figure below (included in the  SFC’s Tax Reform Working Group on Community Development and Infrastructure’s report).


Problems identified in the SFC working group’s report include:

  • Since 2001, funding from excise taxes has not been adequate to handle needed projects. Since 2008, over $65 billion has been transferred from the general fund to address shortfalls.
  • For FY 2015, the CBO estimates that revenues will be about $39 billion, but project costs will be about $52 billion, requiring $13 billion of additional funds.
  • According to the Department of Transportation, Highway Trust Fund insolvency would likely cause the loss of about 700,000 jobs.
  • CBO projects that from FY 2015 through FY 2025, the cumulative shortfall in funds will be about $168 billion, although this projection apparently does not include all projects needed to maintain the nation’s roads and transit infrastructure. According to the report, the American Society of Civil Engineers estimates that the existing system will lead to “an over $1 trillion gap between our investment needs and the funding available by 2020.”
  • Today, about 65% of major roads are not in good or better condition, and one out of every nine bridges is structurally deficient.
  • Today, the U.S. spends only 2.4% of gross domestic product (GDP) on public infrastructure, compared with 8.5% in China.

Senate Finance Committee’s tax reform report on infrastructure

The reports of the SFC’s five Working Groups on Tax Reform were released on July 8, 2015. The report from the Community Development & Infrastructure Bipartisan Tax Working Group Report (the SFC working group) includes background information on four areas:

  1. Highway Trust Fund;
  2. Energy;
  3. Community development tax incentives; and
  4. Tribal tax incentives.

However, the report only includes recommendations for the Highway Trust Fund. In developing its recommendations, the group addressed the following questions it found important:

  • Sustainable funding: What is a sustainable funding solution for the “medium-term” (six years out) to avoid the approach of the past few years of “short-term highway patches”? A midterm solution requires about $90 billion through 2021 to avoid a Highway Trust Fund shortfall (per the CBO).
  • Ending the annual “patch” approach: What is needed to enable a discussion about long-term solutions?
  • Keeping a user pays approach: What are efficient solutions that include a “similar framework of the current user-fee system”?

Interim recommendation

The SFC working group suggests an interim option for addressing the medium-term funding shortfall. It notes that this option will also help tax reform efforts by making the tax system more competitive. This suggestion involves enacting a “deemed repatriation” to tax the deferred earnings of foreign subsidiaries of U.S. companies (revenue is estimated at over $2 trillion), at a low rate, payable over several years. This option is part of Tax Reform Act of 2014, which was proposed by former Rep. Dave Camp, R-Mich. (H.R. 1, 113th Congress).

From the report: “In the context of tax reform, deemed repatriation could play a very important role to achieving a bipartisan solution to fix America’s roads and bridges, while also overhauling our broken tax code.” Footnote 8 to the report mentions that some group members would likely only support deemed repatriation if it were part of tax reform that broadened the tax base and lowered tax rates.

Deemed repatriation was not viewed as a long-term solution because of the expectation that the Highway Trust Fund’s deficits would continue to grow as a result of people driving less, vehicle fuel efficiency improving, and increasing use of alternative-fuel vehicles.

Long-term recommendation

The SFC working group’s long-term proposal is for some type of vehicle miles traveled (VMT) excise tax, which it notes ties to road usage. The rate (or fixed-dollar amount) can be set to generate the required revenues. It could also be adjusted to account for the time of day the roads are used (allowing increased rates for high-demand times) and the type of road and vehicle, as well as other relevant variables. The SFC working group noted that recent work in Oregon on a VMT indicates that a VMT can protect driver privacy and be simple to administer. The group recommends implementing a nationwide trial VMT without delay because it could take 10 years to implement a VMT, and long-term Highway Trust Fund funding requires this type of approach.


While the SFC working group’s report offers two recommendations that would address shortfalls, these solutions contain some weaknesses and pose some challenges:

  1. The recommendations overlook what appears to be an obvious, partial solution—adjusting the current taxes for inflation. Given that the taxes are intended to fund projects where costs increase due to inflation, it is appropriate that the taxes be adjusted annually for inflation. This change would, for example, raise the 18.3 cents per gallon gasoline excise tax to 30.2 cents and could be phased in transitionally over a few years.
  2. Some of the Highway Trust Fund taxes are temporary. In a point relegated to a footnote in the report’s appendix, some of the taxes expire Sept. 30, 2016. While budget figures assume these will be extended, legislation is needed to actually extend the taxes. Why didn’t the group recommend that these taxes be made permanent?
  3. The deemed repatriation idea takes funds away that could be used in tax reform to lower income tax rates.
  4. Many legislators have signed the pledge promoted by Americans for Tax Reform to oppose tax increases. In a July 9, 2015, tweet, ATR president Grover Norquist stated that deemed repatriation is a tax increase. Thus, many legislators may oppose it.                         

In the meantime, continued patching

The shortfall patches that started in 2008 continue. P.L. 114-21 extended the Highway Trust Fund through July 31, 2015, and P.L. 114-41 extended it for another three months (through Oct. 29, 2015). (P.L. 114-41 also included several tax changes, including additional information for mortgage interest reporting, modification of the six-year statute of limitation, and changes in due dates for several tax forms, other than Form 1040. For a summary of these tax changes see Nevius, “Return Due Dates Changed in Highway Funding Bill”; AICPA, chart on “Original and Extended Due Dates”; and Joint Committee on Taxation, Estimated Revenue Effects, JCX-105-15.)

Looking forward

The Highway Trust Fund funding problem is over a decade old. Recent legislation continues to patch the problem for only a few months at a time. More is needed, including adjusting the current excise taxes for inflation and investigating how to connect the tax with road usage for vehicles that don’t use gasoline. The SFC working group’s recommendations are a start. Let’s see what the SFC does next with the report.

Additional reading

  • SFC’s five Tax Reform Working Groups:
  • CBO reports:
  • Joint Committee on Taxation, Long-Term Financing of the Highway Trust Fund (JCX-92-15).
  • House Ways and Means Committee hearing of June 17, 2015—“Long-Term Financing of the Highway Trust Fund.”
  • Senate Finance Committee hearing of June 18, 2015—“Dead End, No Turn Around, Danger Ahead: Challenges to the Future of Highway Funding.”
  • Department of Transportation website on history and funding of the Highway Trust Fund.
  • Oregon’s Road Usage Charge Program.
  • California’s Road Charge Technical Advisory Committee formed by S.B. 1077 (Chapter 835).                                                                                    

Annette Nellen, Esq., CPA, CGMA, is a tax professor and director of the MST Program at San José State University. She is an active member of the tax sections of the AICPA, ABA, and California State Bar. She is a member of the AICPA Tax Executive Committee and Tax Reform Task Force. She has several reports on tax policy and reform and maintains the 21st Century Taxation blog.

Tax Insider Articles


Business meal deductions after the TCJA

This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction.


Quirks spurred by COVID-19 tax relief

This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID-19.