LEXIS-NEXIS® Congressional Universe-Document

LEXIS-NEXIS® Congressional

March 21, 2000, Tuesday

SECTION: PREPARED TESTIMONY

LENGTH: 4164 words

HEADLINE: PREPARED TESTIMONY OF PETER J. BASSO ASSISTANT SECRETARY FOR BUDGET AND PROGRAMS AND CHIEF FINANCIAL OFFICER U.S. DEPARTMENT OF TRANSPORTATION

BEFORE THE HOUSE COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE SUBCOMMITTEE ON GROUND TRANSPORTATION

SUBJECT - REDUCING FUEL TAXES BY 4.3 CENTS PER GALLON

BODY:
Mr. Chairman, Members of the Subcommittee. Thank you for the opportunity to testify on proposals to reduce the Federal fuel tax by 4.3 cents per gallon.

As you are aware, there are a variety of proposals under discussion that would reduce the Federal fuel tax by 4.3 cents per gallon with varying assumptions as to the effective date and duration of the reduction. For the purpose of my testimony today, I am assuming that the 4.3 cents per gallon reduction would take effect on July 1st of this year and that the reduction would be permanent. In addition, based on OMB estimates, I am assuming that the lost revenue would be split 86 percent/14 percent between the Highway and Transit Accounts of the Highway Trust Fund. Before discussing the impact of a 4.3 cents per gallon fuel tax reduction on the Highway Trust Fund, I would first like to provide some history on the fuel tax, in general, and the 4.3 cents per gallon increment that is now being considered for repeal.

History of Fuel Taxes

Prior to 1956, the Federal-aid highway program was financed by the General Fund of the Treasury. Although taxes on motor fuels and automobile products were in existence, the revenue from those taxes was not placed in a special funding account. The Federal-Aid Highway Act of 1956, coupled with the Highway Revenue Act of the same year, authorized significant highway funding increases and established the Highway Trust Fund as the mechanism for financing these expanded programs, which included the Interstate Highway System and expanded Federal Primary and Secondary Systems. To finance the increased authorizations for these programs, the Highway Revenue Act established a dedicated source of revenue which would be deposited in the Highway Trust Fund, including most notably, a 3 cents per gallon fuel tax. In 1959, the fuel tax was increased by a penny to 4 cents per gallon. The first major increase in the fuel tax did not occur until almost 24 years later when the Surface Transportation Assistance Act of 1982 increased the tax to 9 cents per gallon and allocated a portion of the fuel tax equal to about a penny per gallon to a new Mass Transit Account within the Highway Trust Fund.

Another increase of 5 cents per gallon -- increasing the Federal fuel tax to 14.1 cents per gallon -- was enacted as part of the Omnibus Budget Reconciliation Act of 1990. For the first time in the history of the Trust Fund, half of the revenues derived from the 5 cent fuel tax increase went to the General Fund of the Treasury for deficit reduction. This left 11.5 cents of the fuel tax for the Highway Trust Fund, with 1.5 cents directed to the Mass Transit Account. This was the first time since 1956 that a part of the Federal fuel tax was directed to the General Fund. The General Fund portion of the tax was imposed on a temporary basis through September 30, 1995.

Another fuel tax increase of 4.3 cents per gallon was enacted effective October 1, 1993, by the Omnibus Budget Reconciliation Act of 1993. The increase brought the fuel tax to 18.4 cents per gallon with the entire amount of the increase directed to the General Fund of the Treasury for deficit reduction. The 4.3 cent tax increment had no expiration date. The Act also provided that the temporary 5 cents per gallon General Fund fuel tax imposed in 1990 would be extended and directed into the Highway Trust Fund effective October 1, 1995, thereby raising the fuel taxes into the Trust Fund to a total of 14 cents per gallon, with 2 cents going into the Mass Transit Account.

The Taxpayer Relief Act of 1997 redirected the 4.3 cents General Fund tax to the Highway Trust Fund effective October 1, 1997. The Senate report on the bill explicitly states that the purpose of the redirection was "to ensure that more funds will be available for Highway Trust Fund programs in the future." The Transportation Equity Act for the 21st Century (TEA-21) extended the Highway Trust Fund taxes through September 30, 2005. So, currently, fuel taxes totaling 18.3 cents per gallon are being deposited into the Highway Trust Fund, of which 2.86 cents per gallon go into the Mass Transit Account.

The effect of these user tax increases and increased fuel consumption on revenue into the Highway Trust Fund has been significant. In FY 1990, fuel tax revenues into the Trust Fund totaled close to $12 billion. In FY 1996, when the 2.5 cents per gallon fuel tax was redirected into the Trust Fund, receipts totaled close to $21.5 billion. In FY 1998, when the 4.3 cents per gallon fuel tax was redirected into the Trust Fund, receipts increased further to $23.3 billion (which excludes almost $6 billion of 1998 receipts whose deposit into the Trust Fund was statutorily delayed until FY 1999). This year, we estimate that fuel taxes into the Trust Fund will total $30 billion.

I want to emphasize that the user tax enhancements deposited in the Highway Trust Fund were enacted for a reason -- to meet the growing needs of our highway and transit systems. By many indications, the investments made with these funds have been a success. The pavement condition of the National Highway System has been steadily improving.

In 1993, 88.7 percent of the miles on the National Highway System met pavement performance standards for an acceptable ride. In 1997, it had increased to 91.7 percent. Similarly, the condition of bridges on the National Highway System has also improved. In 1993, 26.7 percent of National Highway System bridges were structurally deficient. The 1998 data indicate that that percentage has decreased to 23.1 percent. In the area of transit, ridership has reached a 35-year high, with annual passenger miles increasing by 15 percent from 1993 to 1998. There also have been important highway safety improvements. The fatality rate per 100 million vehicle miles traveled has declined from 1.7 in 1993 to 1.6 in 1998. The injury rate per 100 million vehicle miles traveled also has declined -- from 137 in 1993 to 122 in 1998.

Impact on the Highway Trust Fund and Funding to States Assuming a July 1st effective date, a 4.3 cents per gallon reduction in the fuel tax would decrease revenue to the Highway Trust Fund by $1.4 billion in fiscal year (FY) 2000 and by over $7 billion in each of FYs 2001 - 2005. Total revenue loss during FYs 2000 - 2005 would be over $39 billion.

The lost revenue from the 4.3 cents per gallon fuel tax reduction would adversely impact both the solvency of the Highway Trust Fund and the Trust Fund's ability to meet its commitments as required under the Byrd test. For the Mass Transit Account, the average annual revenue will fall by over $1 billion during FYs 2001 -- 2005. The cumulative effect of this reduction will be for the Mass Transit Account to run out of cash to pay its bills beginning in FY 2004. Specifically, the cash balance of the Mass Transit Account would be a negative $404 million in FY 2004 and a negative $2.4 billion in FY 2005. While the Highway Account would maintain a positive cash balance through FY 2005, it would fail the Byrd test for the second time ever. The Byrd test requires that unpaid commitments at the end of a fiscal year must be less than the sum of the current cash balance and the revenues anticipated to be earned in the following 24-month period.

With a 4.3 cents per gallon fuel tax reduction, the Highway Account would fail the Byrd test in FY 2001 and 2002. This would mean that contract authority would be reduced in these years --- by $2.781 billion in 2001 and by $1.778 billion in 2002. Failure of the Byrd Test results in the proportional reduction of apportionments for all of the highway formula programs:

Interstate Maintenance, National Highway System, Surface Transportation Program, Bridge Replacement and Rehabilitation Program, Congestion Mitigation and Air Quality Improvement Program, Minimum Guarantee, Appalachian Development Highway System, Recreational Trails, and Metropolitan Planning.

In addition to the reduction in Federal contract authority due to the Byrd test, the states would lose both Federal obligational and contract authority due to the Revenue Aligned Budget Authority (RABA) calculation. TEA-21 included the RABA provision to more closely align highway spending with receipts into the highway account. TEA-21 requires that during the development of the President's annual budget, the guaranteed funding levels in the Act be adjusted as new receipt projections are made and actual receipts for earlier years are known. In FY 2000, RABA totaled $1.456 billion and in FY 2001 it totaled $3.058 billion. RABA automatically translates into increases in contract and obligational authority if the adjusted level of receipts increases. The President's Budget does not assume a RABA increase beyond 2001, because by law RABA must be calculated yearly with the President's February budget submission. However, under current law and using current receipt estimates for these outyears, the RABA increase would be $2.887 billion in FY 2002 and $1.587 billion in FY 2003. If the 4.3 cent per gallon tax cut is enacted, RABA in these years would be negative -- -$4.623 billion in FY 2002 and -$11.4 billion in FY 2003. Thus, the total negative RABA impact would be $7.510 billion in FY 2002 and $12.987 billion in FY 2003. This means that instead of receiving additional funds, the states will lose obligational and contract authority that was set in TEA-21. The reduced Federal program size will be felt in every state. In FY 2003, the total Federal-aid obligation limitation would be just over $16 billion, about equal to the funding level in 1992, the first year under ISTEA. The programmatic impact of these reductions is discussed under the next heading.

In addition to the adverse impact on the Highway Trust Fund and Federal highway funding, the 4.3 cents per gallon fuel tax roll-back would reduce revenue into the Airport and Airway Trust Fund. Again, assuming the July 1st effective date, receipts would decline by $164 million in FY 2000. The loss of receipts would be $667 million in FY 2001 and grow to $774 million in FY 2005. In total, $3.8 billion in receipts would be lost to the Airport and Airways Trust Fund during FYs 2000 -- 2005. These reductions would have an impact under the aviation reauthorization bill that has been passed by both the House and Senate. The legislation calls for all aviation trust fund receipts and interest each fiscal year to be used for the four major accounts of the Federal Aviation Administration (FAA): Operations, Airport Improvement Grants, Facilities and Equipment, and Research, Engineering and Development. To the extent that tax receipts and interest fall short of fully funding the needs of those accounts, the General Fund may be used for FAA Operations. The practical effect of this tax repeal would therefore be that FAA Operations would be more dependent on General Fund appropriations by about $700 million each year on top of the $2 billion already assumed in AIR-21. As we all know, such a large sum will be difficult to enact in the competitive appropriations process.

Programmatic Impact

The impact on highway, transit, and motor carrier safety funding would be significant.

With regard to highways, we estimate that the states will lose $20.5 billion during FYs 2002 and 2003 as a result of the RABA calculations. Again, the reduced program size will be felt by every state. California will lose almost $1.8 billion. Texas will lose over $1.4 billion. Pennsylvania will lose $930 million. Florida will lose $900 million. I am providing tables that detail the losses for each state.

What will the losses mean to highway users? Increased highway investment by all levels of government has had a noticeable effect on system conditions and operational performance in recent years. The percentage of deficient bridges has declined steadily; the percentage of pavement in poor condition has also declined. However, there remains a significant backlog of highway and bridge preservation and capacity deficiencies that has not been addressed. Also, there remains a "gap" between future investment requirements and current spending.

Federal Highway Administration analysis reveals that, if Federal funding for highways is sustained at TEA-21 levels beyond 2003 in constant dollar terms and state and local highway funding growth is consistent with historic trends, then the gap will be closed within the next 20 years. If Federal funding is reduced, and State and local funding does not fill the void, then the gap will continue to exist throughout the 20-year period. As a result, system conditions and operational performance would be expected to decline. This decline will tend to drive up highway-user costs, increasing travel time, vehicle operating costs, and crash costs. Indeed, Federal funding reductions could reverse the downward trend in fatality and injury rates we have achieved, and jeopardize our goal of reducing fatalities and injuries by 20 percent in 10 years (by 2008).

While reducing the Federal fuel taxes would marginally benefit consumers in the short term, reducing Federal highway funding by a corresponding amount will cause these benefits to quickly be erased by increased highway user costs. A 4.3 cents per gallon reduction in Federal fuel tax equates to a reduction of 0.252 cents per mile, based on the 17.0 miles per gallon average for all vehicles in 1998. If future Federal investment is reduced correspondingly, and State and local governments do not make up the difference, the resulting deterioration of system conditions and performance would be expected to drive up highway user costs by 0.262 cents per mile within 5 years. Over 20 years, highway-use costs would be expected to increase by 0.616 cents per mile, in constant dollars. Individual drivers, therefore, will save more than twice as much in the long run if the revenue from the 4.3 cent tax is invested in highway improvements, than if the tax is repealed.

With regard to transit, because transit programs are not affected by RABA adjustments, a 4.3 cents per gallon fuel tax reduction would not require a reduction in the guaranteed funding levels in TEA-21. Under TEA-21, the Mass Transit Account of the Highway Trust Fund provides 80 percent of the funding for Federal transit programs. The proposed tax reduction would deplete the cash balance in 2004, making it possible to support less than a $3.9 billion trust funded program level in the next six-year reauthorization package, a 30 percent reduction from the $5.4 billion annual average provided during the next three years of TEA-21.

Again, assuming the State and local governments do not compensate for the reduction in Federal support, a 30-percent reduction in the Federal transit programs will adversely affect public transit. More than 800 transit authorities, metropolitan planning organizations and governments receive funding from one or more FTA programs. The transit systems of every state and virtually every urbanized area rely on Federal financial assistance. Transit helps relieve congestion, provides mobility to millions of Americans who do not or cannot drive, and improves the quality of life through better community growth and providing options for personal mobility.

In the rural areas, there are many operators of only a dozen or fewer vans, often only one or two. Many of these operators already rely on volunteer services and live hand-to-mouth, operating old equipment. A programmatic reduction of 30 percent can easily mean more than a 30- percent reduction in service. The basic mobility of rural residents will be reduced, impacting their ability to access jobs, education and medical treatment.

In urban areas, reductions in transit service will accentuate congestion and, like the rural areas, access to jobs and other basic life activities may be affected.

Funding under the formula programs as well as discretionary funding for bus projects and New Starts will all be equally cut. The Administration has proposed funding for twelve New Starts projects in FY 2001. These projects will require substantial New Starts funding in the next reauthorization cycle. Even more important is the fact that the demand for New Starts funding is so great. More than 190 projects were identified in TEA-21. Most of these projects are advancing, and many other projects not included in TEA-21 are advancing, as well. Most New Starts projects rely on a complex funding plan that includes borrowing to meet cash flow needs. A 30-percent reduction in funding will devastate existing funding plans, cause large increases in financing costs for projects that can proceed, and substantially delay many other New Starts projects.

Finally, a 30-percent reduction in transit funding means that funding for the elderly and persons with disabilities will be reduced, and planning funds that help improve land use and reduce congestion will be cut.

With regard to motor carrier safety, we estimate that the 4.3 cents per gallon fuel tax reduction will reduce Federal motor carrier operations and research programs by one-third, to below the FY 2000 level of $76 million, thereby jeopardizing the expansion of the Federal inspector workforce and new regulatory initiatives. In addition, the National motor Carrier Safety Program (NMCSP) would be reduced to $149 million in FY 2002 and $100 million in FY 2003, the same as the FY 1999 authorized level. This program is the backbone of our efforts to expand state enforcement of interstate and intrastate commercial motor vehicle regulations, thereby reducing motor carrier related crashes, injuries, and fatalities on our Nation's roadways. In essence, program funding would remain virtually flat, undoing the progress made in the Motor Carrier Safety Improvement Act of 1999 that was signed into law only last December, and making it more difficult for the Administration to achieve its goal of reducing fatalities from truck and bus crashes by 50 percent by 2009. Every year, crashes involving large trucks kill more than 5,300 people and injure about 130,000.

Economic Implications

Assuming that the States and localities do not compensate for the reduction in Federal funding and thereby support transportation- related employment, there could be significant economic implications. Eliminating 4.3 cents per gallon of the fuel tax would affect employment and economic activity not only in sectors of the economy involved in highway construction, but in every other sector of the economy as well. The Federal Transit Administration estimates that 36,800 transit jobs are supported for every billion dollars of federal funds invested in transit. So, by 2005, 53,800 transit jobs annually would no longer be supported by Federal expenditures.

Similarly, the Federal Highway Administration estimates that 42,400 jobs are supported for every billion dollars of Federal funds invested in highways. Two-thirds of these jobs are in highway construction and supplying industries, and the remaining one-third is in other sectors of the economy. Reductions in employment would not all occur immediately because highway obligations in any year typically are paid out over several years. A permanent 4.3 cents per gallon fuel tax cut effective July 1st of this year would reduce 30,000 full-time equivalent jobs in 2002 and 265,000 jobs in 2004.

A reduction of 4.3 cents would also impact other industries that supply the highway construction industry. By 2003, for example, demand for cement would be reduced by a total of 10 million tons, bituminous materials by 6 million tons, and steel by over 1 million tons. All other supplying industries similarly would have reduced demands for their products.

Reductions in gross highway investment could also affect overall economic productivity. Costs in virtually every sector of the economy could increase if highway investment is reduced because of the fuel tax decrease. Cost increases would be the result of many factors -- including higher costs to transport labor, materials, and other factors of production -- and increased total logistics costs to manufacture and distribute products. Impacts on Individual Consumers and Businesses The 4.3 cents per gallon fuel tax repeal would provide little relief to individual households. In 1998 (the most recent year for which data is available), U.S. households consumed 99.23 billion gallons of motor fuels and paid about $18.26 billion in Federal motor fuel tax. On average, motor fuel consumption was 955.3 gallons and the Federal motor fuel tax was $176 per household per year. Assuming that the level of household motor fuel consumption remained unchanged, a 4.3 cent reduction in the Federal motor fuel tax would reduce U.S. household expenditure on Federal motor fuel tax by $4.27 billion, or $41 per household annually. This reduction in the fuel tax translates to a 79 cent per week decrease in the amount each U.S. household would spend on Federal motor fuel taxes. Thus, the 4.3 cent per gallon savings will have a negligible impact on the average consumer.

Measured in current dollars, Federal motor fuel tax per household in 1998 was more than five times its level in 1966. But when the effect of inflation is removed, Federal motor fuel taxes paid by the average U.S. household increased by only 27 percent between 1966 and 1998, while real disposable income of U.S. households increased by 60 percent. Therefore, the share of Federal motor fuel tax in household disposable income decreased from 0.37 percent in 1966 to 0.29 percent in 1998. The improvement of automobile fuel economy was largely responsible for the slower growth of household motor fuel consumption (and hence household expenditures on the motor fuel tax) relative to the growth of household income and travel demand. Between 1966 and 1998, vehicle-miles traveled per household increased 68 percent, while motor fuel consumption per household increased only 15 percent.

U.S. businesses paid about $5.07 billion in Federal motor fuel tax in 1998, which accounted for 22 percent of the total Federal motor fuel tax collected in that year. A 4.3 cent tax reduction would reduce U.S. business expenditures on Federal motor fuel tax by $1.18 billion annually, assuming that business motor fuel consumption would remain at its 1998 level. But at the same time it will reduce the revenue of the Highway Trust Fund, which funds our nation's highway and mass transit infrastructures. Any benefits that travelers, truck drivers, and the transportation industry would derive from a 4.3 cent reduction would have to be balanced against such opportunity costs as lower degrees of mobility and accessibility and higher risk in transportation safety resulting from lower investment in transportation infrastructures.

In addition, motor fuel tax is a very small portion of gasoline price and the proposed tax reduction is small compared to gasoline price changes over the last two decades. Today, the Federal tax accounts for only one-tenth of the average gasoline price. The proposed reduction of 4.3 cents per gallon accounts for approximately 2.8 percent of the average cost of gasoline. Over the last two decades, changes in gasoline prices from year to year were as large as 42 cents, about ten times of the proposed 4.3 cent reduction in Federal gasoline tax. Despite this variability, motor fuel consumption in the United States showed a steady growth of 0.8 percent per year. This is consistent with analysis done by the Bureau of Transportation Statistics that gasoline consumption in the United States and, therefore, the travel behavior and transportation needs of consumers, motor carriers, and other businesses, are not very sensitive to changes in gasoline price.

Finally, a 4.3 cents per gallon Federal fuel tax repeal does not necessarily guarantee that the combined Federal-state fuel tax rate will decrease. Indeed, a number of states already have laws on the books whereby a decrease in the Federal fuel tax means an automatic increase in the state fuel tax. Oklahoma, Tennessee, and Nevada are such states. In addition, other states without such laws could increase their fuel taxes in order to make up for the shortfall in highway and transit funding that would otherwise occur.

Conclusion

It is clear that this tax proposal would result in significant funding reductions in several Federal transportation programs -- highways, transit, and aviation. By reducing the Federal share of spending, this reduction will shift additional funding responsibility of State and local governments. Finally, given the price inelasticity of gasoline, it is unclear whether this reduction will alter the travel behavior and needs of consumers and businesses.

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LOAD-DATE: April 20, 2000