As repair needs mount, highway trust fund faces shortfall

The fund that finances the federal highway program through fuel and other taxes is headed for a $4.3 billion shortfall in two years.

The fatal collapse of the 40-year-old Interstate 35W bridge in Minneapolis into the Mississippi River on August 1 has focused attention on the nation's chronic underinvestment in its aging and ailing infrastructure.

Now Congress needs to tackle the politically tricky question of where to get the money to improve the transportation system, even as the highway trust fund that pays for it is facing a multibillion-dollar deficit.

The accident involved one of 1,135 bridges in Minnesota and 73,518 spans nationwide that the Transportation Department has labeled "structurally deficient" -- in poor condition and needing repair but not unsafe. The Interstate 35W bridge was years away from being replaced; instead, the strategy was to patch it and inspect it. Minnesota Gov. Tim Pawlenty recently said he would consider increasing state gas taxes to pay for infrastructure repairs; he had vetoed two such measures in the past.

Minnesota Democratic Rep. James Oberstar, who chairs the House Transportation and Infrastructure Committee, said this week that his priority for the fall would be to establish a new trust fund for bridge repairs. Pete Ruane, president of the American Road and Transportation Builders Association, said, "The tragedy of Minnesota simply dramatizes and underscores" that the nation's bridges, highways, and other transportation arteries are old, outmoded, and under tremendous strain -- and that the country isn't spending enough to maintain its existing infrastructure, let alone expand it for a growing population.

While federal highway spending this year is set at $40 billion, Ruane's ARTBA and other industry groups put the 2007 cost to improve existing highways and bridges at $155.5 billion. Over the next five years, the American Society of Civil Engineers says it will take $1.6 trillion in capital investment by all levels of government to keep the current system up to date. That's almost six times the $286 billion in federal funds that the 2005 highway bill provided to the states for transportation construction and repairs through 2010.

To make matters worse, the trust fund that finances the federal highway program through fuel and other highway-use taxes faces a $4.3 billion shortfall in two years, according to the Office of Management and Budget. Unless Congress plugs that hole, the government will have to slash more than $16 billion from the $43 billion in aid that the states were promised for 2009.

Transportation wonks have known all along that a deficit loomed, but the day of reckoning is approaching sooner than expected. In February, OMB projected that gas-tax receipts would fall $200 million short of the level guaranteed in the law in 2009; last month's revision widened the gap past $4 billion.

That jump "has been a major wake-up call," said Jack Basso, director of management and business development for the American Association of State Highway and Transportation Officials. His organization and other industry groups are urging the federal government to use a variety of funding approaches to invest hundreds of billions of dollars over the next 50 years to nearly double the capacity of U.S. highways and public transportation.

Gregory Cohen, president of the American Highway Users Alliance, said the potential hole in the trust fund is "a real problem, and we're going to have to find a solution. It's not in anyone's interest to allow the federal highway program to go bankrupt."

But heading into a presidential election, Cohen doesn't expect politicians to raise fuel taxes to stave off the 2009 deficit. Meanwhile, he says, the trust fund's purchasing power has declined by 30 percent because of inflation and skyrocketing construction costs -- so the country is spending less today in constant dollars than when federal fuel taxes were last increased 14 years ago.

Policy makers and transportation experts are kicking around several ideas to address the 2009 shortfall besides increasing taxes, which have stood at 18.4 cents a gallon for gasoline and 24.4 cents a gallon for diesel fuel since 1993.

Those possibilities include ending state and local governments' gas-tax exemption; crediting the trust fund with interest; and combating tax evasion by organized crime. Other potential revenue streams include claiming the proceeds of the so-called gas-guzzler tax imposed on low-mileage vehicles, which now goes to general revenue, and dedicating a portion of customs fees to the trust fund.

Taxes on gasoline and diesel fuel provide nearly 90 percent of the trust fund's revenue, with taxes on heavy-vehicle use, truck tires, and truck and trailer sales making up the rest. The highway program distributes money to the states to build and maintain major roads according to a statutory formula that this year guaranteed all states a minimum return of 91.5 percent of the receipts they contribute to the trust fund. A separate, smaller account within the trust fund supports mass transit.

Many transportation lobbyists are still stewing about the 2005 legislative fight over the current law, when the House Transportation and Infrastructure Committee used the Transportation Department's own estimates to write a $375 billion bill and the White House played hardball to force the total down to $286 billion.

"We've got an administration that doesn't get it," said one lobbyist who insisted on anonymity. It has "a strong anti-tax sentiment, and over time it's been harder and harder to discuss funding." The lobbyist also faulted Congress for diverting highway program dollars to an increasing number of earmarks. "We need to have a national transportation system because it's important to the national economy. Instead, it has become all about 'what do I get?' "

Even if Congress can keep the trust fund solvent through 2010, it will face daunting political challenges when it writes the next infrastructure spending bill. Industry groups say that by 2015 it would take $73 billion -- financed by a 10-cent increase in the gas tax -- just to restore the fund's purchasing power. The legislative effort "is going to have to be bipartisan," Cohen said. "If not, we're going to have to face up to major cuts in the highway program, and the states are going to have to come up with their own solutions."

Congress and the new administration would also have to sell a gas-tax hike to a skeptical public that has little appetite to underwrite more "bridges to nowhere."

"There's no question that the number of earmarks, and some of the earmarks, in [the 2005 bill] created the perception the whole program is pork. And that's not true," said former House Transportation and Infrastructure Committee Chief of Staff Jack Schenendorf, who is now with the law firm of Covington & Burling.

Robert Poole, director of transportation studies for the free-market Reason Foundation, argues that Congress should fundamentally rethink how the government doles out the money it raises through fuel taxes. The current system, which collects more money from big states with large populations than they get in return, to subsidize highway construction in sparsely populated states, is "perverse," Poole said. "If we aren't willing to change the way the federal system allocates resources, then don't waste the political capital" to raise taxes, he said. Instead, "make sure that private capital can be used as much as possible."

The high price of gas and concerns about global warming are spurring the development of alternative energy sources -- which may be good for the environment and for national security but cut into gas-tax revenues even as the cost of maintaining the highway system and the demand for greater capacity increase.

"We need a whole package of new financing mechanisms," said Basso of the state transportation officials' group. He cited such options as private financing and such means as federal loan guarantees, private activity bonds, investment tax credits, congestion pricing, and toll roads. Other proposals include taxing alternative fuels, indexing fuel taxes to inflation, and eventually replacing the gas levy with a mileage-based fee that taxes drivers according to the number of miles they travel rather than how much fuel they use.

The ARTBA's Ruane wants to create a multibillion-dollar program, financed by freight user fees outside the trust fund, to build "critical commerce corridors." He said the interstate initiative, which would include truck-only lanes, could accommodate the "tsunami" of freight that U.S. ports, rails, and highways must move in the future, as well as to relieve congestion and improve safety.

"We have a huge problem ahead of us as a nation," said Schenendorf, who serves as vice chairman of a committee established by the 2005 law to study the future of financing surface transportation programs. "Our very way of life, our very economic survival is a stake. As a country, we have really lived off the vision and the investment of our grandparents. We've become complacent."

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