Transportation Policy Academy 2015 – DC – Joung Lee, American Association of State Highway and Transportation Officials

Joung Lee is the Policy Director at the American Association of State Highway and Transportation Officials (AASHTO) in Washington, DC. He was among the speakers at a policy roundtable CSG hosted May 12 in Washington as part of the 2015 Transportation Policy Academy. During these portions of his remarks, Lee spoke to state legislators attending the academy about why the federal Highway Trust Fund faces insolvency again this summer and some of the options Congress could consider to address the situation.

On why the fuel tax will eventually become an unreliable revenue source for the federal Highway Trust Fund…

Lee: “When you look at the 10-year window, the fuel tax projections—at least for the purposes of the Highway Trust Fund—are supposed to be fairly flat if not even increasing just very gradually between now and 10 years from now. Obviously way short of meeting the actual investment needs, but the reason it’s actually not declining or expected to decline at least in the 10-year window is because there is expected to be more share of the revenues from the diesel tax, which means more trucks, while gas tax revenues are expected to dip during that time. Of course, beyond the 10-year window, do you still want to rely on a motor fuel tax type mechanism? Probably not a good idea. One rule of thumb that the Congressional Budget Office has is that for one MPG increase in the CAFÉ standards of vehicle fleets, you would see about a 1 percent decline in Highway Trust Fund revenues. That’s pretty clear in terms of what the future of the fuel tax system holds.”

On why the Highway Trust Fund faces insolvency…

Lee: “What we’re running into now is a situation where the Highway Trust Fund is literally running out of cash. It’s been in situations where it’s had $20 billion plus in cash balance in the early 2000s, which was conveniently used to then cover the overall size of the federal deficit because it wasn’t spent down. But since then what we’ve done, especially in the SAFETEA-LU legislation and beyond is (to say) ‘look, nobody wants to raise taxes or raise the revenues into the Highway Trust Fund (above) what’s expected to come in. Well, why don’t we spend down that built up balance that we had in the early 2000s’ and that set us on a trajectory where the spending rate is steeper than it otherwise would have been. … It’s not a sustainable path that we’ve set ourselves on.”

“Around the mid-August timeframe … that’s when the highway account of the Highway Trust Fund is expected to really dip below even the $4 billion warning level that generally is seen as you want to keep it above that because especially (during) summer construction season $300 million to $400 million each day gets paid out of the Highway Trust Fund. You get the receipts collected into it on a biweekly basis so there is a little bit of a cash flow situation that can arise. In the big scheme of things, that’s not that big of a deal. It becomes a lot bigger deal for the state (departments of transportation) because the federal highway program is a reimbursable program. The states have already paid the contractors to do all the work and then they’re doing the daily reimbursement requests to the federal government. If the federal government says ‘look, we can only pay you 70 cents on the dollar’ then the state is [left holding the bag] literally dealing with whatever the situation that it may find itself in at that point in time. The federal government at that point is expected to give you the remaining 30 cents in the next batch plus interest. So there’s even more cost associated with a delay in terms of the interest that’s collected. But obviously that’s not going to be sustainable for more than a couple of weeks because that will really build up from all the prior unreimbursed balances that you try to catch up. It’s just an approach that’s not going to work.”      

“If you look beyond that August context, what does it do for any new federal dollars that could be committed to projects—your statewide transportation improvement programs, the four-year capital plan, those projects that are receiving federal support? Most of them would not be able to move forward because in 2016 we’re looking at a virtual wipeout of the federal highway program. The federal transit program would be wiped out in fiscal 2016 and 2017 because the mass transit account picture is even worse than the highway account picture in the Highway Trust Fund.”

“This is something that has faced federal legislators since 2008. If we don’t do something about this Highway Trust Fund, we’re going to have this huge cliff. Each time there has been a series of General Fund transfers to what is ostensibly a self-financing trust fund mechanism. Sixty-two billion dollars of General Funds have been used at this point to prop up the federal Highway Trust Fund. Again, not a sustainable path.”

On why those General Fund transfers don’t have to be repaid…

Lee: “The way that the Highway Trust Fund programs fall into the federal budget is a little bit weird. You have your typical mandatory side of the federal budget—social spending on Social Security, Medicare and the like—and the appropriators here control only about one-third of the federal budget through the discretionary pot. … The budgetary authority associated with the Highway Trust Fund programs falls on the mandatory side but then the outlays that occur out of the trust fund years down the road after that budgetary authority has been provided is considered the discretionary side of the budget. It’s like the only program in the federal government that has this weird, dual distinction. And it also has enabled the transfers to happen without having them scored. At the end of the day, the real impact of $62 billion is that it increases the federal deficit. But for the purposes of maintaining the federal budget or how the federal budget sees those $62 billion, it’s seen as moving from the left pocket to the right pocket and that it has no budgetary impact. It’s one of the banes of the federal budgetary wonks up on the Hill. Why is this thing out here being able to take advantage of the loophole? You do have a rule now by Paul Ryan on the House side that says if you make any transfers into the Highway Trust Fund, you have to offset that, not just within a 10-year window, which is another popular, gimmicky way to fund your short-term needs, but within the year it occurs. It’s expected to be overridden yet again if we get to the situation in August or hopefully before then and transfer about $10 billion that’s needed to provide for program funding through December of this year.”

On the short-term options for lawmakers with no long-term reauthorization bill on the table …

Lee: “If because of that Highway Trust Fund balance situation and you do a two-month extension through the end of July, it buys you more time to find that six-year solution on a $100 billion gap that you need to fill above what’s expected to come in to the Highway Trust Fund. That’s not as painful because there’s no Highway Trust Fund fix necessary (with a two-month extension). By July you have to fix it but you can just do the policy extension through then. Another approach was why don’t we just find $10 billion and it would be associated with—if history is any guide—unrelated pay-fors to provide for that patch through the end of the calendar year and hopefully by then perhaps there’s a link to tax reform or just the corporate side of tax reform that can all be packaged together to find a six-year solution on the transportation bill. Another possibility could have been that (with) the presidential election in November 2016 do we even want to go anywhere close to that stuff? Why don’t we kick the can for say a year and a half through the end of 2016 calendar year? Then perhaps it would provide the stability to the program and hopefully (we’d) be in a better place to find a solution at that point.”

On why transportation investment is such a tough sell, particularly in Washington…     

Lee: “The problem with transportation is that the general public has no idea how much they pay and what they get back for it. I like to use the number from the (American Road & Transportation Builders Association) that says the average household pays $46 in gas tax per month at the state and federal levels, which compares to $160 for electricity and gas, $161 for cell phone, $124 for cable and internet access. … Is being able to access our great highway network more important than “Game of Thrones” on cable? I like that show. It’s cool. But really $46 in the big scheme of things relative to other typical household expenditures, it’s not an unreasonable contribution for what you’re able to get back for it.”

“What we’re trying to do at AASHTO is to create state-by-state stories of if the federal Highway Trust Fund becomes insolvent, this is the impact that would have on jobs, the actual dollar value of these projects. We also have a website that lists the top 10 projects that would be at risk, trying again to drive it home. Rather than talking about a $2.6 trillion need or even a $1 billion need that nobody can get their arms around, why don’t we make it more salient, more palpable, more tangible for the end users of the system. That’s the approach that I certainly see … more opportunity to see constructive action at the end of the day.”

On states having success in creating new revenues for transportation…

Lee: “We are encouraged by all the good things that you are leading at the state level in terms of all the different state level revenue conversations. We are tracking … 33 different state level conversations in the last two years in which we’ve seen good progress on (making) that value proposition of increasing the investment in transportation infrastructure with the associated revenues backing that up. We also recognize that those things don’t happen on the first try. It doesn’t happen maybe on the second or third try. Maybe it happens on the fifth or sixth try. But if you are able to explain that the investment needs are reasonable and the benefits are clear to the public and especially that the users’ share of that cost is pretty clear, you see a good partnership from the Governor…, and then getting folks lined up behind the usual construction lobby people or state DOT types—the ones that might not see obvious link to why they would support increased revenue for transportation—and you’re able to see some pretty good success there.”

On why devolution of the federal program would be a bad idea…

Lee: “The Transportation Construction Coalition came out recently with a good analysis of … how much the state gas tax would have to go up if the federal program is devolved or greatly reduced in size. … Sen. Mike Lee of Utah has a bill that would ratchet down the federal program over five years. It would reduce the federal motor fuel tax on gas from 18.4 cents to 3.7 cents. That’s a 14.7 cent reduction in federal fuel tax. What then would have to happen in order to maintain the current funding level for each state is to do some serious fuel tax increases. And again, even if you do these state level fuel tax increases, all you are doing is getting the same amount of money you’re getting now. You’re not going to get any more than that.”

On federal uncertainty causing states to delay transportation projects…

Lee: “As each day goes … we’re hearing about more and more states that are cutting back on their construction programs that were supposed to happen in a more stable environment provided by the Highway Trust Fund. Utah recently delayed 25 projects worth $65 million. Georgia: 329 projects worth $715 million. Wyoming: 18 projects, $29 million. Arkansas: 61 projects for $162 million. … Tennessee: 33 projects for $400 million. This is the kind of exercise we’ve been going through for the last eight years and asking folks to ramp down and ramp back up and expending all this energy just to find a few months of relief at a time is a terribly unproductive way of going about any business let alone something that is more of a long-term horizon oriented (business) like transportation infrastructure investment.”   

On repatriation of corporate earnings as a possible funding source for a long-term transportation bill…

Lee: “The administration has talked about the repatriation idea that would generate $286 billion. The mandatory repatriation as that particular approach is called where all corporate overseas earnings would be taxed at 14 percent, whether (the corporations) want to bring that (into the country) or not. … If you do what’s known as voluntary repatriation, (corporations that want to bring their money into the United States), we’ll give you not the 35 percent corporate tax rate but 6.5 percent as Senators (Barbara) Boxer and (Rand) Paul have talked about recently. They just got a response from the Joint Committee on Taxation saying (the) approach would raise $30 billion in the next two years. Bad news: in 10 years, it will lose $118 billion. So, that’s not going to work.”

On why AASHTO prefers that long-term fixes be supported by user fee-based revenues, such as those recommended in its 2014 Matrix of Revenue Options

Lee: “Generally we aren’t comfortable when it gets into the territory of stuff that we don’t really know about. The (revenue options) in (AASHTO’s Matrix ) are related to transportation use and that’s what the whole system is built on. It’s a user fee (-based system). The further away you get from that, the fear is that even if you were to find a six-year fix, what do you do after that? It becomes increasingly untenable.”

On whether there are any parallels between one recent Congressional action and transportation’s long struggle on Capitol Hill…

Lee: “We’ve seen an example with this Medicare doc fix. … If you’re a doctor receiving Medicare payments, you were facing (a 21 percent cut) from the feds. … Congress generally at the end of every year as part of this whole tax extenders package would patch it up. I understand that after 17 short-term patches that a 10-year fix is in for Medicare that was passed by both chambers, signed by the President into law like three weeks ago. We’re not hearing much about it. It’s going to incur $128 billion in deficit over the next 10 years. … What happened there? That’s not responsible but then if (Congress) is going to just do something like that, can they fix this $100 billion problem with the transportation program?”

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