All over the United States, construction crews are shaking off the winter cold and gearing up for a busy season repairing and expanding our transportation infrastructure. Yet, one ominous question remains: Will the Highway Trust Fund have enough money to keep them on the job?
The most recent estimates by the U.S. Department of Transportation show the trust fund running short before the end of the fiscal year. Moreover, as cash balances dwindle, the department will begin holding reimbursement payments to states. When the dollars run out, pink slips will soon follow — an unnecessary bit of self-inflicted economic pain.
The Highway Trust Fund faces major structural deficits stemming from dramatic improvements in vehicle fuel efficiency. As cars consume less gas, they also pay less in federal gas taxes, which are the main revenue source for the Highway Trust Fund. Meanwhile, federal gas tax rates have remained constant since 1993. By model year 2025, fuel economy will nearly double to 54.5 miles per gallon, meaning the current gas tax will be even less adequate. Congress needs to provide stable, long-term revenue for the trust fund.
Unfortunately, one idea gaining momentum is a corporate tax holiday on foreign earnings. Putting aside that a large share of “foreign” earnings already sit in U.S. banks and are the result of domestic transactions, a repatriation holiday is not a viable fix for our transportation needs. In fact, a tax holiday is the most costly and least fiscally responsible way to patch the trust fund. Offsets are intended to reduce the deficit, a tax holiday would actually cost the government billions of dollars over the next 10 years.
In 2011, the Joint Committee on Taxation examined similar repatriation proposals and found they result in substantially higher budget deficits, once the short-term revenue bump evaporates. The analysis determined that a repatriation holiday with a 5.25 percent tax rate would raise a meager $25.5 billion in the short-term, but ultimately cost the government $79 billion over 10 years. This would be an unacceptably high cost for a plan that also fails to raise sufficient revenue.
To put this in context, the trust fund has a projected shortfall of $172 billion over the next 10 years. Raising the gas tax by 12 cents to 15 cents a gallon above current levels would provide solvency and allow the program to grow to meet the needs of our expanding economy and population. If election year politics make a gas tax increase unrealistic, there is another far more fiscally responsible way to patch the trust fund than a repatriation holiday: Treasury bonds.
The government currently pays about 2.75 percent interest on 10 year treasury bonds. That means if the government borrowed $25.5 billion today, which is equal to the anticipated revenue from a repatriation holiday, it would pay about $8 billion in interest over 10 years or 31 percent of the principal value. In contrast, a repatriation holiday with 5.25 percent tax rate has a whopping 310 percent cost of funds since the government is losing so much revenue in the long term to gain the small increase now.