Permanent Solution for the Highway Trust Fund

The Highway Trust Fund does not raise sufficient revenue to cover its obligations. One of the main reasons is the constant erosion of the value of the gas tax, its largest source of funding.

Some members of Congress and the President are pursuing unsound tax policy as a temporary fix. Lawmakers looking for additional revenue to replenish to trust fund should devise permanent provisions that conform to the trust fund’s long-standing, user-pays standard. One option to fix the trust fund is to raise the gas tax while offsetting that tax increase with an equal reduction in another tax.

There are good policy reasons to raise more revenue from the gas tax in exchange for lowering the revenue received from other taxes.

– The gas tax is a relatively less distortive tax. Lowering more distortive taxes and raising the same amount of revenue from non-distortive taxes would lead to a larger economy.
– The gas tax conforms to the benefit principle more closely than other taxes levied by the federal government. Lowering taxes that do not conform to the benefit principle of taxation and raising the gas tax is an opportunity to connect government revenue to related expenditures.
– Closing the funding gap in the Highway Trust Fund would grant lawmakers additional time to focus on other priorities.

The Taxes and Growth Model reveals a number of tradeoffs.

– If Congress would like to make this change pro-growth, one option would be to lower the capital gains tax rate.
– If Congress would like to address distributional concerns with the gas tax but are not concerned with economic growth, an option would be to expand the earned income tax credit.
– If Congress would like to maintain neutral distribution and growth while fixing the trust fund, one option would be to expand the standard deduction.

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