Krit Chanwong
The federal government uses the Federal Highway Trust Fund to administer funding to highways and mass transit. Unfortunately, the Congressional Budget Office projects that the trust fund will go insolvent in 2028. When this happens, all federal highway spending will face a 46 percent cut.
One way to prevent the Federal Highway Trust Fund from going bankrupt is to raise the federal gas tax. Economist Jason Sorens advocated for this in a recent piece for Reason Magazine. He claims that “opposing an increase to the federal gas tax in the current environment effectively endorses higher income taxes instead.” Sorens is right: Increasing the federal gas tax is one way to prevent the Highway Trust Fund’s insolvency. But it is probably not the best way, since gas tax increases are regressive and can have significant negative macroeconomic effects.
A better way to prevent the trust fund’s insolvency is to reduce spending. There are many ways to do this, such as liberalizing “Buy American” compliance and relaxing prevailing wage regulations. However, the most economically sound way to reduce Federal Highway Trust Fund expenditures is to eliminate mass transit grants. Currently, financed mass transit grants strain the federal government’s ability to fund highway projects, widening the gap between dedicated revenues and outlays by 58 percent. Mass transit grants also distort local incentives by redistributing money from poorer states to richer ones. Eliminating mass transit grants, as such, would ensure that federal highway revenues are used only for highways.
How the Highway Trust Fund Finances Mass Transit Grants
The federal government levies four main taxes and fees on drivers:
- Fuels: The federal government levies a $0.184 cent per gallon tax on gasoline and a $0.244 cent per gallon tax on diesel, from which it collected $33.4 billion in 2023.
- Trucks and Trailers: The federal government levies a 12 percent tax on the retail sales of heavy vehicles, from which it collected $7.2 billion in 2023.
- Federal Use Tax: The federal government levies a tax on heavy vehicles that use highways, from which it collected $1.4 billion in 2023.
- Tires: The federal government levies an excise tax for a variety of tire types, from which it collected $674 million in 2023.
The gross revenue from all these sources is approximately $44 billion. However, some of this revenue comes from non-highway sources, such as motorboats and airplanes. Excluding these non-highway sources, net driving fees and taxes amounted to around $42 billion in 2023.
Not all of the $42 billion is spent on highways. In 1982, Congress passed the Highway Revenue Act of 1982. This act created the Mass Transit Account of the Federal Highway Trust Fund. This account’s aim was to provide grants to support transit systems and would be funded by the mass transit portion of federal fuel taxes. For gasoline, the mass transit portion is $0.0284 cents, which is around 15.4 percent of the total tax rate.
In 2023, the value of the mass transit portion of federal fuel taxes amounted to approximately $4.7 billion. Moreover, $1 billion of all highway income (including interests and general fund reimbursements) was also transferred to be used for mass transit subsidies. As such, $5.7 billion (or 17 percent of gross federal gas receipts) of all federal highway income was used to subsidize mass transit.
This is not a recent phenomenon. As Figure 1 shows, the federal government has used approximately 17.3 percent of annual gas tax revenues to mass transit from 2011 to 2023.
Driving Subsidies Strain Federal Highway Financing
Using federal gas tax revenues to fund mass transit strains the federal government’s ability to fund highways. Figure 2 shows that, from 2011 to 2023, federal highway revenues funded anywhere from 84 to 100 percent of all federal highway expenditures. However, with mass transit subsidies, federal highway revenues could only fund from 74 to 88 percent of all highway expenditures. Mass transit subsidies reduce the federal government’s ability to fund highway projects by approximately 10 percentage points.
Redirecting federal gas taxes to subsidize mass transit also significantly worsens the status of the Federal Highway Trust Fund. As shown in Figure 3, from 2011 to 2023, mass transit subsidies made the cumulative federal highway deficit 2.5 times larger. Without these subsidies, the Highway Trust Fund deficit would be 58 percent smaller. Moreover, estimates show that eliminating mass transit subsidies in 2011 would have delayed the trust fund’s earlier 2014 insolvency by four years. As such, it seems clear that the Federal Highway Trust Fund’s looming insolvency is partially (if not mostly) the result of using highway revenues to subsidize mass transit.
Many have complained that driving is subsidized by taxpayers. This is true. As Figure 3 shows, federal highway revenues from 2011 to 2023 were not high enough to cover all federal highway expenses. But these driving subsidies have to be put in perspective. As my colleague Marc Joffe and I found in a study last year, driving was, by far, the least subsidized mode of transportation in 2022–2023. And, as Figure 3 implies, the amount of money needed to bail out the Federal Highway Trust Fund would have been significantly smaller if mass transit subsidies were simply eliminated.
Mass Transit Subsidies Are Regressive
Mass transit subsidies, in their current form, are also significantly regressive. As Figure 4 shows, poorer states tend to pay more in federal highway revenues. This is probably because poorer states are usually more rural and depend more on driving.
However, rich urban states are more likely to have large transit systems. As such, they are more likely to receive transit grants. Figure 5 plots the net mass transit grant per capita (defined as the amount of mass transit grants received minus the amount of federal fuels tax from that state redirected to mass transit) with per capita gross domestic product in 2023. There is a strong positive correlation (ρ = 0.63) between both variables, implying that richer states tend to receive more (federal gas tax–funded) mass transit grants than poorer states do.
Don’t Make Drivers Fund Mass Transit
Good transportation policy should ensure that riders pay for all services used. This is easy to do because transportation isn’t a public good as it is rivalrous and excludable. Using federal gas revenues to fund mass transit violates this “user pays” principle. By making drivers subsidize mass transit users, the federal government strains its capacity to fund highways and redistributes money from poorer states to richer ones. Eliminating mass transit subsidies will fix this issue, though its impact on the future solvency of the Federal Highway Trust Fund is likely to be modest.
Ideally, the federal gas tax should not be increased or decreased. It should be abolished. As my colleagues Chris Edwards and Adam Michel have argued, “Having the federal government raise [gas tax revenues] and then return the funds to the states with regulations attached is unnecessarily bureaucratic.” Returning control of infrastructure funding to states and local governments would result in cheaper and better infrastructure.