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During the Special Session that starts November 29, the Congress is likely to consider an extension of the Highway Trust Fund beyond its current expiration date of September 30, 1984. Such an extension is necessary if the highway program is to be authorized for the full year. Currently, the Byrd Amendment restricts the level of authorizations.

This Staff Working Paper was prepared at the request of the House Committee on Public Works and Transportation. It is designed to provide a historical perspective on the past changes in the financial condition of the Highway Trust Fund. In particular it describes the various means by which the Congress determines the level of spending from the Highway Trust Fund. In keeping with CBO's mandate to provide objective analysis of issues before the Congress, this report offers no recommendations.

The author of this paper is Richard R. Mudge. It was prepared in CBO's Natural Resources and Commerce Division under the supervision of Damian J. Kulash and David L. Bodde. Valuable comments were received from Patrick J. McCann of CBO's Budget Analysis Division, from Clyde Woodle, Jeff O'Neal, and Kenneth House of the House Committee on Public Works and Transportation, and from Pam Pecarich of the House Committee on Ways and Means.
 

Alice M. Rivlin
Director
 
 

The Highway Trust Fund was established in 1956 as the means of financing the new Interstate Highway System as well as other federal highway programs. It receives revenues from a series of taxes on highway users, most importantly a four-cents-per-gallon tax on motor fuel and several taxes on trucks.

Most federal programs pass through four stages: authorization, appropriation, obligation, and outlay, with budget authority not created until the appropriation process. By contrast, the Highway Trust Fund continues the practice started in the early 1920s of creating budget authority (termed contract authority) at the authorization stage. Thus funds are made available to the states for obligation without first being appropriated. The appropriations committees provide liquidating appropriations just prior to the outlay of funds.

The Highway Trust Fund has passed through two stages in its financial history and appears recently to have entered a third. In its first decade, the fund was characterized by a very low cash balance--on average less than $500 million. During the first few years, the Congress added revenues to the fund by increasing highway taxes and was forced to defer temporarily application of the Byrd Amendment. During the late 1960s, a second stage began that saw the cash balance grow to a total of $12.6 billion by the end of 1979. Steady growth in highway use during the 1960s and early 1970s helped to increase revenues, while a series of Presidential impoundments of highway funds held down outlays. Also important was the fact that starting in 1973, the Highway Trust Fund extended for only one year beyond the last year of full highway authorization. (Such an overhang is feasible since there is normally a two- to three-year delay between the authorization of funds and their cash outlay.) This relatively short overhang reduced the amount of funds that could be authorized, so that outlays were lower than they otherwise might have been.

Since 1978, a third stage appears to have started. The cash balance in the fund has dropped (by $3.5 billion), and appears likely to continue to decline for the next few years. There appear to have been two causes for this change: first, a much slower growth in tax receipts as higher fuel prices encouraged more conservation; and, second, the extension of the Highway Trust Fund to 1984, two years beyond the last year of full authorization. This additional year of revenues permitted somewhat higher authorizations.

There are several limits on the amount of contract authority that can be created in the authorization process. Most important, the financing committees determine the funds available by fixing the level of taxes paid into the trust fund and by setting the number of years for which taxes are to be collected. A second major constraint is provided by the Byrd Amendment--a part of the act that established the Highway Trust Fund in 1956. This requires the Secretary of the Treasury to determine if there will be sufficient funds available to cover expected outlays during the next year and over the remaining life of the trust fund. If there will not be enough cash (including both cash on hand at the start of the year and revenues to be received) the amount of authorizations made available to the states at the start of the fiscal year will be restricted to ensure that adequate cash is available.

This paper contains five sections: a description of the process by which the federal highway program is financed; a survey of major changes in the financial condition of the Highway Trust Fund since 1956; a brief discussion of some of the factors causing these changes; a description of the mechanisms currently used by the Congress to control the level of spending from the trust fund; and finally, a discussion of two highway program options and how they would affect the finances of the Highway Trust Fund.

This document is available in its entirety in PDF.