Fitch: US Highway Fund Needs Gas Tax and Other Revenue Sources

NEW YORK--()--The recent Senate proposal to increase the federal gas tax by 66% is a positive first step to address transportation funding in this country. While raising the gas tax to $0.30 per gallon on its own isn't enough to meet the on-going infrastructure needs, it could be used with other funding methods to bridge the infrastructure gap, Fitch Ratings says.

If the Federal Highway Trust Fund (HTF) receives an incremental increase in funding or relies on a non-sustainable revenue sources, we believe it will likely be too small and too short term to relieve the pressure on the country's infrastructure needs.

The Congressional Budget Office's (CBO) February 2014 HTF baseline projections indicate a combined shortfall of $13 billion in the highway and transit subaccounts of the HTF by 2015 if current spending levels are maintained. This combined shortfall would grow to $172 billion by 2024 under the same assumptions. The Department of Transportation forecasts that the highway subaccount of the HTF will run out of money this summer.

Last week, Senators Chris Murphy and Bob Corker announced an effort to promote a 12 cent per gallon increase in federal fuel taxes to keep the HTF liquid. The Senate will consider a budget bill that would set funding at the 2014 levels.

Our analysis indicates that, if the federal gas tax had been indexed to inflation when it was last raised in 1993, HTF receipts could have kept pace with HTF outlays. We estimate the current rate would be approximately $0.30 per gallon, comparable to what Senators Murphy and Corker are proposing, versus the current $0.184 per gallon. This analysis assumes gas consumption consistent with actuals since 1993. However, to keep up with the actual transportation infrastructure need in the US as estimated by the CBO, Fitch projects the gas tax would need to rise to $0.75-$0.80 per gallon, which appears both politically and economically untenable.

Even if the gas tax is raised, increasing Corporate Average Fuel Economy (CAFE) regulations will reduce the benefits over the longer term. These regulations will lower gas consumption by raising the fuel efficiency of all new cars to an average of 54.5 miles per gallon (MPG) by 2025. We estimate these requirements would result in a 13% reduction in receipts from today's levels by 2032. This illustrates the need for other sustainable long-term sources of revenue to address the country's growing transportation funding requirements.

We believe tolling is one. In Fitch's view, if strategically implemented, tolling can help better link costs for parts of the roadway network to the ultimate users and better manage highway capacity. Implementing the greater use of tolling requires management of user fee levels to ensure affordability to the general population and promote economic activity.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Contacts

Fitch Ratings
Scott Zuchorski, +1 212-908-0659
Senior Director
Global Infrastructure and Project Finance Group
33 Whitehall Street
New York, NY
or
Rob Rowan, +1 212-908-9159
Senior Director
Fitch Wire
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Scott Zuchorski, +1 212-908-0659
Senior Director
Global Infrastructure and Project Finance Group
33 Whitehall Street
New York, NY
or
Rob Rowan, +1 212-908-9159
Senior Director
Fitch Wire
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com