With funding for the Highway Trust Fund (HTF) set to expire yet again on May 31st, many states are already delaying much needed infrastructure projects due to concerns over the fund's ongoing solvency. Such delays and the fund's impending expiration are putting fire to the feet of congressional lawmakers to find a solution to the perennial lack of dedicated revenue, due to our out-of-date gas tax, needed to pay for all of the infrastructure projects supported by the fund. In looking for a way to bridge the gap in funding, Congress should reject proposals to patch the HTF using some form of a tax on the repatriation of offshore profits and instead focus on a more permanent fix through the modernization of the gas tax.
Good: Raising the Gas Tax
Why does the HTF always seem to be in constant and dire need of additional funding? The answer is that lawmakers have repeatedly refused to update and reform the federal gas tax, the primary funding source of the HTF. The federal gas tax has not been increased since 1993, and the 18.4 cent-per-gallon tax has lost more than 28 percent of its value due to construction cost inflation and fuel efficiency in the time period since being fully dedicated to transportation in 1997.
With the HTF deadline again nearing, many Democrats and Republicans finally seem to be catching on to the need to increase the gas tax to make up for its longtime loss in value. Last week for example, a bipartisan group of House members proposed increasing the gas tax by indexing it to inflation, and scheduling further gas tax increases to occur in the future unless lawmakers agree on another funding mechanism.
Now would be an especially advantageous time to increase the gas tax given that gas prices have dropped to relatively low levels in recent months. These lower prices would make it easier for consumers to absorb the impact of a gas tax increase since they are already experiencing the benefit of the significantly lower prices.
The bipartisan push for increasing the gas tax and indexing it to inflation also makes a lot of sense given that it’s the only viable approach offered so far that would provide a long term solution to the HTF's constant funding problems. In addition, the gas tax is a sensible way to fund transportation infrastructure because it generally requires those who use our infrastructure the most, by driving long distances or heavy vehicles, to bear most of the responsibility of its upkeep.
Besides modernizing the gas tax, the most often talked about way to fill in the gap in funding for the HTF has been either a voluntary or mandatory tax on profits held offshore by corporations. The problem with such proposals is that they would reward and encourage offshore tax avoidance, while at best only providing a temporary fix to the gap in funding.
The worst form of these proposals is a repatriation holiday, such as the one recently proposed by Senators Barbara Boxer and Rand Paul. Under their repatriation holiday proposal, multinational corporations could voluntarily bring back profits held offshore by paying a tax rate of 6.5 percent rather than the 35 percent rate they would normally owe.
On its face, this and other similar repatriation holiday proposals cannot be used to fund the HTF, or anything else, because they would actually lose revenue instead of raising it. In fact, the nonpartisan scorekeepers at the Joint Committee on Taxation (JCT) found that a proposal similar to the Boxer-Paul proposal would lose $96 billion over 10 years. The reason behind this is that the holiday would encourage companies to hoard even more of their profits in offshore tax havens moving forward in anticipation of another holiday, and much of the money repatriated under a holiday would have been eventually repatriated at a higher tax rate anyway.
In contrast to a repatriation holiday, many lawmakers have also proposed raising revenue to fund infrastructure through a mandatory or deemed repatriation tax on profits held offshore by corporations as part of a broader corporate tax reform. For example, President Obama has proposed to pay for infrastructure using a 14 percent mandatory tax on unrepatriated profits as part of a broad corporate tax reform that would include a 19 percent minimum tax on foreign profits moving forward. Similarly, Representative John Delaney has proposed a mandatory tax rate of 8.75 percent and would default to a tax system with a minimum tax of 12.25 percent on corporation's foreign profits.
The trouble with either proposal is that they would reward companies for their current offshore tax dodging with a rate lower than the current rate of 35 percent, and over the long term would put in place international tax regimes that continue to incentivize companies to shift operations offshore. In addition, while both proposals would raise a substantial amount of revenue, they would only patch the HTF for a limited number of years, after which lawmakers would have to find another funding sourcing to pay for the gap in infrastructure funding. Finally, using revenue gained from taxing offshore profits to bridge the gap in the HTF would mean that this revenue would not be available for a variety of other important public investments where this revenue could be used.