Federal gas tax holiday would pressure Highway Trust Fund, Garvee bonds

A proposal to suspend the federal gas tax could pressure the popular transportation infrastructure bonds supported by federal aid.

The federal gas tax would be eliminated until January 2023 under bills introduced in the Senate and the House that supporters say would bring relief to drivers facing higher prices across the economy.

The move would reduce gas tax revenues by about $20 billion, translating into a nearly 50% loss from the $42 billion that’s projected to flow into the Highway Trust Fund this calendar year, according to the bipartisan Committee for a Responsible Federal Budget.

The legislation would offset the losses with a general fund subsidy. But it would still hasten the looming insolvency of the HTF, which pays for federal surface transportation costs, analysts said.

And it could require a new long-term fix for grant anticipation revenue vehicle, or Garvee, bonds, which are backed by the federal dollars. The bonds allow states and local governments to accelerate large infrastructure projects by tapping their future formula funding from the HTF.

Garvee bonds, which typically enjoy ratings ranging from A to AA-range and up to AAA if states attach their own pledges, are rated based on the assumption that the HTF will remain solvent.

“Garvee bonds are a relatively stable debt instrument, but there are risks in pledging future federal highway funds to pay debt service,” said Susan Howard, director of policy and government relations for the American Association of Highway and Transportation Officials. “Suspending the federal gasoline tax removes one of the key pillars supporting the Highway Trust Fund.”

The federal gas and diesel taxes, which have remained at the same rate since 1993, generates the bulk of the revenue for the Highway Trust Fund.

Bloomberg News

The federal gas tax, which has remained at a rate of 18.4 cents per gallon since 1993, is the main revenue source, along with the diesel tax, for the HTF.

Amid anemic fuel taxes, the fund has already required regular subsidies from the federal general fund to stay afloat. Roughly $140 billion was transferred into the fund from 2008 to 2020, according to the Congressional Budget Office. The Infrastructure Investment and Jobs Act features another $118 billion general fund transfer that’s expected to keep the HTF afloat for five years.

Despite the proposed transfer to offset losses from a tax suspension, the legislation would still hasten HTF’s insolvency by one year, to FY2026 from FY2027, warned the Committee for a Responsible Federal Budget, which is opposed to the measure.

“With the Highway Trust fund currently just five years from insolvency, lawmakers should not pursue policies that would widen the gap between dedicated revenue coming into the trust fund and spending coming out of it, while using one-time general revenue transfers to make up the difference,” the group said in a blog post.

The IIJA’s infusion into the HTF — though it won’t flow to the states until Congress enacts a full year budget — likely protects Garvee payments in the short term, said Fitch analyst Tori Babcock.

“Garvee bonds would likely be funded via transfers from the general fund pursuant to the recent infrastructure bill in the event of a suspension of federal gas tax revenues,” Babcock said. “Longer term, the suspension of the gas tax would likely lead to a new legislative solution for Garvee bonds.”

The proposals have also generated some opposition in Congress. Influential Transportation & Infrastructure Chair Rep. Peter DeFazio came out against the proposal on Friday.

“Suspending the 18.4 cents per gallon federal gas tax is not going to give consumers significant relief—if any at all,” DeFazio said in a statement. “But suspending the tax will blow a $26 billion hole in the Highway Trust Fund this year and cause further delay in rebuilding our decrepit infrastructure and the tens of thousands of jobs that investment would have provided.”


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