Lawmakers Need to Find a Serious Fix for the Highway Trust Fund | American Enterprise Institute
The federal Highway Trust Fund (HTF) is once again approaching insolvency. The Congressional Budget Office (CBO) projects that the HTF will exhaust its balance by fiscal year 2028. Recently, lawmakers have introduced new fees on electric vehicles (EVs) to help address the shortfall. While these fees are better than general fund transfers and help bring in some revenue, they are not a long-term solution.
The HTF was established in 1956 to finance the construction and maintenance of the interstate highway system. It acts as the primary funding source for federal surface transportation projects. The HTF has traditionally been funded by federal excise taxes on gasoline and diesel fuel. Under current law, the gasoline excise tax is 18.4 cents per gallon, and the diesel excise tax is 24.4 cents per gallon.
The trust fund is based on the “users-pay” principle under which those who use the roads end up paying the taxes that finance them. This principle is both fair and efficient. Drivers who use the roads the most shoulder the greatest burden for their upkeep. Furthermore, the fuel tax puts a price on driving, reducing road overuse.
Since 2008, the HTF has run persistent budget deficits due primarily to the erosion of the value of the gas tax. As the general price level has risen, so too has the cost of road construction, but the real value of the gas tax, last set in 1993, has fallen by more than 50 percent. Less significantly, drivers are consuming more road and paying less tax due to increasing fuel efficiency and “free riding” by EVs, which pay no fuel tax.
In response to persistent HTF deficits, lawmakers have transferred about $275 billion from the general fund since 2008. These transfers were bad policy. They were only temporary patches and weakened the link between road use and taxes paid by shifting part of the cost of road upkeep to taxpayers more broadly.
Over the last year, lawmakers have proposed EV taxes as another potential source of revenue for the HTF. The House version of the One Big Beautiful Bill Act (OBBBA) initially included an EV and plug-in hybrid tax. The Bipartisan BUILD America 250 Act proposed a similar annual tax of $130 for EVs and $35 for plug-in hybrids that would increase by $5 every other year starting in 2029. The Fair SHARE Act proposed a one-time $1,000 tax levied at the point of sale of EVs and a $550 fee on each battery module weighing over 1,000 pounds.
From a “users-pay” perspective, these fees are superior to transfers from the general fund. They do not shift the burden of road financing away from drivers and they help address the (admittedly small) free-rider problem by requiring EVs to pay something to cover federal road projects.
Ultimately, these EV taxes are not going to cut it. The revenue from these taxes is insufficient to cover the HTF shortfall. The CBO estimates that the BUILD America 250 Act tax proposal would raise only $17 billion over ten years for the trust fund. And while these taxes try to enhance fairness between EVs and internal combustion vehicles, the annual fee structure of the tax does not actually price EV road use. EV drivers pay the same amount no matter how much they drive.
Lawmakers should focus on more meaningful proposals.
The most straightforward way to increase HTF revenue is to raise and index the gas tax to inflation. This would increase revenue for the trust fund and prevent the fuel tax from losing its real value in the future. However, it is not a long-term solution. A higher, indexed gas tax does not address the free rider problem of EVs.
An even better reform would be to replace current excise taxes with a vehicle miles traveled (VMT) tax. This proposal would require all drivers to pay a tax in proportion to how much they use roads and could be adjusted for vehicle weight. It would address the free rider problem and could be set to cover spending. However, it is more administratively challenging to implement and can run into privacy concerns.
Rather than shoring up the HTF, lawmakers could devolve these responsibilities to the states. This makes the federal government’s life easier, but would not eliminate the need to find sustainable, efficient, and fair sources of transportation funding.
After decades, the federal HTF still faces insolvency. In the past, lawmakers have transferred general funds to shore up its finances, but this is bad policy. Proposals to tax EVs are a step in the right direction but are not a solution. If lawmakers want to maintain a federal trust fund, they should move towards a sustainable users-pay system like a VMT tax.
