GAO: Fuel Economy Standards, Green Vehicles Jeopardizing Transportation Funding

By Matt Cover | April 3, 2012 | 6:56 PM EDT

Cars drive along a highway in Washington state. (AP Photo)

( – The Highway Trust Fund risks bankruptcy as early as 2013 according to Government Accountability Office projections, in part because of government-imposed fuel economy standards and government-subsidized alternative fuel vehicles.

“The major source of federal surface transportation funding is the Highway Trust Fund, but the revenues that make up that fund are eroding,” the GAO wrote in a March 29 report to Congress.

“This trend will continue with the introduction of more fuel-efficient and alternative-fuel vehicles that have the potential through fuel savings to decrease motor fuel purchases and associated tax receipts.”

The Highway Trust Fund is funded exclusively via the federal gasoline tax. As car companies are forced to make more fuel efficient cars – achieving 54.5 miles-per-gallon by 2025 – and produce more alternative fuel vehicles, the government expects that gasoline consumption will decline, leading to lower revenues from the federal gas tax.

While economists have noted what is known as a “rebound effect” from federal fuel economy standards – when more fuel-efficient cars cause people to drive more, thus consuming the same amount of fuel as before – this effect consumes only about 20 percent of the reduced fuel consumption from fuel economy standards.

In other words, higher fuel economy standards usually end up working 80 percent as well as estimates say they will, because people end up driving more.

Nevertheless, the GAO said that the Highway Trust Fund will face financial difficulties, forcing the government to reevaluate its transportation priorities. Simply spending more money, it said, would not be the answer.

“The challenges facing DOT [Department of Transportation] and Congress regarding transportation priorities and funding cannot be addressed by simply spending more money,” the report said. “Despite large increases in expenditures for transportation in recent years, system performance has not commensurately improved.”

One solution, proposed by President Obama, is to fund transportation spending with general tax revenue, essentially taxing Americans twice to pay for transportation – once when they buy gas and again through their income and investment taxes.

The GAO said that this proposal was probably not sustainable given the government’s deteriorating fiscal position, as it would further deprive the government of much-needed tax revenue.

“Augmenting transportation funding through general revenues would move away from the ‘user pays’ principle and might not be sustainable in the long term given the federal government’s growing fiscal challenge.”

Another possible solution is to expand current loan and loan guarantee programs that provide upfront funding for transportation projects, providing states and localities with immediate federal funds instead of the normal federal grants.

This approach would create problems for DOT however, since it would have to manage a growing portfolio of loans and loan guarantees. It could also further damage federal finances, as the expanded loan program would incur expanded losses.

“DOT will face challenges in balancing a broader portfolio, with the increased exposure and risk to the federal government that these changes might produce,” the GAO said.

A third solution examined by the GAO was Obama’s proposed National Infrastructure Bank, which would be responsible for leveraging federal money through loans and loan guarantees for transportation and energy projects.

However, the GAO said the project would be fraught with difficulties, including the normal problems that come with creating new government agencies as well as a tension between funding projects that carry national importance and funding ones that are politically well-connected.

“The creation of such an entity would create numerous challenges inherent in the start-up of any new program or government entity,” it said. “Another challenge would stem from seeking a balance between financing projects that yield the highest public benefit – but that potentially concentrate funds in one region – with a desire for an equitable distribution of federal investment in infrastructure across the country.”

Despite the new proposals for transportation funding floating around Washington, the GAO made clear that they all are just variations on one thing – federal debt. That debt would eventually need to be backed up by federal revenues, which it noted come from only two places – higher taxes or higher fees.

“While these tools have promise to help meet increasing transportation demands, they are forms of debt that must be repaid, not new revenues. New revenues for transportation infrastructure investments can come only from two sources: new taxes or new fees.”

The GAO said that “ultimately” the government would have to raise taxes or fees if it wanted to fund its expanding list of transportation programs.

“Ultimately, raising new revenues or reducing transportation spending or both will be needed.”