November 23, 2014

Lawmakers Use Gimmick to Patch Highway Funding

  • Discretionary spending is the portion of the federal budget determined through the Congressional appropriations process. Approximately one-third of...

The House Ways and Means Committee and Senate Finance Committee approved similar plans last week to transfer $10 billion to the Highway Trust Fund so it can continue making payments to states through next May. Unfortunately, both plans rely on “pension smoothing,” a gimmick used in the 2012 transportation bill that could increase future federal deficits.

The Department of Transportation (DOT) recently announced it would begin delaying and cutting payments for state transportation projects next month unless Congress fixes the trust fund. States receive half of their transportation money from the federal government.

Rather than pay for the trust fund rescue with legitimate offsets, lawmakers in both chambers want to use pension smoothing to pay for most of it. Pension smoothing reduces the amount of money that corporations must contribute to their pension funds, enabling the government to tax more of the corporate income.

Over the long term, though, this gimmick can increase federal deficits because corporations may need to increase their tax-deductible pension contributions later. Pension smoothing also increases the risk that pension plans will run short and require bailouts from the Pension Benefit Guaranty Corporation, the government agency that insures private pensions.

The White House has come out in support of the House plan, but also criticized lawmakers for failing to find a long-term solution to highway funding.

In another short-sighted decision that could worsen the government’s fiscal problems, the House last Friday passed legislation to permanently extend “bonus depreciation,” a costly tax provision that expired last year.

Theoretically intended to boost business investment, bonus depreciation allows companies to take larger upfront tax deductions on certain capital investments. But it does not pay for itself. According to the Congressional Budget Office and Joint Committee on Taxation, it would cost the government $287 billion in lost revenue over 10 years.