Tracy Miller / December 7, 2015

Congress Uses ‘Sleight of Hand’ to Pay for Highway Bill

After much debate and considerable delay, the House of Representatives has finally passed a highway funding bill. A big question that delayed the bill’s passage was whether the federal fuel tax would be increased to fully cover planned spending from the highway trust fund. Since it was crafted by the Republican majority that opposed tax increases, the legislation did not increase the tax on gasoline or diesel fuel. Instead, the bill pays for much of the difference between projected expenditures and fuel tax revenues by draining $59 billion from the capital of the Federal Reserve. As the former head of the Congressional budget office Alice Rivlin points out, this is “a new low in budgetary gimmickry.”

After much debate and considerable delay, the House of Representatives has finally passed a highway funding bill. A big question that delayed the bill’s passage was whether the federal fuel tax would be increased to fully cover planned spending from the highway trust fund. Since it was crafted by the Republican majority that opposed tax increases, the legislation did not increase the tax on gasoline or diesel fuel. Instead, the bill pays for much of the difference between projected expenditures and fuel tax revenues by draining $59 billion from the capital of the Federal Reserve. As the former head of the Congressional budget office Alice Rivlin points out, this is “a new low in budgetary gimmickry.”

Since 2008, federal highway spending has exceeded the amount of revenue collected in fuel taxes. Congress has been unable to agree on a way to pay for the shortfall in the highway trust fund and has passed a series of temporary bills enabling the government to use money from the general fund to pay for highways. This has added to government debt, much of which was purchased by the Federal Reserve as part of quantitative easing.

In putting together the recent highway bill, Congress had an opportunity to find a way to fully pay for highway spending. Instead, they kicked the can down the road by using budgetary gimmicks that are not sustainable. By using Federal Reserve capital, they are borrowing the money to pay for the shortfall in highway funding just as they have since 2008.

Federal Reserve capital is the amount that the value of the bonds held by the Federal Reserve exceeds its liabilities, which include currency in circulation and bank deposits. The Federal Reserve bought these treasury bonds in the past with newly created money. The Federal Reserve earns interest on these bonds and remits the interest to the treasury after paying its expenses. Reducing the capital of the Federal Reserve will reduce the interest it can pay the treasury in the future.

Former Federal Reserve chairman Ben Bernanke points out that this is “a form of budgetary sleight of hand.” It is no different than the treasury borrowing the money directly from the Federal Reserve. Thus, in effect, Congress has decided to borrow some of the money to pay for the highway funding bill, but to hide this from the public by using capital from the Federal Reserve rather than issuing new government securities on which it would have to pay interest. This compromises the independence of the Federal Reserve, as Congress is dictating what it must do with its capital.

Back in the days when Americans cared about fiscal responsibility, most government spending was paid for by taxes. Government has also borrowed to pay for some of its spending. When government spending is payed for by a tax increase or by borrowing from the public, the public must reduce its spending by the amount of the increase in government spending. During the last century, however, it became more and more common for the federal government to pay for some of its spending by money creation. Using the capital of the Federal Reserve, just like selling treasury bonds to the Federal Reserve, is a way for Congress to pay for government spending with newly created money.

Although it might appear that this way of paying for government spending costs nothing, it costs just as much or more than paying for it with a tax increase. In this case, the cost will be felt through higher inflation caused by an increase in the money supply. By keeping the cost hidden, Congress avoids dealing with hard questions like what is the best way to pay for highway spending and how can the Federal Highway Administration make more efficient use of the money collected in fuel taxes.

Americans are willing to pay for the highways that they use. Taxes on gasoline and diesel fuel were premised on the idea that highway users should be the ones who pay for the cost of building and maintaining highways. Recent improvements in technology open the door for alternative ways to require users to pay for highways, such as vehicle mile charges.

Increasing fuel taxes or instituting vehicle mile charges is not politically popular right now. One reason so many voters oppose paying more in highway user fees is that a substantial percentage of the money in the highway trust fund is used for purposes other than funding highways, such as subsidizing public transportation. If citizens could be convinced that they would get value for the money spent, they might be willing to pay more in user fees. By using gimmicks like this, Congress has found a sneaky way to borrow and escape full accountability to the voters. It is time for Americans to wake up and realize what is happening to them.

Start a conversation using these share links:

Who We Are

The Patriot Post is a highly acclaimed weekday digest of news analysis, policy and opinion written from the heartland — as opposed to the MSM’s ubiquitous Beltway echo chambers — for grassroots leaders nationwide. More

What We Offer

On the Web

We provide solid conservative perspective on the most important issues, including analysis, opinion columns, headline summaries, memes, cartoons and much more.

Via Email

Choose our full-length Digest or our quick-reading Snapshot for a summary of important news. We also offer Cartoons & Memes on Monday and Alexander’s column on Wednesday.

Our Mission

The Patriot Post is steadfast in our mission to extend the endowment of Liberty to the next generation by advocating for individual rights and responsibilities, supporting the restoration of constitutional limits on government and the judiciary, and promoting free enterprise, national defense and traditional American values. We are a rock-solid conservative touchstone for the expanding ranks of grassroots Americans Patriots from all walks of life. Our mission and operation budgets are not financed by any political or special interest groups, and to protect our editorial integrity, we accept no advertising. We are sustained solely by you. Please support The Patriot Fund today!

★ PUBLIUS ★

“Our cause is noble; it is the cause of mankind!” —George Washington

The Patriot Post is protected speech, as enumerated in the First Amendment and enforced by the Second Amendment of the Constitution of the United States of America, in accordance with the endowed and unalienable Rights of All Mankind.

Copyright © 2022 The Patriot Post. All Rights Reserved.

The Patriot Post does not support Internet Explorer. We recommend installing the latest version of Microsoft Edge, Mozilla Firefox, or Google Chrome.