Yesterday, Senate Finance Committee chairman Max Baucus (D–MT) released a modified chairman’s mark on the Highway Investment, Job Creation and Economic Growth Act of 2012 (S. 1813). When combined with the other section of the bill, this draft transportation reauthorization bill would authorize the program for two years after the latest temporary extension, which expires in March.
This bill does contain needed reforms, including ending earmarks and letting states decide how to spend “enhancement” dedicated dollars. However, it makes the mistake of not capturing these savings to drive spending down, instead spending them to the tune of $109 billion, leaving a gaping hole of $13 billion in the Highway Trust Fund (HTF).
One of the more egregious tasks left to Baucus was to fill the gaping hole in the HTF. He does this through a variety of mechanisms. Some are undesirable and harmful tax increases, others close tax loopholes, and others simply help plug the hole by any means possible. And of course, no bill would be complete without unrelated provisions.
The tax increases complicate the tax system and place an undue burden on today’s sluggish economy. While loophole closing is defensibly a step in the right direction, it amounts to only piecemeal tax reform. Any revenue raised from closing loopholes should go to rate reduction as part of incremental tax reform. But using it to lock in more spending, especially wasteful spending, is bad news.
The biggest revenue-raising provision limits the distribution for inherited Individual Retirement Accounts (IRAs). Currently, when an IRA is inherited, it must be withdrawn—and taxed—over the anticipated lifespan of the person inheriting the account, and the account can continue to grow. So, for example, grandparents could bequeath remaining funds in an IRA to their grandson. Say he is only five years old, and they want him to spend it on college tuition. Today, the inherited IRA would be taxed over the lifetime of the beneficiary—i.e., the grandson.
But the provision in the bill, as Heritage expert David John notes, would require the fund to be distributed and taxed within five years. No matter how smart junior is, he won’t be ready for college at the ripe old age of 10. The tax could be high enough, in some circumstances, to drain much of the account and diminishing its potential to grow. So much for the grandparents’ dream of financing junior’s college. Tax policy should be structured to encourage savings and investment transfers between generations, but this proposal would punish both.
Also included is a provision to transfer revenue from imported tariffs on certain passenger motor vehicles from the General Fund to the HTF. This may help plug the hole in the HTF, but it would not drive spending down. And, though the Congressional Budget Office has not yet provided an estimate, the provision would likely drive the deficit up. The Senate Budget Committee claims that the proposal would result in $2.6 billion in transfers. In addition, this provision could establish a bad precedent where lawmakers would see tariff revenue as a pot of money to be tapped into to cover new transportation spending.
Beyond its revenue-raising grab, this chairman’s mark slips in items only tangentially related to transportation. Take, for example, the amendment offered by Senators John Kerry (D–MA) and Robert Menendez (D–NJ), which relieves investors in private activity bonds of paying the Alternative Minimum Tax (AMT). Keeping the onerous AMT at bay is helpful, but Congress should attend to full AMT reform by raising the AMT threshold permanently and indexing it to inflation—in a proper tax bill.
The federal transportation program has become bloated and wasteful in recent decades, with some 35 percent of trust fund revenue spent on decidedly non-road programs. Nature trails, road museums, bicycle paths, and historic preservations projects are just a few examples. These programs draw on the cash-strapped trust fund at the expense of actual road maintenance and construction projects. Motorist taxpayers inevitably draw the short straw, receiving less and less road improvement for their money.
Lawmakers should instead build on the positive reforms of the bill and focus on true transportation priorities of increased mobility and safety and traffic congestion relief. At the same time, they should bring spending down, eliminating the need to hike taxes or otherwise bail out this program. Taxpayers—and motorists—will benefit
