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What is U.S. Congress Proposing Now?

Politics / US Politics Oct 20, 2015 - 05:39 PM GMT

By: Rodney_Johnson

Politics It's no secret that America's highways and bridges are a sham and the overall transportation system is in desperate need of funding.

What is troubling is Congress' latest solution.

We pay for our highways and bridges through a tax on gasoline, which puts the cost of the transportation system squarely on users. Currently, the federal tax on a gallon of gas is 18.4 cents. That tax hasn’t changed since 1993, when gas was $1.16 per gallon, making the tax rate 19%.


But it’s not levied as a percentage, which is why the tax hasn’t changed in more than two decades.

That’s a problem.

Heavier vehicles tend to use more fuel, and therefore pay more tax. Smaller cars, which tend to be light, pay less.

Yes, there is the added twist of hybrid and electric vehicles, which rack up lots of miles while paying almost no tax since they buy little gas. But, as a percentage of all cars, there aren’t many of those on the road.

The problem is that vehicles in general get better mileage today than they did in the 1990s.

In 1993, we used 137 million gallons of gas to drive 2.3 million miles. Vehicles averaged 20.6 miles per gallon. In 2013, we used 169 million gallons to drive 3.0 million miles, and got 23.4 miles per gallon.

We traveled 30% farther, but only used 23% more gas, thereby shortchanging the highway funding mechanism.

To make matters worse, the 18.4 cents paid on every gallon doesn’t go as far as it used to (pun intended). To maintain its buying power, the tax would have to be 30 cents today. So we are paying less tax per mile driven, and the revenue doesn’t go as far.

It’s not surprising then that the transportation system is woefully underfunded. It’s gotten to the point where Congress had to top off the fund on several occasions over the last six years because it couldn’t pay its bills.

Possible answers to the funding woes are obvious. Congress could raise the tax. That would be a start, but would leave the funding vulnerable to the same problem in the future.

Instead of just raising the tax, they could also index it to inflation to keep the purchasing power constant. This won’t address the small, but rising number of cars that use almost no fuel, but it would keep the potholes filled and bridges repaired for the next decade.

But apparently such an approach is too simple.

Our Congress can’t agree on raising the fuel tax, so instead they’ve looked to other methods of funding.

The latest one, which has already passed the Senate, calls for reducing the dividends the Fed pays to banks, and instead funneling the cash to the highway fund.

I can’t find any reason why this makes sense, but I know of one big reason why it’s a bad idea: it’s not their money to give away. It’s ours.

When the Federal Reserve System was set up in 1913, nationally chartered banks were required to join the club. These banks buy shares in their regional Fed bank based on their size, and the Fed pays them a 6% dividend on the stock.

The only difference is, in today’s interest rate environment, 6% looks out of whack. Interest-free, 10-year Treasury bonds pay 2.07%, while 30-year Treasury bonds pay 2.90%. No entity is more risk-free than the Fed, since it can effectively print its own money. So earning triple what a 10-year Treasury pays on Fed shares is a tad generous.

There might be cause to cut the dividend, but redirecting it to infrastructure?

Let’s take a step back and recall where the Fed gets its money. The entity (Is it an agency? A consortium? An academic society with a secret handshake?) charges for services like Fed Fund wires, and also prints cash to buy bonds, on which it earns principle and interest.

The bond returns provide the lion’s share of the Fed’s income. By printing money to buy bonds, the Fed takes a little bit of value from every saver that has accumulated dollars. Essentially, the Fed’s income is taken from all of us.

When the Fed has extra cash at the end of the week, which it almost always does, it sends the extra to the U.S. Treasury as a gift. I’ve covered this many times, so I won’t dwell on it here, even though the disposition of printed money is a mystifying topic.

Now, the Senate bill would have the Fed pay banks a lower dividend – 1.5% to banks with more than $1 billion in assets – and send the excess cash to the transportation fund, not the Treasury.

Granted, I’ve never been a fan of the Fed sending its excess cash to the U.S. Treasury. Just as they print new money, which is an effective tax on all savers, I think they should destroy the extra funds they collect, which would be a benefit to savers.

That said, I’m definitely not a fan of creating a direct pipeline from the Fed’s coffers to an agency of the U.S. government!

At least when the dollars go to the general fund at the Treasury, Congress still has to pass laws to spend it. If they’re allowed to divert funds from outside sources to pay for things, then they don’t have to go through the very difficult task of legislating tax hikes.

There’s a reason it’s hard. They’re supposed to justify what they spend.

Without the vetting process, spending other people’s money gets even easier. If this approach is approved, what’s to stop Congress from grabbing even more cash directly from the Fed, and taking even more from savers?

Rodney

Follow me on Twitter ;@RJHSDent

By Rodney Johnson, Senior Editor of Economy & Markets

http://economyandmarkets.com

Copyright © 2015 Rodney Johnson - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Rodney Johnson Archive

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