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The Tax Policy Center's

Briefing Book

A citizen’s guide to the fascinating (though often complex) elements of the US tax system.

Tax Policy Center Briefing Book

Key Elements of the U.S. Tax System

  • Chapters
    • Introduction
      • Introduction
        • Introduction
    • Some Background
      • Federal Budget
        • What are the sources of revenue for the federal government?
        • How does the federal government spend its money?
        • What is the breakdown of revenues among federal, state, and local governments?
        • How do US taxes compare internationally?
      • Federal Budget Process
        • How does the federal budget process work?
        • What is the history of the federal budget process?
        • What is the schedule for the federal budget process?
        • What is reconciliation?
        • How is a budget resolution enforced?
        • What is PAYGO?
        • What are rescissions?
        • What is the debt limit?
      • Federal Budget Outlook
        • How accurate are long-run budget projections?
        • What have federal budget trends been over the short and long term?
        • What is mandatory and discretionary spending?
        • What are tax extenders?
        • What options would increase federal revenues?
        • What does it mean for a government program to be off-budget?
        • How did the TCJA affect the federal budget outlook?
        • How did the fiscal response to the COVID-19 pandemic affect the federal budget outlook?
      • Taxes and the Economy
        • How do taxes affect the economy in the short run?
        • How do taxes affect the economy in the long run?
        • What are dynamic scoring and dynamic analysis?
        • Do tax cuts pay for themselves?
        • On what do economists agree and disagree about the effects of taxes on economic growth?
        • What were the economic effects of the Tax Cuts and Jobs Act?
      • Economic Stimulus
        • What is the role of monetary policy in alleviating economic downturns?
        • What are automatic stabilizers and how do they work?
        • What characteristics make fiscal stimulus most effective?
      • Distribution of Tax Burdens
        • How are federal taxes distributed?
        • Are federal taxes progressive?
        • How should changes in tax progressivity be measured?
        • What is the difference between marginal and average tax rates?
        • What criticisms are levied against standard distributional analysis?
        • How should distributional tables be interpreted?
        • Who bears the burden of the corporate income tax?
        • Who bears the burden of federal excise taxes?
        • How do financing methods affect the long-run burdens of tax cuts?
        • How do taxes affect income inequality?
        • How do the impacts of tax policies vary by race and ethnicity?
        • Do immigrants pay taxes?
      • Tax Expenditures
        • What are tax expenditures and how are they structured?
        • What is the tax expenditure budget?
        • Why are tax expenditures controversial?
        • What are the largest tax expenditures?
        • How did the Tax Cuts and Jobs Act affect tax expenditures?
        • How will tax expenditures evolve over the coming decade?
      • Tax Administration
        • What is the audit rate?
        • What is the tax gap?
        • What is a tax shelter?
        • What is Free File?
        • What is VITA?
        • What technology does the IRS use?
        • How have cuts to the IRS’s appropriations affected its ability to administer the federal tax system?
        • How did the Inflation Reduction Act of 2022 affect the IRS’s budget?
      • Recent History of the Tax Code
        • What did the 2022 Inflation Reduction Act do?
        • How did the major COVID-19 pandemic relief bills affect taxes?
        • How did the Tax Cuts and Jobs Act change personal taxes?
        • How did the Tax Cuts and Jobs Act change business taxes?
        • What did the American Taxpayer Relief Act of 2012 do?
        • What did the 2008–10 tax stimulus acts do?
    • Key Elements of the U.S. Tax System
      • Individual Income Tax
        • What is the standard deduction?
        • What are itemized deductions and who claims them?
        • How did the TCJA change the standard deduction and itemized deductions?
        • What are personal exemptions?
        • How do federal income tax rates work?
        • What are tax credits and how do they differ from tax deductions?
        • How do phaseouts of tax provisions affect taxpayers?
      • Capital Gains and Dividends
        • How are capital gains taxed?
        • What is the effect of a lower tax rate for capital gains?
        • How might the taxation of capital gains be improved?
        • What is carried interest, and how is it taxed?
        • How is cryptocurrency taxed?
      • AMT
        • What is the AMT?
        • Who pays the AMT?
        • How much revenue does the AMT raise?
        • How did the TCJA change the AMT?
      • Taxes and the Family
        • What is the child tax credit?
        • How did the 2021 American Rescue Plan Act Change the Child Tax Credit?
        • What is the earned income tax credit?
        • Do all people eligible for the EITC participate?
        • What is the adoption tax credit?
        • How does the tax system subsidize child care expenses?
        • What are marriage penalties and bonuses?
        • How did the TCJA change taxes of families with children?
      • Taxes and the Poor
        • How does the federal tax system affect low-income households?
        • What is the difference between refundable and nonrefundable credits?
        • Can poor families benefit from the child tax credit?
        • Why do low-income families use tax preparers?
        • How does the earned income tax credit affect poor families?
        • What are error rates for refundable credits and what causes them?
        • How do IRS audits affect low-income families?
      • Taxes and Retirement Saving
        • What kinds of tax-favored retirement arrangements are there?
        • How large are the tax expenditures for retirement saving?
        • What are defined benefit retirement plans?
        • What are defined contribution retirement plans?
        • What types of nonemployer-sponsored retirement savings accounts are available?
        • What are Roth individual retirement accounts?
        • Who uses individual retirement accounts?
        • How does the availability of tax-favored retirement saving affect national saving?
        • What’s the difference between front-loaded and back-loaded retirement accounts?
        • What is an automatic 401(k)?
        • How might low- and middle-income households be encouraged to save?
        • What are cash balance plans?
      • Taxes and Charitable Giving
        • What is the tax treatment of charitable contributions?
        • What entities are tax-exempt?
        • Who benefits from the deduction for charitable contributions?
        • How would various proposals affect incentives for charitable giving?
        • How large are individual income tax incentives for charitable giving?
        • How did the TCJA affect incentives for charitable giving?
      • Taxes and Health Care
        • How much does the federal government spend on health care?
        • Who has health insurance coverage?
        • Which tax provisions subsidize the cost of health care?
        • How does the tax exclusion for employer-sponsored health insurance work?
        • How might the tax exclusion for employer-sponsored health insurance be reformed?
        • What tax changes did the Affordable Care Act make?
        • What are premium tax credits?
        • How do health savings accounts work?
        • How do flexible spending accounts for health care expenses work?
      • Taxes and Homeownership
        • What are the tax benefits of homeownership?
        • Do existing tax incentives increase homeownership?
        • How do tax incentives affect home values?
        • What are options to reform tax incentives for homeownership?
      • Taxes and Education
        • What tax incentives exist for higher education?
        • What tax incentives exist to help families pay for college?
        • What tax incentives exist to help families save for education expenses?
        • What is the tax treatment of college and university endowments?
      • Tax Complexity
        • Why are taxes so complicated?
        • What are the benefits of simpler taxes?
        • What policy reforms could simplify the tax code?
      • Wealth Taxes
        • What is a wealth tax?
        • How do the estate, gift, and generation-skipping transfer taxes work?
        • Who pays the estate tax?
        • How many people pay the estate tax?
        • What is the difference between carryover basis and a step-up in basis?
        • How could we reform the estate tax?
        • What are the options for taxing wealth transfers?
        • What is an inheritance tax?
      • Payroll Taxes
        • What are the major federal payroll taxes, and how much money do they raise?
        • What is the unemployment insurance trust fund, and how is it financed?
        • What are the Social Security trust funds, and how are they financed?
        • Are the Social Security trust funds real?
        • What is the Medicare trust fund, and how is it financed?
      • Excise Taxes
        • What are the major federal excise taxes, and how much money do they raise?
        • What is the Highway Trust Fund, and how is it financed?
      • Energy and Environmental Taxes
        • What tax incentives encourage energy production from fossil fuels?
        • What tax incentives encourage alternatives to fossil fuels?
        • What is a carbon tax?
      • Business Taxes
        • How does the corporate income tax work?
        • What are pass-through businesses?
        • How are pass-through businesses taxed?
        • Is corporate income double-taxed?
        • How does tax law allow businesses to recover the costs of capital assets?
        • What is the Book Minimum Tax on corporations?
      • Tax Incentives for Economic Development
        • What are Opportunity Zones and how do they work?
        • What is the New Markets Tax Credit and how does it work?
        • What is the Low-Income Housing Tax Credit and how does it work?
      • Taxes and Multinational Corporations
        • How does the current US system of international taxation work?
        • How do US corporate income tax rates and revenues compare with other countries’?
        • What are the consequences of the new US international tax system?
        • How does the tax system affect US competitiveness?
        • How would formulary apportionment work?
        • What are inversions, and how did TCJA affect them?
        • What is a territorial tax and does the United States have one now?
        • What is the TCJA repatriation tax and how does it work?
        • What is the TCJA base erosion and anti-abuse tax and how does it work?
        • What is the TCJA tax on global intangible low-taxed income and how does it work?
        • What is foreign-derived intangible income and how is it taxed under the TCJA?
        • What are the OECD Pillar 1 and Pillar 2 international taxation reforms?
    • How Could We Improve the Federal Tax System?
      • Comprehensive Tax Reform
        • What is comprehensive tax reform?
        • What are the major options for comprehensive tax reform?
      • Broad-Based Income Tax
        • What is a broad-based income tax?
        • What would and would not be taxed under a broad-based income tax?
        • What would the tax rate be under a broad-based income tax?
      • National Retail Sales Tax
        • What is a national retail sales tax?
        • What would and would not be taxed under a national retail sales tax?
        • What would the tax rate be under a national retail sales tax?
        • Who bears the burden of a national retail sales tax?
        • Would tax evasion and avoidance be a significant problem for a national retail sales tax?
        • What would be the effect of a national retail sales tax on economic growth?
        • What transition rules would be needed for a national retail sales tax?
        • Would a national retail sales tax simplify the tax code?
        • What can state and local sales taxes tell us about a national retail sales tax?
        • What is the experience of other countries with national retail sales taxes?
        • What did the President’s Advisory Panel on Federal Tax Reform say about the national retail sales tax?
      • Value Added Tax (VAT)
        • What is a VAT?
        • How would a VAT be collected?
        • What would and would not be taxed under a VAT?
        • What would the tax rate be under a VAT?
        • What is the difference between zero rating and exempting a good in the VAT?
        • Who would bear the burden of a VAT?
        • Is the VAT a money machine?
        • How would small businesses be treated under a VAT?
        • What is the Canadian experience with a VAT?
        • Why is the VAT administratively superior to a retail sales tax?
        • What is the history of the VAT?
        • How are different consumption taxes related?
      • Other Comprehensive Tax Reforms
        • What is the Flat Tax?
        • What is the X-Tax?
        • What is the Fair Tax?
      • Recent Comprehensive Tax Reform Proposals
        • Simple, Fair, and Pro-Growth: Proposals to Fix America’s Tax System, Report of the President’s Advisory Panel on Federal Tax Reform, November 2005
        • The Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform, December 2010
        • Debt Reduction Task Force, “Restoring America’s Future,” Bipartisan Policy Center, November 2010
        • The Tax Reform Act of 2014: Fixing Our Broken Tax Code So That It Works for American Families and Job Creators, House Ways and Means Committee
        • The Graetz Competitive Tax Plan, Updated for 2022
      • Return-Free Tax Filing
        • What is return-free filing and how would it work?
        • What is Direct File?
        • How would the tax system need to change with exact withholding?
        • What are the benefits and drawbacks of exact withholding?
        • What are prepopulated tax returns?
        • Could the United States adopt a prepopulated tax return system?
    • State and Local Tax Policies
      • State and Local Revenues
        • What are the sources of revenue for state and local governments?
      • Specific State and Local Taxes
        • How do state and local individual income taxes work?
        • How do state and local corporate income taxes work?
        • How do state and local property taxes work?
        • How do state and local general sales and gross receipts taxes work?
        • How do state and local motor fuel taxes work?
        • How do state and local cigarette and vaping taxes work?
        • How do state and local alcohol taxes work?
        • How do state and local soda taxes work?
        • How do state and local cannabis (marijuana) taxes work?
        • How do state and local severance taxes work?
        • How do state and local estate and inheritance taxes work?
        • How do taxes on lotteries, casinos, sports betting, and other types of state-sanctioned gambling work?
        • How do state and local revenues from fines, fees, and forfeitures work?
        • How do state pass-through entity taxes work?
        • How do state and local revenues from charges work?
        • How do state earned income tax credits work?
        • How do state child tax credits work?
      • Fiscal Federalism and Fiscal Institutions
        • How do state individual income taxes conform with federal income taxes?
        • How does the federal income tax deduction for state and local taxes work?
        • What are municipal bonds and how are they used?
        • What types of federal grants are made to state and local governments and how do they work?
        • What are state rainy day funds and how do they work?
        • What are tax and expenditure limits?
        • What are state balanced budget requirements and how do they work?
    • Glossary
      • Glossary
        • Glossary

What is the Highway Trust Fund, and how is it financed?

Excise Taxes

<2/2
Federal Budget and Economy
Q.

What is the Highway Trust Fund, and how is it financed?

A.

The Highway Trust Fund finances most federal government spending for highways and mass transit. Revenues for the trust fund come from transportation-related excise taxes, primarily federal taxes on gasoline and diesel fuel. In recent years, however, the trust fund has needed significant transfers of general revenues to remain solvent.

The Highway Trust Fund tracks federal spending and revenue for surface transportation. The trust fund has separate accounts for highways and mass transit. Because obligations from the trust fund generally are for capital projects that take several years to complete, outlays reflect projects authorized by Congress in previous years.

Most spending from the Highway Trust Fund for highway and mass transit programs is through federal grants to state and local governments. The federal government accounts for about one-quarter of all public spending on roads and highways, with the remaining three-quarters financed by state and local governments.

Financing the Trust Fund

The Congressional Budget Office (CBO) estimates that Highway Trust Fund tax revenue will total $43 billion in fiscal year 2023 (figure 1). Revenue from the federal excise tax on gasoline ($25.0 billion) and diesel fuel ($10.8 billion) accounts for 83 percent of the total. The remaining trust fund tax revenue comes from a sales tax on tractors and heavy trucks, an excise tax on tires for heavy vehicles, and an annual use tax on those vehicles. In addition to dedicated tax revenue, the trust fund receives a small amount of interest on trust fund reserves.

The current tax rates are 18.4 cents per gallon for gasoline and ethanol-blended fuels and 24.4 cents per gallon for diesel (0.1 cent of each tax is dedicated to the Leaking Underground Storage Tank Trust Fund). The tax rates on motor fuels have not changed since 1993 and thus have failed to keep pace with inflation. If tax rates had been indexed for inflation since 1993, the current tax on gasoline would be about 37 cents per gallon and the tax on diesel fuel would be about 49 cents per gallon. Although the current taxes on motor fuels (except for a residual tax of 4.3 cents per gallon) are set to expire at the end of September 2028, Congress has routinely extended the taxes in the past.

Trust Fund Balances

Before 2008, highway tax revenue dedicated to the trust fund was sufficient to pay for outlays from the fund, but that has not been true in recent years. Since 2008, Congress has transferred general revenues to the fund on numerous occasions including $118 billion in the Infrastructure Investments and Jobs Act of 2021.

Those transfers will enable the trust fund to meet spending obligations through 2027, but projected shortfalls will appear again by the end of 2028 (figure 2). The Congressional Budget Office projects that, by 2033, outlays from the Highway Trust Fund will exceed trust fund reserves by a cumulative $181 billion for the highway account and by $60 billion for the mass transit account, even if expiring trust funds taxes are extended (CBO 2023).

 

Financing Federal Spending on Highways and Mass Transit

Congress could pay for projected highway and mass transit spending by simply raising the federal tax rate on gasoline and diesel fuel. Increasing those rates by 15 cents per gallon along with indexing the rates for inflation would increase federal revenues by $240 billion over ten years (CBO 2022). (The increase in revenues for the trust fund would be greater than $240 billion because the revenue estimate includes the negative impact of higher fuel taxes on federal income and payroll taxes. Higher motor fuels taxes would increase costs for businesses, thus lowering business profits, employee wages, and the federal taxes collected on that income.)

Drivers likely would respond to an increase in motor fuels taxes by driving less, which would reduce pollution and lessen the need for highway construction and maintenance. But drivers may also respond by driving more fuel-efficient vehicles, which would weaken the incentive to reduce miles driven.

Motor fuels taxes link highway use with the associated costs of building and maintaining roads as well other costs associated with fuel consumption, such as pollution and dependence on foreign oil. But motor fuels taxes are an imperfect user fee because they do not differentiate among vehicles that cause greater or lesser road wear for the same amount of fuel consumed or between travel on crowded and uncrowded roads.

A tax on vehicle miles driven would provide a more direct link to the cost of highway use but, unlike an increase in the tax on motor fuels, would be difficult to implement, requiring new tolls or electronic motoring of vehicles. An advantage of a vehicle mileage tax is that it could adjust to reflect the additional costs of congestion by increasing tolls or the tax rate in certain locations and at certain times of the day. A vehicle mileage tax would not, however, provide an incentive for driving more fuel-efficient vehicles.

Alternatively, Congress could abandon the user-pay principle and simply pay for highways through general revenues. Highway spending would no longer have a dedicated source of revenue and would instead compete with other spending programs for general revenue funding through the annual appropriations process. Or Congress could decide to limit federal highway spending to the amount of revenue collected from existing motor fuels taxes. This would require curtailing some existing highway projects and not starting others, at a time when the nation’s infrastructure is already in need of repair.

Updated January 2024
Data Sources

Congressional Budget Office. 2023. The Budget and Economic Outlook: 2023 to 2033. Washington, DC.

Congressional Budget Office. 2023. Baseline Projections, May 2023: Highway Trust Fund Accounts, Washington, DC.

Congressional Budget Office. 2022. Options for Reducing the Deficit, 2023 to 2032--Volume II: Smaller Reductions. Washington, DC.

Further Reading

Congressional Budget Office. 2014. The Highway Trust Fund and the Treatment of Surface Transportation Programs in the Federal Budget. Washington, DC.

Joint Committee on Taxation. 2015. Long-Term Financing of the Highway Trust Fund. JCX-92-15. Washington, DC.

Kile, Joseph. 2015. Testimony on the Status of the Highway Trust Fund and Options for Paying for Highway Spending. Testimony before the US Senate Committee on Finance, Washington, DC, June 18.

Kirk, Robert S. and William J. Mallet. 2019 Funding and Financing Highways and Public Transportation. R45350. Washington, DC: Congressional Research Service.

Peter G. Peterson Foundation. 2023. The Highway Trust Fund Explained. Washington, DC.

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