Wednesday, February 8, 2012

Danger: Senate Highway Bill Gets Funding from Auto Tariffs

The US Senate is poised to consider its version of the Surface Transportation Reauthorization Bill (S. 1813) this week, and last night the Senate Finance Committee signed off on the funding mechanism, drafted by Finance Chair Max Baucus (D-MT), for this multi-billion dollar piece of legislation.  According to published reports, Sen. Baucus’ legislation, The Highway Investment, Job Creation and Economic Growth Act of 2012, still won't cover the full cost of the Highway Bill because several Committee Members balked at certain controversial provisions.  Unfortunately, another funding mechanism in the Baucus Bill should warrant similar concerns yet for some reason seems to be cruising under everyone's radar: the earmarking of revenue from automobile import tariffs for the Highway Trust Fund.

That is an absolutely horrible - and extremely dangerous - idea.

The full text of the final, approved Baucus bill isn't available online yet, but the aformentioned published reports, as well as the official Final Results of last night's Committee session, indicate that the auto tariff provision will be included in S. 1813.  A summary of that provision was tucked into the original "Chairman's Mark" and reads as follows:
The proposal would appropriate from the General Fund and deposit into the Highway Trust Fund amounts equivalent to amounts received in the General Fund, for fiscal year 2012 through fiscal year 2014, on articles classified under subheadings 8703.22.00 and 8703.24.00 of Chapter 87.
Tariff revenue is supposed to be deposited directly into the General Treasury ("General Fund").  The summary above makes clear that the Baucus Bill, if it became law, will mandate that all revenue collected from the current 2.5% tariffs on imports of small (1000cc to 1500cc - 8703.22) and large (over 3000cc - 8703.24) automobiles be diverted from the General Treasury fo the Highway Trust Fund.  The revised Chairman's Mark extends this measure through FY2016 instead of FY2014.  The revenue estimates accompanying both documents provide no actual estimates of the amount of revenue that the import tariff diversion would deliver to the Trust Fund, and instead punt that calculation to the CBO.

Now, I'm no budget guru, so for now I'll ignore the budgetary gimmicks that appear to be involved here. (How does merely diverting existing revenue from one account to another account actually pay for an entirely new project?  Isn't that like me using the portion of my monthly paycheck that's allocated for my mortgage on a spontaneous trip to Vegas and then calling the Vegas trip "paid for"?  And how does Finance have any clue as to the revenue effects if it's punting to CBO?  Oh, never mind.

Instead, I want to focus on Sen. Baucus' novel idea to tap into existing tariff revenue - rather than cutting spending or (shudder to think) raising new revenues - to fund a specific government spending projects (road construction via the Highway Trust Fund), and to mandate, via US law, that the tariff revenue stream be used only for those purposes.  Do he and his fellow Senators not see the immense problems with that little plan?

Apparently not.  So here's a quick list:

First, there's the awful precedent.  Earmarking tariff revenue for specific spending projects isn't completely novel, but the past cases that I'm aware of - the Cotton and Wool Trust Funds - were specifically intended to fund certain industries allegedly injured by the tariffs at issue.  I'm certainly not condoning these kinds of slush funds, but they're obviously a lot different from the Baucus Bill.  In the latter case, a cash-strapped Senator who can't bring himself to actually cut spending or raise taxes (you know, actually do his job) in order to fund a big new highway construction project is simply scouring the US tariff code for "new" sources of revenue.  So, if the Baucus Bill becomes law, just imagine the feeding frenzy among congressional protectionists and spend-a-holics that could be set off by the precedent.  The spend-a-holics can fund new pet projects without making any difficult choices, and can team with protectionists who would just love to have their favorite tariffs used for those purposes (more on that below).  And the protectionists, of course, also have a new excuse to raise US tariffs (in many cases, there is room between existing, "applied" tariff rates and "bound rates" which the US can't exceed under WTO rules).


So am I the only one who thinks that this is precisely the wrong kind of precedent we want to be setting right now?

Second, the Baucus Bill discourages tariff reductions for the earmarked tariff lines.  For example, if the Highway Trust Fund is, by law, partially funded by automobile tariffs, it will provide yet another political excuse for not eliminating those tariffs.  So free traders will have to respond to not only the typical protectionist excuse that the auto tariffs' elimination will harm US automakers, but also the brand new excuse that the tariff cut will defund the Highway Trust Fund (and kill jobs or drivers or puppies or something)!  Convincing Congress and the Administration to lower tariffs is difficult enough already (despite the overwhelming moral and economic support), thanks.

This is also another incentive for protectionists to lard up spending bills with tariff earmarks.  It literally protects their protectionism.  Ugh.

Third, and somewhat related to the previous point, what would this new policy do to USTR's ability to negotiate tariff reductions in bilateral or multilateral trade negotiations?  Given congressional PayGo rules, all new spending hikes or revenue cuts have to be offset with spending cuts or revenue hikes.  Meanwhile, the Bacus Bill hardwires the tariff earmark into US law as a funding source for the Highway Trust Fund.  So if the United States wants to exchange the elimination of that 2.5% auto tariff for new market access in, say, Japan, will USTR have to get Congress to promise (stop laughing) to pass a new law (shifting the Highway Trust Fund's revenue source back to the General Treasury or something)?  Yeah, our trading partners are going to just line right up to be part of that awesome process.
Thus, the tariff earmark provides yet another impediment - again, as if there weren't enough already - to liberalizing trade, this time via reciprocal trade negotiations.
What a debacle.
I have other questions and concerns, but that'll have to do for tonight.  Until then, I welcome your insights in the comments. 
And fortunately, there's still some time before this awful measure becomes law.  So who knows?  Maybe cooler heads will prevail.

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