Congress left for its one-week adjournment for the Independence Day holiday in the midst of intensive negotiations in both chambers to address  an impending crisis in the nation’s transportation system.  Absent a deal by August, the federal highway trust fund (HTF) will lack sufficient funding to support thousands of road, highway, bridge and other vital transportation maintenance and repair projects.  

The HTF traditionally has been supported by federal fuel excise taxes, but these have fallen short in recent years.  The current fiscal year shortfall is estimated at around $10 billion; it is estimated that over the next six years the shortfall will approach $160 billion. 

Because the insolvency of the highway trust fund could adversely affect countless millions of Americans in every state, finding a solution to the crisis is both a high economic and political priority, especially with Congressional elections just four and a half months away.

Despite rumors that the Senate Finance Committee was hopelessly divided on the HTF matter, Committee Chairman Ron Wyden (D-Oregon) and Ranking Member Orrin Hatch (R-Utah) were able to forge an initial compromise late last week – if not on the final substance of legislation, then on a bipartisan procedural path forward. 

The committee adopted as a starting point for its deliberations Chairman Wyden’s HTF proposal, which reflects input from members on both sides of the aisle.  The chairman’s mark raises just over $7.5 billion through a number of tax compliance proposals (the largest requiring banks to provide additional details in the reports they file on mortgage interest) and  accelerating the time period during which the remaining balance in an inherited retirement plan must be distributed (the “stretch IRA” proposal), as well as language affirming that a longer term resolution of the HTF funding crisis through 2020 should be of the highest priority.  Following opening remarks by Committee members, the committee adjourned the markup to resume the week of July 7.

Given the urgent need to address at least the short-term HTF deficit before the start of the long Congressional August recess, Senators Wyden and Hatch are in negotiations with House Ways and Means Committee Chairman Dave Camp (R-Michigan) with the hope that by the second week of July they will have at least agreement in principle on the parameters of an HTF bill that can clear both chambers and reach the President’s desk for signature before highway funding runs dry in early to mid-August. Given the urgency, there will be little time in July for the chambers to send proposals back and forth.  The chosen course of action is to negotiate a deal between the two chambers from the start.

Nonetheless, Finance Committee members intend to propose numerous amendments to the HTF bill, including an amendment from the chairman to add to the HTF bill the Expire Act, the bill which the Committee approved earlier this year to extend for two years the tax provisions that expired at the end of 2013.   The Expire Act was adopted by the committee on a bipartisan basis, only to stall on the Senate floor in a dispute over whether Republican senators would be permitted to propose non-germane amendments to the measure.   Senator Hatch commended  the Finance Committee chairman for operating in a bipartisan manner and Wyden in turn suggested that he hoped the same bipartisan spirit would lead to an agreement to get the Expire Act done in July as part of the pressing need to deal with the HTF shortfall. 

While the Finance Committee has agreed to a procedure to move forward on the HTF, it is yet to be seen whether and under what circumstances the proposal it adopts in July will clear the Senate floor.  Amendment disputes have tied up most major bills on the Senate floor this year and for the HTF to move ahead to passage in July there will either have to be an agreement by Republican senators not to make amendment demands or by Democratic leaders to be more flexible on the type of amendments they will allow.

On the House side, Chairman Camp is expected to release his own proposal to deal with the HTF shortfall around the second week of July,  presumably after consultation with his Senate colleagues.  In remarks over the past few days, Camp has indicated that he does not favor using permanent tax increases to offset the cost of a temporary extension of highway funding and that any extension should contain substantial cuts in federal transportation spending. 

Camp’s approach to the tax extenders is in stark contrast to the traditional approach taken by the Senate, to adopt provisions extending most of the provisions in a single package.  Instead, Camp has brought a small number of expired provisions before the committee individually for permanent extension, and two of these have been adopted on the House floor (the research credit and small business expensing).  Although Chairman Camp has stated his intention to bring more extenders for consideration on an individual basis in July, it appears unlikely that many more of them will be considered, given the limited amount of House floor time in July and the amount of time that will be devoted to the HTF legislation.  Ways and Means Republicans believe that Camp’s ultimate objective will be to seek to negotiate a deal with the Senate under which one or two of the extenders is made permanent while the rest are extended for two years.

Senator Wyden will urge his colleagues and Chairman Camp to agree to include the extenders in the HTF legislation for two reasons; first, because the lack of time on the legislative calendar is making it increasingly unlikely that the House debate on individual extenders will advance much further, and second, because Senators Wyden and Hatch are eager to focus on tax reform and see the continuing debate over the extenders as a diversion.

Chairman Wyden stated recently that he believes he and Senator Hatch have until the early fall of 2015 to forge a consensus on tax reform if it is to be enacted in the next Congress, and they intend over the balance of this year to lay the groundwork for that effort.  The Finance Committee is expected in July to hold a major hearing on corporate tax reform which is likely to focus on international issues, with more hearings and internal discussion expected after the August recess.  While Chairman Camp is not expected to move further with the comprehensive tax reform draft he released in February his expected successor as Chairman, Representative Paul Ryan (R-Wisconsin) is likely to make tax reform his top priority as well in 2015.

Congress returns in July to the daunting challenge of reaching a consensus on the HTF and the greater challenge ahead of addressing the serious concern that the US tax system is putting US business at a disadvantage in the ever-changing global marketplace.   And, while the Congressional  track record this year in completing major legislation has been unimpressive, the bipartisan cooperation between Senators Wyden and Hatch, as seen both in the initial HTF markup and at their earlier markup of the Expire Act, suggests Congress is potentially capable of finding a path forward on tax reform even in a challenging political environment.