If Congress lets federal highway authorization expire, does Tennessee still get its share of federal gas-tax money, and can the state intercept it directly?

Plain-English summary

In 2014, the federal transportation authorization called MAP-21 was set to expire on September 30, 2014. Tennessee's leadership wanted to know what would happen to federal-aid highway funding if Congress did not reauthorize before October 1, 2014, even though the underlying federal gas-tax collection itself would continue through 2016.

The AG concluded that previously obligated funds were safe. Once the federal government signs a project agreement with a state under 23 U.S.C. § 106, it makes a contractual commitment to reimburse the state for the federal share of eligible project costs. Expiration of MAP-21's expenditure authority would not unwind those promises, although actual cash payments still depend on annual appropriations.

The AG also said the state had no self-help options if reauthorization stalled. The federal gas tax is an excise tax on producers, not on Tennessee drivers, so Tennessee drivers had no authority to remit the tax to the State. Federal law also requires gas-tax revenue to go into the Highway Trust Fund, with no mechanism to divert it directly to a state, which made the questions about state-held escrow accounts moot.

Currency note

This opinion was issued in 2014. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

Q: What was MAP-21?
A: MAP-21, the Moving Ahead for Progress in the 21st Century Act, was the federal surface transportation authorization signed in 2012 (P.L. 112-141, July 6, 2012). It maintained the Federal-aid Highway Program (FAHP), set the funding levels, and reauthorized the federal gas-tax collection and the use of the Highway Trust Fund.

Q: What is the Highway Trust Fund?
A: It is the federal account that holds revenue from the federal motor-fuel excise taxes (gasoline, diesel, and special fuels) and other dedicated taxes, and from which federal-aid highway projects are paid. 26 U.S.C. § 9503 governs deposits in and expenditures from the Fund.

Q: How does "contract authority" work?
A: For most FAHP programs, sums become available for obligation when Congress enacts the authorizing legislation, without further annual appropriations. Funds authorized for a fiscal year are distributed to the states by apportionment on October 1. Distribution at this stage is a notice that the state has federal funds available, not a cash transfer. The state then asks the federal government to obligate funds against specific project agreements, and the federal government pays the federal share as eligible costs are incurred.

Q: Why are pre-October-1 project agreements still enforceable?
A: Under 23 C.F.R. § 630.106(c), the execution of a project agreement is "a contractual obligation of the Federal government under 23 U.S.C. 106." 23 C.F.R. § 630.106(f)(1) requires the federal-aid share to be established at the time the agreement is executed. The Federal Highway Administration's Financing Federal-Aid Highways materials describe obligations as "the Federal government's promise to pay a State for the Federal share of a project's eligible cost." Expiration of new expenditure authority does not extinguish existing obligations; it just blocks new ones.

Q: Could Tennessee tell its drivers to send the federal gas tax to the State instead of the IRS?
A: No. The federal motor-fuel tax is a per-gallon excise tax levied on producers of gasoline, diesel, and special fuels under 26 U.S.C. § 4081. Tennessee drivers are not the taxpayers for federal-excise-tax purposes. Ammex, Inc. v. United States, 367 F.3d 530 (6th Cir. 2004), reflects that distinction. Because the tax is federally imposed, there is no legal basis for any taxpayer to remit it to anyone other than the federal government.

Q: Could the federal government send the tax revenue to Tennessee without it going into the Highway Trust Fund?
A: No. 26 U.S.C. § 9503(b) requires gas-tax revenue to be deposited into the Highway Trust Fund, and the same statute governs expenditures from that fund. The opinion identified no other federal authority that would allow a different route.

Background and statutory framework

The federal-aid highway program is built on a two-track design. One track is the tax: 26 U.S.C. § 4081 imposes the per-gallon federal excise on producers, and 26 U.S.C. § 9503(b) directs the revenue into the Highway Trust Fund. The other track is authorization and obligation: Congress periodically passes a surface-transportation bill that sets program rules, authorizes funding levels, and gives the federal government authority to make expenditures from the Trust Fund for FAHP obligations through a specified date. MAP-21 reauthorized the gas-tax collection and Highway Trust Fund deposits through September 30, 2016, but reauthorized only through September 30, 2014, the authority to make Trust Fund expenditures for FAHP obligations.

The question presented in this opinion was what happens to states if those two tracks diverge. The AG's answer rested on the contract-authority structure that the Federal Highway Administration uses. When a state enters a project agreement before authorization expires, that agreement is a federal contractual commitment to reimburse eligible costs at the federal share established at execution. Subsection (b)(6) of § 9503 confirms that expenditures from the Fund after the cutoff date can still be made "to liquidate obligations made before" the cutoff. Actual reimbursement still requires an appropriation, as § 9503(c)(1) makes clear, but the underlying liability survives.

The opinion's third and fourth conclusions reflect the fundamentals of federal tax authority. The federal motor-fuel excise is imposed by federal statute on federal taxpayers (producers). States cannot redirect that tax stream or hold the revenue in escrow without congressional authorization, because the underlying tax obligation runs to the United States, not the State.

Citations and references

Statutes and regulations:

• 23 U.S.C. §§ 101 et seq. (Federal-aid Highway Program)
• 23 U.S.C. § 104(c)(2) (apportionment formula)
• 23 U.S.C. § 121 (payments to states)
• 26 U.S.C. § 4081 (motor-fuel excise tax)
• 26 U.S.C. § 9503 (Highway Trust Fund)
• 23 C.F.R. § 630.106 (project agreements)
• P.L. 112-141 (MAP-21)

Cases:

• Gurley v. Rhoden, 421 U.S. 200 (1975) (U.S. Supreme Court; nature of federal gas excise)
• Ammex, Inc. v. United States, 367 F.3d 530 (6th Cir. 2004) (federal court of appeals; federal motor-fuel excise is on producers)

Subject

Opinion No. 14-74, Distribution of Federal Gasoline Tax Revenues August 1, 2014

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2014/op14-074.pdf

Original opinion text

STATE OF TENNESSEE
OFFICE OF THE ATTORNEY GENERAL
August 1, 2014
Opinion No. 14-74
Distribution of Federal Gasoline Tax Revenues

QUESTIONS

If the Federal Government continues to impose and collect gasoline-tax revenue and deposits that tax revenue into the federal Highway Trust Fund until September 30, 2016, and Congress fails to enact a transportation appropriations bill before October 1, 2014, to authorize that tax revenue to be apportioned and redistributed to Tennessee:

1. Would the Federal Government be required by federal law or the U.S. Constitution to pay to the State of Tennessee its federal share of the cost of state federal-aid highway projects located within Tennessee?

2. Would the Federal Government be obligated under federal law or the U.S. Constitution to reimburse the State for any increase in the State's share of the cost of a federal-aid highway project located in Tennessee?

3. Is there authority for Tennessee highway users to remit the federal gasoline tax to the State?

4. Is there authority for the gasoline-tax revenue to be sent to the State by the Federal Government without being deposited into the federal Highway Trust Fund?

5. If the answer to Question 3 or 4 is yes, is there authority for the State to hold such federal-gas-tax revenue in escrow until such time as Congress passes a transportation appropriation bill reauthorizing the expenditure of such revenue from the Highway Trust Fund?

6. If the answer to Question 5 is yes, is there authority for the State to use the gasoline-tax revenue it receives to pay the federal share of federal-aid highway projects located within Tennessee?

OPINIONS

1. and 2. Yes. In the event that the current federal transportation legislation expires on September 30, 2014, without any new legislation being passed, the Federal Government will remain contractually liable for the payment of funds that have been obligated (and thus the reimbursement of eligible costs that have been incurred) pursuant to project agreements executed before October 1, 2014.

2. No. Because the federal gasoline tax is a federally imposed tax, there is no authority for any taxpayer to remit that tax to anyone other than the Federal Government.

3. No. There is no authority for the gasoline-tax revenue to be sent to the State by the Federal Government without being deposited into the federal Highway Trust Fund.

4. Not applicable.

5. Not applicable.

ANALYSIS

In 2012, Congress enacted the current transportation legislation that assists states in financing state highway projects, "Moving Ahead for Progress in the 21st Century Act," or "MAP-21." P.L. 112-141, July 6, 2012; see 23 U.S.C. §§ 101 et seq. MAP-21 is the authorizing legislation that maintains the Federal-aid Highway Program ("FAHP") and sets the ground rules under which the FAHP operates, including authorizing the total amount of funds available to the program for each fiscal year and determining how those funds are to be distributed. See U.S. Dep't of Transp., Fed. Highway Admin., FHWA-PL-07-017, Financing Federal-Aid Highways 5 (Mar. 2007). FAHP programs are financed from the federal Highway Trust Fund. Id. at 10. The 2012 legislation reauthorized the imposition of federal gasoline taxes through September 30, 2016, and the transfer of the revenue derived from these taxes into the Highway Trust Fund. See 26 U.S.C. §§ 4081(a), 9503(b). It also reauthorized, until September 30, 2014, the making of expenditures from the Highway Trust Fund in order to meet FAHP obligations that the Federal Government has incurred. See 26 U.S.C. § 9503(c). Pursuant to MAP-21, the Federal Government was required for Fiscal Year 2014 to apportion authorized highway funds to states in proportion to the gasoline-tax payments attributable to a state's highway users. See 23 U.S.C. § 104(c)(2).

1. and 2. The financing cycle for the FAHP begins when Congress develops and enacts surface-transportation authorizing legislation such as MAP-21. Financing Federal-Aid Highways at 8. Passage of authorizing legislation, however, is just the first step. Funds must be made available for obligation, and for most programs within the FAHP, this occurs through a special form of budget authority called "contract authority," which means that sums are made available for obligation upon passage of the authorizing legislation without further annual appropriations. Id. at 9. Funds authorized for a fiscal year are available for distribution through apportionment on the first day of the fiscal year (October 1). Id. at 11. Although funds are "distributed" to a state, no cash is actually disbursed at this point. Instead, the state is notified that it has federal funds available for its use. Id. The state then has the opportunity to request the Federal Government to approve the obligation of funds through the execution of project agreements, by which the Federal Government promises to reimburse it. Id. The Federal Government then makes payments to the state for the Federal share of costs as they are incurred on projects. See 23 U.S.C. § 121.

As noted above, the Federal Government's authority to make expenditures from the Highway Trust Fund expires on September 30, 2014; after that date, expenditures from the Fund are authorized only to liquidate obligations made before October 1, 2014. 26 U.S.C. § 9503(b)(6). As this provision suggests, though, the expiration of this expenditure authority (and the failure to enact any new reauthorizing legislation) will have no effect on the Federal Government's contractual obligations to provide previously obligated funds to the states. See Financing Federal-Aid Highways at 15 ("An obligation is a commitment, the Federal government's promise to pay a State for the Federal share of a project's eligible cost."). Applicable federal regulations require that "the Federal-aid share of eligible project costs shall be established at the time the project agreement is executed." 23 CFR § 630.106(f)(1). "The execution of the project agreement shall be deemed a contractual obligation of the Federal government under 23 U.S.C. 106 and shall require that appropriate funds be available at the time of authorization for the agreed Federal share, either pro rata or lump sum, of the cost of eligible work to be incurred by the State." 23 CFR § 630.106(c). Thus, to the extent that a project agreement is executed for a particular project prior to October 1, 2014, the Federal Government would be contractually obligated to provide the obligated funds to the State. And since "[t]he FAHP is a reimbursable program," Financing Federal-Aid Highways at 17, this means that the Federal Government would be obligated to reimburse the State for any eligible highway-construction-project costs it has incurred.

3. The federal motor-fuel tax is a per-gallon excise tax levied on producers of gasoline, diesel, and other special fuels. See 23 U.S.C. § 4081; see also Gurley v. Rhoden, 421 U.S. 200, 205 (1975). Thus, although MAP-21 calls for the apportionment of the gasoline-tax revenues based upon the number of Tennessee highway users, Tennessee highway users are not the actual taxpayers for purposes of the federal gasoline excise tax. See Ammex, Inc. v. United States, 367 F.3d 530, 534 (6th Cir. 2004). In any event, because the gasoline tax is federally imposed, there is no basis upon which any taxpayer could remit that tax to anyone other than the Federal Government.

4. Pursuant to federal law, the revenue derived from the federal gasoline taxes must be deposited into the federal Highway Trust Fund. 26 U.S.C. § 9503(b). The same federal law authorizes and governs expenditures from the Highway Trust Fund. See 26 U.S.C. § 9503(c). There is no other federal authority governing the disposition of federal-gasoline-tax revenues.

ROBERT E. COOPER, JR.
Attorney General and Reporter

JOSEPH F. WHALEN
Acting Solicitor General

CRISTIN F. HAMBIDGE
Assistant Attorney General

Requested by:
The Honorable Randy McNally
State Senator
307 War Memorial Building
Nashville, Tennessee 37243