Tax Provisions in Transportation Act

Post Date: 7/20/12
Last Updated: 7/20/12


Cross References
• Public Law 112-141 (H.R. 4348)

The President signed into law the Moving Ahead for Progress in the 21st Century Act on July 6, 2012. The law reauthorizes and fully funds the Highway Trust Fund, which is the federal funding source for transportation infrastructure projects like roads, highways, bridges, and mass transit. According to the Senate Committee on Finance, the law is fully paid for and reduces the deficit by $16.3 billion. Revenue raisers that pay for the law come from a number of provisions, such as stabilizing pension interest rates and a provision that increases the premiums for the Pension Benefit Guaranty Corporation. The following is a summary of tax provisions contained in this transportation act.

Extension of Highway-Related Taxes. The annual use tax on heavy vehicles was set to expire on October 1, 2012. The new law extends this tax at its present rate through September 30, 2017. Other taxes dedicated to the Highway Trust Fund that were set to expire on July 1, 2012 have been extended at their present rates through September 30, 2016.

Defined Benefit Pension Plans. In general, employers that maintain defined benefit plans are required to make a contribution for each plan year to fund plan benefits (plan liabilities). These contributions are deductible by the employer. Plan liabilities are calculated by discounting projected future payments to a present value by using legally required interest rates based on corporate bonds. Thus, the lower the interest rate, the less of a discount, resulting in a higher plan liability. As a result of current interest rates being so low, employer contributions to these plans for 2012 would be much higher than in previous years.

Under the new law, plan liabilities would continue to be determined based on corporate bond segment rates, which are based on the average interest rates over the preceding two years. However, beginning in 2012, for purposes of the minimum funding rules, any segment rate must be within 10% (increasing to 30% in 2016) of the average of such segment rates for the 25-year period preceding the current year. This provision is meant to stabilize the fluctuation of interest rates from year to year, resulting in fewer sharp declines and fewer sharp increases in interest rates.

Author's Comment: With a lower minimum funding requirement during periods of low interest rates, such as the case this year, employers will contribute less to their plans than they otherwise would have contributed under prior law, resulting in lower tax deductions, resulting in more revenue for the government. The Senate Committee on Finance expects this to generate $9.394 billion in revenue for the government over the next 10 years.

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