Miriam K. Carliner Chair - Economic Studies
Senior Fellow - Center on Regulation and Markets
Optimism that America will finally address its massive infrastructure problem is on the rise – and understandably so. The Trump Administration is still attempting to fulfill their infrastructure campaign pledge and Democrats have long supported rebuilding the country’s crumbling infrastructure. However, a bipartisan infrastructure overhaul is likely stuck in neutral for the reason we’ve been in gridlock for decades: how to pay for it.
There are three ways to pay for new infrastructure investment: raise revenue, borrow, or pretend (gimmicks that mask borrowing as being paid for). Infrastructure is generally funded by user fees: the gas tax pays for roads. In the past this has had broad political support. People understand that freeways aren’t free and that revenue paid by users for infrastructure are different than generic taxes. Republicans embraced the small ‘c’ conservative idea that people who used public assets ought to pay for them. Democrats overcame objections regarding the inherently regressive nature of flat consumption taxes and the budgetary policy of segregating infrastructure revenue streams from other general revenue to support this system.
This bipartisan consensus lasted for decades, but has broken down on both ends. Republicans morphed from the party of Ronald Reagan and George H.W. Bush (who both raised the gas tax) to the party that signs Grover Norquist’s ‘no new taxes’ pledge which now includes the gas-tax. Democrats broke their end of the bargain in 1993 when they raised the gas tax, not to build more roads, but to reduce the deficit as a fallback option when their proposal for an increased energy tax failed. While those gas tax dollars were eventually restored to the highway trust fund, the glory days were over.
As a result, the federal gas tax, never indexed for inflation, has been stuck at 18.4 cents/gallon since 1993. Simply increasing the gas tax for inflation (32 cents today) and indexing it in the future would fund a large-scale new infrastructure initiative. That would require bipartisan political will that has been lacking for 25 years and a repudiation by the Republican controlled Senate of the pledge that most have signed.
The second choice is to borrow. The federal government’s annual deficit has ballooned under this Administration, approaching $1 trillion a year. Driven by unpaid-for tax cuts and a substantial increase in military spending, the deficit is at an elevated and rising level, during a period when it should be shrinking due to strong economic growth and employment. While the outgoing Congress had no problem running up America’s credit card bill for these priorities, it showed no interest in doing so to rebuild America’s infrastructure. President Trump’s original proposal to spend $200 billion of borrowed federal funds in the hopes of galvanizing $1 trillion of total investment generated little Congressional buy-in. Despite full Republican control, neither the House nor the Senate took up the President’s proposal.
A bipartisan infrastructure overhaul is likely stuck in neutral for the reason we’ve been in gridlock for decades: how to pay for it.
The federal government has generally eschewed borrowing for infrastructure (Eisenhower’s original proposal actually called for infrastructure bonds, but Congress replaced that with the gas tax). In a time of record deficits and low unemployment, it seems unlikely that a divided Congress would set aside deficit concerns to go big on infrastructure.
The third option is to fake it, claiming something is paid for, when in reality it is using an accounting gimmick. This happened with the last surface transportation bill when Congress raided the Federal Reserve surplus and claimed the legislation didn’t increase the debt (it did, only the Treasury debt was sold to the public by the Federal Reserve, not the Treasury).
An alternative idea is to replace federal funds with private capital. Possible in theory, difficult in practice. State and local governments already enjoy a large federal subsidy every time they borrow for infrastructure (or anything else) in the form of tax-free municipal debt. While the Trump Tax Cut reduced this subsidy, making infrastructure more expensive, it is hard to develop a new and larger subsidy to incentivize state and local governments to prefer private capital over tax-free municipal debt. Additionally, private capital investment seeks profit, restricting the type of infrastructure built through this method to the most monetizable projects. This approach has some potential, but on a far more narrow basis than often promised.
New policies to make existing infrastructure investment more efficient, without spending, are out there (here are four). One could envision a set of policy reforms coupled with targeted seeded funding for select types of projects that overall require no new federal revenue or debt. However wise those ideas are, this package would be far shy of the $1 trillion level that both the President and Congressional Democrats have called for.
Further complicating success, the federal government’s accounting and the politics around the ribbon cutting press release both work against building a bipartisan, rural-urban winning political constituency for financing infrastructure. Improving the speed at which refrigerated cargo can enter and exit the port of Seattle will provide more long-run benefits to cattle ranchers in Montana who export their products to Asia, than to the construction workers in Seattle who will get six months of work. Yet the ribbon cutting for the project will occur thousands of miles away from the cattle ranches. Providing the New York MTA with funds to buy new rail cars will actually create more jobs in Lincoln Nebraska— where the Kawasaki plant that builds rail cars is located. But Uncle Sam’s check will go to New York, while Nebraska will appear to have gotten nothing. Overcoming these political problems may seem easy, but ask yourself when was the last time you saw a news report about an infrastructure project in another part of the country and thought: this will benefit me.
Putting infrastructure in the driver’s seat of the legislation process requires a consensus between Congressional Democrats, Republicans, and the Trump Administration. Political roadblocks remain at most turns. The last two years of unilateral Republican control saw infrastructure take a back seat. To reach the finish line of new infrastructure legislation finally being signed into law, a compromise is needed that summons the political courage to either raise revenue, increase the debt, or go far smaller in scope and impact than that of the Administration and Congressional Democrats’ proposals. Failing to make those trade-offs will keep us stuck in the same traffic jam we’ve been in for a generation.