In my previous post, I discussed the economic costs of deteriorating infrastructure to the United States, and the potential of crafting a long-term policy for maintenance and upgrades to the country’s transportation and energy network. With federal spending facing economic sequestration and states and cities tightening their budgets, governments could re-prioritize spending to maintain existing infrastructure, while new projects could be funded based on their contribution to productivity and economic growth. Ultimately, however, improvements will require significant increases in funding, and Federal and state governments could supplement changes to infrastructure policy planning by addressing the shortcomings of existing public funding mechanisms. In this second post, I examine how new funding strategies and a National Infrastructure Bank can help address America’s infrastructure needs.
Broadening funding sources
Existing government funding channels for highways and bridges are drying up. The federal fuel tax, whose revenues are the source of most federal financing for highways and mass transit, has remained unchanged since 1993, and its revenues have declined significantly due to both inflation and the increasing fuel efficiency of cars. Measures to raise the gas tax or even index it to inflation have proven politically impossible, and consequently Congress has had to turn to short-term cash infusions to keep the gas tax-supported Highway Trust Fund afloat.
To account for the rising costs of highway construction and maintenance, several economists, including Matthew Kahn of UCLA and David Levinson of the University of Minnesota, and Edward Glaeser of Harvard, have proposed implementing user fees and congestion pricing. User fees, such as tolls on bridges and highways, are a tried-and-true funding mechanism that could be deployed quickly and with minimal administrative cost; the proceeds from tolls could be directly channeled toward maintenance and upgrades, and the system could be managed within existing state and local departments of transportation.
Congestion pricing, by contrast, imposes charges on users during periods of peak activity. Congestion pricing measures vary widely, ranging from raising existing tolls during rush hours and designating high-occupancy toll (HOT) lanes on highways to charging premiums to drive into dense city centers (London currently has such a system and a similar plan was unsuccessfully floated for New York), though elevated rush hour tolls and HOT lanes are the most popular in the U.S. Examples include the I-495 Express Lanes in Northern Virginia, the Katy Freeway in Houston, and the Metro Express Lanes in Los Angeles.
Broader implementation of user fees and congestion pricing could add $38 billion to $54 billion to transportation budgets each year, note experts Jack Basso and Tyler Duvall in a Hamilton Project policy brief. And beyond serving as a funding measure, such pricing arrangements could encourage a shift to carpooling and public transportation among commuters, potentially reducing carbon emissions in the process. The concept could also be extended to airports; economists Adam Looney and Michael Greenstone have discussed the potential of charging airlines and individual aircraft operators for usage of air traffic control and runway slots based on traffic levels.
Additionally, private capital could serve as another source of infrastructure investment. As I covered in a previous post, public-private partnerships (PPPs) have become an increasingly popular way for state and local authorities to construct and improve highways and bridges. Under a typical PPP, private investors finance the construction and maintenance of an asset while assuming responsibility for operating the asset over a fixed period, earning back their investment through user fees. As Glaeser points out, PPPs have significant advantages, since private operators may be more cost-effective in their investment than public authorities, have a built-in incentive to maintain the asset, and will allocate further investment to a project only if they anticipate enough demand. Projects involving PPPs include a number of toll roads, HOT lanes, and tunnels around the U.S.
A National Infrastructure Bank
A strategic rethink to infrastructure policy alone will not solve the problem of coordinating funding and policy planning, and numerous experts have proposed the establishment of a National Infrastructure Bank (NIB) to do just that. The idea has been floated for a number of years, and though it has enjoyed support from the Treasury and a broad and bipartisan coalition, enabling legislation has yet to get off the ground.
Creating an NIB could significantly streamline the planning and implementation of U.S. infrastructure policy. It would be able to undertake cost-benefit analyses and allocate funding to projects while remaining detached from the political process, thereby enabling it to take a long-term, strategic view of infrastructure spending. At the same time, it would be able to tap the private sector for co-investment in infrastructure projects, while building an overarching framework to manage the growing number of PPPs around the country. While 33 states actually have separate state infrastructure banks (SIBs), Bill Galston and Korin Davis of the Brookings Institution point out that they are generally undercapitalized, limited to supporting intrastate projects, and located within state departments of transportation, which restricts their funding to transportation projects. An NIB could facilitate multi-state projects, while channeling funds to upgrade energy and communications systems in addition to transportation infrastructure.
The urgency of investment
One week after the State of the Union address, the White House unveiled the president’s plan for investing in infrastructure. The plan calls for $50 billion to be directed toward the U.S. transportation system – with $40 billion going toward a “Fix-It-First” program – as well as for the establishment of a National Infrastructure Bank. It is likely to face an uphill battle to receive congressional approval, not only because of the expansion in federal spending but also because, as Galston and Davis observe, congressional leaders will be loath to relinquish their power to appropriate infrastructure spending through earmarks.
But as deferred maintenance to the American transportation system threatens trillion-dollar economic costs over the next decade, it is increasingly clear that the U.S. needs a long-term infrastructure strategy. The costs of maintenance are likely to rise if inaction continues, and at a time when the costs of borrowing are near all-time lows, there may be no time like the present to begin investing in infrastructure upgrades. Prioritizing existing public spending and alternative funding channels like user fees and PPPs will be key elements of a multi-pronged infrastructure plan, but approving increases to federal and state transportation budgets should remain on the table. Establishing an NIB may be the best way to coordinate these diverse funding sources while articulating a long-term strategy for investment.
In the current protracted debate on the merits of government spending, it is worth remembering that investment in infrastructure is ultimately investment in the capacity for future growth, and by extension investment in future quality of life. Washington, the states, and cities should work on crafting policy instruments that will leverage public and private dollars to equip U.S. infrastructure to meet the country’s 21st-century economic needs.
Image Credit: Mario Roberto Durán Ortiz