Who will pay for new infrastructure spending?

June 6, 2012

Infrastructure is an important contributor to full employment, and an efficient network of roads, mass transit and water systems is critical for economic vitality. In 2009, the American Society of Civil Engineers issued a report card showing that the U.S. needed to spend $2 trillion over a five-year period for its infrastructure to be upgraded to “good.” That’s about $1.4 trillion more than the U.S. spent on capital improvements to infrastructure over the five-year period from 2003 to 2007. Where could this new funding come from?

According to a 2010 Congressional Budget Office report, state and local governments accounted for about 60 percent of infrastructure spending and 90 percent of the cost of maintaining transportation and water infrastructure nationally. The federal government provided the remaining funds as well as most of the funding for the nation’s air traffic control system. The CBO breaks down how the money was spent:

Spending on highways at all levels of government accounted for 43 percent of expenditures for transportation and water infrastructure in 2007. Expenditures on water supply and wastewater treatment systems accounted for 28 percent of spending; aviation, mass transit and rail made up 23 percent; and the remaining categories of water transportation and water resources accounted for 5 percent.

And here’s the CBO on the funding for these projects:

In the United States, the public sector rather than the private sector typically provides funding for transportation and water infrastructure. Whether it is more efficient for the federal government to provide that funding depends on the type of infrastructure and the likelihood that such infrastructure will be undersupplied if its provision is left to state and local governments or to the private sector.

Evidence suggests that spending for carefully selected infrastructure projects can contribute to long-term economic growth by increasing the capital stock and raising productivity. (During a prolonged economic downturn, infrastructure spending can also mitigate losses in output and employment.) Realizing the potential gains from public spending for transportation and water infrastructure depends crucially on identifying economically justifiable projects – those with benefits to society that are expected to outweigh costs – but a variety of factors make identifying such projects difficult.

Since yields on U.S. Treasury and municipal bonds are at record lows, it’s appealing for federal, state and local governments to finance projects with borrowed dollars. Lately, investors have favored bonds backed by dedicated revenue streams – there were $11.1 billion in bonds issued for water and sewer facilities in the first quarter, nearly four times more than the $2.9 billion issued for toll roads, highways and streets in the same period, according to the SIFMA Municipal Bond Report (page 7). Private investors are also very eager to gain control of public assets through public-private partnerships, though these are increasingly being shown to be a bad deal for the public.

The most prevalent means of funding infrastructure is a tax on gasoline. At a recent conference organized by the American Society of Civil Engineers and the American Planning Association, discussion focused on the need to create accountability and transparency between state transportation departments and the public in how their taxes were spent:

Also on the panel was Doug McDonald, former Secretary of the Washington state Department of Transportation (2001-07). It was under McDonald’s watch that the department addressed long-standing accountability and trust issues by establishing and publicizing quantifiable benchmarks for measuring performance.

That focus on accountability allowed state officials to win legislative passage of a five-cent gas tax in 2003 after increases were rejected in 2001 and 2002. The increase allowed the state to fund a series of high-priority “nickel projects” selected by lawmakers. After demonstrating they could bring the projects in on-time and on-budget, the department was able to push for a second, phased-in 9.5 cent gas tax hike two years later to fund the largest transportation package in the state’s history, an $8.5 billion plan.

The generic talk about the need to increase infrastructure spending is persuasive, but, as in most public policy matters, the question comes down to who pays for it. McDonald’s idea of “establishing and publicizing quantifiable benchmarks for measuring performance” is so simple that it would be easy to dismiss it. But as tax revenues shrink and demands for government services increase, it will be more important than ever to justify committing scarce taxpayer dollars to infrastructure. America has seen too many “bridges to nowhere” to sign off on unlimited new spending on roads and sewer systems.


CBO: Full dataset on national infrastructure spending from 1956-2007

KBDI 12: Discussion of additional sales tax to fund Denver Regional Transportation District FasTraks

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