In a recent Governing column, I explained why it makes no sense to launch a massive, slapdash infrastructure program right now on the pretense that it would resolve the COVID-19-induced unemployment crisis. That column explained how governors could manage the project-selection process through block grants far better than Beltway patronage could, with a 50-50 split of costs between the feds and the states and their municipalities.
My focus now turns to the financing, to include:
- Federal funding for thoughtful project planning.
- A rational and efficient intergovernmental financing strategy.
- A revenue plan to pay for it.
Advance planning, including fiscal capacity. With pandemic-driven revenue shortfalls already forcing states and local governments to cut their operating budgets, the last thing they can afford to pay full freight for right now is the costs of engineers and architects to design tomorrow’s infrastructure. So that’s where to start: As Congress formulates fiscal aid to the states, leaders need to include a modest, specific $10 billion appropriation to pay states and localities now for half of their costs to prepare qualifying preliminary infrastructure project plans that would be RFP-ready in 2021.
To qualify for such a grant, the applicant should have to explain its plan and document its fiscal capacity to pay its 50 percent share of not only project planning but all project costs. The design work can easily be completed this year, lining up maybe $1 trillion worth of projects for next year.
More reliance on user fees. In 2017, two White House advisers proposed that priority should be given to infrastructure projects with a revenue stream. When unmasked, they really had privatization in mind, and that trial balloon went nowhere. Nonetheless, in the future our roads, bridges, water mains and sewer systems must generally be funded by public revenue bond issues supported by user fees and not general taxpayer dollars.
One clear example is highway and bridge renovation. The federal and state system of motor fuel taxation is incapable of fully funding that work. This will only get worse as fuel economy improves and the nation migrates toward electric vehicles. A nationwide expansion of tolling is a big part of the solution. Fortunately, the technology is already in widespread use for tolls to be captured electronically — no tollbooths required — when a vehicle passes a monitor that captures data from its transponder or license plate. E-tolls won’t solve the entire problem, but they will go a long way to cover these huge costs. The rollout of 5G telecom technology will facilitate the transition.
The same principle applies to water and sewer systems. Too many municipalities funded these public works in the past through general taxation rather than user fees, sometimes because property taxes could be deducted on residents’ federal income-tax returns. But with the 2017 federal tax-cut law’s limits on deductibility of state and local taxes and higher standard deductions, that rationale is obsolete. Metering should prevail.
Mandatory depreciation reserves. As a corollary to the user-fee principle, any federal matching funds for state and local infrastructure should include (for the first time ever) a requirement that the sponsoring government have a depreciation plan to put money aside annually for the inevitable replacement of the project’s facilities. One reason our infrastructure is so depleted is that governmental accounting and budgeting practices are focused entirely on paying off the debt incurred to build the project and fail to also set cash aside for its replacement. For projects that include full depreciation pricing, Uncle Sam could pay 65 percent of the total project cost.
Quick access to cheap credit. Efficient intergovernmental infrastructure funding requires cost-sharing. But even if they already have the plans in hand and their project approved for federal matching funds, most states and local governments are ill-equipped to swiftly obtain the voter approvals required to finance approved projects with general-obligation debt. Most will need accelerated access to 30-year money.
My call in a recent column for opening the Federal Financing Bank window to states is especially important here. If the states can access cheap long-term credit through the Treasury’s FFB facility, they will be able to accelerate construction and repay the bonds at the lowest interest rates ever available.
Inflation-indexed infrastructure bonds. One of the mounting societal risks from our runaway federal deficit spending is that inflation and higher interest rates are increasingly likely in the 2030s. To protect individual retirement savers, the Treasury should begin issuing savings bonds specifically earmarked to fund infrastructure. A similar series of inflation-indexed infrastructure bonds could be sold directly to institutional investors such as pension funds. These bonds would be “non-marketable” — that is, they can only be cashed in, and not sold to other investors — so that only “retail” savers, retirees and qualifying retirement plans are eligible to buy, hold and redeem them for the bonus interest rate.
Uncle Sam can add a sweetener for those who hold these bonds for at least 10 years: The investment return can be stepped up to, perhaps, 2 percent plus inflation, accruing retroactively after the 10-year holding period and applied to the principal. That’s a valuable premium above prevailing market yields that are now set by professional Wall Street traders and foreign investors. By offering a positive risk-free return on investment, this fractional incentive will encourage long-term saving where it’s most needed to assure future retirement security while providing a steady source of infrastructure-targeted capital.
Federal tax increases. And finally, it should go without saying that higher or new federal taxes are necessary for a massive infrastructure program to be funded by revenues and not escalating deficits. Everybody in America has a clear idea of who should pay those taxes: somebody else, not them. Liberals would advocate higher taxes on the wealthiest taxpayers, adjusting corporate tax rates, capping tax deductions for fat-cat investors and eliminating various loopholes. Environmentalists would propose a tax on carbon emissions from fossil-fueled operations. Some conservatives would suggest a value-added tax or flat-rate income tax. If opposing factions cannot find a compromise, we face future fiscal jeopardy far worse than some shared taxes.
Governing's opinion columns reflect the views of their authors and not necessarily those of Governing's editors or management.