Economists Debate Proposals to Fund Infrastructure Investment

Infrastructure has been a hot-button issue in Washington of late, with both President Donald Trump and Congressional Democrats proposing separate trillion-dollar plans to improve our nation's transportation, water management, energy grid, and schools.

Yet while many on both sides of the aisle recognize the importance of infrastructure and the desperate need to repair and expand it in the United States, the pervasive struggle in finding a fiscally responsible way to pay for it remains.

Throughout his campaign, President Trump repeatedly emphasized his interest in investing in infrastructure. While he has not released his own plan, close advisors to the president have proposed substantial tax credits to private companies to create incentives for infrastructure projects.

At the same time, Senate Democrats have released their Blueprint to Rebuild America's Infrastructure, which proposes substantial direct federal investment in infrastructure potentially offset by closing tax loopholes used by corporations and the wealthy. New Secretary of Transportation Elaine Chao has stated she would be open to using a combination of public and private funding to support an infrastructure package, hinting at a potential opportunity for compromise.

Economists gathered at a recent event hosted by the Hamilton Project at the Brookings Institution to discuss the merits and shortcomings of various financing plans in an effort to identify a fiscally responsible approach to funding infrastructure.

Infrastructure Improvements are Vital, and Now Is the Time to Invest

At the event, If You Build It: A Guide to the Economics of Infrastructure Investment, speakers outlined why funding infrastructure is important, what sorts of projects should be prioritized, who is best-suited to make decisions on worthy projects, and how these projects could be financed.

In the framing paper released at the event, the Hamilton Project noted that infrastructure investment may help spur productivity growth and thereby increase living standards throughout the United States.

In recent years, the growth rate of our nation's labor productivity has declined, making various efforts to alleviate poverty more difficult. An influx in infrastructure spending could help reverse this decline. However, we have witnessed inadequate spending on infrastructure over the years, which has contributed to a major backlog in maintenance and new projects.

According to a 2013 report conducted by the American Society of Civil Engineers, the U.S. would need to spend $3.6 trillion by 2020 just to bring its infrastructure up to a state of good repair.

At the same time, interest rates are near historic lows, which reduces the cost of borrowing for capital investment projects. Thus, panelists agreed that it makes sound economic sense to invest in infrastructure at this time to keep costs down, close the deficit in infrastructure spending, and possibly spur growth in our country's labor productivity.

The method of project selection is critical to maximizing productivity and efficiency in future infrastructure investment.

Diane Whitmore Schanzenbach, director of the Hamilton Project, emphasized that maintenance projects often have higher returns on investment than new projects, especially when non-monetary benefits (i.e., healthier communities or improved test scores) are considered. Too often, however, maintenance costs are not incorporated into initial project planning, and system expansions are often prioritized over upkeep of existing infrastructure for political reasons.

A "Fix It First" approach, according to Schanzenbach, would maximize future returns on new infrastructure investment.

Thus, she argued, to promote efficient spending on infrastructure, lawmakers could seek to insulate project decision making from political pressures. This could be done by creating a nonpartisan infrastructure bank with the power to evaluate and select projects based on a thorough cost-benefit analysis rather than political pressures.

How to Pay for It?

The biggest obstacle to a massive infrastructure package remains finding a way to pay for it.

President Trump's plan is mainly built around the notion of promoting private investment, while Congressional Democrats largely support direct federal investment in infrastructure, and have discussed, along with some Republicans like House Transportation and Infrastructure Committee Chairman Bill Shuster (R-Pa.), closing corporate tax loopholes to offset the cost of such investment.

Specifically, lawmakers on both sides of the aisle have voiced support for creating incentives for the return of foreign assets — known as repatriation — and using the taxes collected on those repatriated assets to fund a major infrastructure package. Economists on the panel emphasized that both plans — tax incentives and repatriation — face certain shortcomings.

The administration's plan to provide tax credits to private investors would likely support projects that would have moved forward regardless of tax credits because the projects themselves (e.g., toll roads) are already economically advantageous to the private sector. At the same time, this plan would overlook equally important projects that don't offer significant returns to investors. Such projects include maintenance on existing infrastructure and new construction in rural areas — critical for their constituents but limited in their ability to raise revenue from users.

Using taxes on repatriated earnings to pay for infrastructure, as some legislators on both sides of the aisle have proposed, also presents its own set of challenges.

The windfall of tax revenue generated when foreign earnings return to the U.S. will provide a one-time influx, thus not providing a sustainable source of infrastructure funding for future projects. As a result, revenue from a repatriation tax developed through well-designed corporate tax reform could be used for one-time projects, such as capitalizing a national infrastructure bank.

Furthermore, repatriation brings with it a set of additional considerations, such as ensuring that corporations do not simply wait for the next tax holiday to bring future foreign earnings to the U.S.

In short, paying for desperately needed infrastructure improvements must be multi-faceted and critically considered — there is no single solution.

Whether to employ taxes or user fees, enter into public private partnerships, or rely on state, local, or federal leadership to move a project forward are all important questions, the answers to which will change depending on the type and location of the project.

There was, however, a consensus among event participants that projects must pass rigorous, nonpartisan cost-benefit analysis to ensure scarce resources are efficiently and effectively allocated to the most beneficial projects.

APA's Role

As the conversation in Washington surrounding infrastructure progresses, the American Planning Association stands ready to work with legislators and other policymakers to ensure any infrastructure package prioritizes projects that would bring the greatest benefit to local communities.

Check out our Principles for New Federal Infrastructure Investment Policy to see how we're working to shape the conversation.

Top image: A construction worker in Aberdeen, Washington, examines the exterior of a longitudinal pontoon destined for Lake Washington. Photo by Flickr user Washington State Department of Transportation (CC BY-NC-ND 2.0).

About the Author
Kirsten Holland is policy associate at Advocacy Associates.

February 17, 2017

By Kirsten Holland