This morning, the White House released its long-anticipated, 53-page infrastructure proposal. It is an expansion of the leaked six-page summary that I commented on in late January. The proposal has some elements that will appeal to free market fiscal conservatives. Others, not so much. Free marketeers will like the enhanced flexibility of states and the emphasis on non-federal dollars. They will dislike the planned net infrastructure spending increase and a failure to grapple with existing problems that have long plagued infrastructure policy in the U.S. I have broken these down below from best to worst.
- Allow states to toll their own Interstate Highway System segments. While the feds paid 90 percent of initial construction costs, these segments are owned, managed, and maintained by the states. Outside a few narrow exceptions, tolling existing lanes is currently prohibited under federal law. This makes maintenance, management, and modernization more difficult for states and limits their ability to partner with private financiers and managers. CEI has long supported ending Interstate tolling restrictions.
- Eliminate the volume cap on private activity bonds (PABs) and expand eligibility to non-highway and transit projects. PABs are critical financing tool used by private partners in public-private partnership. They offer the private sector a more level financing playing field with the public sector, as PABs are tax-exempt just like municipal bonds. CEI has long supported uncapping PABs and expanding eligibility to transportation projects, like airports, which fall outside the existing highway and transit coverage.
- Increase funding to federal credit assistance programs. What is interesting about this plan is that it intends to primarily promote additional financing rather than funding. Financing allows project owners the ability to bankroll projects today by issuing debt, rather than securing the dollars up front through government grants. These can also be leveraged by public-private partnerships. This is key to the White House’s claim that $200 billion in total federal spending will be leveraged to support up to $1.7 trillion in infrastructure investment. While that is likely an overly optimistic investment forecast, CEI has long supported the TIFIA program administered by the Department of Transportation, which Congress unfortunately slashed by 70 percent in 2015.
- Expand the Airport Privatization Pilot Program. Under the current program, there are a maximum of 10 slots for airport privatization pilots, with only one being available for a major hub. In addition, to enter the program, airports must currently have the consent of 65 percent of their carrier customers. This has predictably not led to experiments in airport privatization, which are common in the rest of the world. The White House proposal would uncap the number of available slots and reduce the airline approval requirement from 65 percent to 50 percent, something CEI has recommended for years.
- Enhanced permit streamlining. This is a bit outside of my area of expertise, but a major component of the White House plan is removing duplicative permitting requirements and imposing review deadlines. Congress enacted significant permit streamline provisions in the 2015 highway bill, many of which have yet to be implemented. The White House plan goes further, but it is important to note that these changes will not be instantaneous, even if Congress chooses to enact them, as the relevant agencies will need to promulgate new regulations, which typically takes years.
- $20 billion in new annual budget authority for infrastructure. With most of the existing programs unchanged, this amounts to an approximately 20 percent increase in federal infrastructure funding. While half of that budget authority is dedicated to a new “incentives” discretionary grant program that caps federal funding at just 20 percent—far below the typical 50-90 percent federal share under current grant programs—it remains to be seen how much of that will ever be appropriated, as states will still be able to seek funding through traditional channels. Fiscal conservatives may have been able to stomach the $200 billion of infrastructure funding over 10 years if the administration had proportionately reduced spending under other existing programs, but it did not.
- No pay-fors. The White House infrastructure proposal does not explain how any of this will be paid for, leaving that decision to Congress. While it is unlikely that congressional leadership will adopt the White House proposal in its entirety, providing no guidance to Congress on pay-fors is a recipe for increasing the national debt.
- Quarter of total funding dedicated to rural areas. The plan calls for dedicating 25 percent of total funding to rural projects. The problem: Less than 20 percent of Americans live in rural areas. Furthermore, in many cases, rural infrastructure is already overbuilt and local and state officials have been struggling to maintain what they already have in place—and in some cases, depaving rural roads to gravel. As the share of America’s rural population continues to decline, spending an outsized share of federal funding on rural projects will make less and less sense.
- Core bad incentives of federal infrastructure funding remain unaddressed. Contrary to popular myth, there is no nationwide infrastructure crisis. In many cases, measures of infrastructure quality (such as the number of structurally deficient bridges or highway pavement roughness) have been improving steadily over the last two decades. In reality, infrastructure problems are local and are the result of a lack of maintenance. The three major areas where this is true is in municipal surface streets, mass transit systems, and water and wastewater networks. As a general rule, federal funding is for capital projects (i.e., new infrastructure or reconstructing infrastructure), not maintenance and operations. States and locals are expected to pick up the maintenance and operations tab, which is where most project costs are incurred over a project’s lifecycle. But they have not.
The sad story works like this: The feds pick up 80 percent of a highway construction project. State and local politicians work to gold-plate the project to maximize their federal take-home. State and local politicians, and their congressional representatives, hold a ribbon-cutting photo op. Local, state, and federal politicians then move on to find the potential next ribbon-cutting photo op. Maintenance is neglected. Decades later, the highway hasn’t been maintained, the politicians who gold-plated it are retired, and state and local politicians demand a bailout from their own corruption. While the White House plan does clearly incentivize states to develop sustainable funding mechanisms for the long-run care of the facilities, it does not address the existing bad incentives.
- Highway Trust Fund insolvency remains unaddressed. The most critical issue for states and infrastructure builders is the long-term solvency of the federal Highway Trust Fund, which provides the majority of federal infrastructure spending. In recent years, Highway Trust Fund revenues have not kept pace with expenditures, leading to numerous general revenue bailouts. The vast majority of trust fund revenue comes from the federal excise tax on gasoline and diesel. As vehicles become more fuel efficient, this deficit will continue to grow. The infrastructure industry generally favors a fuel tax increase, but any flavor of a tax increase would simply kick the can down the road and/or greatly increase the regressive nature of the fuel tax, which hits low-income drivers the hardest as they tend to drive older, less fuel-efficient vehicles.
CEI supports fundamental reforms to existing federal transportation spending, and eventually winding down the Highway Trust Fund and returning highway and transit funding responsibility to the states and local governments. But the White House is silent on this issue. Interestingly, FY 2019 White House budget request, also released today, assumes that the Highway Trust Fund will be depleted by FY 2021, meaning that reimbursements to the states will be delayed until inflowing revenue can support these payments. This creates a great deal of uncertainty for states and local governments, but perhaps bolsters the appeal of the “incentives” 20 percent match discussed above.
- Failure to uncap the airport passenger facility charge (PFC). The White House proposal is clearly aimed at reducing the federal involvement in state and local infrastructure, which is laudable. However, one prominent omission is the PFC. The PFC is a local airport user fee. The money is collected by the charging airports and never touches the federal treasury. Airlines hate it because it reduces their market power over airport investment decisions, which they often use to game airports into anticompetitive gate lease contracts that drive up consumer airfares. Free market organizations are broadly in favor of eliminating the present $4.50 PFC cap and allowing more airport revenue to be generated locally, as opposed to being disbursed through the federal Airport Improvement Program, a tax-funded grant program. CEI has been adamant that modernizing airports requires much less federal control. Under the White House proposal, airports and federal taxpayers will continue to suffer.