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- Rediscovering Tax and Regulatory Powers at the Local Level - November 1, 2018
President Donald Trump has proposed a trillion-dollar plan for infrastructure investment. The plan calls for public-private partnerships in which the federal government invests several hundred billion dollars to rebuild the nation’s infrastructure, with the bulk of the investment coming from the private sector. The Trump administration maintains that for many years the nation has underinvested in infrastructure, particularly in surface transportation, and that massive new investments are now required to rebuild and expand infrastructure. Trump argues that the injection of federal dollars into infrastructure development will jumpstart the economy and spur long-term economic growth.
Most studies reveal that the current state of the nation’s infrastructure is poor, to say the least, and that rebuilding infrastructure will be extremely costly. One estimate found that rebuilding the highway system alone will require nearly a trillion dollars in investment projects over the next two decades. However, it is not clear that the federal government should undertake this infrastructure investment, because the federal government has a poor track record of effectively managing and completing such projects. For example, a number of studies reveal that federal investments in surface transportation have been or continue to be allocated inefficiently, incurring costs that exceed benefits, and there are many studies showing how special interests steer federal dollars toward unworthy infrastructure projects.
In contrast to the federal government, state and local governments have a better track record for investing in infrastructure. Research shows that state and local governments invest more efficiently in highways and mass transit compared to the federal government. This is largely because state and local governments prioritize the most important transportation infrastructure projects and invest dollars in projects where benefits are likely to exceed the costs. When state governments invest in projects that do incur losses – e.g., privatization of the Indiana interstate highway – they are more likely to stem losses and reallocate funds to other, more crucial projects.
A priori, it is not clear why state and local governments should allocate funds for infrastructure investments more efficiently than the federal government. Elected officials who make these investment decisions at the state and local levels are subject to the same interest group pressures that influence federal investments. Some scholars point to differences in the financing of infrastructure projects to explain the discrepancy. State and local governments are more likely to privatize and rely on public-private partnerships in building highways and mass transit projects, and states have better utilized innovative, effective techniques when implementing tolling and mileage-based user fees.
By contrast, the federal government budget process is conducted in the absence of effective fiscal rules, such as those rules designed to reduce deficits. These rules, if they exist at all, are often circumvented and suspended. Deficits incurred in funding infrastructure projects are typically lumped together with the total deficits funded by borrowing. This means that misallocation and inefficiency in infrastructure investments are not offset by decreased funding for other programs. Those costs are passed along to citizens, who pay the taxes required to service debt. Often, elected officials and citizens are not even aware of these inefficiencies due to the lack of transparency and accountability in federal infrastructure investments. This problem is magnified by cost-sharing arrangements for infrastructure funded by matching federal and state grants.
At the state and local levels, fiscal rules are more effective constraints on budgeting and fiscal policy. In every state and local government, fiscal rules mandate a balanced budget and limit debt, and in many states, those rules limit the growth in revenue and spending. A few states have fiscal rules that approximate rules that have proven to be effective in limiting debt in fiscally prudent Organization for Economic Co-operation countries. Colorado, for example, imposes a strict limit on the growth in revenue and spending at the state and local levels. Surplus revenue above that limit must be rebated to taxpayers. Citizen approval is required to increase taxes or debt through a referendum process. Although the fiscal rules in place at the state and local levels are frequently circumvented and weakened by elected officials in response to interest group pressure, they have still proven to be effective constraints on government budgets.
Elected officials at the state and local levels should be required to make investment decisions as part of a budget process that’s constrained by fiscal rules. Capital investments must be prioritized, along with other expenditures, to satisfy fiscal rules. When this occurs, elected officials and citizens are aware of the tradeoffs in allocating funds to infrastructure investment versus other programs. Any deficits incurred in funding infrastructure projects are offset with revenues that could have been used to provide other government services. As a result, there is greater transparency and accountability for these investment decisions at the state and local levels. Elected officials and their constituents are more aware of the opportunity costs incurred when infrastructure investments are misallocated or inefficient. When fiscal rules require voter approval for tax and borrowing, citizens have direct control over how their tax dollars are spent. Direct democracy results in more prudent fiscal policies in states such as Colorado, just as it does in Switzerland and other countries.
I propose an alternative to Trump’s plan for infrastructure investment. To address the debt crisis, the federal government should declare a moratorium on new investments in infrastructure. Expenditures for infrastructure, including expenditures from the Highway Trust Fund and the general fund, should be frozen at current levels. This would allow funding to complete current infrastructure projects, but eliminate funding for new or proposed projects.
Funding and management for transportation infrastructure should then be transferred from the federal government to the states. All taxes, fees, and revenues now collected by the federal government to finance transportation infrastructure should be collected and retained by the states. The Highway Trust Fund should be eliminated. Any savings from these reforms should be earmarked for debt reduction.
State and local governments should finance and manage the surface transportation system, free from federal laws and regulations. State and local governments should have the freedom to set the level of taxes and fees, and to determine how those revenues are expended to fund surface transportation systems. State and local governments could then set their own priorities in expending these funds for highways, interstates, and mass transit. They could also determine how those funds would be expended for maintenance, rebuilding, and new construction. Expenditures for transportation should become part of the budget process and subject to fiscal rules now in place in state and local governments.
[Originally Published at American Thinker]