Think twice...

3 reasons to think twice about an infrastructure bill

If you’re not careful, federal funding can backfire.

By D.J. GRIBBIN

For Americans eager to see more investment in the nation’s infrastructure, 2019 started strong. With public support from President Donald Trump, congressional committee chairs and Democratic leadership, infrastructure has bubbled to the top of the relatively short list of bipartisan issues that can be achieved this year, despite a divided Congress and an accelerating presidential campaign. This is encouraging as the time is more than ripe to address the deteriorating nature of America’s essential infrastructure.

However, the pending debate in Congress seems to assume that more federal funding is the answer without asking the foundational question: What is the problem we are trying to solve?

When Americans think of infrastructure projects, they often have the 1956 Highway Act in mind, the law that created the interstate highway system through a national gas tax – arguably the best infrastructure project in world history. But the infrastructure challenges of 2019 are vastly different than those of 1956; we should move on.

I spent the past two decades focused on how to deliver infrastructure projects more efficiently in terms of time and money. My career spanned from Wall Street to the White House and involved projects from Puerto Rico to Hawaii. At every step, I was trying to find ways to make highways, water systems, natural gas systems, transit operations, airports, ports, railroads and pipelines more efficient and provide better value to their users. Across all these systems, in virtually every corner of America, the largest obstacle to building and maintaining infrastructure is insufficient funding. As a result, it’s easy to assume that the basic problem is finding funding and that providing more federal money is the answer. Yet when dealing with infrastructure, that is not always the case.

In physics, Newton’s Third Law states that for every action there is an equal and opposite reaction. In policy, too, every action creates a reaction, albeit rarely equal or opposite. In fact, the challenge of policy is that reactions, while inevitable, are difficult to predict. When weighing federal expenditures on infrastructure, policymakers need to keep in mind that allocating more federal funds to infrastructure might backfire. Here are three ways that could happen:

The “coupon effect”

The prospect of federal funding can dampen state and local funding. While voters overwhelmingly support increased infrastructure spending, their strong preference is that someone else pay for it. This dynamic makes it difficult for state and local leaders (who own 90 percent of governmental infrastructure) to turn to their electorate and ask for a tax or fee increase if the federal government is offering “free” funding.

This dynamic can be called the “coupon effect.” Imagine if shoppers in the market for a new suit were told that there is a small likelihood they will receive a coupon for 80 percent off their next suit purchase. Consumers will rationally engage in what economists call strategic delay and postpone their purchase in the hope of receiving a coupon, even if the chance of getting the coupon is very small. Every time a consumer considers heading to the store and buying a suit, he will ask, “But what if a coupon arrives tomorrow?” As a result, many will continue to delay until their suits (or our infrastructure) become unacceptably shoddy and worn.

In my experience, the prospect of federal funding has this same impact on state and local leaders considering a tax or user fee increase to expand or improve the quality of their infrastructure. This dynamic was clearly apparent in Kentucky in 2014, for instance. That year, a candidate for the U.S. Senate encouraged the communities around the Brent Spence Bridge (connecting Cincinnati and Covington, Ky.) to oppose a toll increase, because if elected, she would get the federal government to pick up the $2.6 billion tab to replace the bridge. Her campaign successfully increased opposition to tolling. Yet five years later, the debate on how to fund the bridge is still unresolved, and the probability of full federal funding is still just about zero (notwithstanding the fact that the state is represented by the Senate majority leader, who is married to the Secretary of Transportation).

While further study needs to be done, the coupon effect could actually result in a net decrease in infrastructure funds, especially when coupled with the challenges of substitution; states and local governments receiving an influx of federal dollars frequently substitute the new federal dollars for funds previously allocated to infrastructure and transfer their dollars to other policy priorities. As a result, a dollar in new federal infrastructure spending does not necessarily result in an additional dollar available for infrastructure.

The current non-federal to federal ratio of infrastructure spending is 3:1. Thus, if a 30 percent increase in federal spending (along with celebrations that the coupon is in the mail) dampened by 11 percent non-federal spending increases, our nation would be left with a net national decrease in infrastructure funding.

The goal of infrastructure policy should be a significant increase in infrastructure funding overall. As counterintuitive as it sounds, an increase in federal funding could work counter to that goal.

More cost and delays

Federal funds come with a shockingly exhaustive list of requirements. While all of these requirements represent noble policy goals, they meaningfully add time and expense to any project utilizing federal funding. Data on the cost of federalizing a project are surprisingly scarce, but in one analysis, the Government Accountability Office found that a federally funded sidewalk project built around the same time, in the same county, and by the same contractor was twice as expensive and took three times longer to deliver than a local project. Other studies have looked at the cost impact of individual provisions of federal rules like compliance with laws on prevailing wages and the Buy America Act, but overall, robust studies on the cost of complying with all federal requirements are elusive.

Time is also a cost. In 2015, Florida performed a study on the additional time federal requirements impose on a project. The study compared like projects and held all nonfunding variables constant to ascertain just the impact of federal funding. It compared the length of preconstruction activities between Florida Turnpike Enterprise projects (with no federal funding) and federally funded Florida Department of Transportation projects. The findings were sobering. Although the projects varied in duration, there was a consistent pattern in which federal projects took about four years longer to complete: A highway interchange took 51 months longer, a widening took 50 months longer and new alignment 49 months longer. So, from a pure timing perspective, spending federal funds on a project adds four years to the time between deciding to building a project and putting a shovel in the ground.

There’s one more way to gauge the cost of federal vs. state funding. State governments have created federal exchanges in which local governments can trade federal dollars for nonfederal dollars by paying an exchange cost that ranges from 10 to 25 percent. The cost of federal compliance (and proving federal compliance) exceeds the cost charged in the exchange, and thus state and local governments lose more than 10 to 25 percent of their spending power just by utilizing federal funds as opposed to nonfederal funds.

Some policymakers would declare that such an additional cost is acceptable because these are federal dollars and do not come at a cost to the state or community in which they are being used, i.e. it’s better to have 75 to 90 cents than nothing. But this thinking is faulty, as the next section will show.

Whose taxpayers?

The real policy question when it comes to infrastructure funding is not “who should pay?” but “to whom should they pay?” One way or another, state and local taxpayers and users bear 100 percent of infrastructure costs; the only question is whether they make payments locally, to their state, or to the federal government.

Notwithstanding this reality, many supporters of increased federal infrastructure spending seem to be under the mistaken impression that federal funds come at no cost to states and localities. This is untrue. By law states have to receive back at least 95 percent of the gas taxes they send to D.C. The vast bulk of federal highway dollars are just the federal government returning back to the states federal gas taxes paid by state taxpayers.

The common case for federal funding for nonfederal infrastructure is something like: Current governmental infrastructure funding is woefully inadequate; infrastructure funding comes from federal and nonfederal sources; state and local governments (nonfederal sources) are cash-strapped; ergo, the federal government should provide more funding.

While intuitive and elegant in its simplicity, the case misses the fundamental point highlighted above — all federal funding comes from state and local taxpayers. Given that those paying federal taxes are the same as those paying state and local taxes, increasing federal liabilities for infrastructure reduces the ability of taxpayers to afford to pay for increased state and local infrastructure. This is particularly regretful given the fact, as noted above, that federal dollars purchase less infrastructure.

Some would argue that raising federal taxes is more efficient. And while raising funds at the federal level is theoretically easier (raising one federal gas tax as opposed to 50 state gas taxes), states have raised gas taxes dozens of times since the last federal increase in 1993. Others would note that federal funds are necessary to pay for “projects of national significance.” One thing I learned quickly in my time serving in the White House is that virtually every community has a project of “national significance.” And finally, some argue, the federal government is best positioned to transfer resources to communities who are in need and cannot afford an acceptable level of infrastructure. All of these arguments are solid reasons to consider increasing federal funding, but in every case the additional funds being raised, being spent on important projects, or being reallocated to communities in need all come from other communities. The federal government cannot transfer the burden of infrastructure funding to state and local taxpayers because that is where it rests currently.

It's true that federal infrastructure spending is irreplaceably efficacious for large, expensive projects like the interstate highway system that serve significant swaths of our country. But those aren’t the projects that we need the most right now, like repairing existing roads and bridges, protecting our water systems and expanding access to broadband. Moreover, federal funds are not “free” — in fact, they come at a steep cost by discouraging state and local revenue generation, adding bloat to project time and price, and reducing the revenues that could be raised by more efficient state and local governments.

So, by all means, let’s capitalize on the growing public support for improving our nation’s infrastructure and create a new partnership between federal, state and local governments – one that addresses today’s infrastructure challenges. But in this equation, the federal government’s role is too important to get wrong, and we should think twice before reflexively relying on federal dollars to fund a project that can be better delivered with state and local funding.