Financing Infrastructure: Conservatives vs. Innovators

Financing Infrastructure: Conservatives vs. Innovators
November 1, 2007

Like any major policy debate, the issue of how to finance the nation's infrastructure involves strongly held points of view. To simplify the issue, we shall call the advocates of the opposing perspectives the Conservatives and the Innovators.

Both the Conservatives and the Innovators see a need to increase transportation funding. And both condemn the excessive use of congressional earmarks. Where they differ is in how to finance the funding shortfall.



Conservatives Like Gas Tax

The Conservatives (in the Adam Smith sense of the word) look upon the gas tax as the mainstay of the surface transportation program. Hence they favor a fuel tax increase (plus indexing) as the principal means of dealing with the funding shortfall.

They cite ease of collection and proven revenue-raising capacity of the gas tax as compelling reasons for retaining it as the main source of highway funding.

The Conservatives acknowledge the value of tolling, private capital, and public-private partnerships, but they tend to dismiss them as minor contributors to the transportation program. Nor are they convinced congestion pricing can be a serious source of revenue.

The Conservatives favor maintaining a strong federal role in the surface transportation program and oppose any movement toward devolution. Rep. James Oberstar (D-MN) and Jack Schenendorf, vice chairman of the Policy and Revenue Commission, appear as the most prominent spokesmen for this point of view.



Innovators Want New Sources

The Innovators, on the other hand, tend to think the time has come for a fundamental rethinking of how the nation's surface transportation system should be financed and managed. They question whether the gasoline tax alone can continue to fund the nation's growing transportation needs.

They point to the likely trend of rising vehicle fuel efficiency, increasing cost of road construction, and eroding value of the tax dollar as reasons why we need to diversify the funding sources.

They do not suggest doing away with the Highway Trust Fund, for its resources will be vitally needed to help preserve, rehabilitate, and upgrade existing highways and bridges. But they think funding new infrastructure will require a fresh approach. They see tolling, congestion pricing, private capital, private road concessions, and public-private partnerships becoming vital elements of highway financing and management.



Devolution Wanted

If the financial responsibility for new infrastructure were thus to be shifted to the states, as the Innovators suggest, the federal role in surface transportation would diminish. They think inflation-indexed tolling may become a significant source of revenue to the states, and they assume toll roads will become a sound investment for the private sector.

The Innovators believe the surface transportation program should become more targeted. Federal funding, they contend, should be focused on the most pressing problems such as traffic congestion and freight movement and not dissipated on a large number of unrelated projects of local interest.

The most prominent spokesmen for this point of view are U.S. Transportation Secretary Mary Peters, certain members of the Infrastructure Finance Commission, and several governors, notably Mitch Daniels (R-IN), Rick Perry (R-TX), and Charlie Crist (R-FL).

Peters summarized the Innovators' philosophy succinctly when she said on August 14 (in announcing the winners of the Urban Partnership grants), "We must stop relying on yesterday's ideas to fight today's traffic jams."



Public Opposes Tax Hikes

Public opinion and the mood of the times seem to be on the side of the Innovators. Voters are reluctant to accept gas tax increases in the face of $3 per gallon gasoline. Even in Minnesota, site of the August 1 bridge collapse, 57 percent of respondents in a recent Survey USA poll said they oppose higher gas taxes to fix infrastructure.

Equally important, the public is skeptical that new taxes would actually be used to improve roads and bridges. As a recent Wall Street Journal editorial pointed out, voters have had long experience with politicians promising new taxes will go to such projects only to see them diverted to "Bridges to Nowhere" and other parochial ends.

Peters agrees: "When you or I pay our gas taxes today we don't really know where that money is going to go or whether or not it's going to benefit us directly in our communities," she remarked in a PBS interview on August 15.

"People are reluctant to vote more money [in taxes] unless they know that money is going to actually make an improvement in the transportation infrastructure," Peters continued. (Editor's note: The federal highway funding reauthorization bill for the 2005-2009 period ended up with more than 6,000 earmarks for local pet projects, amounting to $24 billion.)



Tax Increase Likely

Pressure is mounting for a modest increase in the federal gas tax--if not during this congressional session then in the next Congress. The Highway Trust Fund is expected to reach a negative balance in FY 2009 and needs an injection of fresh revenue simply to maintain current levels of expenditure.

Nevertheless, it seems inevitable that tolling, private capital, and public-private partnerships, rather than new taxes, will become the primary means of expanding the surface transportation system.

This conclusion does not stem from an ideological preference for "privatization." Instead it is grounded in the reality that every last cent we can raise through the gas tax will be needed to maintain and reconstruct our aging infrastructure.


Ken Orski (korski@verizon.net) is editor and publisher of Innovation Briefs (http://www.innobriefs.com), a transportation newsletter in its 18th year of publication. This article was adapted from the author's remarks at the Transportation Finance Session and the Budget Chairs Roundtable, Council of State Governments, Quebec City, August 14, 2007.