President Biden is expected to present his “Build Back Better” infrastructure plan in the coming weeks. Although details will not be known until it is officially unveiled, the infrastructure plans set forth during the Biden campaign suggest an ambitious, nearly $2 trillion agenda touching nearly every aspect of the infrastructure sector, from transportation to telecommunications to energy and beyond.
Any legislation of that scale will inevitably face opposition, but broad bipartisan support for infrastructure investment and a need to pass new multiyear highway legislation before current law expires in September may provide enough tailwinds to help push a version of the Biden proposal through Congress.
Rather than using this legislation simply to provide additional infrastructure funding through existing channels, Biden could use this opportunity to dramatically transform how infrastructure is funded and delivered in the U.S. well into the future, particularly in three ways.
The basic framework of federal infrastructure funding has remained largely unchanged for decades. In the surface transportation sector, for example, federal funding comes primarily from the national gas tax, which was created in 1932 and has not been increased since 1993.
The Biden plan could seek to narrow the funding gap for these types of projects by increasing the gas tax—either with a one-off increase or by pegging it to inflation. However, the appetite for substantially raising the tax is limited due to its regressive nature, and increasing fuel efficiency and the growing prevalence of electric vehicles will continue to erode tax revenues in future years.
Therefore, a more innovative solution is needed to address the country’s growing surface transportation funding needs in the coming decades. Possible options include permanently allocating general Treasury revenues to transportation projects, expanding tolling, creating a separate user fee-type charge (such as a miles traveled charge), or taking steps to facilitate and encourage additional private investment in these types of projects.
Incentivizing Private Investment
Although prevalent as a source of funding for infrastructure world wide, private investment in and development of infrastructure—typically through a delivery method referred to as “public-private partnerships”—remains relatively rare in the U.S. And yet, there are a significant number of private investment funds and other private interests (with a healthy amount of capital or expertise to deploy) that focus on U.S. infrastructure assets, indicating that the private sector is eager to invest in or otherwise support this area.
The federal government can do more to harness this interest and incentivize private sector involvement where beneficial, thereby capitalizing on the availability of private sector expertise, while also gaining greater access to available private capital.
One option the Biden administration should consider is to reduce current restrictions on private activity bonds, or PABs, which are tax-exempt bonds made available by the federal government to private project sponsors to fund capital projects. The public subsidy of tax-exemption makes PABs a less expensive, and thus highly favored, source of debt for private investors in public-private partnership projects.
Currently, PABs are subject to state-by-state caps on the overall amount of such bonds that can be issued and to additional sector-by-sector restrictions (rail versus air versus highways, for example) that determine the ability to fund a project with PABs. These restrictions collectively severely limit the ability of the private sector to gain access to this important source of funds and have discouraged some local governments from considering public-private partnerships.
An increased public subsidy of private investment, however, can be justified by the benefits to be gained from further private investment, and the Biden administration could catalyze such investment by loosening PABs restrictions.
The Biden plan could also introduce public-private partnership programs (or alter underutilized current programs, such as the Airport Investment Partnership Program) that go beyond expansion of PABs and actually prioritize public-private partnerships, whether by streamlining regulations or processes for participants who seek to use the programs or by providing incentives for the public sector to utilize them.
Federal and State/Local Coordination
The unique system in the U.S. of federalism and multi-jurisdictional government presents special challenges for the efficient and effective development and operation of infrastructure. Most infrastructure assets throughout the country are owned and operated by state and local governments (such as energy systems, airports, and ports), even though linked to broader regional and national networks.
Therefore, federal infrastructure policy is often aimed at incentivizing local sponsorship and support of desired infrastructure development. This approach has enabled some states or localities to opt out of important federal infrastructure initiatives, and often encouraged the over-politicization of infrastructure investment, leading to patchwork results.
The frequent need for multiple state and local governmental entities to be involved in the sponsorship, review, approval, and oversight of any single infrastructure asset also complicates and delays the successful development of many infrastructure projects.
To be sure, our greatest infrastructure accomplishments as a country, such as the interstate highway system, have been characterized by strong federal vision and leadership, and the Biden administration would be wise to look for opportunities to take on direct leadership responsibility for its most important infrastructure initiatives, while also encouraging and facilitating—but not being fully dependent upon—state and local support.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.