The U.S. Infrastructure Deficit: Taxes, “Pay-to-Play,” or …?

At a Festscrift Symposium last year, held in honor of GIC member, Professor Julian Juergensmeyer, I shared my perspectives on the trend towards the increased “privatization of infrastructure,” meaning, specifically, a shift, over the last several decades, away from broad-based sources of infrastructure funding to private, or “quasi-private,” sources.  In my view, this trend represents one of several potential scenarios we could face if we try to close gap between the infrastructure the U.S. needs to maintain global economic competitiveness and the funding needed to get there.  Other potential scenarios include increased broad-based funding; reliance on overseas infrastructure; or continued deterioration of infrastructure and economic position.

So, why the deficit?  One reason is that, since the tax revolt of the 1960s, we have experienced a shift from broad-based funding sources for infrastructure – our roads, schools, parks, police, and fire facilities, for example – towards private (or “quasi-private”) funding tools.  By broad-based funding, I mean property taxes, income taxes, sales taxes, or gas taxes, for example; in general, those paid by a greater proportion of the population, though not always all of it.  By contrast, “private” funding sources may include special assessments, impact fees, TIFs, toll roads, and other “user fees,” generally paid by individuals, or subsets or the general population, most capable of “paying-to-play” and most likely to be the beneficiaries of the infrastructure once it is built.

Government’s increased reliance on “private” funding sources is understandable in light of our country’s ingrained suspicion of taxes (and taxing authorities); a suspicion that has increased in the last few years, even as the infrastructure deficit has grown.  Cleary, most local governments would not turn away an applicant willing to pay for or build offsite infrastructure.  Also, it is more politically expedient, of course, to convince a subset of the jurisdiction (particularly those who don’t live there yet) to shoulder the infrastructure burden, than it is to convince the entire population to do so.  In fact – given our increasingly transient, increasingly divided, and increasingly aged population – it is more likely than ever that portions of it will feel they don’t benefit from some infrastructure improvements at all.

But here’s the challenge, as I see it:

(a)    sufficient tax increases and continued reliance on debt financing aren’t politically or fiscally supportable;

(b)   fees on the user (the “pay-to-play” options) are widely argued – and believed – to hamper economic growth or to burden unfairly those who can’t afford to pay, and

(c)    it is difficult to picture a sustainable economic recovery if our stateside infrastructure deficit continues to widen.

In my view, if we decide to get serious about addressing the infrastructure gap, broad-based funding sources (like tax increases), sufficient to actually close it, are likely only in a radically different and much more dire economic and political environment than we have today.  Therefore, I expect either we will close the gap through private, or “pay-to-play,” funding alternatives, or – if neither taxes nor pay-to-play come through – we will invest and build wealth by relying on infrastructure (and perhaps capital and labor) in other parts of the globe.  In other words, I expect that the least likely scenario is that U.S. firms will accept a long-term, diminished position in the global pecking order.

But, hey, this is just my take.  I’m interested in other ways (perhaps sunnier ways?) of seeing this play out – particularly from those of you with economic or public finance backgrounds.

What do you believe will happen:

(a) taxes and other broad-based funding tools will increase to cover the gap?

(b) “pay-to-play” tools, like special assessments and tolls roads, will be relied upon?

(c) the U.S. infrastructure deficit grows?

or

(d) U.S. firms and entrepreneurs will rely on offshore infrastructure for growth?

Or are we looking at something else entirely?

Thanks for your comments!

Tyson Smith posted

March 17, 2011

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