President Donald Trump’s infrastructure plan puts a heavy burden on the states and will require both private participation and new local taxes to succeed.
Improving roads, airports, rural internet and the like could boost the efficiency of the nation’s industrial supply chain and raise GDP by $3.9 trillion over 10 years. The administration wants to mostly offer states $200 billion to leverage at least another $1.3 trillion in state and private spending to accomplish that goal.
State and local governments would be hard-pressed to raise income, sales and local property taxes enough to service new bonds for big projects — for example, $12.9 billion to replace the Hudson River rail tunnel damaged by Hurricane Sandy — and the long list of needed smaller repairs and improvements.
Already, many local governments are imposing burdensome environmental, garbage collection and even 911 calling fees on services. Too often, those are not for ongoing expenses and improvements but rather to finance bloated local bureaucracies and unfunded pension liabilities. Residents justifiably question why they pay local sales and property taxes if states and cities are going to charge them fees for using the services those taxes were levied to provide.
A Scranton, Pennsylvania, property owner has filed a lawsuit against a $300 trash collection fee on the grounds that it is more than needed to provide the service.
Potentially insulating state and local governments from such claims, many have privatized roads, waterworks, ambulance and other public services. That ties the fees collected to what private investors actually need to recoup investments.
This principle is at the core of Trump’s infrastructure plan and Vice President Mike Pence’s preliminary push for privatization. The administration proposes to substantially expand tax-free private activity bonds to incentivize private firms to build more toll roads, improve the electrical grid, expand rural broadband and the like.
Private investment in public facilities has a heritage going back to the earliest days of the republic.
Faced with terribly broken roads connecting farms to villages and hampering travel between population centers, state and local governments turned to private firms to build toll roads. Usually, investors were local farmers and artisans, and most roads were not like the ambitious 69-mile road that connected Lancaster, Pennsylvania, to Philadelphia and not thoroughfares in the range of about 15 miles.
Trump’s critics are quick to note that most of those ventures were financial failures — much like Pence’s ill-fated Indiana Toll Road and several other road privatization projects. Indeed, many roads and other infrastructure projects entail construction and maintenance costs that are much greater than any toll or fee that can be collected, especially if the users have an alternative.
That does not apply to garbage and ambulance fees that residents must accept, but it sure does for airport levies and road tolls. If landing fees are too high, airfreight haulers can turn to trucks and rail, and motorists will put up with traffic on secondary roads if tolls on commuter arteries are greater than family budgets can reasonably bear.
This can appear a paradox.
If improving transportation and communication infrastructure can yield economic gains as much as $3.9 trillion and the price tag is $1.5 trillion, then the benefits should make the user fees needed to repay the bonds workable, but as Indiana and many other states have learned with toll roads and other services, those often don’t.
The reason is that many of the economic benefits of improved transportation and communications systems do not accrue to direct users. Rail systems that bring commuters to center cities like New York and Washington greatly increase downtown commerce and land values, but restaurant owners and landlords don’t buy fare cards.10 comments on this story
Exceptions abound where user fees will work. Indiana’s Ohio River toll bridge is a success because most of the benefits accrue to motorists who have no cheaper alternative. Ferries would be too expensive, and swimming to work has yet to catch on.
Unless new bonds are accompanied by local taxing authorities to obtain a contribution from the businesses and landowners that benefit most from projects, most won’t work out financially.
In the end, few alternatives to taxes — perhaps supplemented by user fees and privately financed bonds — are available for paying for many of the nation’s infrastructure needs.