What Trump Needs to Learn About Planes, Trains and Automobiles

(Bloomberg View) -- The tensions between President Donald Trump and House Republicans over whether to enact a massive infrastructure bill have slipped from the news a bit, but we should expect that debate to re-emerge this spring and summer. In the meanwhile, while the topic is temporarily off the front pages, we have time to examine what should and shouldn’t happen -- which is why I’m excited to participate in a conference that the Hamilton Project is holding on infrastructure today in Washington.

The big new idea is to link changes in the corporate taxation of foreign profits to infrastructure investments. The idea seems quite attractive on the surface: The government would change how overseas profits are taxed, collect some additional revenue in the short term, and use it to overhaul the nation’s woefully inadequate roads, bridges, airports and the like. 

This vision, however appealing, misses five key points. 

First, it is unclear how much revenue will actually become available for infrastructure. Some form of change to the repatriation rules is indeed very likely this year. But to the extent the tax legislation winds up excluding a border tax adjustment and therefore without much in the way of revenue raisers, any revenue from a change in repatriation rules may wind up going to a modest reduction in the corporate tax rate, rather than being available for infrastructure spending.

Second, while there is little doubt that our infrastructure needs upgrading, the picture is more nuanced than is often suggested. For example, the Congressional Budget Office recently concluded that pavement quality has been improving, not deteriorating, and that the share of miles traveled on good or better quality roads has risen to nearly half today, from about a third in the early 1990s. Bridge quality has also improved. So while improvements are clearly needed, we need to be smart about where and how we make them.

Third, and most important, the persistent challenges facing America’s infrastructure require more than simply injecting more money into existing programs or new ones that are similar in structure. As the economists Barry Bosworth of the Brookings Institution and Sveta Milusheva of Brown University trenchantly argue, most of the focus in the policy debate is thus misplaced. In particular, the key constraint to higher-quality infrastructure is not access to up-front funds for the initial investment. Instead, it is our unwillingness to pay back those funds over time, combined with several biases inherent in federal funding of local projects. 

As Bosworth and Milusheva observe, “the more basic problem is the distorted nature of the decision-making process and difficulties of generating future revenue streams sufficient to pay for the initial capital investment, maintenance and operating costs. The decision-making process is perverted by an excessive focus on efforts to obtain free federal funding of infrastructure projects whose benefits are largely local, and the emphasis on new construction results in inadequate funding of operating costs and timely maintenance.” 

The CBO has found that operating and maintenance expenses account for more than half of the total costs associated with infrastructure, and more than that in mass transit and aviation in particular. Simply providing more money to build something, without a clear way of paying for the operations and maintenance, will only create problems down the road. 

Fourth, and as a way of both funding those operations and maintenance costs, and also using our infrastructure more efficiently, we should rely more aggressively on user fees and pricing. U.S. drivers pay substantially less in fees per mile than do Chinese drivers, despite the lower per capita income in China. In its 2008 Conditions and Performance Report, the Department of Transportation estimated that a well-designed road-pricing system here could raise up to $55 billion a year, while also reducing congestion.

Similarly, the primary reason the freight-rail system functions much better than the commuter-rail system in the U.S. is that it relies far more on user fees. And in the same spirit, the recent controversy over Southwest Airlines’s argument that the Department of Transportation should award it new landing rights at Mexico City’s international airport because of Trump’s “America First” policy highlights why such air routes should be auctioned rather than awarded administratively. Not all infrastructure investment will be amenable to these sorts of pricing schemes, but many are.

Finally, there is much the federal government can do to better manage its own infrastructure. In December, President Barack Obama signed a little-noticed piece of bipartisan legislation, the Federal Assets and Transfer Act of 2016, that will make it easier for the U.S. government to manage its own buildings and real property more efficiently, including by selling off underused buildings. The law creates a Public Buildings Reform Board “to identify opportunities for the federal government to reduce significantly its inventory of civilian real property and reduce its costs.” The Trump White House should work hard to realize the potential of the new law.

The bottom line is that while some additional money would help, and it will be interesting to see how Trump and House Speaker Paul Ryan resolve their differences on the topic, the most important steps to bolster our nation’s infrastructure involve more widespread user fees, a focus on meeting operations and maintenance costs, and ensuring Washington takes advantage of the new flexibility it has in managing its vast real-estate holdings.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Peter R. Orszag is a Bloomberg View columnist. He is a vice chairman of investment banking at Lazard. He was President Barack Obama’s director of the Office of Management and Budget from 2009 to 2010 and the director of the Congressional Budget Office from 2007 to 2008.

To contact the author of this story: Peter R. Orszag at porszag5@bloomberg.net.

For more columns from Bloomberg View, visit http://www.bloomberg.com/view.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.