Infrastructure Federalism Seems Promising

A driver surveys a stretch of Interstate 10 flooded by Hurricane Ike, Sept. 13, 2008, near Houston.
A driver surveys a stretch of Interstate 10 flooded by Hurricane Ike, Sept. 13, 2008, near Houston.

Photo by Scott Olson/Getty Images

In response to a Center for American Progress report calling for more spending on infrastructure, Josh Barro complains that America’s real problem is unusually high costs that give us too little bang for our buck. Then in response to Republican Sen. Mike Lee’s call to stop wasting so much infrastructure money and use it on good projects instead, Barro complains that there’s no real plan here at all. And indeed it’s a tough problem. Stephen Smith has glossed some of the constituent elements of American overpayment, but the fix isn’t obvious.

I’m not normally a big fan of “leave it up to the states”–type of solutions, but I do think transportation infrastructure may be an exception. The way things work now is that federal transportation spending is largely financed by gas tax revenue, with the overwhelming majority of that revenue earmarked for road projects and states essentially guaranteed to get more than 90 percent of their money back. This winds up substantially undermining the potential environment benefits of gasoline taxation and does a great deal to muddy the waters of who’s accountable for what without generating any meaningful person-to-person or jurisdiction-to-jurisdiction transfer payments. The main upshot of the whole complex system is to allow libertarian suburbanists to maintain the delusion that U.S. auto infrastructure is “paid for by user fees” (i.e., gas taxes), and, in fact, the victim of invidious cross-subsidy to transit programs.

A better path might be for the federal government to tax gasoline as an environmental externality and efficient revenue raiser and then leave states and localities on their own in terms of funding transportation projects.

Practical experience makes me skeptical that huge benefits will flow from this, but in principle with everyone fully paying for their own infrastructure, elected officials will have their incentives aligned properly. States and cities that can’t identify cost-effective projects and can’t find ways to improve the cost-effectiveness of projects on the drawing board will end up with worse infrastructure and higher taxes. States and cities that want to improve will have to adopt best practices. The way the current approach works, too much of the incentive is to build the broadest possible political coalition even at the expensive of bloated costs and then hope to get someone else to pay the tab. A perhaps related element is that in political terms a very large share of the rhetorical controversy over infrastructure projects has come to focus on the tiny minority of American transportation infrastructure dollars that go to rail. If you look around the U.S. for a moment or two, you’ll see that the vast majority of this spending goes to bolster the old nexus between suburban home building, oil extraction, steel production, and automobile manufacturing.

Of course there’s more to infrastructure than transportation, and, as best I can tell, there’s an urgent need for more federal involvement in the electrical grid, not less. But on transportation the main problem I can see with leaving it up to the states is that this will leave states unable to finance projects during recessions. That points to the much larger problem that we still haven’t done anything to beef up federal-level automatic stabilizations to mitigate the sharply pro-cyclical nature of state and local spending. That’s an urgent issue I’d love to see addressed—states should get big slush funds during recessions—but on a structural level I still think the winning strategy is more local responsibility for planning and financing projects. The cost-effectiveness case for doing something should never be “the federal government is picking up half the tab, so …”