Pandemic Reduction? Infrastructure Is the Far Larger Prize.

The first major fiscal legislation to come out of the Biden era will likely be some version of its pandemic stimulus bill, already in the congressional hopper. States and local governments are almost certain to receive some level of federal aid, though nobody will be surprised if the number gets trimmed by GOP opposition and the compromise efforts of moderates in both houses.

But while governors, mayors and other local government officials cannot help but lobby fiercely for immediate help for their 2021 budgets, those numbers are chump change compared with what is potentially coming down the pike for infrastructure funding. The federal dollars at stake for the Biden administration’s forthcoming infrastructure bill are likely to be five to 10 times greater than the pending stimulus bill will provide, if intergovernmental public-finance strategists play their cards wisely.

So state and local government leaders and their policy associations will be smart to immediately lay out and buttress their lobbying and advocacy plans for the infrastructure bill. To deflect and rebut newly reborn congressional deficit hawks, a fallback tax plan to pay for the federal share will require both savvy and moxie, and the state and local lobbyists would do well to be in the room for those discussions as well.

To develop a winning strategy, it’s important to understand how congressional partisans will think differently about — and posture over — the policy framework for a federal infrastructure bill. Democrats will tend to focus on jobs for their union members, and especially on green projects. Traditional (pre-Trumpian) Republicans will tend to focus on the intergenerational financing implications of capital expenditures in the way a corporate investor would: They will want “pay-fors” and assets to match new liabilities.

Here’s the technical side of the problem: Unlike governmental accounting for states and localities, the federal government has no capital account. Economists’ gross domestic product measures of economic activity make no distinction between the U.S. government’s operating vs. capital spending, or of any deficits they require. There is no macroeconomic category for “government investment” analogous to private investment. Infrastructure spending for roads, bridges, hospitals, aircraft carriers and seawalls is tallied just the same as fiscal stimulus checks written to government employees and households who in turn consume and produce goods and services.

Similarly, in the capital markets there are no U.S Treasury bonds earmarked and dedicated to pay for infrastructure. A federal deficit for 2021 COVID-19 aid to citizens, businesses and communities is no different to macroeconomists and Treasury-bond investors than federal spending for infrastructure. But to fiscal conservatives, the policy distinction is huge: Capital expenditures produce long-lived assets that benefit future taxpayers, whereas operating deficits for social spending are ephemeral — they goose the national economy but leave nothing tangible to show for it. Conservatives favor investment over redistribution.

These important conceptual and policy distinctions help identify and map out where the partisan differences and the common ground will lie at the outset of the imminent national debate over how much and what kind of federal infrastructure funding Congress should initiate this year. Here are some important points to understand, explore, consider, incorporate and remember:

America’s accumulated infrastructure decay is far more than Congress can pass in one bill. Back in 2017, the American Society of Civil Engineers tallied up $4.6 trillion in projects to replace outdated, dilapidated public works structures, and that doesn’t include outmoded civic and school buildings. Something around $2 trillion (plus local matching funds) in 2021 is a healthy, hefty start and much more politically marketable than a colossal, overzealous bill. Still, a second trillion-dollar round will be justifiable and structurally overdue during the Biden presidency. One strategy would be to provide now for 75 percent federal funding to design and engineer a second wave of projects to be funded in 2023. Rome was never re-built in a day, after all.

Infrastructure policy implementation lags are a partisan dilemma. By the time a bill is passed, funding applications are reviewed and approved, contracts are let and concrete is poured, we will be right up against the 2022 midterm elections. Republican partisans will be wary of Democrats getting the credit for too much success right before the polls reopen, and such paranoia is justified. So there may be political logic in two-stepping the overall infrastructure initiative to stage some of the projects for ground-breaking after 2022.

The Green New Deal is a blue, but not red, priority. Without dispute, our nation needs to invest heavily and strategically with environmental impacts in mind. Helping schools convert their bus fleets to lower-carbon natural gas or electric power, along with the requisite refill and recharging facilities, is one example. Energy-saving building construction rules are inevitable. But political sensitivities to an over-ambitious bill early this year could stall the entire initiative. A second bill could still be approved later during this congressional term that includes longer-term green initiatives that can withstand spirited pushback.

Construction jobs won’t re-engage unemployed restaurant workers. Most of the private-sector re-hiring in 2021 will be independent of construction jobs. The homebuilding industry is red-hot right now, so one unintended and ironic consequence of a big infrastructure bill will be higher new home prices in 2022, driven by rising scarce-labor costs in that sector. Hardhats are blunt instruments.

“Free money” from Uncle Sam invites waste. If recipient states and localities don’t cover at least 25 to 30 percent of the total costs of grant-funded infrastructure projects, it is almost inevitable that poor decisions will result. State and local lobbyists must promote defensible rules to ensure that only the best projects are selected, and not ones that would have been built anyway without federal help. Otherwise, conservatives can object that it’s just a pork-barrel bailout in disguise.

We have the taxing capacity to fully cover infrastructure debt. With today’s low interest rates, the debt service on Uncle Sam’s $2 trillion share of a timely infrastructure program would require no more than about $100 billion of federal tax dollars annually over the 30-year life of such projects. The revenues from a 10 percent income surtax on annual joint incomes over $400,000, akin to the original 1969 federal alternative minimum tax, or a loophole-free modernized AMT on fat cats, would yield enough to pay this bill. More aggressively, a dedicated seven percent excise tax on corporate stock buybacks, along with a non-disruptive, comprehensive financial transactions tax, could fund fully $5 trillion of infrastructure projects. If fiscal conservatives can’t stomach more deficit funding for infrastructure, they’ll need to face reality — or find the money somewhere else.

Governing’s opinion columns reflect the views of their authors and not necessarily those of Governing’s editors or management.

Girard Miller
Finance Columnist
[email protected]