White House Meeting Results in $2T Infrastructure Goal, No Agreement on Pay-Fors

May 3, 2019

A meeting at the White House between President Trump and Congressional Democrats this week yielded unexpected bipartisan agreement that Congress should pass a bill (or series of bills, more likely) spending $2 trillion on infrastructure. But the meeting yielded no consensus on whether or how to pay for any of that $2 trillion, even as Republicans on Capitol Hill scoffed at the total.

By all accounts, Democrats came to the meeting asking for a lower figure, but as Senate Minority Leader Chuck Schumer (D-NY) said, “we started at $1 trillion and then went up to $1.5 trillion, and [Trump] upped it to $2 trillion.”

In a joint statement after the meeting, Schumer and House Speaker Nancy Pelosi (D-CA) said “In the meeting, our Members emphasized the importance of the infrastructure being for the future, with respect to the prevailing wage and to the imperative to involve women, veteran and minority-owned businesses in construction.

”We have an historic opportunity to build infrastructure for the future, and an urgency to address the safety needs that our crumbling infrastructure represents.  Every congressional district in America has urgent needs, which any big and bold initiative must address.”

Now for the hard part. After the meeting, Schumer said “The ball is in his [Trump’s] court. We told him that previous infrastructure bills had failed because the White House and the Republicans refused to come up with pay-fors. And he agreed that he would meet with us in three weeks and present his pay-fors.”

The day before the meeting, Pelosi and Schumer sent Trump a joint letter saying, in part, “America’s unmet infrastructure needs are massive, and a bipartisan infrastructure package must meet those needs with substantial, new and real revenue.”

Schumer had not helped the pay-for situation by sourcing a news article before the meeting indicating that he would insist on reopening the 2017 tax cuts bill and taking back some of the corporate and high-income tax breaks as a condition for any broad-based transportation tax increase. After the meeting, he clarified that “the pay-fors should not fall on the backs of middle-class and working people, but rather it should make code more progressive rather than less progressive after the tax cut that they did last time, which was mainly for the wealthy. But we’ll see what the president has to say.”

An increase in gasoline taxes, if viewed as a tax, is of course regressive – Warren Buffett does not pay dozens of times as much gas tax as Joe Minimum wage and may actually pay less if he doesn’t drive that much. (Elon Musk pays no gas tax at all because he drives an electric car.) A properly allocated user fee, on the other hand, is neither progressive nor regressive – it only recoups the costs that the user incurred. But the gas tax was always just a proxy for a real user fee, and it has been allowed to become an extremely inaccurate and badly allocated proxy over the years.

There is a widespread sense that a gas tax will only be possible if Republicans and Democrats in Congress hold hands with the White House and all jump forward to endorse it at the same time. Republicans on the Hill are reluctant to do that, and even more reluctant to reopen the 2017 tax bill. This week, House Minority Leader Kevin McCarthy (R-CA), said “the Democrats aren’t talking about a gasoline tax. They’re talking about more than just that. They’re talking about a gasoline tax, but they’re talking about changing the tax code. Making sure that people pay more.”

(Meanwhile, Republicans on the Senate Budget Committee quietly approved a budget plan that includes a highway user tax increase that could be as high as the equivalent of a 17 cent per gallon gas and diesel tax increase, but no one except ETW seems to have noticed.)

Needless to say, it will be extremely interesting to see what, if any, “pay-fors” the White House proposes at the end of the month.

$2 trillion – c’mon, son. To begin with, the $2 trillion number is stupefyingly large if considered over a normal timespan. Assume, for the sake of argument, that the discussion was $2 trillion over ten years – an average of $200 billion per year. And people mean all kinds of things when they say “infrastructure” so let’s use the broadest possible measure. In the ongoing fiscal year, total federal spending on all non-defense “public physical capital” (of which any kind of public infrastructure spending is a subset) only predicted to total $130.2 billion. 51 percent of that takes the form of federal grants to state and local governments for highway, mass transit, rail and other transportation programs (other people’s infrastructure). The remainder is a mix of direct physical spending on federally owned or operated projects, other kinds of capital grants, and equipment purchases.

If all federal non-defense capital spending only totals $130 billion per year, then adding another $200 billion per year on top of that seems wildly unlikely and even impractical.

Put yet another way, the new Congressional Budget Office baseline released yesterday calculates that current-plus-inflation spending levels for all Highway Trust Fund programs over the next ten years (if it is kept solvent) will total $621 billion. The ten-year baseline for all general fund accounts in budget subfunction 401 (ground transportation), including mass transit, rail, and BUILD grants, totals another $106 billion. Airport grants total another $36 billion. The Corps of Engineers water program is another 86 billion. Add that all together and you come up with $850 billion in baseline spending over ten years. You could probably add air traffic control equipment and other forms of infrastructure and get close to $1 trillion. But adding $2 trillion to that over ten years would basically triple total federal infrastructure spending.

One can look at longer timeframes than ten years, but at some point, the use of nominal dollars as a measuring point becomes useless. OMB’s online database only goes back as far as 1940, but total federal spending on all modes of transportation (as a budget function) from 1940 to 2018 only totals $2.3 trillion. Put another way, in nominal dollars it only cost the U.S. $296 billion to wage World War II. The Congressional Research Service estimated in 2010 that $296 billion in WWII dollars equaled $4.1 trillion in 2010 dollars.

Include reauthorizations. The only way to come close to a $2 trillion infrastructure spending target is to include reauthorizations of expiring programs. As mentioned above, the Highway Trust Fund (which is scheduled to expire on September 30, 2020) would, if extended, spend $565 billion at baseline levels over the next nine years (2021-2029), an average of $63 billion per year. Counting surface transportation reauthorization towards your notional top-line spending level should be a no-brainer.

HTF reauthorization would also be attractive because the Trust Fund is partly solvent. Yesterday, CBO estimated that in order to keep the Trust Fund solvent for ten years, $176 billion in additional revenues (or bailout deposits) would be required. This is in addition to over $400 billion in current law excise taxes that are already included in the baseline, and the existing cash balances of the Trust Fund. That’s $621 billion in ten-year outlays that can be supported with just $176 billion in ten-year “pay-fors.” That’s $3.50 in spending for every $1.00 of pay-for. Many other kinds of infrastructure spending require $1.00 of pay-for for every dollar of spending (if you decide that you are indeed going to pay for things).

Water resources reauthorization might also be counted towards this total, as would the total balances of the Harbor Maintenance Trust Fund if the bipartisan legislation introduced this week by leaders of the House Transportation and Infrastructure Committee is included.

Include financing? The last Trump Administration infrastructure plan, designed by White House economic policy staff, was roundly criticized by Democrats for conflating “funding” (direct federal spending or federal grants) with “financing” (federal loans which eventually have to be repaid) as well as the non-federal share of project costs. President Trump has also disavowed that plan. But in getting Trump to agree to a $2 trillion total, Democrats may have little choice but to accept that the face value of federal loans will be counted as federal spending. (Since a change in budget law in 1990, the face value of federal loans no longer shows up in the budget. The only thing that appears in the budget, and thus requires a pay-for, is the “subsidy cost” of the loan which is usually less than 10 percent of the face value of the loan and, in the case of the WIFIA water infrastructure loan program, is less than 2 percent of the face value.) Each billion dollars in pay-fors could subsidize $20+ billion in federal loans.

However, Democrats are, at the same time, arguing that federal loans should not be counted as federal spending in the case of the Hudson River Tunnel, where the Trump Administration wants to count federal loans as being the same as federal grants and New York and New Jersey wants to count federal loans as part of the local financing package. We will have to explore this inconsistency in the future.

At the big House Ways and Means infrastructure hearing two months ago, Ways and Means chairman Richard Neal (D-MA) telegraphed his interest in reviving direct-pay Build America Bonds, last used in the 2009 ARRA stimulus law. States issue a BAB, and the interest is taxable, but the federal government will write a check to the state each year for part of the interest that the state pays to bondholders. (Under the ARRA direct-pay BABs the subsidy rate was 35 percent of the interest rate, and CBO estimates that the federal government will make $3.6 billion in payments to municipalities in 2019 as the annual installment of that interest subsidy.) $181 billion in Build America Bonds were issued in 2009-2010, and if BABs were brought back as part of an infrastructure deal, hundreds of billions could be counted towards the overall infrastructure total, and the federal pay-for could be stretched out over the lifetime of the bond.

What constitutes “infrastructure”? Speaker Pelosi made it a point to say, after the White House meeting, that “one really important advance that we made in this meeting was the president’s real acceptance or maybe just agreement, I won’t say acceptance because he may have been thinking of this all along, and that is that infrastructure should include broadband and it’s important to healthcare, it’s important to education, it’s important to commerce, and his embrace of that in addition to transportation and water issues was very important.” Traditionally, telecommunications and electrical infrastructure has been built by the private sector (often with low-interest federal loans to subsidize extensions to rural and impoverished areas).

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