The Debate Revolves around Funding Infrastructure, Not Need
Believe it or not, there has been some good news during the pandemic. For instance, the American Society of Civil Engineers (ASCE) released its latest comprehensive Report Card regarding the nation’s infrastructure. The report is always filled with statistical detail, penetrating analysis, and savvy recommendations regarding how America can begin to resolve its infrastructure shortcomings.
But this year, the report also hinted at a degree of progress. In 2017, the nation received a D+ for the quality of its infrastructure. That report also noted that the nation faced a $2.1 trillion infrastructure spending gap over the next decade.
America’s grade rose in 2021, to a C-. While such grades turn the noses of Ivy League snobs, it was an indication that prior to the pandemic, America had managed to step up its investment in infrastructure and had at least begun the long road toward physical capital adequacy. This represented the first time in 20 years that the nation’s score began with a letter above D.
One of the factors at work has been stronger state and local government finances. The expansion ending with the onset in pandemic had been associated with increasing property values, growing income, falling unemployment, rising wages, and active consumer and hospitality markets. This produced a crescendo of property, income, retail sales and hotel tax collections while certain forms of social spending declined. That freed up money for infrastructure investment. Low interest rates helped.
The ASCE report spotlighted five categories in which infrastructure had improved meaningfully since release of its 2017 report. This group includes aviation, drinking water, energy, inland waterways, and ports.
Unfortunately, improvement eluded certain categories, including bridges. The grade for bridges slipped from a C+ in 2017 to a C in the most recent report. According to the ASCE, chronic underfunding has led to a $768 billion backlog of road and bridge capital needs. The economic implications of this are massive (and correctable). According to one statistic, one in three trips taken on the nation’s roads were impacted by severe or extreme congestion.
Still, hope springs eternal. Remarkably, the pandemic has not ruined state and municipal finances to the extent one might intuit. When the crisis commenced, governors and other leaders were wrestling with many issues, not least of which was how much damage would ultimately be done to state finances. But by some measures, states ended up collecting nearly as much revenue in 2020 as they did in 2019.
A recent J.P. Morgan survey calls 2020 virtually flat with 2019 based on the financial performance of 47 states that report their tax revenues every month. The only states that don’t are Alaska, Oregon, and Wyoming. Research emerging from the Urban-Brookings Tax Policy Center determined that total state revenues from April through December of last year were down just 1.8 percent from the same period in 2019.
Moody’s Analytics embraced a different perspective and found that 31 states now had enough cash to fully absorb the economic stress emerging from the pandemic without federal assistance. There have been a number of factors at work, including the fact that many white-collar workers, who often pay significant state income taxes, were able to work remotely and continued to be paid. Federal stimulus also helped bolster consumer spending, which translated into solid retail sales tax collections.
Since the beginning of 2021, state and local fiscal circumstances have improved dramatically. While this is due in part to a recovering economy, the more significant factor was the passage of the American Rescue Plan Act of 2021, signed by President Biden on March 11th. The package included $350 billion in support for state and local governments. Some of this money will be spent on infrastructure, including on school construction.
A Very Large Federal Infrastructure Package
The newish administration in Washington. D.C. has proposed spending $2 trillion addressing the nation’s infrastructure challenges. As reported by the New York Times, White House officials indicate that the proposal’s combination of spending and tax credits would physically translate into repairs to the ten most economically important bridges in America, 20,000 miles of rebuilt roads, the elimination of lead pipes and a lengthy list of other projects that will create millions of jobs in the near-term and strengthen American competitiveness over the century to come. Provisions of the package are also fashioned to increase wages, accelerate internet service, render drinking water purer, and shorten commute times.
All of that is welcome. What is more challenging is paying for such a package. Costs of stepped-up infrastructure investment would be financed by expanded corporate tax revenues raised over 15 years, especially from multinationals that earn and/or book profits overseas. Spending would transpire over 8 years.
If nothing else, 2021 is proving to be an interesting year. President Biden charged ahead with an ambitious agenda during this first 100 days, and that agenda is likely to be associated with both spending and tax increases going forward. Given the political and economic dynamics presently in place, it appears that heavy highway contractors will be among the major winners coming out of these political machinations. Approximately $115 billion has been set aside for roads and bridges in the proposed Biden package. Another $85 billion is designated for public transit, $80 billion for Amtrak and freight rail, and $42 billion for ports and airports.
But there are caveats to an otherwise rosy near-term economic outlook. The next few months are likely to be associated with extraordinarily rapid economic growth as stimulus continues to course through the veins of an increasingly vaccinated population and reopening economy. But at some point in the future, America may become associated with faltering stimulus, an even more massive national debt, higher inflation, loftier interest rates, and more significant tax burdens. Time will tell.