"Our goal is to inspire Washington and to inspire the presidential candidates to make infrastructure investments their top priority. The country needs to rebuild its infrastructure."  Gov. Arnold Schwarzenegger, April 25, 2008

While the presidential candidates’ position on this issue remains unclear, in the nation’s capital the need for greater federal investment in transportation infrastructure has been widely acknowledged. Whether infrastructure investment should also serve as a short term economic stimulus and how this infrastructure renewal is to be funded remain open questions. The inadequacy of a stand-alone federal fuel tax to respond to the demands for transportation investment is no longer seriously being questioned. In the words of Rep. John Mica (R-FL), ranking member of the House Transportation and Infrastructure Committee, "the mechanism for financing highway and transit projects is obsolete and needs to be reformed." But what kind of a hybrid revenue system should emerge to take the place of the existing infrastructure funding process remains to be seen. Suggested revenue sources to supplement the fuel tax include a national capital budget, a national infrastructure bank, state infrastructure revolving funds and greater use of private equity capital. While support for public-private partnerships remains strong, some kind of reasonable restraints on private sector investments in infrastructure are increasingly seen as inevitable—and probably necessary.

The Brookings Symposium

A July 25 Brookings Symposium, "Investing in America’s Infrastructure," chaired by former Treasury Secretary Robert Rubin, was emblematic of the rising recognition of the need for greater investment in the nation’s infrastructure. Addressing an overflow audience of more than 200 were former Treasury Secretary Lawrence Summers and Virginia Governor Tim Kaine. Their remarks were followed by panel discussions on the strategies for telecommunications infrastructure and physical infrastructure.

Secretary Summers argued forcefully in favor of using infrastructure investments as a short-term economic stimulus. Such investments, he contended, can be used to alleviate the residual effects of the current economic dislocation and the structural unemployment problems in the manufacturing and construction sectors. But, he added, economic stimulus and job creation should not be used as an excuse for poorly thought out infrastructure investment projects. (Note: the possibility of a second economic stimulus bill that would include substantial funds for infrastructure has been discussed by the House Democratic leadership. However, the passage of another stimulus bill during the current session of Congress is uncertain according to Congressional sources.)

Governor Kaine stressed the importance of infrastructure investment both as a short-term economic stimulus and as a key element in the long term economic growth strategy of the Commonwealth of Virginia. Turning to the question of infrastructure funding, he observed that relying on the gas tax has become very problematic. "I have heard people refer to the gas tax as a ‘dinosaur’ but I think ‘fossil’ would be a more appropriate term," he quipped. We need to diversify our funding sources, the Governor said, and the recent increase in the price of gasoline offers a reason and an opportunity to rethink our approach. Public-private partnerships and private financing are "a great arrow in the quiver" Kaine said, but they are not the answer to all of Virginia’s needs. They represent more like "a 25 percent solution."

The Infrastructure Symposium is the third time in less than a year that Brookings has focused attention on the problems of infrastructure. An October 10, 2007 Brookings conference featured former Governor Thomas Vilsack arguing for the establishment of a national agenda for infrastructure to be supported by a separate national capital budget (see, News Brief, October 22, 2007.) And just two weeks ago Brookings released a major report, "A Bridge to Somewhere", authored by Rob Puentes, Director of its Metropolitan Infrastructure Initiative, recommending a new federal approach to transportation investment (see News Brief No. 14, June 29, 2008). The latest symposium was sponsored by Brookings’ Hamilton Project (Douglas Elmendorf, Director), whose aim is to champion increased public investment in infrastructure as a central element of a long-term economic growth policy. The Brookings Institution is emerging as the premier advocate and center of excellence on issues of infrastructure renewal.

The Governors’ Infrastructure Agenda

Governor Kaine’s emphasis on infrastructure development was echoed by Pennsylvania Governor Edward Rendell, the incoming chairman of the National Governors’ Association. During NGA’s centennial meeting on July 14 in Philadelphia, Rendell announced that strengthening infrastructure investment will become his key priority as NGA’s new Chairman. "It’s an issue about which I am very passionate" he said. Rendell noted that when President Eisenhower was in the White House more than 45 years ago the Federal government was spending 11.5 percent of its budget on infrastructure, compared with less than 2.5 percent today. The Governor pledged to work with fellow governors to design and implement strategies "for smarter, more cost-effective infrastructure investment at the state level." Infrastructure is expected to be a major topic of discussion when the governors reconvene in Washington next February for the NGA Winter Meeting.

Congressional Hearings

Meanwhile, on Capitol Hill, a Senate Finance subcommittee held two hearings designed to explore the fiscal and tax implications of infrastructure investments. Chairman Max Baucus (D-MT) set the tone  in his opening statement at the first hearing by pointing out that the current sources of funding for transportation infrastructure are "in jeopardy," requiring Congress to come up with a wider range of revenue sources and with innovative financing mechanisms to support the next surface transportation program.

But it was the second congressional session that was particularly noteworthy. The hearing was called by Sen. Jeff Bingaman (D-NM), chairman of the Subcommittee on Energy, Natural Resources and Infrastructure, to consider the public policy implications of long-term leasing of concession rights to existing toll roads. In his opening remarks the Senator noted that there has been virtually no consideration given to the tax and financing aspects of these transactions. Yet tax benefits, he said, are key to making these transactions economically attractive to private companies.

"I would like to say how troubled I am that a desire to derive generous federal tax benefits is driving exceedingly long lease terms," the Senator said. As Edward Kleinbard, Chief of Staff of the Joint Committee on Taxation testified, in order to take advantage of the tax code’s 15-year cost recovery period, a lessor must have constructive ownership of the road for its "useful life" which is generally construed as 45 years. "There are considerable policy dangers to these very long leases," Bingaman observed. Referring to the 99-year lease for the Chicago Skyway and the 75-year lease for the Indiana Toll Road, Bingaman said "I question how a state can possibly predict the future needs for a period that is twice that artery’s operating history." (The two facilities have been in operation for 47 and 49 years respectively.)

Senator Bingaman concluded, "I think we ought to reconsider the perverse incentive that the tax code creates for such long leases...If current depreciation rules lead to forms of investment that we judge to contravene public policy, then the Finance Committee should consider changing those rules..."

While the skepticism of Rep. Oberstar, chairman of the House Transportation and Infrastructure Committee, toward long-term leasing of existing toll roads is well known, this is the first time that a member of the powerful tax-writing Senate Finance Committee has openly questioned the legitimacy of such deals on public policy grounds. The potential threat of modifying the tax depreciation rules and losing its tax benefits will undoubtedly give pause to PPP advocates

The National Transportation Infrastructure Financing Commission

The congressionally-chartered National Transportation Infrastructure Financing Commission continued to refine its conclusions and recommendations at a July 22 meeting. The Commission’s mandate is to provide recommendations to Congress concerning the future federal role in funding surface transportation infrastructure. The Commission is in the process of examining a number of alternative funding and financing approaches to augment the current revenue for highways and transit.

There are indications that the Financing Commission, too, is leaning in favor of recommending restrictions on private toll road concessions and on the use of front-end proceeds from long-term leases of existing toll roads . The restrictions would apply only to facilities on the national highway network and those involving prior federal investment. The Commission’s willingness to consider such restrictions in spite of its acknowledged desire to encourage private sector investment shows how far the pendulum has swung in favor of a more regulated PPP process.

The Infrastructure Debate in the Private Forums

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