President Joe Biden recently announced his support for the bipartisan infrastructure framework, a proposal to spend $1.2 trillion on infrastructure over eight years, with $579 billion in new spending. It includes spending on highways and bridges, public transit, passenger and freight rail, electric vehicle (EV) charging stations, airports, water, broadband and power. How to pay is still the subject of considerable disagreement, as are questions about which projects should be prioritized.
In its current form, the proposal includes too much federal spending that could be funded privately. Even where government funding is required, it should mostly be collected from user fees. And most of those user fees could be better collected and administered by state governments than by the federal government.
First, it makes more sense to fund EV charging stations, passenger and freight rail, and power infrastructure privately. Each provides valuable services that can be sold to users. The only reason for the federal government to subsidize broadband and water infrastructure is to help communities where residents might not be able to afford user fees or access the service. And this spending could be reduced if federal subsidies were targeted only to regions of the country with a concentration of low-income residents.
Second, we should fund more projects with federalism. The federal government owns only about 3.5% of U.S. infrastructure; 40.5% is privately owned and 56% is owned by state and local governments. The federal government does pay a substantial share of the costs to fund some of the infrastructure, such as highways and transit systems, that’s owned by state and local governments. Nevertheless, much of what is federally funded could be more effectively funded by state and local governments.
State and local governments are likely to be more accountable and make better local decisions than a larger, more distant government entity beholden to national political forces.
Third, and regardless of ownership, infrastructure should be funded by users whenever possible. It’s both fairer and more efficient than using across-the-board taxes.
User fees already play an important role in funding highways, water and wastewater infrastructure. Highways are funded largely by revenues from fuel taxes, collected by the federal government and every state government. In many communities, water and wastewater facilities are funded by local residents, who are billed in proportion to the amount of water they consume. Many other kinds of infrastructure, such as electric power lines and broadband, are managed by private firms and funded by user charges.
Some updates would be wise. The Biden administration has promised not to raise taxes on the middle class, and he views an increase in the federal gas tax as a violation of that promise. The growing percentage of vehicles powered by electricity also raises questions about continuing to rely on fuel taxes. But highway improvements and maintenance can be paid for with other kinds of user fees. Options include tolls and mileage-based user fees.
Mileage-based user fees charge drivers in proportion to vehicle miles driven on all publicly maintained streets, roads, and highways. Improvements in technology make this feasible, with vehicle owners billed monthly. This could be gradually phased in while fuel taxes are phased out. Vehicle owners would pay for what they use, with heavier vehicles paying more in proportion to the wear and tear they cause. Again, it’s a user fee — not a tax — particularly if the revenue is earmarked to pay the specific costs of maintaining and improving those roadways.
This is only one example of how to fund infrastructure with user charges. It gives people an incentive to limit their use of scarce resources. Road user charges raise the cost of products that are shipped a long way, compared to those that are locally sourced. Such a system also provides better information to citizens about how much infrastructure costs to build and maintain.
In spite of politicians’ optimistic pronouncements, not all infrastructure spending enhances economic growth and development. If Congress funds it with corporate income taxes, as the president originally proposed, we could see a reduction in private investment and lower economic growth. With user fees, it’s less likely that government will spend on wasteful projects or crowd out other kinds of private investment.
Tracy C. Miller is a senior policy research editor with the Mercatus Center at George Mason University and the author of a new policy brief, “Infrastructure: How to Define it and Why the Definition Matters.”