Transportation Policy in a New Fiscal Era

Donâ??t mourn Build America Bonds

On December 10th, the big four transportation groups (AASHTO, AGC, APTA, and ARTBA) sent a joint letter to Congress urging the inclusion of Build America Bonds in the year-end tax bill. But to no avail; the provision was not included.

Why these groups thought extending a temporary subsidy program for state and local governments would be continued in the new era of fiscal constraint we’ve entered is beyond me. Over the next 10 years, the $165 billion of BABs issued during the program’s two-year life will add $36 billion to the national debt. Instead of lobbying for ever-larger unsustainable federal largesse, our transportation organizations should be figuring out new policies to sustain and improve our infrastructure in an era when the size and cost of the federal government must shrink, not expand.

The evidence that we have entered a new era is all around us, if we take off the blinders worn by most of those who live and work inside the Capitol Beltway. It’s not just the November “wave” election that dramatically altered the balance of power in Congress. The underlying message of that election is that a majority of Americans see the federal government as over-extended and needing to be scaled back. One of the earliest signs that Congress is starting to get that message is the two-year ban on earmarks in the House and among Senate Republicans. While that will make life a bit harder for some people’s favorite transportation projects, my advice is “live with it,” because that’s only the tip of the iceberg.

A far more important sign of the times is the report from the president’s deficit commission. Transportation interests cheered its call for a phased-in 15 cent increase in federal fuel taxes, but had little to say about its rationale: to completely end any future general-fund bailouts of the Highway Trust Fund. This was a hugely significant recognition by the commission that the users-pay/users-benefit principle makes the Trust Fund different from nearly every other spending category-and that this uniqueness should be preserved.

Of even larger significance is the commission’s bold call (in one scenario) for ending all tax breaks, to make possible a tax system with a corporate tax rate of just 26% (compared with today’s uncompetitive 35%), while streamlining personal rates to just three brackets: 8%, 14%, and 23%. Under that proposal, there would be no more Alternative Minimum Tax, no mortgage interest deduction, and no more tax exemption for municipal bonds. (The Wall Street Journal‘s David Reilly likes the proposal, pointing out that, if anything, profligate state and local governments need less incentive to take on more debt, and noted that if they had to compete more for investors, those governments might “provide investors with better and more timely information.”) While that proposal is unlikely to be adopted any time soon, the fact that it has garnered serious discussion indicates how much the environment in which we must craft transportation policy has changed.

If you doubt that the environment has changed as much as I claim, look at what happened to the attempted Senate omnibus spending bill. Despite being stuffed with such budget-busting pre-Christmas goodies as a billion dollars more for high-speed rail, a half-billion dollar increase in highway funding, another half billion for more TIGER grants, and a quarter billion for more “livability” grants, the measure was defeated.

In remarks delivered December 9th to the National Conference of State Legislatures in Phoenix, transportation consultant Kenneth Orski reflected on what the new fiscal era means for federal transportation efforts. His predictions included the following:

· Reducing or eliminating non-core activities such as “transportation enhancements” and “livability” programs that have little or no national impact;

· Eliminating “executive earmarks” such as TIGER grants (this would be consistent with the ban on congressional earmarks);

· Compensating for the lack of new federal money by empowering states to leverage existing resources via expanded TIFIA, Private Activity Bonds, PPPs, and tolling;

· Curtailing the costly high-speed rail (HSR) program and reprogramming unspent stimulus funds away from TIGER and HSR projects.

I will add to that list a further focusing of the federal highway program on major corridors for interstate commerce-modernization of the Interstates and upgrading selected routes on the National Highway System to Interstate standards. By focusing the federal role and dollars on a more limited portion of the highway system, this change would, in effect, “devolve” responsibility for the rest of the highways to state DOTs, freed from all the costly requirements that come attached to federal aid dollars.

In addition, when crafting the reauthorization bill, Congress should resist calls for “breaking down the silos” of federal funding in the name of multi-modalism. The real agenda underlying such calls is to force highway users to pay for transit, inter-city rail, port dredging, waterway locks and dams, etc. That’s not only unfair to highway users who pay those “highway user taxes”; it would also distort the share of travel and trade using each mode and would very likely further politicize the distribution of funds. It’s also about the worst thing we could do at a time when the Highway Trust Fund cannot even keep up with legitimate highway needs!

So let’s not mourn the demise of Build America Bonds. They are a symbol of the era of fiscal incontinence that we are leaving behind as we turn the page to 2011 and a new era of fiscal restraint. Happy New Year!

Robert Poole is director of transportation studies at Reason Foundation. This column first appeared in Public Works Financing.