At the end of April, Senate Minority Leader Chuck Schumer (D-NY) stated that President Trump and the White House had agreed to a $2 trillion infrastructure spending package. Rumblings of a big infrastructure bill have bounced around Washington for almost the entirety of the Trump presidency, long enough for “Infrastructure Week” to become a DC punchline. Indeed, it’s been almost two years to the day since the term was first coined. So there are plenty of doubts as to whether or not this proposal will actually go anywhere.
That said, it’s worth engaging with the proposal nonetheless. And one problem with the discussion around this plan is that there has been no credible plan to fund it. Some lawmakers have suggested doubling the gas tax to pay for it. However, the federal gas tax raised roughly $37 billion last year, and even assuming that drivers would not drive less or start preferring more electric cars, doubling the gas tax would not come anywhere close to generating $2 trillion in revenue.
A better approach to thinking about infrastructure reform is addressing how expensive building infrastructure is in the United States. It is more expensive to build subways and roads in the United States than in almost any other developed country. Reducing costs is good policy whether or not one wants to build massive new infrastructure projects. Here are a few proposals to lower excessive input costs:
Repeal “Buy American” Laws
Current law strongly encourages lawmakers to buy American-made construction materials. These requirements help drive up input costs by roughly 12 percent, as governments have to forgo using cheaper foreign goods like Chinese steel. These regulations protect a comparatively tiny number of jobs, and place large costs on taxpayers and the broader economy. According to the Heritage Foundation, repealing all “Buy American” provisions (not just the ones applying to infrastructure) could generate 300,000 net jobs and $22 billion in economic growth.
Repeal the Davis-Bacon Act
Conceived during the Great Depression partially as a way to guide the benefits of the New Deal towards white workers, the Davis-Bacon Act mandates that workers on federal infrastructure and public works projects be paid local prevailing wages. This policy raises spending on federal infrastructure projects by between $12.4 billion over the next decade (according to the Congressional Budget Office) and $10.9 billion in one year (according to the Heritage Foundation). Based on the Heritage Foundation’s estimates, repealing the Davis-Bacon Act could create 155,000 more jobs at the same cost.
Repeal the Jones Act
The Jones Act not only requires that goods be shipped on American-made vessels, but also that those vessels be owned and crewed by Americans. There are numerous unintended consequences of this law, from inhibiting disaster relief efforts in Puerto Rico to forcing New England to import natural gas, even though there are domestic natural gas reserves that could easily fill the region’s needs. This regulation costs the overall economy between $5 billion and $15 billion a year, and can make infrastructure projects even more difficult.
Repeal Project-Labor Agreements
Similar to the Davis-Bacon Act, project-labor agreements require federal projects hire union workers for projects larger than $25 million. As Citylab noted, according to a study from the National University System Institute for Policy Research, these project-labor agreements increase infrastructure construction costs by between 13 and 15 percent.
According to a Cato Institute study by Gabriel Roth, 30 percent of the costs of US transportation infrastructure are added on by federal government regulations. Carrying that assumption forward, removing these regulations would reduce the cost of the infrastructure bill from $2 trillion to only $1.4 trillion. The federal government also spends roughly $100 billion a year on transportation and water infrastructure alone, so eliminating these excessive costs could reduce spending by another $300 billion or so over a decade. As such, the cost of the infrastructure bill would fall from $2 trillion to barely over $1 trillion.
A Note on Revenue
Revenue for new infrastructure spending should come from two places: a gas tax increase and user fees. The gas tax has not increased since 1993, and in inflation-adjusted terms, the real gas tax rate has fallen by almost 50 percent; furthermore, the US has some of the lowest fuel taxes in the developed world. Raising the gas tax to 50 cents a gallon and indexing it to inflation going forward could raise over $300 billion over the next decade, according to the Tax Foundation. There are two advantages to the gas tax as a funding source for transportation. It functions as a benefit tax or user fee, as people paying the tax are the same people who benefit from the service it funds, namely roads. And secondly, the gas tax functions like a Pigouvian tax, forcing drivers to internalize the cost of pollution generated by burning gasoline. On the subject of user fees, a good substitute or supplemental revenue source along with a gas tax increase would be tolls. Tolls are direct user fees for the beneficiaries of infrastructure, and as such are economically efficient.