As Congress considers turning the $579 billion bipartisan infrastructure deal and President Joe Biden’s $2.2 trillion American Jobs Plan (AJP) into legislative text, policymakers may consider using additional tax revenue generated from infrastructure spending to offset the plans’ deficit impact. Applying dynamic scoring to the spending side of the proposals would only generate a small amount of additional revenue.
The Congressional Budget Office (CBO) estimates that additional infrastructure spending would deliver about a 5 percent return on investment, which is about half of the economic return of private sector investments. The return on public infrastructure increases the size of the economy, which in turn increases tax revenue from additional economic activity. For example, the infrastructure spending may increase individual income tax revenue to the extent it creates new jobs and raises wages.
While it is good that policymakers are taking the impact of the economy on tax revenue seriously, it is important to remember that the dynamic effect of increased spending would only offset a small portion of the total spending. In other words, new spending—like tax cuts—rarely pays for itself.
For example, consider the $579 billion bipartisan infrastructure framework, which over 10 years would spend $312 billion on transportation infrastructure improvements and $266 billion on other infrastructure projects like water infrastructure and broadband deployment. If we assume the entire $579 billion yields a 5 percent return, the plan would generate about $67 billion in additional federal revenue over 10 years according to our modeling.
This $67 billion of new revenue would cover about 11.5 percent of the spending, likely representing an upper bound as the return to items like broadband deployment may be lower than the 5 percent estimate provided by CBO on more traditional infrastructure spending.
President Biden’s American Jobs Plan would increase infrastructure spending by about $1.7 trillion over 10 years. We estimate it would produce about $162 billion in additional federal revenue if all the spending earned a 5 percent return from 2022 to 2031. This also may be thought of as an upper bound to the extent some of this spending, e.g., modernizing schools and federal buildings, does not clearly fit the definition of traditional infrastructure spending.
Dynamic Revenue Impact of Increased Infrastructure Spending, 2022 to 2031 (Billions of Dollars)
|$579 Billion Bipartisan Infrastructure Proposal
|$1.7 Trillion Infrastructure Proposal in American Jobs Plan (AJP)
Source: Tax Foundation General Equilibrium Model, July 2021.
Dynamic scoring also applies to the funding mechanisms for the new infrastructure spending. While the $1.7 trillion in infrastructure spending on its own would increase long-run GDP by 0.3 percent and long-run GNP by 0.1 percent, after accounting for the negative economic impact of the American Jobs Plan’s corporate tax increases, long-run GDP would fall by 0.5 percent and long-run GNP would fall by 0.3 percent. Accordingly dynamic revenue collections ($1.57 trillion) would end up being $110 billion less than conventional revenue ($1.68 trillion) on net.
Supporters of President Biden’s American Families Plan (AFP) are also considering dynamic scoring for new spending, but it is unclear whether these programs would generate any measurable economic returns in the long run. Our modeling of the American Families Plan and the home care and workforce development components of the American Jobs Plan treats this spending as transfer payments with zero long-run effect on GDP.
As argued by American Action Forum president and former CBO director Douglas Holtz-Eakin, “There is no reason that the insights into pro-growth policy proposals should be restricted to the tax side of the ledger.” However, it is important to remember that dynamic effects of spending only offset a small portion of the total cost and that this impact can be more than offset by the economic damage of increasing taxes on investment.