Paying for Infrastructure With Pixie Dust
President Biden and a bipartisan group of senators have agreed to the framework of a plan to boost infrastructure spending by about $579 billion. On top of already planned spending for roads, bridges, transit, water, and broadband, it would amount to a massive $1 trillion. And they have agreed to pay for it largely with…pixie dust.
Let’s face it: If Congress wants to pay for a $1 trillion spending plan without raising the deficit, the only real ways to finance it are by raising taxes, cutting other spending, or both. This agreement does very little of either. And while the White House fact sheet describing the agreement includes no revenue estimates with its brief descriptions of the pay-fors, they are certain to generate far less than the plan costs.
The challenge was obvious from the time the talks began. Congressional Republicans refused to agree to any bill that reversed the corporate tax cuts in the 2017 Tax Cuts and Jobs Act. Biden rejected any form of gasoline tax hikes or other user fees on vehicles because they’d violate his promise to not raise taxes on households making $400,000 or less.
By not hiking corporate taxes and not raising taxes on households with incomes of less than $400,000, the White House and the senators eliminated many serious tax increases. And major offsetting spending cuts never seemed to be on the table.
That left lawmakers in the same place they’ve been for years. Most want an infrastructure bill. After all what politician doesn’t enjoy cutting a ribbon for a new highway or transit project? But they’ve never been able to agree on how to pay for it.
Now they have. And the agreement is: They’ll borrow the money, or at least most of it.
They’ve settled on a grab-bag of narrow revenue raisers and promised spending reductions that likely never will happen. Or if they do, they’ll generate far less than the plan’s backers hope. Some of the ideas have been used to pay for spending increases as far back in the 1980s. They didn’t achieve the goal then. They won’t now.
While we have not yet seen a Congressional Budget Office score for most of these ideas, it is fair to say that most are, um, aspirational. Just take a look at the list:
Extend the mandatory sequester. This one takes a bit of explanation. It refers primarily to an automatic two percent cut in payments to Medicare providers such as doctors and hospitals if Congress fails to meet certain budget targets. The agreement reportedly would extend the requirement from 2030 through 2031. Thing is, for years, Congress has missed the targets and waived the sequester. Indeed, it currently is suspended through the end of the year. At least four times over the past decade, Congress has extended the sequester for one or more future years, claiming credit for savings each time.
Selling 5G spectrum. Presidents have been promising to pay for stuff by selling spectrum since the 1980s, when they were talking about radio and TV bandwidth. The fiscal problem: The government already has begun peddling its 5G spectrum. Is the plan to sell more, or to take credit for what it already is doing? Plus, there is evidence that demand for this spectrum may be softening.
Selling oil from the Strategic Petroleum Reserve. As with spectrum, the federal government already has been selling off oil from the SPR. How much of this revenue will be from new sales and how much would be taking credit for already-planned deals? If Congress approves this one sometime soon, at least the US would be selling high, though it isn’t clear who’d be buying. The other problem: Will the US eventually buy more oil to refill the reserve, and at what price?
Reduce the tax gap. Published reports suggest the negotiators settled on a roughly $40 billion increase in the IRS budget, which they say would generate about $100 billion in taxes that are owed but not paid. That return on investment is not unreasonable and perhaps even conservative once the new enforcement program are in place, according to my Tax Policy Center colleague Janet Holtzblatt. But Janet warns that it will take time for the IRS to hire and train new enforcement staff and develop new anti-fraud techniques.
Macroeconomic impact of infrastructure investment. Even with good information, calculating the economic impact of spending is hard. But these investments inevitably will be a mix of needed projects and bridges to nowhere. Before knowing the mix, trying to calculate the overall economic benefits is a fool’s errand. That won’t stop supporters from putting some formulaic number on them. But any resemblance to what turns out to be reality will be purely coincidental.
This agreement will produce some money to pay for infrastructure. But it won’t be close to $1 trillion.