The announced goal of the Biden’s administration newly released plan to spend over $2.3 trillion to improve America’s aging physical infrastructure seems laudable. However, upon closer inspection, many of the assorted activities included in the proposed legislation will go to projects not defined as infrastructure. “Less than 6% of this massive proposal goes to roads and bridges," according to Senator Mitch McConnell (R-KY). Worse yet, the proposal sharply increases corporate taxes to cover the plan’s massive cost while ruling out higher fuel taxes or mileage-based user fees. It abandons the “user pays/user benefits” principle that has supported U.S. infrastructure for decades.
It is hard to overstate the ubiquity of user fees in America. These fees, or per-unit rates, have successfully funded all types of civil infrastructure for decades. Rates charged to shippers fund freight rail, kilowatt-hour rates on electricity fund the electricity system, and per-gallon charges fund water systems. Indeed, “user fees” in the form of prices for everything from bread to socks successfully fund those basic market operations.
Per-gallon taxes on gas and diesel fuel at both the federal and state level have supported the U.S. transportation system for over a century. Oregon first imposed a per-gallon tax on gasoline in 1919, with the federal government following in 1932, both at one cent per gallon. The federal Highway Trust Fund, established by the Eisenhower administration in 1956, prescribed a three-cent-per-gallon gas tax to fund Interstate Highway construction. That was soon increased to 4.5 cents per gallon.
At the time, gas taxes were viewed as user fees because almost all drivers paid roughly the same in fuel taxes for each mile of highway driven. Although the link between miles driven and taxes paid has weakened over time, due mainly to alternative-fuel vehicles, gas taxes retain many user-fee features.
The benefits of user fees to fund infrastructure are legion. They embody the basic notion of “horizontal equity” in that the customer pays a price that reflects the operation, maintenance — plus contribution to capital costs — of the infrastructure facility they use. Per-unit fees can be adjusted to reflect the cost of the infrastructure being used, as with other utilities. Those who drive more, and on more expensive roads, pay more. This principle is accepted and indeed promoted in virtually all aspects of U.S. economic life.
Second, although they do not eliminate it, user fees help reduce the diversion of revenue from an infrastructure facility to other, unrelated purposes. This is particularly true when state and local governments use revenues to pay back bondholders, who have strong incentives to eliminate or reduce diversion.
Third, user-fee revenue is more insulated from the political process, and provides reliable funding over a long period of time. Reliability is critical for the proper operation and maintenance of infrastructure over its entire life cycle. Given that deferred maintenance is the key problem bedeviling U.S. infrastructure today, wise policy should encourage greater reliance on user fees, not discard them. The Biden administration plan as currently constructed offers no mechanism to ensure that the backlog of deferred maintenance does not grow again, once new program funds are spent.
Finally, user fees help take infrastructure spending out of the political and into the economic realm. The willingness of drivers to pay direct user fees provides an objective gage of the value they receive. Scarce transportation funds should be spent on roads and highways where more drivers willingly pay the fee, instead of politically appealing infrastructure projects.
Revenues into the federal Highway Trust Fund have declined faster than expected due to changes in driving habits, electric vehicles, and more efficient engines, among other factors. Yet, since the 1970s, Congress has expanded the range of activities on which Highway Trust Fund monies can be spent. Included today are funds for mass transit, bike trails, sidewalks, and even transportation museums. As a result, to ensure its solvency, since 2008 Congress has transferred almost $144 billion from its general fund into the Highway Trust Fund.
Refocusing the Highway Trust Fund as a true user-fee account would go a long way in addressing America’s infrastructure problems. A May 2020 report from the Congressional Research Service shows that several straightforward fixes, such as devoting all revenue to highways only, adjusting for lost purchasing power since 1993 (when the gas tax was last raised), and indexing to future inflation, would go a long way making the trust-fund model sustainable. Raising corporate taxes that weaken the economy would be unnecessary.
An infrastructure bill provides a rare opportunity to affirm and buttress the user-fee model that has allowed the United States to build much of it excellent civil infrastructure. Abandoning that successful model for a corporate tax hike that reduces business investment, capital formation, and thus economic growth would be a major mistake.
