Business Ethos Blog

How Are We Going to Pay for It

Dr. David Mielke, Retired Dean of the College of Business at Eastern Michigan University

 

President-elect Donald Trump pledged during the campaign to invest $1 trillion in the nation’s infrastructure.  The Governor’s 21st Century Infrastructure Commission found that the state would need to spend in excess of $60 billion more over 20 years just to fix existing infrastructure systems.  Infrastructure has become a hot button issue and most would agree it is a priority.  The question is who will pay for it?  Are public-private partnerships a possibility?  Or should taxes be raised?  Can the country afford to increase the national debt?  Can the state and federal budgets be examined to shift priorities to infrastructure from current budget expenditures?  Will the infrastructure expenditures stimulate the economy and provide enough new tax revenue to cover the costs?  What is the “Right Thing to do?”  Let’s look at some issues:

  1. At a recent conference in Detroit the CEO of an investment banking company said the country has $2 trillion worth of infrastructure needs and the federal government can only cover about half.  It includes $1.7 trillion for surface transportation, $134 billion for drinking water and waste water, $126 billion for airports and $30 billion for ports and inland waterways.
  2. As a country, we are spending less now as a percentage of GDP, under 2% than we were 20 years ago on such infrastructure needs.
  3. Some experts, including Ms. Chao, nominated to head the Department of Transportation, believe there are opportunities for the private sector to invest in infrastructure and get a return on investment.  These potential partnerships would likely include investment tax credits and user fees.
  4. Public-private partnerships, in which private companies operate public infrastructure for a fee or other payments are increasingly common overseas and in Canada.  The Gordie Howe International Bridge between Windsor and Detroit is an example.
  5. The US has lagged in implementing these types of agreements.  Michigan is one of more than two dozen states that lack the sort of enabling legislation to more easily allow these types of projects.
  6. Michigan ranked last in the nation for its infrastructure,with a grade of D, on the American Society of Engineers’ last state infrastructure report card in 2009.  As an example, many of the state’s community water systems are at least 50 years old.
  7. Michigan also lags neighboring states and the nation when it comes to investment in infrastructure.  Citing census data, a Deloitte report found Michigan state and local governments spent the least per year on average on infrastructure among Great Lakes states, 6.4%, compared to the next lowest state Wisconsin at 8.5%, between 2010 and 2014.  The national average was 10.6% during that period.
  8. Governor Snyder’s 21st Century Infrastructure Commission found that the state would need to spend in excess of $60 billion more over 20 years just to fix existing infrastructure systems.
  9. A recent study of 300 business owners and managers, by Crains found that 35% consider infrastructure the most serious problem, that if addressed, could help Michigan’s economy.
  10. Nearly half of those polled, 46%, would favor raising Michigan’s sales tax by 1% and dedicating the funding to infrastructure needs.  This would ensure that everyone pays.  The current exemptions for sales tax, includes food, which would to an extent shield lower income families from being impacted by the higher tax.
  11. There was also some support to cut existing state spending, including public schools and universities, prisons and human services and increase infrastructure spending.
  12. Some advocate restoring some of the $1.5 billion in business tax cuts since 2013.  The business tax was seen as an impediment for business expansion in the state.
  13. Another group considered boosting the state’s income tax from 4.25% to 4.35%.
  14. There is also support to increase user fees.  The most recent example is the increase in the state gas tax and 20% increase in registration fees.  This could also include increases to water and sewage rates.  Many consider this important because the current fees include the costs of the infrastructure that was heavily subsidized by the federal government years ago and is insufficient to cover the replacement costs.
  15. Some suggest increasing bonding, that is borrowing more money to cover the infrastructure costs.

There is no doubt that the US and Michigan infrastructure needs to be upgraded and enhanced.  However, at least at the current time, no one at the state or federal level is promoting a way to pay for it.  Is it the formation of public-private partnerships?  is it increasing user fees—the federal gasoline tax has not been increased for decades?  Should the state increase the sales tax, or income tax rate, or reinstate some of the business tax cuts?  Or should the state and federal budgets be examined to cut some current expenditures and increase funding for infrastructure?  What is the “Right Thing to do?”  First the state and the federal government has to get serious about dealing with the problems.  We have had enough reports, from the Feds, the Governor, the Business Leaders for Michigan identifying the problems, but none of those groups have provided recommendations for how to fund the infrastructure.  It is time for our representatives to step up and develop solutions.  The answer to funding is a combination of the possible solutions.  Yes, we need public-private partnerships with tax incentives.  The state should move to pass the legislation to make this possible.  Yes, user fees should be increased, the Federal gas tax for sure and municipalities must start charging rates that include the costs to replace the infrastructure–not using the old subsidized costs.  The state sales tax should be increased, it is a more reliable source of revenues than the income tax and will increase yearly as we spend more in Michigan every year.  The income tax is more volatile and more difficult to project.  However, we must have safeguards that any new sales tax increases are in fact guaranteed to be spent on infrastructure, not anything else.  Of course, we should always be looking at budgets, looking for cost savings and reevaluating priorities that we are spending our tax dollars with the biggest bang for the buck.  But no, we should not increase government borrowing, unless we have new revenue sources to cover the debt payments.  We can’t afford to push the payment problem down the road, so to speak, by borrowing with the hope of paying off the debt somewhere down the road.  Will these suggested solutions cause criticism and opposition?  For sure, but someone has to pay.