Racing Ahead Or Falling Behind? Six Economic Facts About Transportation Infrastructure in the United States

POLICY MEMO | MAY 2015 Racing Ahead or Falling Behind? Six Economic Facts about Transportation Infrastructure in the United States Melissa S. Kearney, Brad Hershbein, and Greg Nantz WWW.HAMILTONPROJECT.ORG ADVISORY COUNCIL MISSION STATEMENT The Hamilton Project seeks to advance America’s promise of opportunity, prosperity, and growth. The Project’s economic strategy reflects a judgment that long-term prosperity is best achieved by fostering economic growth and broad participation in that growth, by enhancing individual economic security, and by embracing a role for effective government in making needed public investments. We believe that today’s increasingly competitive global economy requires public policy ideas commensurate with the challenges of the 21st century. Our strategy calls for combining increased public investments in key growth-enhancing areas, a secure social safety net, and fiscal discipline. In that framework, the Project puts forward innovative proposals from leading economic thinkers — based on credible evidence and experience, not ideology or doctrine — to introduce new and effective policy options into the national debate. The Project is named after Alexander Hamilton, the nation’s first treasury secretary, who laid the foundation for the modern American economy. Consistent with the guiding principles of the Project, Hamilton stood for sound fiscal policy, believed that broad-based opportunity for advancement would drive American economic growth, and recognized that “prudent aids and encouragements on the part of government” are necessary to enhance and guide market forces. Racing Ahead or Falling Behind? Six Economic Facts about Transportation Infrastructure in the United States Melissa S. Kearney, Brad Hershbein, and Greg Nantz Introduction A founding principle of The Hamilton Project’s economic strategy is that long-term prosperity is best achieved by fostering economic growth and broad participation in that growth. This strategy includes an essential role for effective government to make much-needed public investments. This month The Hamilton Project is focusing on the need for public investments in our nation’s transportation infrastructure. As part of this focus, we offer this primer document, “Racing Ahead or Falling Behind? Six Facts about Transportation Infrastructure in the United States.” While each part of the nation’s infrastructure is vital— from the electrical grid that powers our cities to the water systems that deliver clean drinking water around the country—these facts focus on the state of investment in transportation-related infrastructure. The economy of the United States depends on our nation’s transportation infrastructure. Every day, tens of millions of people commute to work in the United States using public roads and transportation systems. Billions of dollars’ worth of freight is transported using the nation’s highways, railroads, ports, and inland waterways (Fact 3). Significant public investment—at all levels of government—is required to maintain this system, conduct periodic repairs, and expand our nation’s transportation systems to safely handle movement of greater numbers of goods and people. A well-functioning system of mass transportation is both a substitute for and a complement to our nation’s highway system (Fact 4), but funding for these systems is also stretched thin. The facts make it clear that the state of public financing for transportation infrastructure warrants serious attention. Federal spending as a share of GDP has fallen (Fact 1) and the federal Highway Trust Fund (HTF)—the designated source of revenue for spending on our nation’s highways—is about to run out of money (Fact 2). The primary source of funding for the HTF is the federal gas tax, but that tax has not been raised since 1993. Of course, state and local governments also play an active role in both the funding and building of infrastructure projects. Interestingly, there is large variation across states in both their reliance on state-level gas taxes (Fact 5) and the amount of federal funding states receive for the construction and maintenance of roads (Fact 6). The Hamilton Project • Brookings I Introduction continued from page 1 An efficient and reliable transportation infrastructure facilitates the transactions that enable the economy to grow and to create private sector jobs. Many observers agree on the need for increased investment in America’s aging infrastructure, including roads, bridges, and airports. However, determining how to fund and finance infrastructure investment presents important policy and political challenges. The purpose of this document is to provide objective background facts to help guide those necessary policy and political discussions. 2 Racing Ahead or Falling Behind? Six Economic Facts about Transportation Infrastructure in the United States As a share of GDP, public infrastructure spending 1. has been stagnant between 1979 and 2014. Public infrastructure spending from all levels of government and operations and maintenance, but much of it is in the form totaled $416 billion in 2014—$41 billion (9 percent) less than of grants and loan subsidies to state and local governments. In its peak of $457 billion in 2003 (solid blue line in the figure; 2014 these intergovernmental transfers constituted 70 percent Congressional Budget Office [CBO] 2015). This total includes of federal infrastructure dollars; 90 percent of these funds spending on highways, mass transit, rail, aviation, ports, went specifically to capital projects rather than to operations waterways, dams, and water supply networks. As shown in and maintenance (CBO 2015). the figure, total public spending on infrastructure as a share of GDP (dashed blue line) peaked in the late 1950s, during The majority of infrastructure spending consists of funds the initial stages of construction of the Interstate Highway raised by state and local governments—reflected in the figure System. Since the mid-1980s, however, total public spending as the difference between the blue and green lines—and is as a share of GDP has remained relatively flat. used primarily for operations and maintenance. Over the past thirty-five years, this category of spending nearly doubled Infrastructure spending by the federal government, as from $170 billion to $320 billion. Because federal spending indicated by the solid green line, has been relatively flat over the was flat, the share of overall infrastructure spending coming past thirty-five years, equaling about $96 billion in both 1979 solely from state and local governments increased from 63 and 2014. Some of this money covers direct outlays on capital percent in 1980 to 77 percent in 2014. FIGURE 1. Public Infrastructure Spending, 1956–2014 Adjusted for inflation, federal spending on transportation and water infrastructure are at about the same level today as they were in 1979. 500 3.0 450 2.7 Percent of GDP (dashed line) Percent 400 2.4 350 2.1 300 1.8 250 1.5 200 1.2 150 0.9 Billions of dollars (solid line) 100 0.6 50 0.3 0 0 1956 1964 1972 1980 1988 1996 2004 2012 Total public (real dollars) Federal (real dollars) Total public (percent of GDP) Federal (percent of GDP) Sources: Bureau of Economic Analysis 2015b; Congressional Budget Office 2015. Note: Total public spending includes spending by federal, state, and local governments. Loans and subsidies from the federal government to state and local governments are counted as federal spending. Infrastructure spending includes spending on transportation (highways, mass transit, aviation, and rail) and water infrastructure. Annual values (in 2014 dollars) are adjusted using an infrastructure-specific index that accounts for changes in the prices of goods and services purchased for infrastructure. The Hamilton Project • Brookings 3 The Highway Trust Fund is at its lowest balance 2. since 1969, and is set to run out of money by summer of 2015. The HTF, established by the Federal-Aid Highway Act of (shown by the blue line) has plummeted to levels last reached 1956, was the first dedicated funding source for highway in the late 1960s. This resulting shortfall has led Congress to construction and maintenance (U.S. Department of make repeated transfers from general revenue to keep the HTF Transportation [USDOT] 2015a). Supported by a federal motor solvent (the green line). If these transfers do not continue, the fuels tax—as well as additional taxes on tires and trucks—the HTF is expected to be bankrupt by summer of 2015 (CBO 2014). HTF’s revenue helps pay for federal highways and, through grants to other levels of government, many state roads as well. If avoiding dependence on transfers from the General Fund Since 1982 HTF revenues have also been set aside to support is a future objective of the HTF, increasing the federal tax on mass transit (USDOT 2015a). gasoline is one way to achieve it. The federal tax on gasoline has been fixed at 18.4 cents per gallon (in nominal terms) For most of its history, the HTF was well in the black, even as since 1993, even as average fuel efficiency has improved and the Interstate Highway System was being built. Over the past the growth in total miles driven has slowed (USDOT 2014b, fifteen years, however, expenditures have routinely exceeded 2015b). The CBO estimates that raising the gas tax by between revenues (as shown by the dashed purple line’s position below 10 and 15 cents per gallon would be sufficient to cover expected the horizontal axis). As a consequence, the HTF’s balance HTF shortfalls over the next ten years (CBO 2014). FIGURE 2. Highway Trust Fund Balance, 1957–2013 Highway Trust Fund expenditures have exceeded revenue since 2008, requiring transfers from the General Fund in order to keep the account solvent. 40 35 30 25 20 15 10 5 Billions of dollars 0 -5 -10 -15 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 Balance without general fund transfers Balance including general fund transfers Annual net income Sources: Bureau of Economic Analysis 2015a; U.S.

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