Revenue Structure

A broader infrastructure question that needs to be answered is how we can design a better role for the federal government in partnering with infrastructure projects across the United States. While many people imagine that the federal government already builds and controls the majority of infrastructure projects across the nation, in reality it owns less than 10% of those projects. The vast majority of United States infrastructure is owned and operated by the states and local government. The challenge for federal policymakers is designing a new system allowing them to partner with state and local governments as they develop state and local infrastructure.

When state and local policymakers anticipate the possibility of impending federal funding for local infrastructure projects, they tend to hold off on investing any of their own transportation funds towards the project, as they would much prefer to let the federal government pay the bill. This is called the coupon effect, and I discuss it in greater length in this podcast with Kent Smetters of the Wharton School of Business. The coupon effect is a persistent barrier against any attempt to maximize the spending power of both federal and state transportation dollars, and overcoming it  should be a main focus of any efforts to reorganize how the federal government partners with the states.

The White House Infrastructure Proposal attempted to address this by pairing federal investment with projects already being undertaken and partially funded by the states. This allowed states to determine the infrastructure priorities that they were most interested in accomplishing and then to get federal assistance to realize those goals. It also kept the states from postponing increases in infrastructure investment because of the hope that the federal government will intervene and fix their infrastructure.