President Biden’s $2 trillion plan to build and revamp everything from roads to bridges to schools to factories to broadband would benefit businesses and workers everywhere. Infrastructure improvements make the whole country more productive and efficient. Demand rises. Companies make more, hire more and pay more. Growth perks up. Mostly everybody ends up better off.
Just don’t ask anybody to pay for this economic wonder. The nation’s biggest business groups all support robust infrastructure spending, but as Biden rolled out his big plan on March 31, they all insisted somebody else should foot the bill. Biden wants to fund it by raising the corporate tax rate from 21% to 28%. Nope, say America’s businesses. Find another way.
The Business Roundtable, US Chamber of Commerce and National Association of Manufacturers all issued statements supporting the goal of Biden’s infrastructure plan on the same day Biden began releasing the details. And they all said raising business taxes would be a counterproductive way of funding it. Instead, they want “user fees” to be the source of funding. That means tolls for roads, bridges and tunnels, and other types of charges for those actually benefiting from the new infrastructure.
That’s not a bad approach, in principle. User fees in the form of a gasoline tax were the main funding source for the national highways system President Eisenhower signed into law in 1956, perhaps the most important US infrastructure program ever. That arrangement worked for decades.
But the federal gas tax has been stuck at 18.4 cents per gallon since 1993, with inflation and improving fuel efficiency greatly eroding its power as a transportation funding mechanism. By one estimate, the purchasing power of that tax revenue has plunged by 64% since 1993. This coincides with growing Republican hostility toward tax increases for any reason at all, which didn't always block new taxes. President Ronald Reagan, the archetypal Republican, signed a gas-tax increase into law in 1983, and his successor, fellow Republican George H. W. Bush signed another one into law in 1990.
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But since the last hike under President Clinton in 1993, Republicans who controlled one or both houses of Congress most of the time have squelched any new gas-tax funding for transportation. Part of the problem has been declining income tax rates for the wealthiest Americans, with the top marginal rate falling from 50% in 1986 to 37% today. Business taxes have fallen too, with the top corporate rate falling from 46% in 1986 to 21% today. Politicians can’t plausibly cut taxes on the wealthy but raise gasoline taxes on ordinary people.
As a “user fee,” the gas tax (plus a few other fees) covered the cost of federal transportation programs until 2008. Then funding started to run short, because Congress couldn’t or wouldn’t raise the user fee to keep up. Congress now diverts at least $20 billion per year into the highway fund from general revenue, one of the many factors ballooning the US national debt, now $28 trillion.
User fees are getting little love in Washington even as Biden rolls out his new plan. The gas tax is becoming an anachronism as more drivers buy electric vehicles, completely avoiding the gas tax. A new version of this would be a tax on “vehicle miles traveled,” or VMT, so drivers would pay to use roads no matter what powers their cars. But Transportation Secretary Pete Buttigieg had to correct himself recently when he said a VMT might be part of the Biden bill. Even Biden doesn’t support that idea, apparently, perhaps because he has pledged no new taxes of any kind on households with income below $400,000. So Buttigieg walked himself back a couple days later.
Republicans remain so averse to tax hikes that they effectively oppose infrastructure spending as well, since the funding has to come from somewhere, and they can’t say from where that should be. Senate Minority Leader Mitch McConnell of Kentucky said recently that “I’d love to do an infrastructure bill,” while at the same time saying he opposed a “massive effort to raise taxes.” McConnell hasn’t said how he would like to pay for it.
Republicans argue that a tax hike now would set back the economy, which is still not fully recovered from the coronavirus shutdown. But the solution isn’t complicated. Unlike stimulus checks that the Treasury sends out all at once, infrastructure spending takes place over years or decades. Estimates of the Biden plan assume some spending will continue into the 2030s. So a corporate tax hike, if that’s the funding mechanism, could be delayed or phased in gradually to assure it doesn’t interfere with the recovery.
The National Association of Manufacturers favors the use of bond financing for some infrastructure program, an idea Oregon Sen. Ron Wyden, the Democratic chair of the Senate Finance Committee, also supports. Bonds have financed some infrastructure in the past, but they have some disadvantages. The federal government subsidizes bonds issued by states and localities, typically by making them tax-exempt at the federal level. So they're not free. Sometimes states and cities have to pay fees to Wall Street firms to develop and market the programs. And since these bonds finance regional activity, they don’t necessarily have the shock-and-awe effect of a single huge program crossing state lines.
Despite the opposition, Democrats may have the votes to boost the corporate tax rate, if not to 28% then maybe to 25% or 26%. If they obtain less revenue than desired, they may have to scale back spending, too. That may not end up so bad. Biden is aiming high, and if he only got half his infrastructure program, it would still be a major buildout effort. If there's less squealing by the funders, maybe there will be a few more goodies in the future.
