Statement of
The American Road and Transportation Builders
The President's Commission to Study Capital
Friday, January 30, 1998
Presented by
Dr. William R. Buechner
Director of Economics and Research

My name is William Buechner and I am the director of economics and research for the American Road and Transportation Builders Association. ARTBA is a federation of 4,000 firms and individuals with an interest in federal investment in transportation infrastructure programs. I have a PhD. in Economics from Harvard University and I served for 22 years as a senior economist with the Joint Economic Committee of Congress before joining ARTBA.

I want to thank you for allowing the American Road and Transportation Builders Association to appear before you this afternoon. I would like to start with some general comments on the appropriate way to finance federal government expenditures and then discuss why ARTBA supports the capital budget and why a capital budget would be an appropriate way to finance federal investment in transportation infrastructure.

The Federal government has a number of important responsibilities, many of which require money and resources to fulfill. There are essentially two ways of raising this money. One is to finance it out of current income by levying taxes and user fees. The other is to finance it out of future income by issuing bonds.

Our current budget procedures suggest that the only proper way to finance federal expenditures is through taxes. We have a budget that is reported on a cash basis. Whenever expenditures exceed tax revenues in a fiscal year, we call the resulting difference a "deficit," which suggests a shortcoming or failure that has to be fixed. This terminology has forced us to frame budget policy and financing issues within the straightjacket of achieving a balanced budget and avoiding a deficit. Balancing the budget has been an overriding preoccupation of Congress and the President for the past 15 years and it has damaged public policy by impeding the ability of the federal government to respond to investment opportunities that have long-run economic consequences.

There is a much more productive way to address how the federal government finances its expenditures. Instead of framing financing issues around avoiding a deficit, we should instead be asking the more sensible question: To finance federal expenditures, what combination of taxes and bonds imposes the minimum burden on the economy?

The notion that the ideal is a balanced cash basis budget suggests that the proper answer to this question is always--"all taxes and no bonds." That is, borrowing money is always bad and we should always pay for all federal expenditures, no matter what the nature of the expenditure, through current tax receipts. In economic terms, what this implies is that the real cost to the economy of the first dollar of bond financing is always higher than the economic burden of the last dollar of taxes. As an economist, I am not willing to make that kind of statement without some firm empirical evidence about the relative economic burdens imposed by taxes and bonds.

We know that taxes impose significant real burdens on the economy. Income and payroll taxes distort the incentive to work and earn an income, and this can reduce the amount of labor offered for employment. Taxes on capital distort the incentive to save and invest. Sales and excise taxes distort consumption decisions. And the resources devoted to computing and collecting taxes could be used to produce other goods and services. All of these distortions reduce the potential output and benefits from our productive resources.

Bond-financing also has costs. Government borrowing to finance federal expenditures reduces the availability of funds for, and raises the cost of, private investment which cuts into our long-term economic growth. To the extent that our domestic pool of savings is enhanced by our ability to tap into foreign savings, this may help in the short run but it can reduce future domestic consumption from future output.

Both taxes and bonds thus impose real costs on the economy and it is not obvious that the real economic burden of tax-financing is always less than the real economic burden of bond-financing, as the balanced budget notion implies.

The fact that businesses, households and state and local governments all make widespread use of bond-financing for at least some of their investment expenditures suggests that "all taxes" is not the way the federal government should be financed.

When is bond-financing appropriate? In general, the proceeds should be invested in long-lived assets and the investment should generate a stream of income or benefits to pay for the assets as they are used.

Primary among the federal expenditures that meet these criteria are the federal government's investments in transportation infrastructure.

ARTBA has long advocated that the Federal government should use capital budgeting for transportation programs for the reason that these programs are different from other government programs. Transportation investments have a long lead time and require funding stability that can't be provided under current budget procedures. Transportation programs fund long-lived assets that have a major impact on the performance and productivity of the American economy. And transportation infrastructure generates an income stream as it is used. For these reasons, transportation investment programs present a strong case for a different budget treatment from ordinary run-of-the-mill government expenditures.

Transportation investment is different from other government expenditures in that transportation projects require very long lead times and long-term funding predictability. Planning and design requirements, environmental reviews, the permit and bidding processes all stretch out the time it takes to start work, and then there are the inevitable delays between start and completion, including bad weather, unexpected construction problems, etc. For years, federal transportation funding attempted to accommodate these needs by providing long-term contract authority outside of the annual appropriations process. But in recent years, Congress has been using the appropriations process to place annual caps on the amounts that can be obligated by the states, which has put transportation programs right back into the uncertainty created by an annual funding process. ARTBA would support establishing a capital budget to restore funding stability and predictability to the federal transportation investment programs.

Furthermore, the current budget process does not recognize the economic importance of our nation's transportation infrastructure. Late last year, the Commerce Department released data on the value of the nation's fixed reproducible tangible wealth that help quantify the economic value of our transportation infrastructure.

The Commerce Department reports that in 1996 the total value of the nation's fixed reproducible tangible assets was $23.8 trillion. These assets include all of the man-made structures and equipment in use by all sectors of the economy in the United States. Of the total, just over $1.5 trillion is transportation infrastructure--the nation's highways, bridges, airports, subways, etc.--most of which is government-owned. Thus, transportation infrastructure accounts for a bit over 6 percent of the nation's total tangible assets.

Almost half of the nation's fixed tangible assets, however, are in the form of military equipment, personal homes and consumer durables. These assets are not available to businesses or government to produce future goods and services. Deducting the value of these assets from the total leaves $12.3 trillion of productive assets. Out of this, transportation infrastructure represents 12 percent--or one out of every eight dollars--of the nation's productive assets.

The value of our transportation infrastructure greatly exceeds the value of other tangible assets that are often more closely associated with the competitiveness and productivity of our economy. For example, the value of transportation infrastructure is ten times the value of all of the computers and peripherals in use in the nonresidential, nonmilitary sectors of the economy. It is worth double the value of all of the industrial buildings in the country, double the value of all of the office buildings. There is a good reason why we have invested so much in transportation infrastructure. For more than a decade, the work of economists like David Aschauer, Alicia Munnel and Ishaq Nadiri has made us aware of the high rate of return to government investment in transportation infrastructure.

Transportation infrastructure is also a good part of what makes the other resources so productive. I would like to submit for the record a study I prepared last year titled "The Road to Prosperity, The Importance of the Federal Highway Program to the Economic Prosperity of Individual States." This study used data from the 1993 Commodity Flow Survey to show that 75 percent of the products for the average state are shipped to their destination by truck. And for the average state, more than 40 percent of the state's products are shipped by truck to other states, demonstrating the importance of having a national highway system.

The Commerce Department's data on tangible wealth also include data on the rate of depreciation for each asset class. Among all the classes of productive assets, investment in transportation infrastructure has the slowest rate of depreciation and thus the longest estimated useful life. Highways, streets and other transportation facilities on average are expected to last over 67 years before having to be completely torn up and rebuilt. The only asset class that has a longer expected life is residential structures, such as single-family homes and apartments.

Transportation infrastructure also generates its own income stream. The federal government's transportation investment programs are almost entirely financed through user fees that are deposited into dedicated trust funds. The Highway Trust Fund is the largest and most important. It finances the federal-aid highway program and the federal government's investment in mass transit. It is funded entirely by user fees in the form of the federal motor fuels tax and weight taxes on heavy trucks. There are also trust funds for airports, waterways and harbors, and each is funded through fees levied on users. Revenues into the Highway Trust Fund are expected to grow from $25 billion in FY 1997 to $34 billion in FY 2002 and to $37 billion by 2007. Investment in federal transportation programs does not impose a cost on anyone other than those who use them.

The current budget treatment lumps transportation investment financed from the Highway Trust Fund and other transportation trust funds under the same domestic discretionary cap that applies to the government's day-to-day spending. This creates an incentive for Congress to skimp on transportation investment and build up balances in the trust funds to disguise the size of the overall federal deficit. There is currently a $24 billion unspent balance in the Highway Trust Fund and, under current budget policies, this will growth to $70 billion or more by 2002.

Within the next week or so, the Department of Transportation will release its biennial report on the condition and performance of our nation's transportation system, commonly known as the "needs report." The last report, issued in late 1995, showed that the nation was investing $15 billion less each year than the amount necessary just to maintain existing conditions. The new report is expected to show little improvement, if any.

ARTBA has argued for years that a change is required in the way transportation investment is treated in the budget.

Establishment of a capital budget that includes transportation infrastructure programs may be the best approach. I would like to quote from the association's basic policy statement:

"ARTBA urges the federal government to adopt a capital budget that differentiates between federal capital investments in public infrastructure and the general day-to-day operating expenses of government.

"This accounting procedure is used by most state governments and many other nations.

"Such an action would help ensure that highway user revenue in not impounded and that artificial spending ceilings are not placed on the user-supported "pay-as-you-go" federal highway program."

A capital budget would be especially helpful if it addresses the first concern I raised, the notion that the federal government should not borrow. Changing the budget rules for transportation investment--allowing long-lived transportation investments to be bond-financed through a capital budget, and then paid off through gasoline taxes and other user fees as the facilities generate benefits for future generations--would give the federal government a means to make far better public policy decisions than the current budget rules allow. It would also have a significant impact on the budget bottom line, since the only outlays that would appear in the budget would be the annual amortization costs. This could be especially helpful as the federal government wrestles with rising Social Security outlays in the coming decades.

We think you should be aware that ARTBA has also been pursuing other budget options to improve federal policy on transportation investment. Three years ago, we formed the Alliance for Truth in Transportation Budgeting along with more than 100 other organizations and trade associations to support the proposal to take the transportation trust funds entirely out of the unified budget. This would eliminate the incentive for Congress to use unspent balances in the trust funds to mask deficit-financing of other government expenditures. This proposal passed the House of Representatives overwhelmingly during the last Congress and is included in BESTEA, the House version of the Intermodal Surface Transportation Efficiency Act (ISTEA) reauthorization legislation.

Another proposal, introduced last year by Senators Bond and Chafee, would establish a separate "revenue constrained fund" budget category for the Highway Trust Fund and take it out from under the discretionary spending caps. This would also reduce the incentive for Congress to hold down transportation investment to balance the budget.

On behalf of the American Road and Transportation Builders Association, I want to thank you for this opportunity to be here this afternoon. We support the work of this commission and look forward to your report. I will try to answer any questions you may have.

President's Commission to Study Capital Budgeting