I testified
to the congressional Joint Economic Committee today regarding the nation’s infrastructure challenges. Former Governor Ed Rendell also testified, and the hearing was chaired by Senator Amy Klobuchar.
The way ahead for infrastructure is to privatize as much of it as we can. Let’s give America’s entrepreneurs a crack at financing, owning, and managing our airports, seaports, and other facilities.
Infrastructure privatization has swept the world, but there are numerous hurdles to such reforms in this country. Here are some of the issues I raised to the committee:
- Tax exemption on municipal bond interest. When state and local governments borrow funds to build infrastructure, the interest on the debt is tax-free under the federal income tax. That allows governments to finance infrastructure at a lower cost than private businesses, which stacks the deck against the private provision of infrastructure. Policymakers should consider phasing-out the tax exemption on state and local bond interest, perhaps in exchange for reducing overall tax rates on capital income.
- Income and Property Taxation. Government facilities don’t pay income taxes. While state-owned airports are tax-exempt, for example, a for-profit airport would have its net earnings taxed at both the state and federal levels. Similarly, government-owned facilities are exempt from property taxes almost everywhere in the United States, while for-profit businesses often bear a heavy burden of property taxes on their land, structures, and machinery and equipment. Note that by privatizing infrastructure and thus subjecting it to taxation, governments would be broadening the tax base. They could use the added revenues from base broadening to reduce overall tax rates, which would spur greater investment of all types in the economy.
- Crowding Out. The existence of government infrastructure—which is often provided at artificially low prices to the public—deters potential private investments. Private highways, for example, face an uneven playing field because drivers on a private highway would have to pay the private tolls plus the gasoline taxes that fund the government’s “free” highways.
- Federal subsidies. The crowding out problem is exacerbated when federal subsidies tilt state and local decisionmakers in favor of government provision. Potential private airports, for example, are not eligible for most federal airport subsidies. Consider that before the 1960s, most urban bus and rail services in America were privately owned and operated. But that ended with the passage of the Urban Mass Transportation Act of 1964. The Act provided subsidies only to government-owned bus and rail systems, not private systems. That prompted state and local governments across the country to take over private systems, swiftly ending more than a century of private transit investment in America’s cities.