Congressional Budget Office
Director’s Blog

Last week CBO’s Deputy Director Robert Sunshine testified about the financing of the federal government’s aviation programs (basically operations of the Federal Aviation Administration) before the House Ways and Means Committee. Reauthorization of the aviation programs raises a number of significant policy questions:

• How much do we need to spend on those activities, especially to ensure that we have a safe, efficient, and effective air traffic control system?
• How much of those costs should be borne directly by users of the system, and how much by the general public?
• Of those costs borne by users, how should they be allocated among different types of users—or among users at differing times or differing places?

How much to spend. Before the current economic downturn, congestion and delays in the U.S. had risen to record levels.  According to the FAA, in 2007 and 2008 about ¼ of all commercial flights in this country arrived at their destination at least 15 minutes after the scheduled time.  In 2007, about 680 million passengers boarded nearly 10 million domestic revenue flights.  That’s 26 percent more flights than in the year 2000, for about 14 percent more passengers.  Both of those figures have declined somewhat from their peak, but demand for travel is likely to increase again when the economy starts to recover, hopefully later this year. 

The system is clearly under stress, and implementing the next generation air traffic control system will require a significant investment of resources by both the government and the private sector over many years.  CBO has not done any analysis regarding the potential costs of that system, but it seems likely that at least several hundred million dollars a year will be needed for that purpose.

Who should bear those costs?  Most of the benefits of federal aviation programs accrue to users of the aviation system—though the general public also benefits from the use of the system by the military and other government agencies, and from the flow of commerce that the system facilitates.  Historically, a combination of general taxpayers and users of the system have paid for its costs—the users through a set of aviation taxes that flow through the Airport and Airway Trust Fund.  Economists generally believe that a good way to foster efficient use of any system is to charge users for the cost they impose on that system.  In recent years, receipts to the trust fund have covered more than 3/4 of the cost of the government’s aviation programs. 

How should costs be allocated?  It is important to determine not only how much users should pay, but also how to apportion those costs among the various users.  Almost 70% of the trust fund revenues come from the passenger taxes.  Another 20% comes from the international arrival and departure tax.  Fuel and cargo taxes account for the rest.  It’s not clear, however, that this system of taxes encourages efficient use of the system. 

Most of the taxes are linked closely to the number of passengers and the fares they pay—not to the number of aircraft operations.  But the cost of the air traffic control system and the amount of congestion in the system is driven largely by the number, timing, and location of aircraft operations.  For example, over the past several years, the number of aircraft departures has grown much more rapidly than the number of passengers—because air carriers have tended to substitute higher frequency service with smaller aircraft for less frequent service with larger aircraft. 

Finding a way to allocate costs that accurately reflects the impact that various kinds of users have on the aviation system is a real analytical and political challenge, but a better alignment of taxes with costs could help reduce congestion and delays.

As I discussed yesterday, I participated in two panels at the Milken Institute’s Global Conference in Los Angeles on Monday.  The second panel was about “Infrastructure Projects as Economic Stimulus.” You can view the slides and webcast.

My main observations at this second panel were:

• Some of the infrastructure spending in the stimulus package would pass a cost-benefit test even apart from the recession.  For example, CBO’s analysis of infrastructure investment last year concluded that “additional spending of up to tens of billions of dollars each year on transportation infrastructure projects” could be justified as having benefits that exceed the costs.  We warned that economic returns on specific projects vary widely, so specific investments should be selected carefully.  In addition, we explained that some of the additional spending could be avoided by creating incentives to use existing infrastructure more efficiently—such as congestion pricing, which we analyzed more fully earlier this year.  Still, additional targeted infrastructure investment could be appropriate even in normal times. Moreover, these are not normal times, and it may be appropriate to undertake more immediate infrastructure spending than otherwise in order to put idle resources to use.

• CBO projected that infrastructure spending approved in the stimulus legislation would generate outlays—and thus economic stimulus—only gradually.  For example, we are looking for increases in federal highway spending to be 10 percent of the amount appropriated in the rest of fiscal year 2009, 25 percent in FY 2010, 20 percent in FY 2011, and a declining share thereafter.  Although the sluggishness of this projected spend-out surprised some observers, we explained that the need to draft plans, solicit bids, enter into contracts, and then to undertake the work (during appropriate weather) had led previous increases in budgetary resources for highways to be followed by increases in                                      

            Budgetary Resources and Outlays for Highways 

Source: Congressional Budget Office

outlays with a measurable lag. Lags in other areas of infrastructure spending can be even longer, especially where programs are new or receive significant boosts in funding relative to recent years—descriptions that fit provisions in the stimulus package focused on weatherization and broadband expansion among others.  CBO projects that total infrastructure outlays resulting from the stimulus package will peak in 2010 and 2011 but will remain significant for a number of years.  

Infrastructure Outlays as a Result of the American Recovery and Reinvestment Act



Source: Congressional Budget Office

• Very early data on the use of funds approved in the stimulus package are consistent with this perspective.  For example, the Department of Transportation has reported that $7 billion has been obligated for highway spending but only a few million federal dollars have been spent.

This morning I’m testifying before the Senate Finance Committee on infrastructure investment. My statement can be found here, and the webcast is posted here.

The testimony occurs at a time when burgeoning congestion on the nation’s transportation networks and concerns that the nation is underinvesting in its physical infrastructure have focused attention on the federal government’s role in sustaining that infrastructure.

The testimony defines “infrastructure” as including transportation, utilities, and some other public facilities. The nation currently invests more than $400 billion per year in infrastructure defined this way, and about $60 billion of that amount is funded by the federal government each year, primarily for highways and other transportation networks.

The testimony makes the following key points:

• Estimates from the Federal Highway Administration (FHWA) and other sources indicate that additional spending of up to tens of billions of dollars each year on transportation infrastructure projects could be justified. Some of that spending would simply maintain the current performance of existing infrastructure; other projects would improve performance to the extent that the economic benefits
  exceeded the costs (although some projects would have net benefits that were smaller than those that could be obtained from spending on items besides infrastructure).
• Although the rationale for some additional spending is probably strong, the economic returns on specific projects vary widely. Accordingly, even if the Congress were to increase spending, it would be important to identify which projects provided the largest potential benefit from limited budgetary resources.
• Some of the demand for additional spending on infrastructure could be met by providing incentives to use existing infrastructure more efficiently and by devoting current budgetary resources to their highest valued uses. For example, the Department of Transportation has reported that the demand for new spending on highways could be reduced by as much as $20 billion annually if congestion pricing were implemented to encourage efficient use of existing infrastructure.
• A special-purpose entity, such as a federally chartered infrastructure bank, could provide funding for infrastructure outside of the annual appropriation process but would not be a source of “free money”: Any reduction in the federal shares of project costs (obtained by reducing grant sizes or by shifting from grants to loans or loan guarantees with smaller subsidy costs) would require greater shares to be borne by project users, state or local taxpayers, or both.

In addition, attentive readers will note that in what I believe to be a first for CBO, the testimony includes a few lines of poetry (see footnote 47). These lines appear in response to a comment from David Brooks of the New York Times at a public forum that CBO reports don’t have enough “romance” in them; when I asked him what he possibly meant by that comment, he suggested that CBO documents could include some poetry. Footnote 47 was the best we could do for now.

I am testifying this morning before a joint hearing of the House Committee on the Budget and the Committee on Transportation and Infrastructure. To view the hearing click here.

The testimony defines “infrastructure” as including transportation, utilities, and some other public facilities. The United States currently invests more than $400 billion per year in infrastructure defined this way, and about $60 billion of that amount—mostly for highways and other transportation networks—is financed by the federal government each year.

The testimony makes the following key points, among others:

• Growing delays in air travel and surface transportation, bottlenecks in transmitting electricity, and inadequate school facilities all suggest that some targeted additional infrastructure spending could be economically justifiable.
• Federal spending on infrastructure is dominated by transportation. Although capital spending on transportation infrastructure already exceeds $100 billion annually, studies from the Federal Highway Administration, the Federal Aviation Administration, and elsewhere suggest that it would cost roughly $20 billion more per year to keep transportation services at current levels. Those studies also suggest that substantially more than $20 billion in additional capital spending per year on transportation — and perhaps as much as $80 billion per year or so — would be justified on economic grounds if well targeted (because such spending would generate benefits whose value would exceed its cost).
• In some other types of infrastructure outside transportation, such as systems for wasterwater and drinking water, additional spending is needed to maintain current services or allow modest improvements.
• Although the economic rationale for some additional infrastructure spending is strong, the economic returns on specific projects vary widely. Carefully ranking and funding projects to implement those with the highest net benefits would yield a disproportionate share of the total possible benefits at a fraction of the total spending that is potentially economically justifiable. A related point is that the aggregate estimates do not justify increases of those amounts in infrastructure spending unless such spending is carefully targeted to economically efficient projects. Otherwise, the spending would not generate the same benefits as the estimates suggest—and indeed it could produce costs that exceed the benefits.
• The estimates of infrastructure spending that are needed to maintain current performance or that could generate larger economic benefits than costs, furthermore, can be substantially affected by how existing infrastructure is priced.
  • The estimates for highways, for example, assume no expansion in the use of congestion pricing—that is, tolls that are higher during peak times and lower during off-peak times.
  • The Federal Highway Administration, though, estimates that widespread implementation of congestion pricing would reduce the investment needed to maintain the highway system by $20 billion annually.
• Studies suggesting the need for or benefits of additional infrastructure spending do not provide policy guidance about how such spending should be financed. The “benefits principle” suggests that federal taxpayers are often the least efficient source of financial support for an infrastructure investment — after the direct beneficiaries of the investment and local or state taxpayers. Even when federal support for a given type of infrastructure is justified in principle, implementation problems might make it undesirable in practice. The GAO, for example, found that states offset roughly half of the increases in federal highway grants between 1982 and 2002 by reducing their own spending, and that the rate of substitution increased during the 1980s.
• Although many advocates of additional federal infrastructure spending seem interested in complex and sometimes opaque structures through which to channel such federal support, the fundamental question is how much support the federal government will provide and the efficiency with which such support is provided. On the latter point, the federal government could substantially increase the efficiency with which it subsidizes debt financing of state and local spending.
  • For example, state and local tax-exempt bonds will cost the federal government an average of $31.2 billion per year between 2007 and 2011. Yet in 2006 and 2007, observed yield spreads suggest that any bonds purchased by taxpayers in a marginal tax bracket above 21 percent cost the federal government more in forgone tax revenues than they save state and local governments in reduced interest cost.
  • A more efficient approach could involve tax-credit bonds, which allow bond purchasers to receive credits against federal income tax liability (rather than excluding interest payments from federal income taxation).
  • To illustrate, assume that the inefficiency associated with current tax-exempt financing is between 10 percent and 20 percent, so that 80 percent to 90 percent of the federal tax expenditures actually translates into lower borrowing costs for states and localities. Then, if the outstanding stock of tax-exempt debt during the 2007–2011 period instead took the form of tax-credit bonds designed to deliver the same amount of federal subsidy, the federal government would save between $3 billion and $6 billion per year.
• The federal government can also encourage the use of “asset management” to maximize the benefit from existing and future infrastructure. Asset management relies on monitoring the condition of equipment and the performance of systems and analyzing the discounted costs of different investment and maintenance strategies.
  • As one example, the federal government reduce total investment and operating costs by changing the way it acquires, manages, and disposes of property — a topic explored in a box in the testimony.
• The testimony also discusses capital budgeting, a topic that is the subject of a separate report being published by CBO today. A short summary is available here.