The Trump administration has a historic opportunity to fix America's aging infrastructure. This is not a rhetorical statement, but rather a statement of economic imperative that the administration must seize the moment given the uniquely favorable environment.
Not only is there broad bipartisan support in Congress for higher federal spending on infrastructure, but there are very favorable underlying macroeconomic conditions--low funding costs, strong demand from institutional investors for infrastructure assets, and potentially large productivity gains. There are two official plans in broad outline on the table: one by the Trump administration and the other by Senate Democrats. Both plans call for $1 trillion in new investment in public infrastructure over a decade, with a key difference in the funding. The Senate plan would fund the additional investment with direct federal spending. The Trump proposal envisions a combination of federal and private funding wherein the federal government contributes $137 billion in tax credits for projects that generate their own revenue streams.
In the historical context of U.S. infrastructure legislation, the administration's current proposal is politically attractive but falls short of reforming the national infrastructure financing system, with its complex fiscal federalism, fragmented markets across states, and a tradition of using federal tax policy to subsidize infrastructure spending by state and localities. And here is the nub of the problem. In negotiating with the Congress, success is more likely with a strong, comprehensive reform package with projected positive spillovers for the tax reform agenda, growth, and job creation than with a transactional approach. Engagement with Congress should be defined not so much in terms of fiscal space but in terms of the nation's infrastructure investment and financing needs.
The United States stands out in the world as a country with a highly decentralized infrastructure investment and financing structure. Public spending on transport, water, and social infrastructure is largely the domain of state and local governments that are close to end users and well-equipped to weigh the relevant costs and benefits of different investment projects. Of the total $416 billion in public spending on transport, water, and social infrastructure in 2014, for instance, state and local governments accounted for $320 billion, and the federal government...