Budgeting for Capital Investment

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

Abstract

The unified budget of the U. S. government is, in most respects, a cash budget. It is somewhat biased against public investment, because the benefits of such investments accrue over a period of time whereas the cash outlay is immediate. This testimony looks at options for directing more funds to highways, mass transit, and other public investments. It examines higher fuel taxes, tolls and congestion fees; capital budgeting; infrastructure banks; a capital revolving fund; public-private partnerships; and approaches to improving the efficiency of current grants and subsidies. It concludes that tolls and congestion fees are very promising as are public-private partnerships. A capital revolving fund would be useful for agencies that only invest occasionally. A capital budget and infrastructure banks are less desirable.

The text below is an excerpt from the complete document.
Read the full written testimony in PDF format.

Testimony

Mr. Chairman, Mr. Mica, and other members of the committee. Thank you for the opportunity to testify.

It is difficult to properly handle investments in public budgets. The rewards are spread out over an extended period of time while the cost or the pain of investing is immediate. That makes it difficult to finance public investments. There are two different situations.

The first occurs when there is a fairly steady stream of investment financed by a dedicated tax. The highway program is a perfect example. It is hampered by strong political resistance to raising the dedicated fuel tax, especially in instances in which the pre-tax price of gasoline has been rising rapidly. The tax has not been raised since 1993, although the last increase, which was originally dedicated to reducing the budget deficit and not to highway spending, has now been redirected into the highway trust fund. It is generally agreed that the current rate of tax of 18.4 percent per gallon is not sufficient to finance conservatively estimated investment needs or to cover the spending levels authorized in 2005.

The second problem occurs when an agency generally has a fairly stable operating budget, but occasionally has to make a sizeable investment. For example, the National Institute of Standards and Technology (NIST) may need an expensive new laboratory. Our budget process is not well designed to handle such lumpy expenditures. The budget resolution makes a spending allocation to the Appropriations Committee which, in turn, allocates spending allowances to its various subcommittees. It is difficult for a particular subcommittee to get a sudden increase in its allocation, because the increase is likely to come out of the hide of other subcommittees. Similarly, when a subcommittee decides its spending allocation among programs, any sudden increase for NIST must be found in the budget of other programs within the subcommittee’s jurisdiction.

The rest of this testimony reviews options for dealing with the two problems. Some are more relevant to one problem than the other.

(End of excerpt. The entire testimony is available in PDF format.)

The views expressed are those of the author and should not be attributed to the Urban Institute, its trustees, or its funders.

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

Usage, posting and reprint of materials on the UI web site:

Most publications may be downloaded free of charge from the web site in PDF format. This information may be used and copies made for research, academic, policy or other non-commercial purposes. Proper attribution is required.

Copyright of the written materials contained within the Urban Institute website is owned or controlled by the Urban Institute. Posting UI research papers on other websites is permitted subject to prior approval from the Urban Institute—contact paffairs@urban.org.

If you are unable to access or print the PDF document please contact us or call the Publications Office at (202) 261-5687.