States drive infrastructure but are largely absent from Clinton’s plan

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December 7, 2015

Hillary Clinton has unveiled a five-year, $275 billion infrastructure plan. The plan, released on November 30, would increase spending for aviation, energy, broadband, and water systems as well as roads and mass transit (like the just-passed $305 billion surface transportation bill). The plan incorporates many stalwart Democratic proposals (a National Infrastructure Bank and a revived Build America Bonds (BABs) program) as well as a few traditionally Republican ideas (public-private partnerships (P3s) and expedited federal permitting) that have made their way into Obama administration initiatives.

However, like many of its forebears on both sides of the aisle, Clinton’s plan glosses over the tremendous role of the states in funding and delivering infrastructure.

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In 2014, state and local governments spent $320 billion on transportation and water infrastructure, not including federal funds. That was three-quarters of total investments; for some categories of infrastructure, the state and local share was even higher.

Beyond spending, state and local government land-use decisions, environmental reviews, labor laws, procurement, and other regulations shape what infrastructure gets built, how, and where. The sum total of these often overlapping and poorly coordinated federal, state, and local requirements means that it can take more than a decade for projects to get approved. Fragmented decisionmaking can also lead to poor investment decisions, as when states and localities ignore regional and national benefits.

Clinton’s plan would partly address the fragmentation issue by creating a National Infrastructure Bank to encourage multi-jurisdictional and multi-modal projects. The bank would use $25 billion in federal funding to provide up to $225 billion in loans, loan guarantees, and other credit enhancements. Local projects would repay the loans through taxes, tolls, or other dedicated revenue streams.

There may be advantages to consolidating projects and reviewing them all according to the same national criteria through “a bipartisan board of highly qualified directors.” But who’s to say that these philosopher kings would do a better job selecting projects than a decentralized system of states and localities? An alternative may be to rejigger existing federal funding formulas to require the use of cost-benefit criteria and reward regional and national benefits as well as experimentation with alternative financing models, like P3s.

A revived BABs program is also a nonstarter for states. While taxable bonds enacted in the 2009 recovery act helped unfreeze the municipal bond market by attracting pension funds and foreigners (who do not benefit from the traditional muni bond tax exemption), interest in BABs dried up after federal subsidies to issuers were cut by the sequester—turning the federal promise into a risky proposition. States and localities also fear that BABs would be the first step toward cutting back or eliminating the federal tax exemption for municipal bonds.

Unlike candidates who would largely eliminate the federal role in transportation, Clinton has put forward a forceful argument for a strong national infrastructure, drawing on examples such as the Hoover Dam and Interstate Highway system that helped spur economic productivity and growth. But there is still more room for enlisting the states.

Clinton’s proposal to introduce more “merit-based competitive grants” represents one step toward this goal. A commitment to revisiting outdated federal funding formulas and providing more rewards for local experimentation, such as trials of vehicle miles traveled fees, would do even more and perhaps combine the best of centralized and decentralized approaches to infrastructure.

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