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Let's pay for infrastructure in ways that are fair to future generations

Let's pay for infrastructure in ways that are fair to future generations
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Since President BidenJoe BidenBaltimore police chief calls for more 'boots on the ground' to handle crime wave Biden to deliver remarks at Sen. John Warner's funeral Garland dismisses broad review of politicization of DOJ under Trump MORE announced his $2.7 trillion American Jobs Plan and American Families Plan, news headlines have debated the meaning of infrastructure. Many conservatives maintain that infrastructure means the basic physical systems of a government, such as roads, bridges, dams and airports. Others, mainly progressives, contend we need a definition that also captures governmental programs, such as those for job training, paid family leave, and child and elder care. The presumption is that infrastructure projects are more politically popular, and thus more likely to get funded, than social programs. But debates about the meaning of infrastructure miss the real challenge: who pays for these enhancements — taxpayers today, or future generations.  

If Biden’s plans are adopted, projects that are mainly ongoing should be funded with current revenues — not by adding to the federal deficit. If we are to impose continuing costs upon the government, then, at the very least, we should ensure an enduring way to cover them. Otherwise, the fiscal shortfalls will be persistent and, owing to the related interest costs, will continually increase.    

Definitions of infrastructure don’t really matter. The question that must be addressed for the two bills is what types of projects and activities should be funded with debt and what types with current taxes or other revenues. For both individuals and governments, a fiscally sound policy is that debt should fund only one-time projects and activities that provide long-term benefits. Projects providing only current benefits or expected to be ongoing should be paid for out of current revenues.   

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State and local governments adhere to a concept known as “interperiod,” or “intergenerational,” equity. Taxpayers each year should pay for the services that they enjoy. So, it’s appropriate for a government to issue bonds for traditional infrastructure projects, such as roads and bridges, but not for operating costs, such as the salaries of government employees or routine maintenance of roads and bridges. In the future, taxpayers will pay off those bonds while they enjoy the benefits of the long-lasting projects. Operating costs, however, mainly benefit current taxpayers and should be paid for by them. That’s why most state and local governments prepare two types of budgets: “operating” and “capital.” Operating budgets must be balanced without resorting to debt. Capital budgets, by contrast, don’t need to be balanced, so their proposed long-term projects can be funded with bonds or other forms of long-term debt.   

The federal government, however, doesn’t prepare separate operating and capital budgets. Expenditures for operating costs are appropriated similarly to those for long-term projects. But the same basic concept of interperiod equity should be equally applicable to the federal government. Barring exceptional circumstances, such as war or recession, today’s taxpayers should pay for the goods and services they enjoy. The federal government can run deficits — which, of course, have to be covered with borrowings — but only for one-time programs or projects that mainly offer benefits in the future.   

Programs that improve childhood nutrition or provide free college tuition may help future Americans. Nevertheless, the costs of these programs are ongoing while those, for example, of improving airports and ports (other than for servicing their debt) are incurred only once. That’s why it is important to distinguish between building a school and paying its teachers. It’s appropriate to borrow for one but not the other. 

Biden’s plan fails to draw the distinction. Both plans will increase the current federal deficit but will be paid for by tax increases and reforms over the next 10 to 15 years. We should, therefore, link the plan’s funding to the type of project or program. Thus, the federal government should issue long-term bonds to pay for the non-recurring projects that will benefit mainly the future and raise taxes for the ongoing costs of the recurring programs. 

Regardless of how we define infrastructure, if we reap the benefits of Biden’s plan, we are obligated to pay for them ourselves, rather than to pass on the costs to the taxpayers of the future — our children and grandchildren. 

Michael Granof is the emeritus EY Distinguished Centennial Professor of Accounting at the McCombs School of Business at The University of Texas at Austin. He recently completed a 10-year term as a member of the Federal Accounting Standards Advisory Board and another as a member of the Governmental Accounting Standards Board.