Infrastructure “Payfors” that Won’t Pay For Much

Blog Post
Thursday, July 01, 2021

Earlier this year, The Concord Coalition mused whether fiscal watchdogs should fear bipartisanship. Bipartisanship can mean everybody gets what they want – no trade-offs, no sacrifices, no tough choices – just tax cuts and spending increases for everyone, leaving future generations to pay the price of rising debt.  

This week, President Biden and a group of ten Senators are congratulating themselves for negotiating a bold $1.2 trillion bipartisan infrastructure package that would pump $579 billion in new money (above the current baseline) into the federal budget for roads, bridges, mass transit, rail, airports, waterways, and broadband over the next 10 years. Sadly, past prognostications about bipartisanship and fiscal irresponsibility are proving fairly accurate.     

The Concord Coalition applauds the realization that new spending must be paid for, but in negotiating the list of offsets, lawmakers cobbled together a patchwork of provisions that may satisfy the political definition of an offset but will likely fall short of the Congressional Budget Act definition. Unfortunately, this outcome was preordained. When Republicans refused to increase income taxes on corporations and high net worth individuals and Democrats refused to raise taxes on households earning less than $400,000, the universe of remaining revenue options was emptier than Old Mother Hubbard’s cupboard – and spending reductions elsewhere were never on the table. The predictable result was a set of dubious payfors that won’t really pay for much. 

An official score from the nonpartisan Congressional Budget Office is not yet available, but you don’t need to be a budget expert to spot the fiscal sleights of hand:

The expectation that infrastructure investment will generate additional economic growth (aka dynamic scoring; rumored savings: $60 billion over 10 years). The consensus among economists is that the domestic economy will continue to expand as it emerges from the COVID recession. This “offset” assumes, however, that the economy will grow even faster than expected, attributable to the multiplier effect of higher infrastructure spending. Economic theory says this faster growth should lead to more jobs, higher wages, and in the end, greater revenue collections that can help offset the initial expenditure.

This makes sense in theory, but in practice the second-order budgetary effects of fiscal stimulus are very hard to predict. How, when, and where infrastructure money is spent and when the economic benefits are realized are critical variables that scorekeepers have no way of knowing. Dynamic scoring is an evolving but immature science at best, and a complete guess at worst. 

Extend the Budget Control Act’s (BCA) mandatory sequester (rumored savings: $40 billion in the 10th year). When the BCA established discretionary spending caps in 2011, it also directed a special bipartisan Congressional committee to find an additional $1.2 trillion in savings. When that committee failed, the BCA imposed stricter discretionary controls and a decade-long sequester of certain mandatory spending. Although the original mandatory sequester was scheduled to end after FY 2021, it has been extended several times as an offset for other legislation. Under current law, the BCA mandatory sequester will not expire until FY 2030 and the bipartisan infrastructure deal would extend it an additional year, to FY 2031. 

The problem with this offset is two-fold. First, it won’t happen for another decade, giving lawmakers plenty of time to undo the offset in a future Congress. Second, lawmakers have reversed this offset once before. The March 2021 COVID rescue package cancelled the FY 2021 installment and lawmakers will probably repeat this again in FY 2022. Why? The mandatory sequester reduces payments to Medicare providers like hospitals and doctors which have very powerful advocacy groups in Washington, D.C.

Enhance unemployment insurance program integrity (rumored savings: $70-$80 billion over 10 years). The global health pandemic and the government’s fiscal response revealed major shortcomings in the joint federal-state unemployment insurance (UI) program. Outdated computer programs, poor fraud detection, and uniquely robust benefits led to widespread abuse. The Department of Labor inspector general’s office recently noted that the amount of UI benefits paid out improperly through fraud or errors  has typically exceeded 10% in recent years.  This suggests that improper payments of pandemic-related unemployment programs could total more than $80 billion.

Media reports suggest that the bipartisan infrastructure framework expects to recoup $70-$80 billion over the next decade from enhanced fraud and improper payment detection in the UI program. Clearly there is room for improvement, but the Department of Labor recently issued guidance to the states granting greater flexibility to waive the collection of overpayments. This raises questions about the Biden administration’s commitment to the projected savings. 

Reduce the IRS tax gap (rumored savings: $100 billion over 10 years). Nearly all IRS operations are funded through the annual Congressional appropriations process. Since 2010, the amount of IRS funding and staff allocated to enforcement activities has fallen by one-third, while at the same time, the complexity of the tax code and increasing sophistication of tax planning schemes have raised the cost of collecting taxes owed. As a result, the tax gap – the difference between what taxpayers owe each year and what the IRS actually collects – is very large and growing. 

Although official details remain scarce, media reports suggest the bipartisan infrastructure plan would increase the IRS budget by $40 billion – a one-third increase – over the next 10 years and generate $100 billion in net new revenue. A separate estimate by the nonpartisan Congressional Budget Office, however, suggests $100 billion is a gross estimate and that the net impact would reduce annual budget deficits by only $63 billion over the decade.

Plus, the IRS cannot turn on a dime. Even with an immediate infusion of budgetary resources, it takes years to hire and train IRS agents. Moreover, recent privacy lapses at the IRS that publicly exposed the tax returns of several high profile, wealthy Americans suggests Congress may be reluctant to invest further in the IRS until additional security measures and changes in agency culture can be implemented.  

Sell oil from the Strategic Petroleum Reserve (rumored savings: $6 billion over 10 years). The Federal government maintains an emergency stockpile of petroleum products to minimize the impact of supply disruptions and to comply with its obligations under the International Energy Program (a multilateral treaty). The bipartisan infrastructure agreement contemplates selling a portion of the stockpile and using the proceeds to help offset the new infrastructure spending. 

This offset isn’t new. The Bipartisan Budget Act of 2015, The Tax Cuts and Jobs Act of 2017, and The Consolidated Appropriations Act of 2018 all used SPR sales to offset provisions that would otherwise increase budget deficits. These bills direct the Department of Energy to sell more than 100 million barrels of petroleum products (total) between FY 2021 and FY 2027 – about 14 percent of the SPR’s authorized capacity. Proceeds from those sales can’t be booked twice so any revenue offsets attributable to SPR sales in the infrastructure bill will have to be new sales. 

But another tranche of sales raises new questions: What is the market for additional SPR sales given the current schedule? Will the legislation enumerate a revenue target to minimize price risk? Will the federal government have to replenish the SPR to meet its obligations under the IEP, minimizing the financial gain from any new sales?

Proceeds from 5G Spectrum Auctions (rumored savings: $65 billion over 10 years). Like the SPR sales, the federal government is already selling 5G spectrum. Does the bipartisan infrastructure framework assume proceeds from auctions already scheduled (psst: no double counting) or does it anticipate new rounds? Will there be sufficient private market demand for more spectrum after the scheduled auctions are complete?   

Offsets that generate zero savings or actually increase the deficit. Other named offsets, such as public-private partnerships and private activity bonds, incentivize private investment which is not new federal funding (and hence, not an offset). And some proposed “offsets” might actually increase the deficit - such as repurposing COVID funds that were never going to be spent and allowing states to sell or purchase unused toll credits. 

The cold hard truth for lawmakers is that the tree of low-hanging offset fruit has been picked clean. All that remains are small-ball fees and fines that are simply incapable of providing the revenue boost needed to offset a major investment like the bipartisan infrastructure bill. It’s time for politicians and voters alike to have an open and honest conversation about our national priorities – and the sacrifices we are willing to make to pay for them.