Infrastructure Banks and Debt Finance to Support Surface Transportation Investment

Summary

Investment in surface transportation infrastructure is funded mainly with current receipts from taxes, tolls, and fares, but it is financed by public-sector borrowing and, in some cases, private borrowing and private equity investment. This report discusses current federal programs that support the use of debt finance and private investment to build and rebuild highways and public transportation. It also considers legislative options intended to encourage greater infrastructure financing in the future.

The federal government’s largest source of support for surface transportation infrastructure is the highway trust fund (HTF), which is funded principally by taxes on gasoline and diesel fuel. Funds from the HTF are distributed to state governments and local transit agencies for projects meeting federal standards. State governments, local governments, and transit agencies must also contribute their own resources because grants from the HTF do not meet states’ entire surface transportation capital needs. The federal government supports additional infrastructure spending by providing a tax exclusion for owners of municipal bonds, or “munis,” issued by state and local governments. The federal government also supports project finance through loan programs, such as the Transportation Infrastructure Finance and Innovation Act (TIFIA) program, which can help leverage private investment via public-private partnerships (P3s), and through federally authorized state infrastructure banks (SIBs).

All of these financing mechanisms impact the federal budget, although none are as costly as federal grant funding. With less federal support, financing places a greater burden on state and local governments to identify revenue sources to repay loans or to provide a return to private investors. In many cases, nonfederal revenue to finance a project is provided by a highway or bridge toll, but it could be a pledge of future sales tax or real estate tax revenue.

There are many legislative options that Congress might consider in modifying the federal role in surface transportation financing. This report considers five:

Creation of a new type of tax credit bond, such as the American Fast Forward Bonds.

More funding for the TIFIA program, which already has received enough applications to almost exhaust the budget authority made available for FY2013 and FY2014.

Greater encouragement for P3s, including creation of a federal office that could provide technical advice and consulting services and help develop the P3 market.

Creation of a national infrastructure bank (I-bank), an independent federal agency with financing and project expertise that would provide low-cost long-term loans on flexible terms.

Enhancement of SIBs that already exist in many states, possibly with dedicated federal funding.