After months, if not years, of political wrangling, Infrastructure Week appears to finally be upon us. And at first glance, taxpayers might feel optimistic that there are attempts to cover the cost of yet more spending after the trillions of taxpayer dollars that have been spent over the last year. Unfortunately, upon closer inspection, it becomes clear that the vast majority of the “pay-fors” the White House identifies are gimmicks and phantom sources of funding.
“Reduce the tax gap”
While Internal Revenue Service (IRS) Commissioner Chuck Rettig’s announcement that the tax gap could “approach, or possibly even exceed” $1 trillion has spurred excitement among those hopeful of a massive new revenue source, the truth is far less compelling. As NTUF noted in a recent issue brief, the Commissioner’s estimate is probably about twice the actual size of the tax gap.
Consequently, attempts to close the tax gap would likely raise far less revenue than the White House thinks. The Biden administration has estimated it could raise $780 billion in additional revenue over the next decade by investing $80 billion in IRS enforcement, while Sen. Elizabeth Warren (D-MA) has proposed to raise $1.75 trillion by increasing enforcement funding by $315 billion.
Both these plans are wildly inaccurate. The Congressional Budget Office (CBO) estimates that increasing IRS enforcement funding by $20 billion would raise $61 billion over the next decade, but the rate of return begins to decrease significantly at higher enforcement funding levels.
Moreover, the IRS is not an agency well-prepared to receive an influx of new funding and immediately start raking in new unpaid tax bills. As recently as this May’s Tax Day, the IRS was working through a backlog of about 30 million tax returns, some of which dated back to the previous filing season. This is in part due to the fact that the agency lacks very basic resources like functional printers and copiers.
“Unemployment insurance program integrity”
While it’s important to ensure that taxpayer funds go where they are meant to, it’s rarely a good idea to finance new programs by attempting to curtail “waste, fraud, and abuse” in existing programs. In that sense, plans to fund an infrastructure package through improving program integrity of the federal unemployment insurance (UI) subsidy are certain to fall flat.
Earlier in June, an Axios report claimed that as much as half of the federal UI subsidy went to fraudulent claims, equaling around $400 billion. Yet the source for this claim was a firm that specializes in preventing this kind of fraud — hardly an unbiased source. Congress and the administration should thoroughly investigate these claims, but they are not sufficiently reliable to use as a “pay-for” that offsets new spending.
Particularly considering that the federal UI insurance subsidy is not likely to run much longer, expecting any kind of significant influx of revenue from “improved program integrity” is likely misguided.
“Redirect unused UI relief funds”
This kind of “pay-for” might make sense on federal balance sheets, but taxpayers should immediately recognize it as a gimmick. Only in Washington do unused funds immediately become “free money” that can then be spent elsewhere as additional funds.
Imagine your car breaks down. You’re expecting to have to cough up at least a thousand dollars, but you get lucky — the problem wasn’t as bad as you thought, and you only have to spend $400. Do you then take that $600 you “saved” and go buy yourself a new TV? Probably not. You might have spent less than you expected at the mechanic, but it’s not like you couldn’t use that money more responsibly.
Incidentally, the national debt is over $28 trillion.
“Allow states to sell or purchase unused toll credits for infrastructure”
“Toll credits” are generated by states that use tolls to fund infrastructure projects that benefit federal intrastate projects. States can then use these to count towards the amount of infrastructure funding states need to contribute to receive matching federal funds.
Senators from New Jersey and New Hampshire, both states with unused toll credit balances, have introduced S. 1808, the Toll Credit Marketplace Act. This would allow states to sell unused toll credits to other states, which is what the White House proposes here. However, it’s not clear how the federal government would raise any additional revenue from this proposal, let alone the $30 billion the White House claims it would raise. It is unclear how the White House arrived at this figure. The text of the bill in Congress would establish the tolling marketplace as a pilot program “to identify the extent of the demand to purchase toll credits.” Any estimates of savings are highly preliminary and uncertain.
In fact, by potentially increasing the amount of states qualifying for federal matching funding through the purchase of toll credits rather than actual state contributions to infrastructure investment, this proposal could simultaneously increase federal expenditures and reduce total spending on infrastructure.
“Extend expiring customs user fees”
User fees are normally intended to cover the costs of the goods or services provided through a federal program. The customs user fees are assessed by U.S. Customs and Border Protection (CPB) on imported and exported goods. The fees had been in effect through September 30, 2029 until a law last year extended them through October 21, 2029. Extending customs fees far in advance is an oft-repeated gimmick to increase offsetting receipts years from now in order to “offset” current year spending hikes. Moreover, as CPB notes, these user fees “defray certain costs related to the provision of services that ensure that carriers, passengers, crew members and their personal effects comply with customs laws.” Extending the fees will offset the CPB’s costs but will have little to do with the infrastructure spending in this package.
“5G spectrum auction proceeds”
Back in February, the FCC was able to raise over $81 billion in its C-band auction. Legislation from Sens. Roger Wicker (R-MS) and Marsha Blackburn (R-TN), would have deposited “up to $65 billion” (the amount the White House says this line-item will pay for) into the Treasury. This is also the amount of funding that the White House plans to put towards broadband infrastructure.
To be clear, spectrum auctions on their own terms are a very good thing. They help to more efficiently use spectrum and can provide significant proceeds to help finance other priorities. And unlike many other items in this list, this actually would represent new offsetting receipts and not reshuffled funds.
But these are receipts the federal government was anticipating receiving anyway — not new funds raised as a result of the infrastructure package. Moreover, receipts from spectrum sales were, in the past, generally used to defray costs associated with the auctions, but a significant amount was used to reduce the deficit. Given the present budget situation and the amount of spending that Congress has engaged in to push through the pandemic, it’s a worrying sign that revenue sources traditionally used for deficit reduction are now going towards new spending.
“Extend mandatory sequester”
Sequestration of mandatory spending programs was originally created in the Budget Control Act of 2011 to require across-the-board cuts from FY 2013 through FY 2021. Subsequent budget deals extended the sequestration for additional years. For example, the Bipartisan Budget Act of 2019 extended mandatory sequestration for an additional pair of years through FY 2029 as an offset for higher spending caps in FY 2020 and 2021. This offset also showed up in the CARES Act which extended the mandatory sequester through FY 2030.
While sequestration, properly implemented, can be an effective tool to reduce spending, the reality is that Congress has routinely waived application of the sequester. The CARES Act as amended by two subsequent laws waived application of this sequestration to Medicare for twenty months through December 2021. Congress should not count on savings a decade from now as offsets against spending boosts that will primarily occur over the next five years. This is a poor way of budgeting.
“Strategic Petroleum Reserve sale”
The Strategic Petroleum Reserve (SPR) was established as an emergency stockpile but has often been used as a political tool to manipulate oil prices (or at least to appear to do so). This “pay for” was in the Bipartisan Budget Act of 2015, another package to increase spending caps up front with offsets down the road. Proceeds from the SPR drawdowns go to the SPR Petroleum Account which can be used to fund drawdown activities, transportation, and purchase of additional petroleum to replenish the stockpile. To the extent that the SPR is subsequently refilled, this petroleum “pay for” will evaporate.
“Macroeconomic impact of infrastructure investment”
Democrats heavily criticized Republicans for using dynamic scoring in their cost estimates of the 2017 Tax Cuts and Jobs Act. Yet that’s precisely what this bipartisan group proposes to do with this infrastructure bill.
NTUF has long argued that the CBO should incorporate dynamic scoring into its models. It is naked hypocrisy, though, that Democrats want dynamic scoring for a massive spending bill but not for tax reductions.
Dynamic scoring is a better fit for tax cuts than spending hikes, since the rate of return on public investment is inferior to the private investment it often crowds out. The CBO estimates that private investment has twice the rate of return than public investment does. Former CBO Director Douglas Holtz-Eakin warns that the government’s policies “should generate a rate of return to society that exceeds the market return in the private sector. The resources for any public investment are ultimately drawn from the private sector through taxes and fees, or in some cases by borrowing from the private sector. In each case, the dollars used to make these investments constitute foregone opportunities to make other market investments.”
Furthermore, there is much more research and reliable data about the dynamic effects of changes to tax policy than there is for targeted spending increases. This makes it easier to construct a dynamic tax model that can make accurate projections about the future.
Conclusion
It is disappointing that lawmakers are recycling so many budget gimmicks as offsets in this $1.2 trillion infrastructure plan. Lawmakers should identify real offsets throughout the bloated federal budget and end the practice of adding more to the federal debt.
It should also be concerning to taxpayers that, even including this smorgasbord of phantom and gimmicky offsets, the White House was only able to come up with $584 billion. It should tell taxpayers just how bad this bill is for future generations that, even credulously believing that all these offsets are genuine, the bill remains not even half-paid-for.