The Deficit Commission & P3s

12/02/2010 02:37 am ET | Updated May 25, 2011

The Deficit Commission makes a number of recommendations which, if adopted, would result in structural changes to how we finance infrastructure projects. We must think through the policy implications of these proposals.

Here are 3 of the most important provisions.

The first two are fairly unsurprising, most folks have strong views on them already. The third is not straight-forward. There is a very significant fourth one - but it will be the subject of another post:

1) No More Bridges to Nowhere -- Recommendation 1.10.7

Unsurprisingly, the Commission recommends eliminating

the practice of highway authorization earmarks such as the infamous Bridge to Nowhere.

This is for all of us in the bleachers.

This is certainly an expected recommendation that should surprise no one. The arguments against earmarks enjoy widespread support for very good reasons. The bad arguments for keeping earmarks are widely known. The good arguments for keeping earmarks exist but aren't well made and nobody wants to hear them anyhow. Moving on . . .

2) Fully Fund the Transportation Trust Fund and Raise the Gas Tax -- Recommendation 1.7

The Commission demonstrates its commitment to revenue for much needed transportation projects while also promoting modernization of how roads, bridges and other infrastructures are selected for support. The idea is to increase the gas tax by 15 cents within a two-year window: 2013-2015. It then does a couple things to make sure priority projects go forward and to ensure that money coming in is tied to what goes out the door.

3) Remove the "Exempt" from "Tax-Exempt State and Municipal Bonds" -- Figure 7: Illustrative Tax Reform Plan and throughout the document as "Tax Earmarks"

Perhaps most interestingly and significantly is the Commission's Recommendation to phase in a removal of the tax-exemption for state and municipal bonds. In other words, the interest on new bonds would be taxed.

If adopted, this may have the most far-reaching effect on how infrastructure projects are financed and carried out of any of the Commission's infrastructure-related recommendations.

Today, one of the main arguments for carrying out a project through municipal tax-exempt bonds rather than via public-private-partnerships goes to the existence of this tax-exempt status of municipal bonds. The argument is that public works projects should be carried out by the government (and its contractors) because the cost of raising money through a tax-exempt bond issuance is demonstrably cheaper than other means such as through private equity.

If we remove the tax-exemption on state and municipal bonds, it will move us much further along towards a cost parity between financing and carrying out projects by government versus public-private-partnerships (P3s).

The discussion would inevitably shift away from cost-of-capital arguments and toward debates over other public values. We would need to clarify the best way of financing the range of projects that sit within a government's portfolio.

There are many reasons for doing projects that are directed and controlled by the state that are not tied to cost-of-capital. We would need to be much clearer about what those reasons are. We would need to be much clearer about what projects are suited to P3s.

We have to realistically assess how the Commission's recommendation here would impact upon what infrastructure projects we could finance so as to ensure national competitiveness, security, and broad based opportunity - the reasons we build infrastructure.

Before we can take the Deficit Commission's Final Report seriously in how it addresses our crumbling bridges, broken levies and degraded water systems, we need to think through the implications of what are dramatic recommendations in how we pay for things and how we design, build, operate and maintain our basic infrastructure.

The Commission does do a service if we have a public debate over these things right now. It could be the type of adult policy debate that candidate Obama promised.

Otherwise, we may simply find that budgetary constraints, problems in our political system, and market imperatives dictate our policies.