THE BLOG
09/13/2010 11:35 am ET | Updated May 25, 2011

Under-taxed Americans are Too Broke to Finance Sustainability Infrastructure

As America struggles to make its cities more energy efficient and build mass transit, electric car charging stations, smart grids, sources of renewable energy, modern water systems and even schools and roads, we face financial challenges in every way. Travel through Europe or Asia and you will see high tech airports and state-of-the-art bullet trains; come to New York City and you see a run-down JFK Airport and the converted warehouse we call Penn Station. While we can certainly blame our current infrastructure finance crisis on the Great Recession, the longer-term problem, with apologies to any Tea Partiers, is that Americans are under-taxed, and they do not save enough of what they earn. I admit, I dislike paying taxes as much as the next guy - and I spend lots more than I save. But the reality is that there is insufficient money for infrastructure because we are unwilling to invest in the future

One of the central issues for sustainable cities is who will pay for the transition to a green urban economy? How is public infrastructure in particular to be financed? To some degree this should be merely a continuation of the role that local governments in the United States have long played in financing infrastructure projects. Taxes and user fees generated at the local level can be used to create the revenue streams needed to pay off debt from capital expenditures. More creative approaches to financing have developed in recent years. In both California and New York, surcharges on electric utility bills fund energy efficiency and renewable energy expenses. In a number of American states Property Assessed Clean Energy (PACE) bonds have been developed to fund energy efficiency and renewable energy projects. PACE programs enable property owners to pay for these energy improvements over 15-20 years via an increase in their annual property taxes. If they move before the debt is retired, future owners must pay for the cost of the home improvement.

Where sustainability investments can save money, these creative forms of municipal finance can transform future savings into capital for investment now. In many cases, this can work, but in others, we need to be creative, as new services and revenue streams will be needed. We have seen this take place in some respects in recent years. At one point, the cost of water delivery was hidden in property taxes, though recently it became a separate charge. At one point, entertainment was freely available to anyone who owned a TV or radio and an antenna. Today, we pay monthly bills for cable television and satellite radio. Urban amenities that promote sustainability will also carry charges in the future. Congestion pricing for driving in a crowded central business district is one example; I suspect we will invent many others.

The total tax rate in the United States is much lower than that of most European nations. In 2006, total taxation in the U.S. came to 28% of our GDP. This is compared to 44.2% in France, 37.1% in England, 35.6% in Germany and 33.3% in Canada. The Japanese and Koreans pay slightly less taxes than we do, but most developed nations have higher tax rates than the U.S. In the United States we face the challenge of financing the infrastructure needed for the twenty first century while paying for the military required for our national defense. Despite assertions to the contrary, our problem is not excessive military spending, but that we are under-taxed. The U.S. spends about 4% of our GDP on the military, compared to 2.6% in France, 2.4% in England, 1.5% in Germany, and 1.1% in Canada. Even if the military spending of these other nations equaled ours we would still have less funding then they do (as a percentage of our GDP) for domestic public services.

In addition to being under-taxed, until the Great Recession of 2008-2010, Americans were consuming more and saving less. The percentage of disposable income saved by Americans dropped steadily from about 10% during the mid 1960s to the 1980s to less than 4% in the 1990s. At several times in the early 21st century the American savings rate fell to zero and below. Coupled with low taxes, we saw a financial picture of a society binging at the mall instead of saving and investing in the future. It is not that increased private saving directly translates to more funding for public infrastructure, but rather that it indicates our culture may be more receptive to long-term investment. During the credit-driven boom years of the early 21st century, consumption was both king and queen. People leveraged their homes and retirement savings to buy massive SUVs, big screen TVs and countless other products, and the capital needs for basic R & D and national infrastructure were ignored. The Great Recession and the stimulus packages that followed resulted in increased rates of individual saving and a growth in public investment in green infrastructure. For many people, the shock of losing half of their retirement savings resulted in increased thrift and savings. As the high-end retailers on Madison Avenue can tell you - the party's over.

However, due to the fact that tax rates were not increased over the past two years (to avoid turning the recession into a depression), recent infrastructure investments were not built on a sustainable financial footing and have only increased the national debt. Cities and states in the United States face multiple fiscal crises, and despite federal funds, investment in sustainability initiatives has been stalled in many places.

In the long run, investment in the transformation of our cities into environmentally sustainable communities will require capital from a variety of sources. One source will be debt retired by increased taxes. Another source will be savings generated from more energy and resource efficient technologies and management practices. The market will play a role, as more efficient companies are able to offer lower prices than those that are less capable of controlling their resource use. However, some of the investment in sustainability will need to come from public sources, or at least public incentives. Financial issues must be addressed if sustainable cities are to become a reality. If we keep starving infrastructure investment, we will unquestionably fall behind the global competition. And until these issues are addressed, the idea of a sustainable city will be more of an aspiration than a living, breathing reality.