America is falling apart. Our roads are crumbling, our bridges are impassable and our sewers are backing up. Politicians have always believed in the talismanic power of public works to generate jobs and to gather votes, and the sheer size of the "infrastructure problem" presents an unprecedented opportunity to do both.
One study, provocatively titled "America in Ruins," estimates that we must quadruple our annual public spending from the present total of $70 billion if we are to prevent further deterioration. This would mean a 40 percent increase in all state and local taxes -- a prospect that would drive the beleaguered taxpayer to something less democratic than a tax limitation referendum. It would grossly inflate construction costs, expose local governments to massive fraud and abuse and lead to inhumane cuts in other public services.
Fortunately, there are some solutions to this crisis that do not require an impossible increase in public expenditure. First, local governments can stop using scarce tax-exempt bond revenues to subsidize private investments. Last year, less than half of the revenues from bond issues were used for public works projects. The rest were used to finance private projects, including hospitals ($5.4 billion), pollution control for private corporations ($4.5 billion), industrial development ($3.2 billion). Cut these subsidies out and we could double public construction spending for public purposes. Private investment was generously encouraged under the 1981 Tax Recovery Act. Further public aid is redundant.
Second, state and local governments can start charging for the services they provide. There is no reason why citizens at large should pay for expensive water supply systems unless they use the water. Yet, in most states, general obligation bonds are used to pay for irrigation systems for farmers, ore-washing for mining companies and green lawns in new suburban subdivisions. A water user fee will encourage greater conservation, reducing the need for new reservoirs and water treatment facilities. Those who would argue that "user fees" are hard on the poor should compare them with the alternative of cutting back on social service spending to continue the present subsidies for inefficient development.
Third, we can stop giving away the local tax base through tax abatements and exemptions to attract business. There is no evidence that the $1 billion given away annually by states and cities to lure business has had any real effect. The resources would be better used repairing streets, improving the local education system and modernizing our ports.
These are not easy steps to take. But local officials must face some painful facts. It should be clear by now that the federal government will not help. While Washington wrestles with its own enormous deficits, it is unlikely to bail out states and cities from the results of their profligate subsidies to local businesses. Second, the tax-exempt bond market will not be a source of low-cost money in the foreseeable future. Interest rates will remain high, and investors will carefully scrutinize new issues. Fiscal gimmicks -- from zero-coupon bonds to the tax leasing of public facilities to private corporations -- will prove little more than placebos. With no cheap sources of funds, local governments will have to make some painful decisions about which projects really require a public subsidy.
Public infrastructure investments are an important ingredient for successful economic recovery. The past level of underinvestment is endangering growth. But we should use this "crisis" as an opportunity to define new priorities. Public funds should not be used to build convention centers, industrial parks and buildings for large corporations. A sound fiscal strategy and a clear allocation of responsibility between the public and private sectors are much more powerful development incentives than speculative projects and tax subsidies. Construction activities may provide local politicians photo opportunities. But, in the long run, the local voters will be more impressed with a leader who can fill their potholes, hold down the cost of local debt and lay the foundation for sustained economic growth. And that will require saying "no" to a lot of pork-barrel projects and making the users of public facilities pay for the privileges