» Administration, some members of Congress hope to introduce and pass a bill during the lame duck session. Without agreement on how to fund it, though, the process seems futile.

When Barack Obama campaigned for president, one of his primary campaign planks was that he would not raise taxes on families making less than $250,000 a year. That political move, however nice sounding for the country’s middle class, has paralyzed the development of a new transportation bill in the United States. There is a significant need for improvements to the American infrastructure system but no new revenue to pay for them; because of its initial campaign pledge, the Administration has been unwilling to move ahead on such straight-forward ideas like an increase in the gas tax or the implementation of a vehicle miles traveled fee.

The result? The last transportation authorization legislation, a five-year bill that laid out the federal government’s plans and priorities for spending on highways and transit, expired more than a year ago. More funds have been shifted to the states, but only through the expenditure of general revenues; the fuel tax, which is supposed to pay for transportation infrastructure, is not producing nearly enough funds to cover the costs of the national transportation program. Thus the importance of these appropriations of general revenues, which are sourced from the federal income tax.

But now those temporary extensions are coming to an end; on December 31st, Washington will have no more money to pay for any transportation projects. Thus President Obama’s announcement yesterday of a push to pass a $50 billion down-payment on the next transportation bill during the lame-duck period after the November elections but before the new Congress is installed in January. The Administration also released a report completed by the Treasury Department demonstrating how many jobs such infrastructure investments might produce.

These funds, playing off the President’s plan announced last month to spend $50 billion on an infrastructure bank, would be the first part of a new transportation bill that would dedicate up to $75 billion a year to all forms of transportation. Mr. Obama has said in the past that he wants to renovated 150,000 miles of existing roads, construct 4,000 miles of railways, and rehabilitate 150 miles of runways. Los Angeles Mayor Antonio Villaraigosa, present at the President’s speech yesterday, has his own ideas about how the money could be used: He wants much of the funds to be loaned to his city for the construction of his 30/10 rail expansion program.

The problem is that despite all the hoopla over the President’s new transportation agenda, he has yet to promote a sustainable funding plan for the investments that he has claimed will “pay for themselves” somehow without requiring the increase of any taxes. It’s a fantasy.

There is no secret plan being developed by the Administration: It is clear that the first $50 billion, if approved, would come from general revenues and once again be used simply to shore up the transportation program to ensure that the states are able to continue their work on essential roads and transit projects. Mr. Obama’s appeal to the public about the importance of transportation is undoubtedly actually a plea to members of the House and Senate, who he wants to take the fall and propose tax increases to pay for the project.

Yet Republicans now appear to have a significant chance to take back the House of Representatives; their resistance to tax increases is even more solid than that of the Administration. Is the current Democratic majority expected to solve the nation’s transportation funding problems during the lame-duck session? Is it possible for a six-year transportation bill to be developed over the next two months and then be passed? Is there any way a consensus can be developed between members of Congress and the White House on how to fund any increase in expenditures on transportation? The answers to these questions better be “yes:” A GOP-led House is not likely to be particularly cooperative when it comes to finding the funds for transportation.

Congressman James Oberstar (D-MN), current head of the House Transportation and Infrastructure Committee, must be fuming; he has been working for two years on the development of a new transportation bill but the Administration has been thoroughly uncooperative because of its interest in other legislation such as health care and financial reform. Mr. Oberstar could lose his chairmanship in this fall’s elections.

But he is advancing the idea of a 15¢ increase in the federal fuel tax to pay for transportation nevertheless, an almost doubling of the existing 18.4¢ revenue source. Though Transportation Secretary Ray LaHood has repeatedly said that the Administration would not support any increase in that funding stream, the lack of agreement about how to pay for transportation today means this approach could be the only reasonable one. There are, of course, long-term limitations to the fuel tax because of the increase in fuel efficiencies of automobiles and the growing presence of cars not powered by gas.

And then there is another possibility: Simply removing Washington altogether from its involvement in the funding of transportation. That is what Texas Governor Rick Perry (R) is suggesting. Mr. Perry says he would rather have states simply keep the money collected on fuel taxes in their jurisdiction, rather than have the federal government get its hands wet in the middle as the distributor of dollars.

That, however, would be devastating to advocates of alternative transportation. State governments have been notoriously bad at spending their own funds on anything other than roads; how can they be trusted with the entire pot of money? Moreover, the involvement of the federal government encourages the development of national plans for interstate highways and high-speed rail. If states were to take over transportation funding in its entirety, those proposals would likely be relegated to the trash heap.

The Obama Administration, despite its announcement yesterday, has yet to engage a serious conversation about these issues. Will it do so, or is it hoping that the problems in transportation financing will simply go away? They won’t.

» The European Investment Bank and Build America Bonds could serve as a model, but that strategy moves the burden of infrastructure spending to the next generation.

If you haven’t been following lately, it’s becoming increasingly difficult for members of Congress to get anything done. In terms of transportation, this fact is no laughing matter, because the nation’s ground transport systems is running on hot air — deficit spending — for lack of agreement about how to pull together financing for the next planned six-year transportation bill, now a year late.

What was once considered unthinkable — a reliance on the income tax-sourced General Fund to ensure continued cash flow to states for the purposes of highway and transit construction — has become something of the status quo. But the lack of a committed, long-term source of funds for the program has produced a situation in which an expansion of overall spending on transportation, something that many consider an urgent priority, is very difficult to undertake.

Rather than acting as a consensus-builder, the Obama Administration has systematically undermined potentially the most politically reasonable approach: raising the gas tax, an action that hasn’t been pursued since 1993. Just this week, Secretary of Transportation Ray LaHood ruled out a gas tax hike even though alternatives, like a vehicle-miles-traveled tax, would take years to implement. So a continued reliance on the General Fund seems likely — and it has some significant merits, mostly relating to the fact that it derives funds from the progressive income tax rather than regressive user fees.

Nonetheless, everyone involved in the process seems to want more funds for transportation — just not from the deficit-laden treasury. That’s why the Administration has been harping again and again on an idea it’s been fantasizing about since before Mr. Obama even won the Presidency: a national infrastructure bank.

According to its proponents, such a bank would provide a new funding source to the nation’s essential infrastructure projects, allowing cities, states, and even regions as a whole to build new rail lines or electricity grids. Theoretically, this independently-run institution would finance only meritorious projects and it would do so by leveraging the government’s guaranteed and virtually infinite bonding capabilities. In turn, voilà: the U.S. gets a renewed physical plant, and taxpayers are asked to foot less of the bill.

The usefulness of this concept is relatively easy to understand when put in context. Take the example of Los Angeles: under the leadership of Mayor Antonio Villaraigosa, the local Metro transportation agency wants to speed up spending on 12 major transit projects — from a planned thirty years to just ten. But sales tax revenue to pay for those projects will take decades to come in, meaning that the proposal is dead in the water. That is, unless the federal government steps in, lending Los Angeles the equivalent of two-thirds of total tax revenue, using as collateral twenty years of taxes that the region will eventually pay back to Washington. The end result: L.A. gets a big new transit network much more quickly than planned, all at the same price as initially assumed.

A national infrastructure bank could provide these loans, unlike the current executive departments that have no mandate to do so. So there’s a gap to fill.

But as nice as the infrastructure bank may sound, its own financing mechanisms have yet to be clearly defined, even though the way it would lend out is relatively easy to understand.

In his fiscal year 2011 budget, President Obama suggested appropriating $4 billion to establish the new infrastructure bank, with the assumption that the new agency would distribute grants to qualified projects and have its coffers refilled every year or so depending on need. Of course, what’s envisioned there is no bank at all, since it wouldn’t be generating revenue in return for its investments: it would be draining Washington’s coffers even more, with no clear explanation for why it is necessary. What’s the point of establishing another federal agency to dole out grants for infrastructure, when the Departments of Transportation, Housing and Urban Development, and Energy already do that all the time?

This non-bank idea, in other words, is a non-starter.

But what about an infrastructure bank that distributed loans at low interest rates and then expected to get its money back over time? What Connecticut Congresswoman Rosa DeLauro has been proposing for years is something modeled on the European Investment Bank (EIB). The EIB was founded in 1958 and provides low-interest loans at up to 50% of cost to qualified projects in a variety of sectors in Europe and North Africa. Recent projects funded by the EIB’s transport division include an extension of the Bilbao Metro in Spain, a tramway network in Lodz, Poland, and the high-speed rail line between Istanbul and Ankara in Turkey.

Despite its vast size and lending obligations — it is larger than the World Bank — the EIB is independent, does not rely on infusions of funds from any European governments, and has a stellar credit rating.

The principal of encouraging states and local governments to take out low-interest loans was championed by the stimulus act of early 2009, which included a provision for Build America Bonds. Governments have now issued $78 billion in these bonds, now representing 20% of the municipal debt market, mostly because the BAB program is such a good deal for public authorities that want to take out debt for new construction projects. Unlike the proposed infrastructure bank, however, the BAB program does not distribute funds based on merit, nor does it rely on a government bank — the federal government artificially produces low interest rates by subsidizing private loans.

But the EIB and BAB models, as interesting as they are, do not actually increase the amount of money being spent on transportation in the long-term — they simply transfer more of the current spending load into debt. Is that a good idea when governments are already so squeezed by limited budgets? How can we be sure that we’ll be in an adequate financial situation to pay back these debts in the future? Spending now through loans inherently means less spending in the future: If Los Angeles compresses thirty years of transit spending into ten, what happens during the other twenty? Nothing at all, unless another separate revenue source is established.

So none of the the infrastructure bank proposals put forth thus far will actually aid in reversing the current lack of adequate financing for transportation.

But there’s an alternative that would meld the idea of a bank and a grant-lending institution, leveraging the power of the federal government to invest and then using the profits to spend on necessary projects.

Imagine the federal government began offering a bank savings account package to young people and seniors with a very favorable rate of return, run through private banks in exchange for, say, their participation in the FDIC bank insurance system. Then say the government “collected” all of those funds together in a public bank and used the money to invest as it wished in the private sector. If well managed, this system could make enough money through its investments not only to give its depositors high interest rates, but also a large profit that would go not to shareholders but instead towards the construction of new social housing and infrastructure.

It turns out that this is not that far-off of an idea: it’s exactly how France’s Caisse des Dépôts works. The independent agency, originally formed in 1816, finances much of the country’s affordable housing and urban redevelopment schemes; more recently, it has contributed to the construction of new high-speed rail lines. For the most part, these expenditures are in grant form, meaning that the Caisse is increasing France’s overall spending on infrastructure without increasing the nation’s debt load. That makes it significantly more effective in moving forward with new spending than would be the infrastructure banks proposed for the U.S.

The Caisse can raise funds easily partially because it runs a huge percentage of the nation’s bank deposits, but also because it invests directly in (and helps run) a number of major French enterprises, a type of state involvement in the economy that is a hallmark of French policy but is unlikely to play a major role in traditionally hands-off American political decision-making. On the other hand, since the Caisse is autonomous — it makes its investment decisions without, say, the involvement of the National Assembly — it acts somewhat more like a non-profit than an arm of the national government. It does not rely on any kind of subsidy to maintain its operations.

Even without a savings account scheme, a similar bank in the U.S. could leverage existing government funds, such as those reserved for Social Security, to invest in the market and earn interest for the public sector. If properly managed, those dividends could be sent back to local and state governments in the form of grants for infrastructure. It’s hard to see the downsides of that idea.

Update, 9 March: I should point out that the investment-bank system I’m advocating would work much as public pension funds already do, investing and then using the returns to fund payments to subscribers. The use of this system for pensions produces some major problems, of course: if the market goes down, people stop getting their pensions, and that’s a huge problem. On the other hand, if this system were used for infrastructure creation, it wouldn’t need to be as stable and continuous year-to-year, meaning the use of market investment wouldn’t be as problematic.

Image above: European Investment Bank Headquarters in Luxembourg, from Flickr user Cédric Puisney (cc)