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This is the best fix for transportation funding, and nobody in Washington is talking about it

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A very strange debate is stalking the halls of Congress on the question of how to find money to finance a short-term patch-up of the country's transportation trust fund. Both a group of legislators, led by Rand Paul (R-KY) and Barbara Boxer (D-CA), and the White House want to use the one-time tax windfall generated by a corporate income tax reform to plug the funding gap. But they're arguing over how to structure this windfall. The GOP's naturally taking the side that's friendlier to the interests of businessmen, while the White House pushes for more long-term tax revenue. As an argument about the future of the corporate income tax, it's interesting and important.

But while Paul and Obama duel over corporate taxes, there's a much better approach to fixing the transportation problem. Just borrow the money. Here's why.

The two transportation problems

Let's put it this way. There are two kinds of ways a transportation funding bill could try to solve problems — depending on which problem it's trying to solve.

One is that it would be good to have a sound long-term strategy for paying for infrastructure. The gasoline tax is the financial basis of American transportation funding, but growing fuel efficiency — and the fact that the gasoline tax isn't indexed to inflation — have eroded it.

How to build a long-term strategy, technically speaking, is actually not very controversial. You need to return to the principle that drivers should pay for the roads they use — either by hiking the gasoline tax, creating a new vehicle-miles-traveled tax, imposing congestion fees, or some combination of similar measures. The problem here is, of course, political. People don't like paying taxes.

The other possibility is the idea that it would be good to spend a whole bunch of money on transportation infrastructure right now. There's some evidence that the US has systematically underinvested in infrastructure, and good reason to believe that, with construction activity still depressed in the wake of the housing bust, this would be a good way to employ people. The president's budget cites an International Monetary Fund report which argues that a wide range of rich countries, including the USA, would benefit from an infrastructure surge.

The financial problem we don't have

Many countries that would benefit from an infrastructure surge — Greece, say — also suffer from the problem that they are broke. A one-off windfall in tax revenue to finance a one-off surge in public construction would be a huge win for Greece. But the US doesn't have Greece's problems. Global investors are not just willing to lend the US government money, they're practically begging us to borrow more.

As of Monday evening, for example, the interest rate on 7-year federal bonds was lower than the rate of inflation. That makes borrowing the money, and paying it back in the future when the money is less valuable, an extremely affordable option. Of course, even at negative real interest rates it's not a good idea to straight-up waste money. Expending resources on infrastructure boondoggles is a bad idea regardless of where the money comes from. But the assumption of the entire transportation funding debate is that we have economically useful projects that Congress wants to build.

Given the current low interest rate environment, basically any infrastructure project worth doing is worth doing with borrowed money. As long as Congress is primarily interested in the short-term picture, they should just forget about "paying for" road spending and borrow the money. The only thing worth arguing about is how it gets spent.

The transpo/corporate tax link is political

Senior officials in the White House appear to be familiar with the economic case for funding infrastructure through debt. You can see this in the details of the budget proposal: the transportation spending element is "front-loaded" and then "paid for" out of a revenue stream that accumulates on a longer time horizon. Furthermore, the estimated revenue raised by the future tax proposal is actually a bit larger than the amount of money they need for the transportation trust fund now. All of which is to say that they recognize that, on a policy level, the transportation funding boost and the corporate tax issue have nothing to do with each other.

But politically, they like the linkage.

The president appears to like the idea of deficit neutrality, and senior officials explain that they like the way their proposal mimics the structure of ideas some Congressional Republicans support. The White House thinks Congress is heading in this direction, and wants to offer a plan that is somewhat similar in spirit in hopes of shaping the congressional debate.

The risk of linkage

The White House's calculation may prove correct. But it's risky. That's because Obama's plan is actually quite a bit different from the superficially similar idea offered by Senators Rand Paul and Barbara Boxer that is gaining some support in Congress.

The details of Obama's corporate tax plan are complicated, and you can read about them here. What you need to know now is that it does two things. On the one hand, it increases future revenue, via taxation of US corporations' foreign profits. On the other hand, in the course of switching to that new system it creates a one-off tax windfall. The Boxer-Paul plan also has a short-term windfall, but it would reduce long-term corporate tax revenue by encouraging even more future tax avoidance.

Which is to say that Obama and Boxer-Paul are actually offering opposite ideas on the corporate income tax. They both have a one-time tax windfall for the government. But Obama's windfall is the result of cracking down on tax avoidance by multinationals, while the Boxer-Paul windfall rewards tax avoidance.

Like anything else in the legislative process, this disagreement could be resolved. But it doesn't seem especially likely. And the point of agreement — that windfall revenue could be directed to the transportation trust fund — has almost no policy significance, given the extremely low cost of government borrowing at this point. If Congress agrees that there's a good economic case for more transportation spending, they should just spend the money. Leave the argument about corporate taxes for another day.