Assessments of alternative funding options for infrastructure investment

In this economic modeling research paper, the KPMG computable general equilibrium (CGE) model is used to analyze the impact on the U.S. economy of a hypothetical infrastructure investment program funded by three alternative options: (1) an increase in the federal fuel excise tax rate, (2) introduction of a nation-wide vehicle mileage tax (VMT), and (3) introduction of a nation-wide vehicle weight tax. To demonstrate potential applications of a CGE model for the policy impact analysis, various modeling results and issues in relation to additional infrastructure spending funded by increases in the federal fuel excise tax rates are first discussed. Then the main macroeconomic impacts under the federal fuel excise tax funding option are compared with those under the other two funding options. KPMG’s CGE model includes the potential behavioral response of all sectors of the economy to the investment program as required under norms used by the Congressional Budget Office (CBO) and the Joint Committee on Taxation when evaluating major tax proposals. In the usual economic impact modeling exercise, the social net benefits of infrastructure spending are often assessed as a complement to a narrowly defined financial cost/benefit analysis. This aims to highlight the flow-on economic benefits of an infrastructure project. However, such analysis is often undertaken without due consideration of funding sources and can potentially lead to an overestimation of a project’s net benefits. In this paper, the economic benefits of infrastructure spending are compared to the economic costs of introducing new taxes based on the user-pay principle. The net social benefits of alternative funding options are assessed in terms of economy-wide flow-on impacts. It is important to note that this model exercise was undertaken in isolation from other current and future potential forms of funding.