An Analysis Prepared for:
Transportation Construction Coalition
American Public Transportation Association
Prepared by:
Global Insight
24 Hartwell Avenue
Lexington MA, 02421-3158
May 13, 2003
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Impact of the Bipartisan House Transportation and Infrastructure Committee’s
FY 2004-2009 Highway and Public Transportation Investment Proposal on the US
Economy
Executive Summary
A consortium of the Transportation Construction Coalition and
the American Public Transportation Association has retained Global Insight to
evaluate the economic impacts of a proposal by the bipartisan leadership of
the Committee on Transportation and Infrastructure (T &I) of the U.S. House
of Representatives to increase federal investment in highway and public transportation
improvements during Fiscal Years 2004 through 2009.
Global Insight used its U.S. Macroeconomic Model to estimate the
economic impacts of this proposal compared to a baseline program. Two simulations
were conducted. The baseline simulation estimated the economic impact of the
highway investment levels in the U.S. government’s proposed FY 2004 budget plus
flat-line funding for the public transportation program. The alternative simulation
analyzed the economic impact of the investment and revenue increases proposed
by the bipartisan T&I Committee leadership. In both scenarios, all other assumptions
about the future performance of the economy were identical.
Over the period 2004-2009, the incremental impact of the higher
investment and revenues proposed by the bipartisan T&I Committee leadership
on some key economic indicators is summarized as follows:
The T&I Committee leadership proposal would add $290 billion to the nation’s
nominal gross domestic product (GDP) over the next six years when compared
to the level of GDP generated by the baseline program, or an amount equal
to the total annual output of a state the size of Massachusetts, Virginia
or North Carolina.
The proposal would add $129 billion to household disposable income or a
six-year total of $1,100 per household for each of the 117.6 million households
in the United States. This would more than compensate households for the annual
$45 cost of the proposed increase in the federal motor fuels tax, or $268
over the 6 years, and leave a total of more than $800 per household for other
consumer purchases or savings.
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The proposal would add $98 billion in consumer spending, or a six-year total
of $836 per household.
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The proposal would add $21 billion to equipment investment by the nation’s
businesses, thus generating higher productivity and making the U.S. more competitive.
As a result of the increased investment in highways, public transportation,
and business equipment, it would add $73 billion to real potential GDP over
the next six years. The impact of these investments on potential GDP will
last far beyond 2009 in that they will impact the standard of living of future
generations.
The proposal would generate an additional $102 billion in federal tax receipts,
thus helping to reduce the federal deficit or provide funding for government
programs.
The proposal would also generate an additional $140 billion in state and
local tax receipts, even with no change in tax rates or tax policies. These
additional revenues would be sufficient not only to generate the matching
funds required under the highway and public transportation programs, but they
would also help reduce state and local budget deficits.
Impact of the Bipartisan House Transportation and Infrastructure
Committee’s FY 2004-2009 Highway and Public Transportation Investment Proposal
on the US Economy
Introduction
A consortium of the Transportation Construction Coalition and
the American Public Transportation Association has retained Global Insight to
evaluate the economic impacts of a proposal by the bipartisan leadership of
the Committee on Transportation and Infrastructure of the U.S. House of Representatives
to increase federal investment in highway and public transportation improvements
during Fiscal Years 2004 through 2009.
This report presents the results of the Global Insight study.
Background
In FY 2002, the federal government invested a total of $31.8 billion
in highway improvements. This federal investment, along with additional investment
by state and local governments, generated a total value of highway and bridge
construction put in place of $54.4 billion in 2002.
The bipartisan leadership of the Committee on Transportation and
Infrastructure of the U.S. House of Representatives has proposed that federal
highway and public transportation investment increase substantially when Congress
reauthorizes the federal surface transportation programs under the Transportation
Equity Act for the 21st Century (TEA-21). The Committee’s proposal recommends
$40 billion for the federal-aid highway program in FY 2004, growing to $60 billion
in FY 20091. Actual outlays – i.e., payments for work actually performed – would
grow to just over $56 billion by FY 2009 (*1). Assuming state and local highway
investment grows at the same pace as federal investment over the next six years,
the amount of construction work performed on highways and bridges would increase
to almost $97 billion by 2009.
| *1 This is based upon preliminary data. The actual proposal may differ
when the legislation is introduced, but should not materially affect the
results of this study. |
In addition to assessing the economic impact of increased investment
in highway improvements, Global Insight evaluated the economic impact of the
proposed increase in funding for public transportation. We tested a program
that would grow in equal increments from $8.0 billion in FY 2004 to $14 billion
in FY 2009.
To isolate the economic impacts of the proposed increase in federal
highway and public transportation investment, Global Insight compared the bipartisan
T&I Committee proposal to a baseline representing the current funding outlook
for these two programs during the next six years. This baseline consisted of
two parts:
The baseline for federal highway funding was taken from the budget submitted
by the administration for FY 2004 – 2008. Under the administration’s budget,
federal highway investment would grow from $29.3 billion in FY 2004 to $33.1
billion in FY 2008. These annual investment levels are consistent with the
TEA-21 rule linking annual highway funding with receipts into the Highway
Trust Fund. For FY 2009, which was not covered in the budget, the study assumed
continued trend-line growth of federal highway investment proposed in the
budget.
For the public transportation baseline, the study assumed federal investment
would remain flat at $7.2 billion per year, which is the amount appropriated
in FY 2003. Public transportation funding was not directly linked to Highway
Trust Fund revenues under TEA-21 and thus flat funding is the appropriate
baseline.
The Committee’s proposal for federal highway investment for FY
2004 to 2009 is approximately $110 billion above the comparable figures from
the U.S government’s FY 2004 budget while the Committee’s proposal for public
transportation program funding is approximately $23 billion above the FY 2004
U.S. government budget.
These new initiatives would be funded by a combination of an increase
in the federal motor fuels taxes and a redirection of selected existing taxes.
The motor fuel tax rate would rise to an average of 21.1 cents per gallon in
FY 2004(*2) from the current level of 18.4 cents per gallon and would subsequently
rise in annual increments to 27.1 cents per gallon in FY 2010. The impact of
the proposed increase in the federal motor fuels tax is incorporated into the
results of this study.
| *2 Assumes mid-year implementation of 5.5 cent per gallon increase in the
motor fuels tax rate. |
Global Insight’s analysis shows the year-by-year incremental impact
of the bipartisan T&I Committee proposal on such key economic concepts as nominal
GDP, real potential GDP, disposable income, consumer spending, equipment investment,
federal tax receipts, and state and local tax receipts compared to the levels
that would be generated by the baseline proposal.
Assumptions and Methodology
Global Insight used its U.S. Macroeconomic Model to estimate the
economic impact of the highway and public transportation investment proposed
for federal Fiscal Years 2004 – 2009 by the bipartisan leadership of the House
Committee on Transportation and Infrastructure, compared to the baseline spending
for these two programs described earlier. Two simulations were conducted. The
baseline simulation estimated the economic impact of the highway spending included
in the U.S. government’s FY 2004 budget plus flat-line funding for public transportation.
The alternative simulation analyzed the economic impact of the increases in
highway and public transportation investment proposed by the bipartisan T&I
Committee leadership. The underlying assumptions for the two scenarios are presented
in the following table.
In both scenarios, all other assumptions about the future performance
of the economy are identical. The economic assumptions forming the basis for
the analysis include:
Inflation as measured by the Consumer Price Index was assumed to remain
in the 2-2.5% range from 2004 to 2009.
The Federal Reserve will not raise interest rates until early summer of
2003. By 2009, the federal funds rate will rise to 5.5%.
The unemployment rate will fall from its current 6% level to 4.6% by 2009.
Oil prices will fall to $25 per barrel from their current level and then
rise again to reach $28 per barrel in 2009.
The analysis was comprised of four tasks:
Task 1. In consultation with the clients, Global Insight researched the
level and characteristics of the proposed highway and public transportation
programs and developed a set of reasonable and credible assumptions that were
used as inputs into the Global Insight Quarterly Model of the U.S. Economy.
Task 2. Since a certain level of continued federal investment in highways
and public transportation is part of the current baseline, Global Insight
developed two scenarios – a baseline showing the impact of no investment above
current policies as described earlier and an alternative simulation showing
the impact of implementing the bipartisan T&I Committee program as described
by the clients.
Task 3. A report was prepared that provides summary charts and tables for
the alternative simulation that highlights changes from the baseline scenario
forecasts for key economic concepts such as nominal gross domestic product,
real potential gross domestic product, disposable income, consumer spending,
equipment investment, federal tax receipts, and state and local tax receipts.
The written analysis in the report discusses the results and identifies the
factors underlying the analysis.
Task 4. The impact on nominal gross domestic product, disposable income
and consumer spending was allocated among the states in proportion to their
share of federal highway investment.
Summary of Results
The charts and tables presented below provide year-by-year details
of the total impact on key economic indicators of the increased highway and
public transportation investment proposed by the bipartisan leadership of the
House Transportation and Infrastructure Committee. Data are presented in Appendix
A.
The total impact is the result of direct, indirect, and induced
spending effects. These are defined as follows:
Direct effects — the hiring of construction workers and purchases of non-labor
goods and services.
Indirect effects — the additional demands for inputs from the industries
that sell non-labor goods and services directly to the project.
Induced effects — the increases in employment, and income generated by the
expenditure of disposable income of the newly hired construction workers.
Nominal Gross Domestic Product
The bipartisan T&I Committee proposal would generate more nominal GDP between
2004 and 2009 than would the baseline transportation spending proposed in the
administration’s FY 2004 government budget.
Over the period 2004-2009, nominal GDP would be $290 billion above the level
generated by the baseline program. This is equivalent to the entire annual gross
state product of a state the size of Massachusetts, Virginia, or North Carolina.
Under the Committee proposal, GDP will increase relative to the amount generated
by the baseline program due to the expansionary impacts of the highway and public
transportation investment on three important components of GDP: consumer spending,
investment spending, and government spending.
Incremental Impact on Nominal GDP
Disposable Income
Over the period 2004-2009, disposable income under the bipartisan
T&I Committee leadership proposal would be $129 billion above the amount generated
by the baseline.
Incremental Impact on Disposable Income
Over the six years, the average household in the United States
would receive over $1,100 more disposable income under the T&I Committee proposal
than under the baseline. Not only would this cover the annual $45 cost of the
proposed increase in the federal gasoline tax to the average household (a 6-year
total of $268), it would provide about $800 over the six years that could be
spent on other consumer goods or saved. This increase in disposable income is
attributable not only to the increases in income accruing to the construction
workers associated with highway construction, but also due to the indirect and
induced impacts that result.
Consumer Spending
Under the Committee proposal, consumer spending would be above
the amount generated by the baseline scenario every year between 2004 and 2009.
Over the six-year period, consumer spending would be $98 billion
above the baseline, or an average of $836 for every household in the United
States. The indirect and induced impacts of increased highway and public transportation
investment will lead to an increase in disposable income and consequently an
increase in consumer spending.
Incremental Impact on Consumer Spending
Equipment Investment
Business investment in equipment would also be considerably higher
during the next six years under the T&I Committee proposal than under the baseline
program.
The Global Insight Macroeconomic Model indicates that, over the
period 2004-2009, equipment investment by the nation’s businesses would be $21
billion above the amount generated by the baseline program. This is because
the impact of the proposed increase in spending for highways and public transportation
is to increase business profits and ultimately increase equipment investment
spending.
Incremental Impact on Equipment Investment
Federal Tax Receipts
Federal tax receipts will be significantly higher under the T&I
Committee’s proposal during the next six years than under the baseline program.
Incremental Federal Gasoline and Induced Tax Receipts
Part of the increase would be due to the proposed increase in
the federal motor fuels tax. But much would result from the economic growth
prompted by the increased highway and public transportation investment plus
the increase in the inflation-adjusted tax basis for goods and services. Over
the period 2004-2009, gasoline tax receipts will be $32 billion above the level
generated by the baseline program while program-induced tax receipts will be
$102 billion higher.
State and Local Tax Receipts
Another benefit of the T&I Committee’s proposal is that state
and local tax receipts would be above the baseline scenario every year between
2004 and 2009.
As is the case with federal tax receipts, the economic growth
prompted by the spending increase along with an inflation-adjusted tax basis
for goods and services cause state and local tax receipts to rise. Over the
period 2004-2009, state and local tax receipts increase $140 billion above the
amount generated by the baseline program. These increased tax receipts are more
than adequate to cover the 20% matching requirement for the proposed T&I Committee
program, and, in addition, would help state and local governments deal with
their current budget problems.
Incremental Impact on S&L Tax Receipts
Economic Impacts by State
As part of the process of assessing the economic impact of the
proposed increases in highway and public transportation investment, Global Insight
allocated the incremental impacts on gross domestic product, disposable income,
and consumer spending to the individual states according to their 2001 share
of federal highway spending. The results are shown in the following table:
The five states receiving the greatest economic impacts from the
proposed spending increases are California, Texas, New York, Pennsylvania, and
Florida. These states account for almost 32% of the total national impact. However,
all states benefit substantially. For example, Rhode Island’s gross state product
increases by $1.7 billion while Delaware’s gross state product increases by
$1.2 billion.
The following table shows the impact of the proposed spending
increases on households over the 2004-2009 period. While disposable income per
household increases by almost $1,100 during the six-year period, the cost per
household of the proposed gasoline tax increase is only $268 over the period—a
return of 4 to 1 for each dollar of spending.
Real Potential GDP
Real Potential GDP measures the ability of the economy to grow
over time. It is a measure of productivity in the sense that it reflects the
underlying growth rate of the economy based upon the growth of the various factors
of production, i.e labor, capital, and technology.
At the levels of federal highway and public transportation investment
proposed by the bipartisan leadership of the Transportation and Infrastructure
Committee, real potential GDP will be above the level generated by the baseline
scenario every year between 2004 and 2009. Over the period, real potential GDP
under the T&I Committee proposal is $73 billion above the baseline result, measured
in constant 1996 dollars.
The increase in productivity comes in a number of ways. Increased
investment in highways and public transportation at the level proposed by the
Committee will reduce congestion and improve travel times for individuals and
businesses, thus freeing time for more productive uses. The stronger growth
of the economy compared to the baseline will generate more business investment
in equipment which will also boost productivity.
Clearly, increases in highway and public transportation investment,
other things being equal, will have a positive impact on real potential GDP
and the economy’s ability to grow.
Incremental Impact on Potential GDP, $96
Other Economic Benefits of Highway and Public Transportation
Investment
The Global Insight U.S. Macroeconomic Model is designed to analyze
the impact of policy proposals, such as the Transportation and Infrastructure
Committee’s proposal to increase federal investment in highways and public transportation,
on such economic variables as gross domestic product, consumer spending, real
potential GDP and tax receipts.
There are a number of additional economic benefits that may accrue
from increased investment in highways and public transportation that the model
does not address but which should not be overlooked. Since they are not part
of the model, the model does not provide a dollar value for these additional
benefits, but they include:
Reduced travel time costs and congestion costs. Investments that increase
highway capacity or the capacity of public transportation systems can help
reduce congestion, thus reducing the economic cost of time and fuel wasted
in traffic jams.
Reduced crash costs. Highway crashes can involve significant economic costs,
including medical costs, rehabilitation costs, lost wages, legal fees, property
damage and reduced productivity both at home and at work. Highway investments
that improve road safety and investments that expand public transportation
options can reduce the number and severity of crashes and thus reduce the
economic cost of crashes.
Reduced vehicle operating expenses. Poor road surfaces can raise the cost
of operating and maintaining motor vehicles. Repairing and improving road
surfaces can reduce these costs, as would investments that expand public transportation.
Long-run economic impacts
In addition to the short-run economic impacts of increased highway and public
transportation spending that are the focus of this study, there are long-run
productivity impacts as well. These impacts extend far beyond the years of program
implementation and leave a legacy for future generations.
Highways, bridges and mass transit systems are a major component of the nation’s
capital assets and among the most long-lived. A highway or bridge can, with
proper maintenance, serve for 50 years or more, while subways and rail lines
built in late 19th century are still being used today. Few other assets have
such extensive service lives.
Long after 2009, the additional highway and public transportation improvements
financed under the T&I Committee’s proposal compared to the baseline will continue
to serve highway users and support productivity improvements.
Highways, bridges and mass transit provide essential services to private businesses
and individuals, despite being publicly owned and financed, and can have a significant
impact on long-run productivity growth. Investment in the transportation infrastructure
will reduce congestion and lead to improved product flow. Also an improved transportation
system will likely lead to increased tourist travel and increased consumer spending.
This will stimulate many state economies. In addition, increased highway spending
will lead to an increase in capital spending which will increase labor productivity.
Increases in highway investment will also promote economic development. By
facilitating transportation flow, highway investment will revitalize and diversify
the economy of rural areas and smaller communities, enhance and disperse industrial
growth, and encourage more balanced population patterns. In addition, it will
promote the development of economic growth centers, encourage the location of
business and industry in rural areas, and provide rural citizens with improved
highways to such public and private services as health care, recreation, employment,
education, cultural activities, and in general encourage the social and economic
development of rural communities.
To the extent that increased highway investment reduces transportation costs,
it will reduce our balance of payments deficit and ultimately make the US more
desirable for foreign investment.
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About the authors About the authors Robert Cuomo and Joyce Brinner conducted
the study and between them they have over 50 years of experience in conducting
economic analyses. Robert Cuomo Robert Cuomo has over 25 years experience as an economist.
He is currently with Global Insight’s Advisory Services Group, with business
development and project management responsibility for many of Global Insight’s
major consulting engagements. He has expertise in applied econometrics
and forecasting dealing with large economic and demographic databases.
Past work has included developing detailed end-use forecasts for electric
residential, commercial and industrial customers. Dr. Cuomo has extensive
experience in providing testimony on electric utility forecasts before
the Massachusetts Department of Public Utilities. Dr. Cuomo’s primary responsibilities include maintaining
existing client accounts as well as identifying additional client needs
and addressing them through the development, implementation and management
of appropriate projects. Dr. Cuomo has supervised several economic impact
studies including an assessment of the economic impact of the construction
of an Alaskan Natural Gas Pipeline on the lower 48 states. He manages
large complex projects, which require the integration of related intricate
tasks. He also assists in the development, documentation, and presentation
of Global Insight’s Macro and Regional forecasts. Prior to joining Global Insight, Dr. Cuomo was Chief Economist
at NSTAR/Boston Edison. In his most recent position, he was General Manager
of Boston Edison’s Residential Energy Efficiency Programs. Responsibilities
included developing energy efficiency programs and administering a $22
million budget. Prior to that, Dr. Cuomo was Manager of Boston Edison’s
Forecasting and Market Analysis Division. In this capacity, he was responsible
for the development of the Company’s short and long-term forecasts of
energy sales and revenues and peak demand. His division also conducted
residential and commercial/industrial surveys on a regular basis as well
as market analyses for the Company’s business plan. Dr. Cuomo holds Ph.D. and M.A. degrees in Economics from
Boston College, and a B.A. degree from Merrimack College. His graduate
fields of specialization were Microeconomic Theory, Macroeconomic Theory,
Industrial Organization, Public Finance and Economic Development. Joyce Brinner Dr. Joyce Brinner is a principal in Global Insight’s Advisory
Services Group. Dr. Brinner helps clients assess the economic outlook
and its impact on their specific operations. She is an expertin developing
modeling systems for clients to use in forecasting their markets. Her
clients range from local governments and businesses to global industry
players, all with a need to forecast their revenues or their market revenues.
Dr. Brinner has testified before Congress and state legislatures on industry
restructuring and the impact of climate change policies on the economic
outlook, and has advised government agencies on the development of their
modeling systems. She has over 25 years experience in performing economic
analyses. Prior to her current assignment, Dr. Brinner managed DRI’s
global energy forecasting and publication activities. Under Dr. Brinner’s
direction, DRI produced quarterly, semi-annual, and annual energy publications
for globalmarkets, and monthly oil and natural gas market reports. These
comprehensive publications analyzed and projected energy demands, supplies,
prices, explaining recent developments and investigating alternative future
scenarios for all fuels and most regions of the world. The forecasts were
supported by a global energy data, modeling and forecasting system. Dr. Brinner also directed model development for the U.S.
Economic Service and led the development of the DRIEnergy Modeling System.
As director of model development, she was responsible for the regression
modeling supporting the Quarterly Model of U.S. Economy, the premier model
used by Standard & Poor’s DRI in generating its forecasts of the U.S.
economy. She wrote monthly articles on pricing and energy for the DRI
Review of the U.S. Economy, and semi-annual analyses of the U.S. energy
and electricity markets for the U.S. Energy Review. Dr. Brinner received her B.A. in Mathematics from Ohio University,
an M.A. in Economics from Ohio State University, and a Ph.D. in Economics
from Boston College |
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