Don't Raid Banks to Pay for Highways

Is the "Check Gimmicks" light on?

Photographer: Patrick T. Fallon/Bloomberg

In trying to shore up ailing roads and bridges without raising taxes, Congress has lately been moved to inspired bouts of creativity. The Senate has considered selling petroleum reserves, raiding the Sport Fish Restoration and Boating Trust Fund, and denying Social Security payments to fugitives (don't ask).

One other measure deserves scrutiny. The highway bill the Senate passed in July would slash the annual dividend that's paid to big banks on the stock they're required to hold as members of the Federal Reserve System, to 1.5 percent from 6 percent. The $17 billion or so this would save over 10 years would be spent on transportation.

This makes little sense as policy making, sets a terrible precedent and -- not least -- would do nothing to solve the long-term problem of paying for roads.

Money for Highways

The dividend rate the Fed pays was set by law in 1913. The banks' shares can't be sold, traded or offered as collateral. The money used to purchase them -- the equivalent of 6 percent of a bank's capital, with half on call -- can't be used for loans or other business purposes. And buying shares is mandatory for membership.

Compensation for these shares, then, is appropriate. If Congress thinks 6 percent is too generous, a fairer option might be to tie the dividend to the rate paid on 10-year U.S. Treasuries, which would rise and fall with the market. But simply cutting the dividend to 1.5 percent amounts to an arbitrary new tax to pay for unrelated spending.

Worse, no one knows exactly what effect it would have. Fed Chair Janet Yellen warned in July that it could have "unintended consequences" and "deserves serious thought and analysis." Yet Congress hasn't even studied the issue. Here's one worry: To compensate for the lost dividend revenue -- the equivalent of about 4 percent of the industry's annual profit, by one estimate -- banks could take bigger risks and pass on costs to customers. Some might consider exiting the system altogether.

A more immediate concern is that this change would seduce legislators into thinking that banks are the answer to all their problems. That's where the money is, after all, and bankers are not an especially popular constituency. But relying more heavily on the finance industry -- or the Fed -- to pay for government spending erodes fiscal responsibility, undermines financial stability and reduces the urgency to solve underlying problems.

Which points to a more fundamental issue. Even under optimistic assumptions, this proposal would contribute to a mere three years' worth of transportation funding, after which Congress would have to devise some new expedient, even as the country's infrastructure deteriorates and the shortfall in the Highway Trust Fund widens alarmingly. Gimmicks only delay the pain.  

A better solution is to modestly increase the federal gas tax, index it to inflation and begin serious work on a longer-term overhaul that accounts for new technology and patterns of driving, such as a vehicle-miles-traveled tax. That would ensure that highway spending is still largely paid for by people who drive on highways. And it would bring this perennial crisis to a reasonable end.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.