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Widening political fault lines tabled gun-control, stymied immigration reform and have now shut down the government entirely. Against that backdrop, one policy area stands out, at least for the moment: transportation.
America’s transportation infrastructure has been deteriorating for decades. In its March 2013 Report Card for America’s Infrastructure, the American Society of Civil Engineers assigned American bridges a grade of C+; roads, D; and transit, D. According to a Texas A&M study released earlier this year, traffic congestion costs motorists $121 billion annually in wasted time and fuel – not including its negative impact on air quality and human health.
To turn back the clock on these trends, the ASCE estimates that American infrastructure needs $3.6 trillion in investment by 2020. That’s a lot of money.
An innovative proposal from Rep. John Delaney, D-Md., may help bridge the gap by introducing domestic infrastructure investment to an unlikely bedfellow: U.S. corporations with sizable overseas earnings. Both infrastructure policy and corporate tax policy represent black eyes to America’s global competitiveness, and the bill would apply a salve to both.
Delaney’s Partnership to Build America Act would create the American Infrastructure Fund, a pot of money used to guarantee or provide loans to state and local governments to help finance infrastructure projects that meet the fund’s qualification standards.
How would the money be raised? Entirely off-budget. Corporations would fund AIF by purchasing $50 billion worth of Infrastructure Bonds. Those bonds would carry a 50 year term, pay 1 percent fixed interest and, importantly, would not be guaranteed by the U.S. government. Here’s the carrot: for every dollar they invest in bonds, U.S. companies could repatriate a certain amount of their overseas earnings – tax free.
The ratio of dollars invested to dollars repatriated would be set using an innovative auction approach, likely averaging out to one to four and leaving corporations with an effective tax rate of about 8 percent. Leveraging the $50 billion in bonds at a 15:1 ratio, the AIF could theoretically provide $750 billion in loans and guarantees. That’s not $3.6 trillion, but it makes a dent in the gap.
Delaney’s bill seems to assume that political dynamics prohibit raising the gas tax or otherwise raising fresh dollars for infrastructure projects. If the co-sponsor count is any indication, he is probably right: the bill’s off-budget, business-friendly and investment-directed nature has pulled together support from 23 Republicans and 22 Democrats.
In a new Congressional era devoid of earmarks, facilitating access to financing is a big deal, especially for localities with small-dollar but locally-critical projects. The AIF would only verify the creditworthiness of potential borrowers, leaving project selections and proposals to states and localities. Without earmarks, these localities currently don’t know where to turn. This could help them out.
And broadly, the bill’s emphasis on public-private partnerships is a step in the right direction. At least 25 percent of projects financed through AIF must be suchpartnerships, defined as projects in which private capital finances at least 20 percent of the total cost. To meet investment demands without raising revenue at the national level, policy must better leverage the strengths of private capital and facility management that these arrangements bring to the table.
Yet many questions and concerns remain.
Perhaps the largest is funding. Loans issued by the AIF would need to be repaid by state and local governments, and it is unclear where that money would come from, even in a rebounding economy. While the bill’s emphasis on public-private partnerships is meaningful, it is unlikely to address a core roadblock to their adoption: the general public’s suspicion of user fees. Many see user fees as another tax: “You’re telling me I must pay a gas tax to help maintain the roads – and open my wallet for tolls on top of that? No deal.” Viable policy solutions to the problem of political acceptance have yet to be proposed.
Furthermore, as Robert Poole of the Reason Foundation notes, the bill permits AIF to invest up to 20 percent equity in qualified projects. If a key goal of the AIF is to ensure that states and localities have skin in the game, up-front AIF equity investment doesn’t make much sense.
Whether the AIF’s corporate carrot will remain flavorful in the long run is also an open question. If corporate tax policy is reformed in the next several years and rates are lowered, the need to repatriate piles of off-shore cash may drop sharply. That also raises a broader question about repatriation: if it would benefit the U.S. economy and result in more domestic investment, why not just allow it, period? Why should government policy designate certain causes as worthy of revenues generated by a repatriation arrangement, and implicitly designate others as unworthy?
Finally, the vulnerability of the AIF’s Board of Trustees to political pressure is a concern, despite the bill’s strong language to the contrary. With four of the board’s eleven members appointed by the sitting president and holding at least some sway over project approval, politicization could creep into the process over time.
With these concerns noted, the Delaney bill could well ease access to infrastructure financing at a time when investment is sorely needed – and at no taxpayer risk if the no guarantee promise holds. It could also help spur the adoption of PPPs, which will comprise an increasing portion of the US transportation portfolio over time. Perhaps most admirably, it is building consensus around a vital domestic policy issue at a time of paralyzing partisanship.
Brad Wassink researches domestic policy at the American Enterprise Institute
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