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Finding the Revenues to Pay for Infrastructure

The warring camps in Washington are unlikely to find a middle ground on their own. Governors and mayors need to take a seat at the adult tax-policy table.

Biden's charging plan could sell 25 million EVs
Two Tesla EVs charge at the city of Palo Alto EV charging station in a public garage. One component to financing new infrastructure could include a federal fee for electricity consumption at vehicle charging stations.
LiPo Ching/TNS
It’s too early to predict which, how or whether any of the competing federal infrastructure proposals now bouncing between the White House and Capitol Hill will eventually become law. Perhaps a bipartisan deal can be reached on at least the physical infrastructure features that are of utmost importance to states and localities, but Senate GOP resistance to “pay-for” rollbacks of the 2017 corporate tax breaks could be a deal-killer. Republicans’ recent shell-game pitch to fund $300 billion worth of projects by “repurposing” aid committed to the states and municipalities in the American Rescue Plan Act has rankled most local officials as disingenuous.

As various counterproposals ping-pong up and down Pennsylvania Avenue, the partisan dynamics are clear: Democrats might be able to cram a bill through by using the budget reconciliation process, if they can hold together all 50 blue votes in the Senate. But if they are unable to take the reconciliation route, they will need at least 10 GOP senators' votes to achieve a bipartisan compromise.

If Democrats decide to go it alone, it’s pretty clear that they will include a host of progressive tax features to pay for some or much of the deal. Meanwhile, GOP leaders aligned with business and wealth lobbyists oppose both a corporate tax hike and deficit financing for infrastructure.

If GOP senators buy in to the size and scope of a compromise infrastructure package — almost certainly focused only on “hard” infrastructure and not the Democrats’ “soft, social” infrastructure — agreement must still be reached on how to pay for it. Congress needs pragmatic, not ideological, revenue sources.

In the past, the prevailing philosophy and behavior of state and local leaders and their policy organizations has been that federal tax policy issues like these fall outside their job description. The role of state and municipal lobbyists has always been to clamor for funding on the expense side of the federal budget but to hold silent about the revenues side because it’s presumably beyond their purview. To avoid partisan stalemates, this political paradigm must change, if anybody really expects Congress to ever properly raise the trillions of dollars needed for physical infrastructure. In a sharply divided government, somebody must show the way. The warring camps on Capitol Hill are unlikely to find middle ground on their own, especially when K Street lobbyists and anti-tax policy wonks are hovering to squelch any revenue proposal, no matter how sensible and necessary.

For starters, the governors need to insist that a compromise package should include a provision that allows but does not require states and localities to repurpose funding from the American Rescue Plan. If D.C. politicians want to take credit twice for those funds as part of the total package, that would be only a cosmetic add-on to reach a middle-ground number. But it should mollify GOP governors who whine that they cannot use the money to cut taxes. Nobody can claim that spending leftovers on infrastructure would be a bad use of American Rescue Plan dollars.

Next, Democrats need to give up their high-horse idea that user fees to pay for transportation facilities are “regressive” just because everybody must pay for their benefits. Their idea that society owes more than half the population a free ride is a doomed political philosophy. It’s why Franklin Roosevelt insisted on payroll taxes to support Social Security, to ensure an enduring social contract. There are plenty of ways to make a total revenue package progressive, with everybody who uses priceable public facilities such as roads and bridges chipping in, while social goods such as clean air and water are funded chiefly by taxing those most able to pay.

At the intergovernmental family policy luncheon, it’s time for governors and mayors to stop acting like children at the kiddie table and take a seat with the adults to identify rational ways to raise the federal revenues needed to pay for neglected infrastructure at the same time they lobby for the municipal bond provisions they also need to carry out their share of the program. Here are suggestions for a balanced menu of federal taxes and changes that would have minimal impact on business hiring decisions without treading on the 2017 corporate tax rate that Republicans deem sacred:

● Tax corporate stock buybacks. A 7 percent surtax on these would actually promote jobs. No company would be required to pay such a surtax if it deploys its profits to build the economy instead. It will prod company directors to favor job-creating capital outlays or pay out taxable dividends.

Charge annual vehicle fees for road usage. As our economy shifts toward electric vehicles, federal and state taxes on motor fuels won’t cover the costs of highway repairs, let alone construction. EV drivers must ultimately pay their fair share. Until we can pinpoint mileage driven on specific roads and bridges, the simplest tax would be an annual federal tax on Blue Book vehicle values. To avoid regressivity, don’t tax the first $20,000 of car value before 2030, given that used gas-guzzlers remain the primary vehicles of lower-income drivers. A uniform federal fee with 50 percent of the revenue shared with the states would be a formula well worth promoting.

● Impose a federal electricity usage fee. Annual vehicle fees will not be sufficient to pay for roads and highways, and they ignore actual usage. A federal fee for electricity consumption at vehicle charging stations and for residential consumption above today’s average domestic household levels would fairly assign costs to users, similar to utilities’ tiered consumption pricing. This also incentivizes household solar power installations.

● Cap the qualified business income deduction. Part of the 2017 tax law, QBID is a loophole for private companies and their wealthy partners and owners to escape taxes on 20 percent of business income. Keep it for gig workers and the self-employed who net less than $100,000 and repeal the rest. This is a sensible rollback of a fiscally indefensible windfall for the wealthy, while still incentivizing self-employed proprietors.

● Beef up the alternative minimum tax. The AMT never accomplished its original purpose, to capture revenue from One Percenters who dodge taxes through various loopholes. A reformed AMT (or a millionaire surtax) should apply only to income above Biden's pledged no-tax-increase level of $400,000 and include all investment income that now escapes ordinary taxation. Silver-spoon intergenerational trust fund distributions of six-figure inherited annual principal payments should also be added to the AMT tax base.

● Reform capital gains taxes. Raise the top preferential rate for the highest-income long-term investors from 20 to 30 percent; that’s short of what the White House proposes but still a substantial increase. Restore the minimum holding period for this lower rate to three years, which was the standard before Reagan; a one-year investment can hardly be called “long term” and is really just a trading profit, not fuel for economic growth. Tax carried interest of hedge funds, real estate developers and venture capital fund managers at this higher rate, along with speculators’ commodity and futures trading profits. Eliminate the “step up” in tax basis of estates, and tax inherited capital gains at 3 percent annually for nonspousal heirs who continue to hold the assets. Finally, target and close the opportunity zone loopholes that shrink real estate investors’ capital gains taxes even when they fail to create proportional permanent employment.

Full funding of all the physical infrastructure in Biden’s jobs plan is attainable, with just some of these revenues ample to pay for the corresponding debt service. Then, if Democrats still want to use their pet progressive taxes to also finance a “human infrastructure” package through Congress under budget reconciliation procedures, with predictable 2022 midterm campaign friction, that’s on them. State and local leaders should focus on just the tangible infrastructure package that has grassroots support and present a sober, balanced and doable revenue strategy to today’s dysfunctionally fractured Congress.



Governing's opinion columns reflect the views of their authors and not necessarily those of Governing's editors or management.
Girard Miller is the finance columnist for Governing. He can be reached at millergirard@yahoo.com.
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