The tax code overhauls being pushed by congressional Republicans might not sound like infrastructure bills, but they contain many provisions that could have a big impact on the ability of states and localities to pay for public works improvements.
The proposed plans include major changes to financing roads, ports and airports, as well as state programs related to electric vehicles and wind energy.
But the biggest disappointment for many people in infrastructure-related industries is that these changes are part of a tax plan instead of a standalone infrastructure bill. Trump administration officials have repeatedly said they would work on an infrastructure package after the tax overhaul.
Transportation advocates would rather see the two issues addressed together. After all, it’s hard to imagine any serious infrastructure bill that doesn’t also include either a sizable increase in spending (paid for with a tax hike) or tax incentives. In fact, the last time Congress raised the federal gas tax rate in 1993, it was a small part of a large debt-reduction package.
Since last year, President Trump and his advisers have repeatedly linked tax code changes with an infrastructure measure. Trump’s original proposal called for new tax incentives to lure $800 billion in private capital for infrastructure improvements, but that idea got little traction on Capitol Hill. Just last month, Trump hinted at another way to pay for infrastructure: by using tax revenue on corporate profits that American companies are stashing overseas. “We need [that money] so badly for so many things, including infrastructure,” Trump told the Heritage Foundation. Both the House and Senate plans include ways to tax the overseas income, but neither include new infrastructure spending.
In other words, the avenues for funding or financing a big new infrastructure initiative are rapidly vanishing.
“We need to be honest with the American people: Failure to find the revenue for an infrastructure initiative now, as part of tax reform, will make passage of such a package nearly impossible in the future,” said Bud Wright, executive director of the American Association of State Highway and Transportation Officials, in a letter to congressional leaders.
For transportation advocates, in particular, that’s troubling news, because the Highway Trust Fund, the main source of federal transportation money, is teetering on insolvency. For the last decade, revenues (mostly from federal fuel taxes) that go into the Highway Trust Fund have not kept up with spending, so Congress has repeatedly found other money to plug the hole. Most recently, it took money from the Federal Reserve to keep transportation spending going through 2020. But Congress does not have a long-term plan.
“The Highway Trust Fund solvency problem is a revenue problem, not a policy problem,” said Pete Ruane, the president and CEO of the American Road and Transportation Builders Association. “It is a problem that rests squarely on the shoulders of the House and Senate committees charged with developing revenue and tax bills. Federal transportation tax reform should be a priority in this broad legislation. Thus far, the ball has been dropped.”
Richard White, the acting president and CEO of the American Public Transportation Association, which represents transit groups, called the tax overhauls a “missed opportunity.”
“The time to act is now,” he wrote to the senators who head the Finance Committee. “A predictable, long-term federal commitment to surface transportation investment is essential to the nation’s economic growth and international competitiveness. This tax bill represents the best and most realistic opportunity to accomplish this goal.”
So, while a major infrastructure component seems off the table, transportation and other infrastructure groups are focusing on the details of a proposal passed by the U.S. House and a separate measure being debated in the U.S. Senate.
Here are some of the key issues:
Private Activity Bonds
State and local leaders – along with many people in infrastructure-related industries – were relieved that the proposals did not call for ending the tax exemption for municipal bonds. But, as Governing’s Liz Farmer reported, they were taken aback that the House called for eliminating private activity bonds (PABs). States and municipalities issue PABs, which are tax-exempt, on behalf of private or nonprofit developers.
“The federal government should not subsidize the borrowing costs of private businesses, allowing them to pay lower interest rates while competitors with similar creditworthiness but that are unable to avail themselves of PABs must pay a higher interest rate on the debt they issue,” the Republicans on the House Ways and Means Committee explained in a summary of their bill.
Many infrastructure groups favor the Senate’s approach on the issue, because its bill would not eliminate PABs.
Getting rid of PABs could have far-reaching consequences, by making it more expensive to build a wide array of infrastructure projects. These bonds have been used to finance hospitals, affordable housing, university buildings, toll roads, bridges, airports and ports. Pennsylvania, for example, used them to launch a public-private partnership to rehabilitate 558 bridges; New York is using them to renovate LaGuardia Airport; and California has used them to retrofit hospitals to be safer in earthquakes.
“Preserving PABs, enhancing them for certain infrastructure projects and expanding them to public buildings should be the priority in tax reform, rather than terminating them,” wrote a group of 29 local government and infrastructure organizations in a recent letter.
In fact, the president’s own budget proposal from earlier this year called on expanding the use of PABs, not eliminating them.
The move could also undermine efforts to use public-private partnerships, warns Robert Poole of the Reason Foundation, a libertarian think tank. When state agencies finance projects, they can use tax-free financing through municipal bonds. PABs give P3s the same tax advantage for financing the same types of projects, he said.
“PABs for P3 infrastructure are not a subsidy,” Poole wrote. “They are a well-justified policy enacted by Congress to create a more-level financial playing field for a worthwhile improvement in the procurement of large-scale public-purpose infrastructure."
Advance Refunding Bonds
Another provision of both the House and Senate plans is that they would ban governments from issuing what are called advance refunding bonds. These bonds allow governments to refinance debt earlier than they would have otherwise, ultimately letting governments take advantage of lower interest rates years sooner.
Many industry groups called the bonds an important tool for them to lower costs. Several water industry groups, for example, touted the savings in a letter to Sen. Orrin Hatch, chair of the chamber's finance committee. “Between 2012 and 2016,” they wrote, “states and localities advance refunded 941 tax-exempt municipal bonds that paid for water and wastewater infrastructure improvements, saving communities and ratepayers at least $1.36 billion.”
Electric Vehicle Credits
Ten states, led by California, have set mandates that 15.4 percent of vehicles sold in their states must have zero emissions by 2025. (In California, the state that’s come closest to meeting that benchmark, only 3 percent of new vehicle sales are currently zero-emission vehicles.)
Provisions in the House tax bill could make meeting that goal even tougher. The proposal would eliminate a $7,500 credit for people who purchase electric vehicles, which was originally part of the economic stimulus package championed by President Barack Obama in 2009.
“There is no question that the potential elimination or phase out of the electric vehicle tax credit will impact the choices of prospective buyers and make it more challenging for manufacturers to comply with electric vehicle mandates in 10 states,” said the Alliance of Automobile Manufacturers in a statement.
The changes would come just as the auto industry is rolling out new models of electric vehicles, in part to meet the state regulations. Automakers already offer 30 models of electric vehicles, the manufacturing group noted, but they only account for 1 percent of sales nationally. Revoking the tax credit could stymie sales further, experts warn.
“That will stop any electric vehicle market in the U.S., apart from sales of the highly expensive Tesla Model S,” Xavier Mosquet, senior partner at consultant Boston Consulting Group, told Bloomberg. “There’s no Tesla 3, no Bolt, no Leaf in a market without incentives.”
Ending Wind Tax Credits
The wind power industry has known since 2015 that tax credits that helped spur its remarkable growth over the last decade would soon come to an end; the credits were already being phased out and were scheduled to end by 2019.
But the House tax overhaul would change the rules for how companies qualify for the investment or production tax credits. It would also reduce the value of the production credit, by eliminating inflation adjustments. Wind energy advocates say would jeopardize half of the new wind farms being planned or built now.
“Wind energy went first on tax reform, voluntarily agreeing to a phase-out to give the industry time to adjust," said Tom Kiernan, CEO of the American Wind Energy Association, in a statement.
“Businesses can’t go back in time to qualify for financing under the new rules,” he added. “So under the House version they would either suffer a retroactive tax hike, or be forced to walk away and break contracts for manufacturing and construction work that thousands of American workers are counting on.”
Since 1986, the federal government has prohibited private entities from using private activity bonds to build sports stadiums. But many sports teams have taken advantage of tax-exempt bonds anyway, by using municipal bonds issued by states or localities. The House bill would remove the tax exemption for muni bonds for sports stadiums.
The idea is hardly a new one. The Congressional Research Service, the Government Accountability Office and congressional panels have been looking into the issue for decades. The Obama administration, in its 2015 budget proposal, called for eliminating the tax deduction for stadiums, too.
The Brookings Institution estimates that, since 2000, the federal government has lost $3.2 billion in tax exempt bonds that helped build or renovate 36 professional sports stadiums.
So far, the National Football League has been the most vocal opponent of repealing the exemption. “It’s something that the NFL will oppose because we believe that the construction of new stadiums and renovations of stadiums are economic drivers in local communities,” NFL spokesman Joe Lockhart told The Wall Street Journal. “If the idea is to promote economic growth, this would be a step backwards.”
The stadium provision is not in the Senate tax bill, but there appears to be some support for the idea in the upper chamber as well. U.S. Senators Cory Booker, a New Jersey Democrat, and James Lankford, an Oklahoma Republican, introduced a bill earlier this year to eliminate the stadium subsidies.
“Professional sports teams generate billions of dollars in revenue. There’s no reason why we should give these multi-million-dollar businesses a federal tax break to build new stadiums,” Booker said.