by Jeff Yoders on NOVEMBER 30, 2016
Washington news organizations such as Politico are reporting more details about what a potential Trump Administration $1 trillion infrastructure plan might look like.
The pictures that the Washington, D.C. media are portraying are quite dramatic and some of them engage in a level of speculation about funding mechanisms that likely only have a tangential relationship to what is being discussed right now at Trump Tower.
Could more transit projects be part of a Trump infrastructure plan? Source: Jeff Yoders.
Politico’s analysis is a case in point, with speculation and quotes from both democrats and republicans about everything from a new gas tax indexed to the inflation rate to a quote from U.S. Rep. Peter DeFazio (D. Ore.), the top Democrat on the Transportation Committee, who said that public-private partnerships “won’t do much for the 143,000 bridges that need work nationwide unless you’re going to toll 143,000 bridges… it’ll help with individual sorts of big projects, but it’s not any kind of cure-all, and it certainly isn’t going to get the big bang that Trump has talked about in infrastructure.”
Federal Infrastructure Bank?
Yet, a mere 45-minute drive away, the Baltimore Sun praised another idea supposedly being debated by President-elect Trump and his advisors. U.S. Rep. John K. Delaney (D. Md.)’s Partnership to Build America Act would use repatriated corporate profits now held overseas (made available by a reduced tax rate on overseas earnings brought home and a larger tax on profits that remain off-shore) to put billions into the Highway Trust Fund and to create a new U.S. investment bank — with a $750 billion infrastructure fund — that would be available to state and local governments.
The New Republic gets right to the point and ominously says “Beware Donald Trump’s infrastructure plan.” Vox got in on the fun, too, cherry-picking the category “privately financed road projects” as an example of just how few innovative financing deals have been used in federal road construction, ignoring entirely the fact that bridges, sewer systems, ports, airports and other key assets have always been a part of Trump’s infrastructure improvement promise.
The only thing we really know right now is that two Trump senior policy advisers, potential Commerce Secretary Wilbur Ross and Peter Navarro, have spelled out what Ross called a “totally self-financing” plan that would produce up to $1 trillion worth of projects at no net cost to the government. Navarro argued for tax credits equivalent to 82% of the equity private financiers spend on infrastructure to raise the initial capital to replenish the Trust Fund. We called the idea infraTrumpture in a previous analysis.
By offering up to $137 billion in income-tax credits to lure private companies — and their cash parked overseas just like in DeLaney’s plan — to needed infrastructure projects, Navarro is betting on a new direct, federal revenue stream being created by the construction companies and their employees paying business and wage taxes into multiyear projects. That increased tax revenue can make up for the tax credits given to the private investors and, the theory goes, pay for the remaining costs. Under Navarro’s estimates, the tax income balances out the revenue lost to the income-tax credits.
If done this way, public-private partnerships used to finance infrastructure spending would need not be funded by tolls or other user fees as DeFazio and Vox claimed, because the tax revenue paid by the workers and the construction companies would offset the private investors’ tax credits and raise the remaining billions needed.
Remember, the investors are being rewarded with tax breaks for putting 82% of the money down in the first place. If constructed efficiently these projects could, possibly, even return a surplus to the U.S. Treasury.
Navarro calls it a way to “leverage new revenues and work with financing authorities, public-private partnerships, and other prudent funding opportunities,” and “harness market forces to help attract new private infrastructure investments through a deficit-neutral system of infrastructure tax credits.”
What is a PPP?
A PPP is a complex financing instrument with several different variations depending on the type of project, but PPPs generally involve a contract between a private entity and a government authority in which the private entity provides a project or public service while assuming significant financial, technical, and often operational risk in the project.
Yes, In some cases, the provided private service is paid directly by users of the service via mechanisms like tolling as DeFazio said but, in others, the governmental authority agrees to reimburse the private entity per some prescribed formula or lease payment, in this case, tax credits. This type of project could entirely be financed by wage taxes paid by construction workers and business taxes paid by construction companies based on the economic impact a booming construction sector and $1 trillion of infrastructure projects could generate.
There could also be deals based on development of nearby land for commercial property or other investment carrots. The Organization for Economic Cooperation and Development is certainly for PPPS... worldwide.
There’s still a lot we don’t know about the infraTrumpture plan and how it will be financed but the reaction in Washington, so far, has been a knee-jerk one that does not understand construction financing or how PPPs, in general, really work.