Commentary: Delaney’s infrastructure bill doesn’t hold up to scrutiny

Photo above: Washington Beltway (Photo by ephien under Flickr Creative Commons License.)

UMBC Professor Roy Meyers

By Roy T. Meyers

meyers@umbc.edu

In Monday’s MarylandReporter.com story, U.S. Rep. John Delaney talked about his proposed “Partnership to Build America Act”–a bill that would allow U.S. corporations to avoid taxes when they repatriate profits that are now booked overseas, if they purchase bonds that would be used to build infrastructure.

Delaney claimed that “There’s no really big pot of money other than the overseas cash”to finance transportation and public works spending.

Delaney deserves praise for seeking to build consensus on important policy issues. He’s received plenty of favorable media mentions on this bill, but as a budget and policy expert, I believe those reviews are far too generous.

The rhetoric supporting the bill is attractive–“bipartisan,”“build America,”“partnership”–but it distracts attention from the bill’s complexities. It is wise to remember that if you don’t understand a financial arrangement, then it’s time to watch your wallet.

Basics of the proposal

U.S. Rep. John Delaney

Here are the spending basics of Delaney’s proposal. It would create the American Infrastructure Fund (AIF) and capitalize it with up to $50 billion. That money would be used to finance infrastructure projects that pass benefit-cost tests.

The projects would be expected to pay the AIF back, meaning that the infrastructure projects most likely to be financed through the AIF would be those where it would easy to charge tolls. The AIF is thus somewhat duplicative of the existing Transportation Infrastructure Finance and Innovation Act program, and like various proposals to create an “infrastructure bank.”Assuming that the bank would spend $10 billion a year for five years, it would add a small amount of funding for federal investment.

While the spending hurdles used by an infrastructure bank are worth considering (see these analyses from the Congressional Budget Office and Brookings), it’s the financing of Delaney’s proposal that especially deserves scrutiny.

Corporations would bid to buy AIF bonds. Those bonds would pay only 1% interest over 50 years, which even in today’s low interest rate environment would mean a substantial loss to purchasers compared to alternative investments with similar risks.

Who pays at what cost

The compensation for that loss is that the winning bidders would be allowed to avoid U.S. taxes on repatriated profits for a multiple of the face value of bonds they purchased. The bill caps the multiple at 6; Delaney’s press release estimates it at 4; the auction proceeds will determine the actual multiple (the lower the multiple, the more attractive to the government).

Estimating the likely cost of financing the bank is complicated, but one analysis concludes it would be far more expensive than simply appropriating the funds out of general revenues.

Proponents of Delaney’s approach argue that absent this mechanism, those corporate profits will stay overseas because of high U.S. corporate tax rates. An alternative explanation for those foreign profits, well-reported in The New York Times here and here, and as shown in the ongoing frenzy of inversions, is that corporate lobbyists, lawyers, and accountants have created and extended numerous loopholes in the tax code. Since corporations won’t bid for AIF bonds unless they receive cuts in their effective corporate tax rates, the Delaney plan could end up rewarding the companies that have been most aggressive at dodging taxes (and the high net worth individuals who own their stocks).

U.S. Treasury Department (Photo by Elfboy/Flickr Creative Commons License)

Reforming corporate taxes

I agree with the many people who think the corporate tax code should be simplified; doing so could reduce corporate marginal tax rates. Republican and Democratic leaders have proposed comprehensive plans for corporate tax reform. They should negotiate and try to resolve their differences. Adopting the Delaney plan would make that more difficult, in part because it would create the incentive to continue loopholes in expectation that the AIF would be recapitalized.

Rep. Delaney claims that his bill “Creates a large-scale infrastructure financing capability with zero federal appropriations” (emphasis supplied).

Here’s my translation: corporate tax revenues that should be going into the Treasury would be diverted before they reach there, allocated instead to the AIF which would spend those moneys. The funds would not go through the scrutiny of the annual appropriations process, but they would be functionally equivalent to regular spending.

In the Delaney bill, the people who would oversee the spending would be the eleven directors of the AIF, seven of whom would be representatives of the largest purchasers of the bonds.

I don’t doubt that, say, Apple or GE would take care that their moneys were well-invested so that their 1% 50 year bonds would be paid in full, but I wonder if most Americans think public infrastructure investments should be guided by these companies.

How to pay for infrastructure

It’s not hard to find examples of government infrastructure spending that is poorly-managed (planning to catch a bus in Silver Spring?), but it’s also the case that there are many worthwhile infrastructure projects that can’t be afforded now.

The explanation is simple: the reluctance of elected officials to raise taxes and/or user charges. Taking that as a political given, Delaney and his co-sponsors have stepped into the breach.

But his plan was not picked up by the committees who are now considering temporary funding for surface transportation programs. Instead, they have picked an alternative that is even worse: “pension smoothing.”

Corporations could set aside less than they should for pension commitments, thus increasing their taxable income and corporate tax payments now, which will mean that these missed contributions will have to be made up later–thus reducing federal revenues in the future.

Road users should pay

Bay Bridge Toll Plaza

Unfortunately, most federal leaders have left at the side of the road the “user pays”principle relied upon by President Eisenhower when the interstate highway program was created. In great contrast, it is nearly impossible to find a transportation policy or budget expert who thinks that transportation spending should be financed primarily from general revenues or by budget gimmicks.

Instead, they argue that we benefit from receiving economic signals about how our usage affects the condition of the roads and other important concerns.

This means that transportation infrastructure should be financed from a mix of charges that are adjusted as our behavior and desires change. As we rely on more fuel-efficient cars, we have found that the gas tax is an insufficient funding source for roads.

Heavy trucks should be charged the most for the use of the roads, but hybrid and electric cars need to be charged as well, while retaining the gas tax that compensates for the polluting effects of gasoline consumption. Tolls and congestion fees help spread out when and where people travel, reducing the time they waste stuck in traffic jams. Mass transit should be subsidized to the extent it reduces congestion and pollution.

Not all of our leaders are afraid to make these points. A bipartisan bill from U.S. Sen. Bob Corker, R-Tenn., and Sen. Chris Murphy, D-Conn., would raise the federal gas tax. Maryland raised its gas tax, and the backlog of worthy transportation projects is being reduced. Rather than adopt counter-productive creative financing schemes such as the Delaney proposal, we should realize that the best “really big pot of money”for infrastructure is the spending that we are willing to finance through a transparent process.

Roy Meyers is professor of political science and affiliate professor of public policy at the University of Maryland Baltimore County.