Reason to Hope for Possibility of a Federal Infrastructure Tax Credit

Published by H. Blair Kincer on Monday, February 6, 2017 - 12:00am

As the new administration and Congress adjust to working together in Washington, the nation’s governors came together Jan. 25 to outline priorities for 2017 and emphasized a record of putting partisanship aside to make progress in their states. During the annual state of the states address, NGA Chairman Terry McAulliffe of Virginia and Vice Chairman Brian Sandoval of Nevada voiced bipartisan support for a comprehensive infrastructure plan that would repair existing infrastructure, create stability for the Highway Trust Fund and address water and energy needs, all in order to provide a backbone for a strong economy.

On Capitol Hill, many policy insiders believe an infrastructure plan will be a priority for 2017, but likely not during the first 100 days of the new administration. Many see the issue as one upon which Democrats and Republicans could cooperate if a financing strategy can be agreed upon.  Speaker Paul Ryan, R-Wis., and Senate Minority Leader Chuck Schumer, D-N.Y., had made significant progress in discussing the terms of infrastructure legislation in the last Congress, and are expected to continue such deliberations given that President Trump has made infrastructure a top priority.

The plan released during President Donald Trump’s campaign calls for $137 billion in tax credits to fund the equity portion of a $1 trillion infrastructure plan. A transition team version of the plan changed this figure to $550 billion. According to a summary document by Wilbur Ross and Peter Navarro released in October, the plan is intended to address the issue of America’s crumbling infrastructure. With 82 percent of the costs supported by revenues, the plan may lend itself to new infrastructure that generates predictable and robust revenue streams to pay for debt. This could come in the form of tolls for highways, airport fees, fees for port usage, etc. As the Ross and Navarro piece indicates, “Much more needs to be built anew...”

A criticism of the plans is that current infrastructure investors, such as pension funds, typically are not interested in tax incentives because of their tax status. However, this may open the door for a whole new source of equity for infrastructure development. With a focus on new infrastructure, the credit concept could work similarly to the other tax credits. The equity piece is something Novogradac & Company readers understand well: a tax credit to cover equity contributions.

And such a model has bipartisan support as well.  Sens. Ron Wyden, D-Ore., and John Hoeven, R-N.D., introduced the Move America Act in the last Congress, which includes a provision to create an infrastructure tax credit, largely modeled after the low-income housing tax credit.  Both senators are expected to reintroduce the bill soon.

The Trump infrastructure tax credit as it stands is a framework with many details left undetermined. Equity return seems to be from tax benefits, generated without necessarily owning any assets. The Treasury Department has generally preferred tax credit recipients also have equity ownership in assets, with a potential for at least a minimal amount of cash return. That means the return mechanism may need to be modified. The Novogradac Federal Infrastructure Tax Credit (FITC) Working Group is currently drafting a white paper that will make design recommendations.

While lots of details remain to be seen, the creation of a credit to incentivize infrastructure is a new, exciting idea in the federal system. However, states may be leading the way. A new credit in Utah was passed in 2015 (Utah S.B. 216, Utah High Cost Infrastructure Development Tax Credit). This credit is designed to incentivize new construction of transmission lines, power substations, gas lines, rail facilities, road improvement projects, water self-supply projects and water removal system projects, among other things. The mechanism is familiar to those in the tax credit industry, with the program providing tax incentives over a 20-year period of up to 50 percent of qualifying infrastructure costs incurred by a business. The goal is to provide rural Utah with economic expansion opportunities. The evolution and development of this program will be interesting.

The federal infrastructure tax credit proposal has received criticism from Democrats, but House leaders including Speaker Ryan and House Transportation Chairman Bill Schuster, R-Pa., have said that a bill will be forthcoming. Schuster held a hearing about infrastructure on Feb. 1 and the Senate Environment and Public Works Committee is slated to hold a similar hearing on Feb. 8. On Jan. 24, Senate Democrats unveiled a $1 trillion infrastructure plan that largely relied upon public funding. Certainly Democrats are expected to push for spending in any infrastructure deal, but the final deal is likely not to be based on a tax credit only or spending only, but rather a combination of both approaches.

While GOP budget hawks are unlikely to jump on board for any plan that increases the federal deficit, examples such as the one in Utah show the possibilities of tax-credit financing of infrastructure programs.  The fight to determine the best infrastructure financing model may be on, but with pressure from the states and the need for infrastructure, this may be one of the few areas of agreement in Washington. There is reason to hope the administration and Congress will succeed in getting an infrastructure plan, including an infrastructure tax credit, passed.