Tax Credits Hold Significant Potential for Infrastructure Investment

Published by Owen P. Gray on Monday, May 15, 2017 - 12:00am

One of the top priorities for both President Donald Trump and the 115th Congress includes promoting greater infrastructure spending and investment, and both have suggested a federal infrastructure tax credit (FITC) in some form as a powerful mechanism to do so. Before the November 2016 election, Trump campaign representatives Wilbur Ross (now Commerce Secretary) and Peter Navarro (White House National Trade Council Director) proposed a federal tax credit to generate investment in infrastructure projects. Their proposal involved $137 billion in federal tax credits to generate enough investment to make a $1 trillion infrastructure package viable.

This is not the first time the concept of a FITC has been proposed as a mechanism to boost investment in infrastructure. In 2015 a bipartisan bill was introduced by Senator Ron Wyden, D-Ore., and Senator John Hoeven, R-N.D., called the Move America Act. The bill sought to create more tax-exempt bonds to be used for infrastructure projects and included the creation of a tax credit for infrastructure projects. The concept of a FITC has bipartisan support, which is expected to be reintroduced soon. Additionally, building and rehabilitating America’s infrastructure is something both major political parties can agree on given its current state.

Current Status of America’s Infrastructure and Infrastructure Public-Private Partnerships

An insufficient infrastructure system can result in decreased productivity, increased carbon emissions, and even jeopardizes public health. Yet, despite the important role that it plays, America’s infrastructure continues to fail.

For example, the American Society of Civil Engineers (ASCE) recently released its 2017 Report Card, which grades America’s infrastructure based on the nation’s 16 major infrastructure categories. In its 2017 Report Card, the ASCE gave America’s infrastructure a “D+”, the same grade it received in the 2013 Report Card. The 2017 update, as noted by the ASCE, signifies only incremental improvement in infrastructure over the past couple of years.  

The increased use of infrastructure systems (i.e., increased highway use noted by the Federal Highway Administration) combined with the fact that our existing infrastructure systems are aging contributes to the deterioration of America’s infrastructure. Even with this continued deterioration, less has been spent on infrastructure in recent years. Currently, most spending comes from the public sector. According to the Congressional Budget Office, federal, state and local governments spent $416 billion on infrastructure in 2014. However, this amount still represents a decrease in infrastructure spending. The U.S. Commerce Department’s Bureau of Economic Analysis has stated that in general “net public non-defense investment at all levels of government was 1.5 percent of GDP in 1980 and only 0.6 percent in 2015.”

With this decreased public spending, there has been increased focus on using public-private partnerships (P3s) for infrastructure investment and financing. At their most basic level, P3s inject private sector capital into projects and shift the risk of construction and compliance to private parties. These partnerships may be utilized in conjunction with direct governmental spending to address America’s infrastructure needs and to fill in gaps associated with declining public sector spending on infrastructure The Federal Highway Administration has affirmed the benefits of P3s saying they “bring creativity, efficiency, and capital to address complex transportation problems facing state and local governments.” In order to encourage the use of P3s, we should design effective and efficient mechanisms to bring these partnerships to fruition, and implementing a FITC may be a significant way to do so.

Benefits of a FITC

The benefits of other federal tax credit programs have been documented. For example, in a 2011 report, Novogradac & Company evaluated the effectiveness of the low-income housing tax credit (LIHTC), one of the premier “pay for performance” P3-based tax credits. That report noted that the LIHTC has resulted in low foreclosure rates, high compliance rates, and the stable investment track record for investors. As with the success created by a P3 such as the LIHTC, a FITC could have similar successes and benefits. Some benefits of a FITC would include, but are not limited to:

  1. large-dollar investments from third-party investors,
  2. screening of projects before development by third-party investors,
  3. construction and/or reconstruction risk and other development risks borne by investors and developers,
  4. tax credits are received for performance over time,
  5. able to easily collect from investors in the instances of recapture,
  6. state-level allocation, customization, and oversight, and
  7. regulatory guidance from the IRS and enforcement by IRS auditors.

These are benefits that are hard to replicate with direct spending, and exist as a good supplement to direct spending. For example, as also noted in Novogradac’s 2011 report about the LIHTC, other supply-side government programs relying only on direct spending have experienced mixed success.

Design will be Key

When designing a FITC, other federal tax credit programs are instructive. What works in other tax incentives can be extracted and applied to the design of a FITC. A well-designed FITC would make more projects financially feasible.  A future post in this space will discuss a concept for the overall structure of a FITC, including why different types of models should be available to allow more projects to be eligible.