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Trump Infrastructure Plan Expands PABs, Light on Tax Credits

Published by Michael J. Novogradac on Thursday, March 1, 2018

Journal cover March 2018   Download PDF

Nearly everyone in Washington, D.C., agrees that America’s infrastructure needs improvement, but a consensus on how to fund such an effort is elusive.
The Trump administration released its infrastructure plan Feb. 12 as part of its fiscal year 2019 budget proposal–advocating a $200 billion federal investment designed to spur an additional $1.3 trillion for roads, transportation and other needs such as wastewater treatment plants, veterans’ hospitals and transformation of brownfield sites.

“This is the start of a negotiation–bicameral, bipartisan negotiation–to find the best solution for infrastructure in the U.S.,” an administration official told Politico two days before the release.

The 55-page proposal wasn’t embraced by everyone. Democrats said the federal funding total fell short of what is needed to repair roads, railroads, tunnels, airports and more. They said these concerns would be better addressed by a proposal they released last year that called for $1 trillion in federal investment.

There are other options. The U.S. Chamber of Commerce has proposed an increase in the federal gas tax to raise $394 billion over 10 years–one way to fund a significant amount of infrastructure improvement, but a proposal that would surely run into some strong opposition.

The administration’s proposal includes a $6 billion expansion of private activity bonds (PABs), which were in danger of losing their tax-exempt status two months earlier during tax reform negotiations. Notably missing from the Trump administration proposal is tax credits, which is somewhat surprising given their central role in their campaign proposal, but they’re not necessarily off the table.

The administration’s proposal would eliminate many existing federal infrastructure-financing programs and significantly reduce federal support for infrastructure projects over time–for example, tables from the Office of the Management of the Budget (OMB) indicate a drop of nearly $25 billion of federal spending–down to $69.4 billion–for air, ground and water transportation from 2019 to 2022. 

Trump’s plan proposes to spend the $200 billion in federal funds to spur investment partnerships at the state, local, tribal and private level. It focuses on returning decision-making authority to local and state governments, requiring those entities to match any federal allocation by at least a four-to-one ratio.

The timing of the infrastructure plan (and budget release) was awkward. It came just a few days after Trump signed a bill to boost spending by $300 billion over two years and less than two months after tax cuts were signed into law that are expected to add $1.5 trillion to the deficit over the next decade, before accounting for any macroeconomic effects of the tax cuts.

Infrastructure is a longtime focus of Trump. Before his election, Trump promised a bill in his first 100 days in office to generate $1 trillion in investment–although the administration’s work on repealing Obamacare and passing tax cut legislation delayed that. 

The administration’s plan focused on traditional items, such as roads, bridges and airports. It also addressed such needs as drinking and wastewater systems, waterways, water resources, energy, rural infrastructure, public lands, veterans’ hospitals and brownfield and superfund sites.

In addition to the optimistic promise that it would stimulate at least $1.5 trillion in new investment over a decade, Trump’s proposal vowed to train the workforce of the future and shorten the approval process to two years or less–the current permitting process often takes more than five years.

Dividing the $200 Billion

The president’s budget infrastructure request–a framework, not legislation–is divided into several financial portions.

Half of the $200 billion federal investment would be to create an incentives program to spur additional funds from state and local government and the private sector. An additional $50 billion of federal funding would be dedicated to a new rural infrastructure program, largely allocated to governors to allow states to set priorities.

Also in the program would be $20 billion for transformative projects, $20 billion to expand loan programs that underwrite financing, such as the Transportation Infrastructure Finance and Innovation Act (TIFIA) and Water Infrastructure Finance and Innovation Act (WIFIA) programs, and $10 billion for a new revolving fund.

Incentive Program Details

The incentive program, which makes up half of the proposed federal cost, would include an application that the administration said will be evaluated on objective criteria. The largest objective factor would be creating additional investment –half of the scoring would be based on evidence of how the application will secure and commit new, nonfederal revenue for sustainable, long-term funding for infrastructure investments.

Another 20 percent of the scoring would be how the applicant will secure and commit new nonfederal revenue for operations, maintenance and rehabilitation. That emphasis is reflective of the Trump administration’s desire to focus on more state and local spending.

The rest of the criteria would be the dollar value of the project, how it will improve efficiency in project delivery and operations, plans to incorporate new and evolving technologies and evidence supporting how it will spur economic and social returns on investments.

While tax credits were not mentioned in the request, there is room. For instance, the Move America Act of 2017, which includes tax credits and a class of PABs (Move America Bonds) to fund infrastructure, could be rolled into the proposal. The Senate version of the bill is sponsored by Sen. John Hoeven, R-N.D., with Finance Committee ranking member Ron Wyden, D-Ore., as a co-sponsor, while the House version is sponsored by Ways and Means Committee member Jackie Walorski, R-Ind., with fellow committee member Earl Blumenauer, D-Ore., as a co-sponsor. With key members on the tax-writing committees already on board, the bill could become a vehicle to deliver the incentive program.

Increased PAB use

Included in the administration’s plan is a $20 billion investment from increasing the existing federal loan programs for infrastructure and broadening the use of PABs.

Under current law, existing PAB allocation levels are projected to finance the funding of approximately 700,000 affordable homes over the next decade, according to Novogradac & Company LLP analysis made when PABs were targeted for elimination in House tax reform legislation in November 2017, and updated after the final tax reform bill. Interestingly, the Trump administration’s infrastructure plan calls for the expansion of PABs.

New categories eligible for PABs would include qualified surface transportation facilities (roads, bridges, tunnels, passenger railroads, surface fright transfer facilities and other facilities eligible under the Transportation Infrastructure Finance and Innovation Act); hydroelectric power generating facilities; flood control and stormwater facilities; rural broadband service facilities; and environmental remediation costs on brownfield and superfund sites.

The proposal would also remove the volume caps on public-purpose infrastructure projects and allow income from PABs to be exempt from alternative minimum tax (AMT) liability.  The PAB provisions would come at a federal cost of $6 billion over 10 years, according to the plan, not much more than the estimated $8 billion cost of the Move American Act over the same period.

In a span of two months, PABs went from an endangered species to a vehicle to fund infrastructure improvements.

Rural Program, Capital Fund

The rural infrastructure program includes $50 billion, 80 percent ($40 billion) of which would be provided to states, which could distribute the money as block grants for infrastructure projects in rural areas with populations of less than 50,000 people.

Political Repercussions

While there was resistance to the Trump administration’s plan, conservative Republicans were shocked at the price tag and Democrats said there wasn’t enough investment, efforts to enact an infrastructure plan provides an opportunity for existing community development tax credit proposals to be enacted.

If an infrastructure bill gains momentum, two obvious legislative opportunities are the inclusion of the Cantwell-Hatch affordable housing bill and an increase and extension beyond 2019 or permanence for the new markets tax credit (NMTC). Both provisions have been introduced in Congress and fit into the spirit of infrastructure improvement, so keep an eye on what happens there. It’s possible that infrastructure legislation could create a new tax credit along the lines of the Move America Act, expansion of the low-income housing tax credit and permanence for the NMTC.

However, in the wake of tax reform legislation and coming just three days after Trump signed legislation to expand federal spending by $300 billion in fiscal years 2018 and 2019, a large federal expenditure on a new program–even one as popular as infrastructure–might be a hard sell.

Congress will have to create legislation to address the issues, which is no easy task since 11 House and Senate committees oversee the areas of policy included in the Trump proposal.

It’s as if nearly everyone in Congress agrees on the destination of infrastructure improvement, but are using different maps. Now it’s up to Congress to find a path that’s acceptable to enough members to gain approval and get President Trump’s signature. 

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