Seasoned Perspectives on Money, Markets and Institutions
Friday, April 28, 2017
Infrastructure Could be Trump's Key to Tax Reform
Infrastructure Could be Trump's Key to Tax Reform Ingo Walter
Getting close to the end of his first 100 days in office, President Trump badly needs a win on domestic policy, and he’s selected tax reform. Tax reform is almost as complicated as health care reform, but most people believe good tax policy can benefit things they care about - incomes, employment and growth - so the political underpinnings are there to bust the bunker of special interests entrenched in the current US tax system. A promising approach: Use infrastructure as a powerful wedge to meaningful reengineering of the tax system.
Like a ship that collects lots of barnacles
after a long time at sea, the federal tax code affects economic performance at
all levels. Don’t believe it? Read it. Or at least do your own taxes this year
to better understand what’s inside the box. It’s a disgrace.
There are plenty of connections between the two worlds that could make this work.The fact that the last significant tax reform
in the US took place over 30 years ago - in 1986 under Ronald Reagan - shows
how hard it is to make meaningful improvements. Riddled with loopholes,
carve-outs for special interests, attempts at social engineering, conflicts
with state and local governments, and pitting stockholders against bondholders,
foreign against domestic tax residents - the list goes on and the lawyers and
lobbyists keep circling.
If the tax system is widely regarded as an
open sore, that opinion seems in line with many people’s opinion about US
infrastructure as well. In both cases the issues are not abstractions. Voters
experience them “up close and personal” - with the next head-scratcher of a tax
worksheet or the next tire-shredding pothole.
Much of the infrastructure focus in the US is
on transportation facilities, widely associated with words like decrepit, rotten,
obsolete and third world. Financially strapped local governments, saddled with
much of the cost and beset by other fiscal priorities, have skimped on
depreciation and maintenance. Everyone wants the benefits of good
infrastructure and nobody wants to pay, so things are allowed to deteriorate to
a point where “crumbling” becomes the right word.
Everybody on the Trump team knows that making
a run at tax reform will stir up a political hornet’s nest and possibly create
a second political setback for the Administration after health care. So it’s
smart for Trump to couple tax reform to his (and Hillary Clinton’s) widely
supported campaign promises on infrastructure. But Trump first has to answer a
simple question: What’s the plan?
Boiling it down so far, the plan involves $1
trillion of additional capital spending in the near-term, with an emphasis on
greater reliance on the private sector and the use of tax credits as a key
policy tool. The details - What? Where? When? How? - are supposed to be
forthcoming soon. Eager to get a slice of whatever is going to happen, 49
states submitted 428 “shovel ready” infrastructure projects back in February.
In getting the initiative off the ground, here are a couple of things the Trump
team might want to consider.
·Transportation is the
lynchpin. Electric power generation and transmission, freight rail, warehousing
and logistics, pipelines and energy terminals are mostly in private ownership
and doing just fine. Social infrastructure (schools, hospitals, correctional
facilities, the courts) creates broad public benefits and is largely publicly
financed, albeit with private competition in some areas. Same with water and
sewage. So those are mainly off the table. Fixing our roads, bridges, tunnels
and transportation hubs are a must and will have the biggest impact. Government
tends to be pretty bad at multitasking, so Trump should narrow the immediate
focus on the transport sector.
·Public or private, or
both? Done right, government involvement in infrastructure is inevitable. It is
the key to the effective use of private capital in transportation. It provides
operating concessions, eminent domain, rate-setting, engineering and safety
standards, and in some cases financial partnerships with the private sector
(public-private partnerships). There always has to be a coincidence of interest
between the private and government sectors that is carefully anchored in
durable and robust project agreements, and everyone has to be able to claim
The key issue is to identify projects that generate robust
future cash flows that can be turned into today’s private sector financing –
attractive non-listed and listed equity investments, bank lending facilities
capable of coping with construction risks supported by solid infrastructure
bankers who have been around the block a couple of times, and the kinds of
high-quality long-duration debt instruments backed by realized cash flows that
big institutional investors like insurers and pension funds crave. Attractive
projects that cannot be calibrated to meet these conditions, however valuable,
will have to remain off the table for the private sector.
Be patient about jobs. Infrastructure investments increase aggregate spending in the economy but at the same time require high-quality, specialized labor that’s in limited supply due to U.S. education and training bottlenecks. This could put the brakes on promised employment gains. The newly popular emphasis on vocational training for high-skill jobs and attractive pay that comes with it should help. A key issue is the excruciating delays that often beset US infrastructure projects in our hyper-litigious and politically testy environment. Trump has already tried to clear away some of the regulatory underbrush and should make sure it actually happens. Still, benefits that start flowing a decade or more from now aren’t worth very much today, and in any case will be harvested by governments - so they require a good dose of statesmanship.·
OK on the private sector
involvement, but what’s with the tax credit idea? It’s not obvious how private
infrastructure financing can benefit from tax credits. Municipal bonds are
already tax-favored - a status that may be up for negotiation as part of
Trump’s tax reforms. Any additional infrastructure-specific tax benefits would
probably take the form of corporate “tax subsidies” on “approved” projects,
which puts the government in a position of deciding which worthy projects would
count toward the promised $1 trillion in federal support. Here the U.S. can
learn quickly from Europe and Asia, where good outcomes in many cases seem to
have captured broad public support for public-private ventures and where
creative moves, such as the European Bank for Reconstruction and Development
(EBRD) by now have a track record that can teach us some valuable lessons on
The devil is in the details. But the product of a good
infrastructure plan is significantly higher income and output in the short term
and economic growth in the long term, so that prospects are seen to improve for
everyone. The product of good tax reform is much the same. The two issues are
joined at the hip. Both are positive-sum games, with plenty of scope for
promising gains in one domain to compromise perceived losses in the other. In
politics, more degrees of freedom are good for outcomes that are in the public
interest. Linking infrastructure to tax reform can make a positive
contribution, so Trump should give it a shot.