Bloomberg Government regularly publishes insights, opinions and best practices from our community of senior leaders and decision-makers. This column is written by Elaine Buckberg, former Deputy Assistant Secretary for Policy Coordination at the U.S. Treasury Department and current Principal with The Brattle Group.
President Trump appears determined to make good on campaign promises, and in his inaugural address he committed to “transform America’s crumbling infrastructure.” The need to invest in our nation’s infrastructure is a rare area of bipartisan agreement. Will President Trump, like Presidents Franklin Delano Roosevelt and Dwight D. Eisenhower, leave a legacy of infrastructure investments that transform our economy?
The infrastructure plan authored by Trump’s nominee for Commerce Secretary, Wilbur Ross, and White House National Trade Council head, Peter Navarro, calls for $137 billion in tax credits for private-equity investments in infrastructure. The Trump proposal provides no upfront cash, just a tax benefit for private investors—departing from longstanding federal policy of giving states and municipalities money to build infrastructure. Yet the authors argue that the tax credits would stimulate $1 trillion in infrastructure investment.
Beyond those provisions, the plan provides few details. Whether the Trump tax credits will leave a legacy of economically important projects or simply subsidize private investments with little public benefit at taxpayer expense will depend on the answers to some critical questions.
1. Will the tax credits support public infrastructure investment or just subsidize the private sector?
The Trump plan leaves unanswered the critical question of whether the tax credits will be reserved for public infrastructure that government has long supported— transportation and water systems—or will be made available to private projects in energy and construction.
Suggesting that some of the credits will go to support infrastructure traditionally funded by government, the plan calls for more use of public-private partnerships (PPPs). In a PPP, government contracts with private investors to take on some combination of designing, building, financing, operating, and maintaining public infrastructure projects. Recent PPPs include the Purple Line addition to the Washington, DC Metro transit system and a water supply system for San Antonio, Texas.
While privately-owned energy and telecom infrastructure is essential for our economy, extending credits to private projects risks letting taxpayers subsidize investments that would be made anyway.
A stronger case can be made for extending credits to those private investments with the greatest public benefits, such as upgrading the cybersecurity of our electric grid or delivering broadband to unserved communities.
2. Even if directed to public projects, can tax credits bring down infrastructure costs to states and municipalities?
By raising after-tax profit, the proposed 82% tax credit would make a wider range of public infrastructure projects attractive to investors. Although plan details are incomplete, one interpretation is that for every $1,000,000 invested, investors would receive a tax credit of $820,000—and take over $2,340,000 in profits before paying a penny in taxes. Put differently, investors get to keep 50% more in profits compared to other investments.
If investors share the tax savings with state and local governments, it can make projects cheaper. And while government infrastructure projects are notorious for frequently running behind schedule and above budget, incentive-based PPP contracts can benefit taxpayers with on-time and on-budget delivery.
3. How do we ensure the tax credits go to high-value public infrastructure—and not to private pork?
Whether the tax credits will fund the most needed investments will depend not only on the types of projects that qualify, but also on how selection decisions will be made. To ensure taxpayer funds are used for public good, the credits should be awarded competitively and based on public economic benefits.
Using a transparent public benefits standard can protect against the all-too-frequent political use of infrastructure funds (think bridges to nowhere), as well as against pressure from would-be project investors. Both the Commonwealth of Virginia and the federal TIGER grant program consider the economic benefit-cost ratio of candidate projects before making funding decisions.
The tax credit program poses an opportunity to advance projects that would have a large positive impact on national or regional economic activity. Explicitly favoring projects that cross state lines or municipal boundaries would incentivize governments to work together to deliver important investments.
Projects of major economic significance include modernizing air traffic control, building the Gateway Tunnel to double passenger train capacity into New York’s Penn Station, and improving intermodal freight links at our busiest freight junctions.
If the Trump Administration funds infrastructure with tax credits, allocating them wisely for the public benefit is the best way to ensure that the Trump era will leave behind a meaningful legacy of infrastructure investments. Failing to do so would instead let taxpayers subsidize $1 trillion in private energy and construction projects with little public benefit.
The opinions presented in this column are those of the author and do not necessarily reflect the opinions of Bloomberg Government or Bloomberg LP.