US Infrastructure Hopes Betrayed By GOP Tax Reform

By Henry Teitelbaum, Editor, P3-Planet

Probably the most important campaign promise now slated for sacrifice on the altar of Republican tax reform is President Donald Trump’s fabled Infrastructure Plan. 

It is clear with the release of the GOP’s final draft that the massive tax cut for big businesses, friends, family and the few other Americans that share in the extraordinary wealth of the top one percent won’t leave anything for investment in new airports, roads, bridges, hospitals and other essential public assets. 

A Dubious Achievement

This is only one of the dubious accomplishments of a  tax plan that will add $1.5 trillion to the federal deficit over 10 years. The latest iteration of the reform will also undercut the municipal bond market by eliminate provisions for the tax-free refunding of existing private activity bonds.  This makes it far more difficult for borrowers to finance public housing and other public infrastructure. Between the two, it’s virtually certain that little  public money will be available to incentivize private investment in infrastructure.

The only leg left for any infrastructure program is  the tax windfall that corporate tax reform was supposed to deliver. Indeed, the  bill that is being prepared for the President to sign this week will cut the corporate tax rate from 35% to 21%.  But for those who still recall, the idea was to encourage US corporations, who collectively owe an estimated $2.5 trillion in deferred taxes on overseas activities, to repatriate their profits. From the taxes paid on this, $1 trillion would be made available for investment in the equity of infrastructure projects over the next 10 years.

The Writing’s On Wall Street

That of course was the idea. In reality, structures are needed de-risk and encourage these investments, such as loan guarantees, tax incentives and other Federally supported programs. None of these appears to have even been discussed, so the investment windfall is highly unlikely to happen as advertised.  

Meanwhile, those of us who watch the ticker tape on Wall Street know that the extraordinary performance of publicly traded US companies that retain large caches of offshore profits has nothing to do with expectations of a surge in domestic infrastructure investment.

There simply isn’t any reason for them to believe in Trump’s “vision”. Why would anyone who operates a hugely successful business overseas invest in the equity of an unrelated activity they know nothing about? Rebuilding bridges, dams and other essential infrastructure carries considerable construction and operation risk, so who would willingly take the plunge at a time when Congress is undermining its own creditworthiness? Most companies themselves admit privately that they will use any tax windfall to buy back shares or payout dividends. 

Other than grandstanding on the need for infrastructure investment following a deadly train derailment in Washington State on the eve of the tax bill vote, Trump has been silent on this critical element of his infrastructure plan.

It barely shows up on his agenda as he becomes ever more distracted by the chaos he creates each day. Rather than tweeting about policy initiatives, Trump is still  busy with his online bullying, self-promotion and of course obstructing the mounting investigations into his administration’s pre-election dealings with Russia. 

The reality is that after a string of failed policy initiatives, most notably the repeal of the Affordable Care Act, nothing else matters for Trump other than getting something, anything past the post before his first year in office ends. If that means throwing the budget into permanent deficit and leaving nothing for investment, so be it.

GOP Swamp Poodle

One effect of Trump’s self-destroying behavior in office is that his leadership position in relation to his Republican-led Congress is  weak and compromised. So much is this now the case that,  far from being able to follow through on his populist election agenda, he’s become the ultimate GOP swamp poodle. 

Senate Majority Leader Mitch McConnell was never much interested infrastructure and even said during the campaign that it was “not a top priority.” Ditto House Whip Paul Ryan who placed its importance low on his list of priorities. Both Congressional leaders have always been, and remain entirely about getting tax cuts. Now they’ve got Trump right where they want him to be.

While all of this has been happening, the once-in-a-generation opportunity for Trump to borrow long-term at historically low cost has been slipping away. The near-zero interest rate borrowing terms that were available in 2017 were likely the last best chance for any administration in Washington to take the lead for a meaningful infrastructure investment agenda. This is particularly true for  private investment, where low-cost borrowing can make a huge difference.

Interest rates in the US are now firmly on a tightening cycle as growth and inflation start to pick up. December’s quarter point rise in the Fed funds target, which is now between 1.25% and 1.50%, is of course still low by historical standards, but there are already three further interest rate rises in store for 2018 with no guarantee that each of those increases will be by only a quarter point. More important is the reality that whether Trump leaves office or not, America looks set for another three years of inaction and neglect of the country’s infrastructure needs. 

Evidence of this neglect is all around us, though it generally hits the newsstands only when some essential public asset such as a bridge or a dam spectacularly collapses. The 2017 Infrastructure Report Card, the American Society of Civil Engineers gave the nation a cumulative GPA of D+, unchanged from the previous survey in 2013 and consistent with “D” grades going back to 1998.

Where are the Jobs?

We have lost precious time because of  the chaos that Trump has brought to Washington.

But the real losers in all of this will be within Trump’s own political base. Infrastructure investment creates jobs, lots of well-paid, long-term, full-time jobs. A lot of these are well-suited to the unemployed blue collar base that Trump promised to help during the campaign. 

Unlike the few, and likely temporary jobs that watering down pollution standards may bring back to America’s dying coal industry, infrastructure investment brings economic growth to  depressed parts of the country. It does this  by boosting productivity and by creating a more desirable and competitive place for businesses to locate. The assets that these investments create are the building blocks of long-term prosperity, whether its more highway capacity, more efficient power generation, improved water and air quality, or better student test scores. 

From a budgetary standpoint, the pickup in growth that infrastructure generates through job creation and new public assets  is a far more reliable  source of tax revenue than this fiscally ruinous tax reform bill.

This article has appeared in The Market Mogul. If you are interested in running this or any of my other stories, please contact the author at hthq@hotmail.com.