Tag Archives: GOP Congressional agenda

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.

Has Trump Deep-Sixed His Own Infrastructure Agenda?

Image by Henry Teitelbaum

A once-in-a-generation opportunity to restore America’s failing infrastructure is being squandered by a dysfunctional White House.

By Henry Teitelbaum, Editor, P3 Planet

It would be difficult to overstate just how wide the chasm running through the American political landscape has become since Donald Trump entered the White House. It is evident on the streets, at town halls, and in every proposal that comes before Congress. Even so, there is a lot of common ground when it comes to appreciating the need to invest in restoring the country’s crumbling infrastructure.

America has some of the oldest, most inadequate and poorly maintained public roads, bridges, transit systems, waterways and sewage infrastructure in the developed world. Its condition is seriously affecting everyone’s quality of life, whether through clogged roads, flight delays or flooded homes. In the face of challenges ranging from the threat of bridges collapsing to an entire city’s water supply becoming tainted, there should be no scope for partisan disagreement on the need to act quickly.

Failing Infrastructure’s Real Cost

In the just-released 2017 Infrastructure Report Card, the American Society of Civil Engineers gave a particularly grave assessment of the state of these critical public assets. The nation received another cumulative GPA of D+, unchanged from the previous survey in 2013 and consistent with “D” grades going back to 1998. That’s an exceptionally poor performance for a country with the kind of wealth America has, particularly given the number of high-profile infrastructure-related emergencies that have hit since the last survey. Lead tainted drinking water in Flint, Michigan in 2014 and this year’s evacuation of 200,000 people living downstream from the Oroville Dam in California are two incidents that made headlines, but there are many others.

One might have hoped that such crises would focus more minds on the condition of the nation’s dams and drinking water infrastructure. Sadly, according to the report, this has yet to happen. Both got “D” grades, which is one level above failing, just like last time. Meanwhile, the condition of America’s neglected transit systems, parks and solid waste infrastructure meanwhile, has actually worsened, according to the ASCE. In 2013, for example, it found that only 51% of people in America are able to use public transit to do their grocery shopping. This means more cars on the road, more unnecessary traffic congestion, more pollution, and more cost to those who can least afford it.

The reason, according to the ASCE, is that America is paying only about half of its infrastructure bill, and this is creating a funding gap of the kind that costs businesses and the economy hugely in terms of lost sales and productivity. This gap is estimated to total somewhere around $1.44 trillion between 2016 and 2025, or just under half of the nation’s $3.32 trillion infrastructure funding needs for the period. The cost to the US GDP, according to the report, will grow to an estimated $3.9 trillion by 2025 should infrastructure needs continue to be ignored.

The Case for Investing

Aside from the economic costs of not fixing America’s broken infrastructure, there are excellent reasons for making new investments in it today. Borrowing now, while interest rates are still low, reduces the cost of financing, which improves the financial feasibility of long-term projects. This makes them more attractive to the types of investors that are structurally geared toward this type of investment.

Increasingly, for example, pension funds see infrastructure as a good way to invest safely over the long term. When they are operational, public assets such as toll roads generate secure long-term, even inflation-indexed cash flows that are easy for pension funds to match to their liabilities. At a time when large pension funds in the US are lamenting the lack of attractive long-term investments at home due to low yields on government bonds, infrastructure could provide just the kinds of returns they seek to meet the needs of a growing population of retirees.

Infrastructure investment also has a long-standing history of generating high-quality jobs, both directly in the construction industry and in a range of services to local economies. Building a better physical infrastructure that brings benefits for future generations can also encourage stronger communities. It does this by helping to restore a sense of common purpose to a nation where faith in government has been eroded and where voters worry about their future and their children’s future.

Does Washington Know About This?

So why is it taking so long for Washington to get behind a big infrastructure plan? For the answer, look no further than President Donald Trump’s failing leadership and divisive style of governing.

It’s not just that the US President has failed to set, lead or seriously promote his infrastructure agenda so much as his inability to engage seriously with any issue long enough to see it through. Infrastructure, as much as any legislative program, requires discipline, bipartisanship and patience – none of which has been in evidence from the Oval Office.

“…the Trump Administration quietly moved to Plan B, and practically nobody noticed.”

Over the past six months, we’ve instead witnessed a distracted and belligerent President failing to push through any of his campaign’s legislative agenda, whether it’s tax reform or his repeated efforts to repeal and/or replace Obamacare. The way with which Trump moves from failure to failure while blaming everyone else is as astonishing as it is consequential. Which brings us to Trump’s infrastructure agenda.

During the campaign, Trump promised to spend $1 trillion on infrastructure over the next 10 years. The original proposal, the “Trump Private Sector Financing Plan,” relied on passage of a huge, heavily flawed and ultimately un-passable overhaul of the entire US tax system. This would have included reducing taxes on the repatriation of US corporate overseas profits from 35% to as low as 10%, if companies then invested those profits into infrastructure redevelopment. Some $2.5 trillion of deferred taxes overseas earnings could then be eligible for investment in rebuilding America’s roads, airports and water systems, and other essential assets.

But because the Trump administration doesn’t have a budget bill yet, even with Republicans dominating both houses of Congress, none of these overseas profits are available for investment. So when “Infrastructure Week” came around a few months ago, the Trump Administration quietly moved to Plan B, and practically nobody noticed.

Stealing A Page From Hillary

The proposal that was finally unveiled bears very little in common with his original infrastructure proposal other than the $1 trillion aspirational figure over 10 years. Instead of relying on tax revenue and credit giveaways to incentivize private sector equity investment, though, the plan appears to rely almost entirely on Public-Private Partnerships (PPP) to bring private financing and expertise to the task.

Even to the untrained eye, this looks an awful lot like the infrastructure plan that Republicans ridiculed and then blocked for much of President Obama’s eight years in office. It’s also very much like the plan put forward by Hillary Clinton during the campaign, which envisioned mobilizing private capital for investment in public infrastructure through the PPP model.

PPP, or as it’s called in the US and Canada, P3, is a model for procuring and managing long-term infrastructure that has been used successfully around the world in both developed and developing countries. It requires private consortia, typically construction firms and their financial backers competitively bid for a contract to design, finance, build, operate and maintain a public asset. The private companies also shoulder the risks around project delivery and face stiff financial penalties for failing to perform contracted duties. In this and other ways,P3 is distinct from privatization because the asset, whether a road, an airport or a school district, remains publicly owned.

People debate the merits of this model as opposed to traditional public sector borrowing and spending. But in an age when governments, including the US, are close to broke, it has broad appeal. In Canada it has become something of the default procurement option for the government because it delivers reasonable value for money and better mobilizes the skills, discipline, financial capacities and risk management capabilities of the private sector.

Dysfunctionality As Policy

So what does the Trump administration’s failure to push through a corporate tax reform bill linked to his original infrastructure agenda, or for that matter even a budget, mean for America over the next three and a half years?

We will have to see after the summer recess. But it doesn’t take a tarot card reader to tell you that the signs are not good. A federal government led by an incompetent administration that stumbles from crisis to crisis of its own making is unlikely to follow through on any kind of infrastructure agenda. That would be a huge lost opportunity for America because an infrastructure-led government agenda could go a long way towards putting investments to work in restoring the country’s competitiveness while delivering the jobs that Mr. Trump boasts about creating.

With or without support from the current administration, P3 projects are destined to become a permanent part of the infrastructure investment landscape in the US because the alternatives are expensive and sometimes deliver poor value for the public funds that are invested. In Canada, they account for some 36% of all infrastructure investment while in the US it’s 1%.

The most likely scenario for the next few years will be for many of the 33 states that have PPP-enabling legislation in place to formulate their own infrastructure agenda, perhaps in cooperation with each other. This could go some ways towards making sure these next few years are not wasted while waiting for Trump’s dysfunctional government in Washington to do its job.

This blog post has also appeared in The Market Mogul.

Is Trump’s US Infrastructure Vision For Real?

IImage by Henry TeitelbaumBy Henry Teitelbaum, Editor, P3-Planet.com

Right up to election day, President-elect Donald Trump was frustratingly short on the details of his post-election plans. In hindsight, it seems that lack of specificity didn’t hurt his chances, and may have even helped his campaign.

Now that he’s elected, Trump’s public remarks point to the possibility that he really is committed to investing in rebuilding America’s infrastructure. If confirmed, such a program would go a long way towards redeeming an otherwise deeply misguided political agenda.

As of this writing, it’s too early to expect a detailed plan from the new administration, particularly one that is led by such an easily distracted personality. However, most political observers seem to agree that this is one domestic program that passes the smell test. It is potentially  a rich harvest of low hanging political fruit because behind all the angry rhetoric of the campaign, both candidates put infrastructure near the top of their domestic agendas.

Serious Commitment

An analysis written in October by Commerce Secretary nominee Wilbur Ross and and business professor Peter Navarro — both senior policy advisers to Trump — points to a serious level of political commitment to infrastructure investment. It also indicates a willingness to consider innovative approaches to private sector financing for infrastructure  alongside public sector and public private partnership investments.

The “Trump Private Sector Financing Plan” described in their analysis is designed to be a revenue-neutral option for financing up to $1 trillion of the nation’s infrastructure needs over 10 years. A key incentive for early stage private sector infrastructure construction would come from federal tax credits. These would be  equal to 82% of the amount of the estimated equity required to absorb long-term revenue-related risks on projects. Because the equity component of the required investment is tax credit-supported, it reduces the revenue needed to service the financing, thereby improving the project’s feasibility.

Tax Neutrality

By their calculation, $167 billion of private sector equity investments in infrastructure could then be sufficient to secure leverage financing of $1 trillion. All of this assumes interest rates of 4.5% and 5%, an assumption that the post-election jump in yields call into question.

To achieve tax neutrality, the plan calls for the repayment of the tax credits from incremental revenue generated from project construction. That would be mainly from taxes on additional wage income and taxes on additional contractor profits.

Trump’s proposed corporate tax reform plan is designed to incentivize private capital flows into redeveloping America’s infrastructure. It achieves this by using the tax credit on infrastructure equity investment to offset corporate tax liabilities on the repatriation of  untaxed profits from foreign operations – effectively turning a tax liability into an equity investment.

Trump has proposed to tax US companies’ accumulated offshore profits at 10%, down from the current top corporate income tax rate of 35% on a one time basis if they repatriate those monies. US companies currently hold an estimated $2.5 trillion in earnings overseas because current federal law allows them to indefinitely defer paying taxes on these profits until they return them to the US.

Trump, who has specified that as a businessman he has “always loved leverage”, has also indicated a desire to take advantage of the current historically low interest rates to borrow long term, likely for a sum exceeding $500 billion.

Clean Sweep of Congress Helps

It’s worth remembering that Trump has been a real estate developer for his entire career. It is where his main business interests lie. But  it also seems that creating impressive, modern, even garish physical structures really excites him on a personal level. During the campaign, Trump emotionally recounted his experiences visiting modern airports in China and Dubai and wondered why the US has allowed its own public infrastructure to fall into its current state of disrepair.

Another factor that supports a potential increase in borrowing for infrastructure investment is the Republican sweep of both houses of Congress. Historically, most of the increase in federal spending in the US in recent decades has occurred under Republican administrations, most notably under George W. Bush when both Houses were under Republican control.

There is also considerable bi-partisan support for large scale infrastructure investment. President Barack Obama’s first term featured the American Recovery and Reinvestment Act, which was passed in 2009. It has been widely criticized for being too small in scope, and too focused on shovel-ready projects and other short-term fixes to address the enormous backlog of under-investment in infrastructure. But many still consider it an important Keynesian boost to the economy that contributed to the US outperforming other developed countries over the past eight years. A significant part of Hillary Clinton’s plan would have involved extending this investment program by creating a federally funded infrastructure bank that Obama was blocked from creating in the early part of his term by congressional Republicans.

Sorry State of US Infrastructure

There’s no question that the US would benefit enormously from new investment in these essential assets of future prosperity. The nation has been under-investing in its economic and social infrastructure for many years under both political parties, with overall spending dropping by half over the past three decades.

The extent of the neglect is evident across the board, with the American Society of Civil Engineers giving the country’s infrastructure a ‘D+’ GPA score on its 2013 report card. This includes a ‘D’ (poor) for drinking water and wastewater and a near failing grade of ‘D-‘ for levees and inland waterways. Aviation, roads and schools infrastructure are also rated ‘poor’ in terms of their fitness as measured by their capacity, condition, funding, future need operation, maintenance and public safety.

According to the ASCE, the US has infrastructure needs of about $3.6 trillion through 2020, including $1.7 trillion for roads, bridges and transit alone.

The Trump analysis points out that the future attractiveness of the US as an investment destination, its competitiveness, and its productivity are all at risk from the poor condition of the country’s infrastructure. It noted that the US now ranks 12th on the Global Competitiveness Index in infrastructure, with traffic delays due to inadequate transportation infrastructure costing the economy more than $50 billion annually.

Public Safety Issues Emerging

Beyond this, America’s quality of life and increasingly public safety are compromised, as recent episodes of lead poisoning and bridge collapses have demonstrated. The Trump campaign’s analysis cited an investigation by USA Today identifying nearly 2,000 additional water systems spanning all 50 states where testing has shown excessive levels of lead contamination of the past four years, including 350 systems supplying drinking water to schools or daycare facilities.

Since the Great Depression in the early part of the 20th century, infrastructure investment has been used as a fiscal tool for generating economic growth.

Citing the Federal Reserve, The Trump campaign paper says that in the US every $200 billion in additional infrastructure spending creates $88 billion in wages and increases real GDP growth by more than a percentage point, with each GDP point creating 1.2 million additional jobs. Other estimates, suggest that this multiplier effect could be even higher. According to the Federal Reserve of San Francisco, over a 10-year horizon, the average multiplier effect of government spending on highways is about two, which means that for every dollar spent, two dollars of GDP activity is generated.

There is also a potentially huge pool of domestic investment demand for infrastructure projects from pension funds, insurers and other institutions with long-term liabilities. The long-term nature of infrastructure programs means these investments are structurally well matched to the revenue flows from the debt that finances their construction, operation and maintenance.

Inflation Protection, Diversification Benefits

This revenue is highly reliable due to its link to dedicated tax revenue streams (availability payments) or revenue collected from tolls (concessions), it can provide inflation protection to the investor. Investors also look to infrastructure for its portfolio diversification benefits.

There are several challenges that could derail, or at least limit the success of Trump’s infrastructure plans. Among these is that the US unemployment rate has now fallen below 5% and continues to decline. That leaves very little slack in the labor market to prevent cost-push inflation from being generated. Regardless of the fundamental economic case for investing in infrastructure, shortages of labor are bound to appear, driving up the cost for delivery of these assets and making his goal less attainable.

It seems, in fact, that Trump’s plans for rebuilding America’s infrastructure will almost certainly be at cross-purposes with other key elements in his domestic agenda. Most notably, this includes his outspoken pledge to deport some 11 million illegal aliens.

Debt Spiral Risks

Another consideration is that the scale of Trump’s other policy initiatives, including higher defense spending and a range of tax cuts, could create a debt spiral that is potentially unsustainable. Already, the bond curve has steepened significantly amid concern that interest rates could start to rise quickly to prevent inflation from running out of control. If this happens, it could quickly and dramatically raise the cost of any large infrastructure investment program.

My own view is that Trump, or his Congressional allies will sooner rather than later have to decide which of his campaign promises needs to be curtailed so he can pursue the priorities that he believes will restore America to some semblance of his definition of its historic ‘greatness’.

GOP Should Put Infrastructure Back On US Agenda

By Henry Teitelbaum, Editor, P3 Planet

Over the past six years, Republicans have become very adept at blocking US President Barack Obama from achieving anything in Washington, often through tactics that could have done lasting damage to the nation’s credit standing in the world.

Now that the Republicans have control over both houses of Congress, it’s time for them to grow up. The 114th Congress  brings with it just about enough time before the  2016 Presidential election campaign for the Republicans to craft a meaningful federal agenda that will prove it is more than just the party that says “no”.

While there is already talk of working together on a tax reform or immigration agenda over the next six months, it’s hard to imagine a breakthrough on issues of such long-standing disagreement between the two parties.

Continue reading GOP Should Put Infrastructure Back On US Agenda