“Trump seems convinced that the problem is a lack of available private capital, and thus has proposed a tax plan that includes generous credits to encourage private investment in infrastructure. That is the wrong approach”
In the United States today, with partisan polarisation at record levels, there is still at least one policy goal on which there is broad consensus, not only among Republicans and Democrats, but also among business and labour leaders, states and cities, and ordinary citizens: infrastructure.
The US has been short-changing infrastructure for years. Historically, federal, state and local governments have together invested about 2.5% of GDP in non-defense infrastructure assets. But, over the last 35 years, federal investment as a share of GDP has dropped by more than half.
For a long time, state and local governments were able to cover the shortfall, increasing their contribution to three quarters of total spending. But when the Great Recession hit, states and cities were forced to slash their budgets. As a result, in the second quarter of this year, total public expenditure on infrastructure fell to an estimated 1.4% of GDP, the lowest share on record.
This is all the more worrying, given the already-poor state of US infrastructure, which earned a grade of D+ from the American Society of Civil Engineers in its 2017 quadrennial report. Almost 20% of US highways are in disrepair. The costs and consequences of deferred maintenance are apparent everywhere, and almost every city and state has its horror stories: dysfunctional subways in New York City, leadcontaminated drinking water in Flint, Michigan, the nearcollapse of a major dam in Oroville, California.
The report estimates that restoring US infrastructure to “a state of good repair” would cost $4.6 trln between 2016 and 2025. That is $2.1 trln more than has been committed so far. Developing new funding sources for infrastructure investment is therefore critical.
An innovative strategy under discussion in Washington, DC, is linked to corporate-tax reform – a priority for President Donald Trump and congressional Republicans. Under the current tax system, US multinationals can defer tax payments on their foreign earnings until the earnings are repatriated. With foreign earnings growing and foreign corporate-tax rates falling, deferral has become increasingly attractive. As a result, US companies are holding an estimated $2.6 trln in foreign earnings abroad, rather than repatriating it and paying taxes that could be used to finance, say, domestic infrastructure investment.
Since 2013, the US Congress has floated several reform proposals to increase revenues collected on the stock of foreign earnings. Two recent bipartisan bills – which seem to have the support of Speaker of the House Paul Ryan, among others – link such reforms directly to federal infrastructure funding.
But Trump seems eager for state and local governments, which are in the strongest position to assess the needs of their communities, to shoulder much of the burden. Federal funding, he has signalled, would be limited to “high priority,” “transformative” national projects and used as leverage to encourage public-private partnerships (PPPs).
Private investors have long been eager to invest in public infrastructure – such as transportation or energy – in exchange for a share of those projects’ future revenues. Of course, private investors are generally not interested in projects that don’t generate revenue – such as, say, school libraries, urban “greenways,” or low-income housing – despite the importance of those projects for the economy and society.
In some areas, however, PPPs can offer substantial value. Though private finance may be more expensive than taxadvantaged public finance, over a project’s entire life, a PPP can benefit its government partner in numerous ways: through innovation; reduced design, construction, and lifetime maintenance costs; and risk mitigation.
To date, PPPs have played only a minor role in infrastructure development in the US. Trump seems convinced that the problem is a lack of available private capital, and thus has proposed a tax plan that includes generous credits to encourage private investment in infrastructure.
That is the wrong approach. What is really limiting private infrastructure investment is, to some extent, public