Trump’s Plan to Fix the Nation’s Infrastructure | Katonah Real Estate

The President-elect’s ambitious proposal relies on private financing, but the plan has its critics.

 

According to President-elect Donald Trump, the answer is yes. You can get $1 trillion in infrastructure using a “revenue neutral” model of private financing that won’t burden government budgets.

The declining state of America’s infrastructure has long been a major issue for both Democrats and Republicans, but the parties have disagreed about how to pay for what the American Society of Civil Engineers (ASCE) has identified as a $3.6 trillion investment gap.

Trump’s senior policy advisers say they have an answer. In late October, Wilbur Ross, a private equity investor, and Peter Navarro, a University at California, Irvine business professor, released a detailed plan for Trump’s vision on infrastructure, which calls for investment in transportation, clean water, the electricity grid, telecommunications, security infrastructure, and “other pressing domestic needs.” Trump’s vision relies heavily on private companies to make American infrastructure great again.

Road work in Kitsap County in Washington state

Kitsap County Public Works – Roads Division via flickrRoad work in Kitsap County in Washington state

To finance $1 trillion dollars worth of new infrastructure, the Trump plan would entice private companies to invest $167 billion of their own equity into projects. In return, these companies would get a tax incentive equal to 82% of that equity investment, or roughly $137 million in government tax breaks. Companies could then leverage their initial equity investment and tax credit financing to borrow more money on private financial markets, where interest rates are at historic lows. “With interest rates so low, this has got to be the best time from a break-even point of view, from a societal point of view,” Ross told Yahoo! Finance.

In addition, companies would be allowed to receive revenue—in the form of tolls or fees from users of this infrastructure—in order to offset their costs and generate profits.

An overpass project on Interstate 595 in Florida

FormulaNone via flickrJosh Lintz”An overpass project on Interstate 595 in Florida

The Trump plan hopes to pay for the financial burden of those government tax credits in two ways: First, through the increased tax revenue that would come from the wage income of construction workers and others building the projects; and second, from the taxes that would be paid on the increased revenues of the companies contracted to do the work. In other words, the income tax of workers and the profits made from fees collected from users of the infrastructure would offset the lost tax revenue from government tax credits.

Creating a deficit-neutral infrastructure plan is nothing new. In 2015, Sen. Bernie Sanders (I-VT) championed a bill calling for a $478 billion investment over six years without increasing the deficit. Funding relied on closing corporate tax breaks that allow corporations to stash money overseas. That bill was blocked by the Republican Senate.

Public-private partnerships are common in complex infrastructure projects, but what’s unusual about Trump’s plan is the extent to which private companies would take over the entirety of projects. Private entities, which are beholden to corporate revenue requirements, would be put in charge of public sphere entities. Navarro, responding to that potential criticism, said in an interviewwith Yahoo! Finance that Trump’s “form of financing doesn’t rule out the government managing the whole thing after it’s built. This is not like the prison thing.” (Stock prices of for-profit prison companies, meanwhile, are on the rise with Trump’s win.)

A sewer project in Baltimore

Elvert Barnes via flickrA sewer project in Baltimore

How important is it to close the infrastructure investment gap? The ASCE’s 2013 Report Card for America’s Infrastructure gave the country a D+ grade. The next report card is being prepped for release in March 2017. “From ACSE’s perspective, clearly there’s a role for the private sector in infrastructure development, and it’s already been involved for a long time,” says Brian T. Pallasch, managing director of Government Relations and Infrastructure Initiatives at the society. “We still have a bit of uncertainty as to what [private investment] means in the Trump administration’s proposed perspective. They clearly want private investment in infrastructure. When you get the private sector involved in infrastructure, there is going to need to be a rate of return for them to make money. Historically, municipal infrastructure hasn’t had private investors because there hasn’t been a rate of return. How does that solve itself?”

How, for example, might you make the business case for a profit-driven private company to invest in the municipal water supply in Flint, Mich.? The answer may lie in increased fees for users of that service. “We feel very strongly that users of infrastructure should pay for it. That principal is one we support,” Pallasch says. That said, he notes the need to be realistic about the financial burden certain fees could cause. “The idea of raising water rates is a struggle for many municipalities where you have low-income households. We’ve been talking to colleagues in the water world about how do you set up programs where you raise rates and it allows subsidization of lower income residents?”

As for water, the Trump plan suggests tripling funding for state revolving loan fund programs, which supply low cost financing to municipalities, but it does not identify where those increased funds would come from.

Trains in Des Moines, Iowa

Phil Roeder via flickrTrains in Des Moines, Iowa

Critics of revenue-neutral plans such as these say that what would be saved on the front end will get paid for on the back end in the form of tolls and increased fees for users. In general, “revenue neutral tax proposals by definition create winners and losers,” economist Thomas L. Hungerford wrote last year in an op-ed. “The winners would pay less in taxes and the losers would pay more in taxes. The losers tend to be highly concentrated in certain income groups and business sectors, essentially becoming special interests.”

Some economists believe the Trump plan to use tax revenues to offset costs is overly ambitious. It assumes that the income tax revenue generated from construction and other contract workers on these projects will be in addition to existing tax revenue. As Alan Cole, an economist at the independent Tax Foundation, told the Washington Post, the plan overinflates the potential revenue because it assumes workers on these projects were previously unemployed or not already contributing to income tax revenue. (This plan also means that income tax revenue would be diverted from other funding needs to underwrite infrastructure.)

Cole noted, too, that Americans would ultimately foot the bill for these new projects, not only in user fees. “Maintenance and new construction would only occur in communities where it is urgently needed if private investors were convinced users could afford to pay,” he told The Washington Post. And if, as Navarro proposed in his Yahoo! Finance interview, the government takes over the projects once built, then the government would be on the hook for long-term care and maintenance.

Indeed, having so much private investment could weight projects to wealthier demographics. “Under Trump’s plan, poorer communities that need the new projects and repairs the most would get the least attention,” writes Jeff Spross, business and economic correspondent for The Week.

Lents Town Center project in Portland, Ore.

Twelvizm via flickrLents Town Center project in Portland, Ore.

There’s also concern that Trump’s infrastructure plan doesn’t work in tandem with his other proposed policy changes, such as tax cuts for the wealthy. “He’s right that borrowing to invest in infrastructure makes sense in times like these when interest rates are low,” the editors of The New York Times write. “But combined with his other plans, Mr. Trump’s proposed borrowing would do severe fiscal damage.”

Once financed by private enterprise and tax incentives, infrastructure projects under Trump’s plan would speed through the “boondoggle” of “red tape” via a proposed streamlined approval process. Projects would “put American steel made by American workers into the backbone of America’s infrastructure,” according to the vision statement, co-authored in part by Ross. A billionaire investor, he specializes in bankruptcies and has “parlayed a series of ballsy political and financial gambles on left-for-dead assets—midwestern steel mills, southern textile mills, and Appalachian coal mines—into an empire.” It’s unclear how Trump’s administration would dictate that private companies use only American steel when Trump himself relied on cheaper Chinese steelin his own real estate development projects. The Trump vision also touts an increase in private sector investment to “better connect American coal and shale energy production with markets and consumers.” Notably absent is any mention of investment in renewable energy infrastructure.

Overall, the current Trump plan strongly focuses on traditional “horizontal” infrastructure needs—surface roads, pipelines, water distribution. Besides a call to modernize America’s airports, the infrastructure of buildings and other public spaces isn’t explicitly mentioned. The ACSE, meanwhile, categorizes schools, public parks, and recreation among the critical infrastructure needs in its report card.

Fort Irwin hospital project in California

US Army Corps of Engineers via flickrFort Irwin hospital project in California

The American Institute of Architects (AIA) has consistently lobbied the government to expand its view of infrastructure. “One of the things that we’ve communicated to presidential transition teams in the past, and will continue to do, is to remember that infrastructure is more than roads and bridges; it’s also schools and libraries and buildings,” says Andrew Goldberg, Assoc. AIA, the Institute’s managing director of government relations and advocacy. “It’s not just the infrastructure that moves people and things, it’s also what happens once you get there. Infrastructure was the first policy related item that Trump mentioned in his victory speech, and I think that there is a strong opportunity coming into next year for some serious work. It will be important to speak to the importance of the built environment and the community assets in addition to ‘traditional’ infrastructure.”

 

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