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Make-America-Great-Again Bonds?

The following is an excerpted version of an article that describes and discusses in some detail many of the specific infrastructure proposals likely to be considered as part of an infrastructure-incentive initiative. The entire article is available by clicking here.

Investment in public infrastructure is a longstanding topic that has received a lot of renewed attention since election night, prompted in large part by its prominent mention in President-elect Trump's acceptance speech as a centerpiece of his job creation plans.  Lawmakers on both sides of the aisle have spoken for many years about the pressing need to rebuild the nation's roads, bridges, airports, seaports, waterworks, and many other public facilities that are often taken for granted.  The Trump administration's seeming enthusiasm for this topic has breathed new life into those discussions.  If and when policymakers and politicians move beyond platitudes to actual legislative proposals, they will likely consider some new proposals suggested by members of the Trump administration as well as some "oldies but goodies."

"Newer" proposals have a public-private-partnership (P3) focus — an equity-tax-credit proposal touted by Trump senior advisors (see http://peternavarro.com/sitebuildercontent/ sitebuilderfiles/infrastructurereport.pdf), and a House bill (H.R. 5361) introduced in the 114th Congress with bipartisan support from seven members of the House Ways & Means Committee — designed to clear the way for tax-exempt bonds for P3 "delivery" of public buildings (many of the "social infrastructure" variety) that would otherwise be considered taxable private activity bonds.  

"Oldies but goodies" are previously successful measures that focus on federally-subsidized debt financing, whose biggest obstacle to future utilization (other than perhaps federal revenue concerns) might be their Obama-stimulus heritage.  Those include direct-pay subsidy bonds like Build America Bonds (BABs), the elimination of alternative-minimum-tax (AMT) treatment of interest on certain private activity bonds, and the liberalization of rules excepting "bank-eligible" bonds from rules disallowing interest deductions for banks that buy tax-exempt bonds.  Hopefully, fair-minded Republican policymakers who desire infrastructure investment  but are turned off by that Obama association, will decide to "just get over it," particularly if an infrastructure bill can, as some have suggested, temporarily resurrect bipartisanship.  

If federal policymakers are indeed serious about incentivizing public infrastructure investment and realizing the related job-creation benefits in the relatively near future, an "all of the above" approach is essential.  Innovative P3 approaches enhanced by tax credits for equity investments may well attract private-equity capital and foster cost savings for certain types of projects.  However, the bread and butter of public finance has always been, and will likely continue to be, debt capital that is subsidized one way or another by the federal government.  While the old dogs in the public-finance arena are learning the new tricks of the P3 world, efforts should be made to improve the ability to access low-interest-rate debt capital from the tried-and-true state and local bond market to supplement those new tricks and continue to fill the many gaps that will never be filled by private equity alone.

The prominent mention of rebuilding infrastructure and creating jobs in President-elect Trump's campaign and election-night acceptance speech had led many to believe that an infrastructure bill would be one of the first legislative initiatives of a Trump Administration.  However, more recent comments by Chief of Staff-designate Reince Priebus and Senate Majority Leader Mitch McConnell have sought to tamp down those expectations, suggesting that legislative initiatives for infrastructure investment may come after tax reform and actions on Obamacare.  If that is the case, and tax reform and Obamacare suck much of the early oxygen out of the 115th Congress, infrastructure investment may either resume its position (right up there with peace in the Middle East) as a topic about which much is said and little is accomplished, or yet see the light of day given the broad support it enjoys among Democrats, as well as those Republicans interested in showcasing "shovel-ready" projects back home.

The fate of the 100-year cornerstone of infrastructure investment incentives — the tax exemption of interest on state and local bonds — is not clear under tax reform proposals that have been floated recently.  Trump's pre-election website descriptions of his tax reform plan do not specifically mention tax-exempt bonds, although in a December 15, 2016 article Politico reported that President-elect Trump told a group of mayors that he favors "keeping" tax-exempt bonds.  The House Republicans' blueprint for their tax reform proposal, described in a paper entitled "A Better Way" published in June 2016 by a Republican Tax Reform Task Force, can be read to suggest implicitly that, in the case of individual taxpayers, interest on state and local government bonds will be treated the same as any other interest income, and 50% of all interest income will be tax-exempt.  However, even if 100% of state and local bond interest remains tax-exempt, the relative benefits of tax-exempt bonds would be diminished by this 50% across-the-board exemption proposal and lower tax rates.  This, and other tax-reform factors at play, could, with respect to the tax-exempt bond market, induce pre-tax reform jitters and/or post-tax reform doldrums.

An overall goal of tax-reform proposals is to lower tax rates across the board by eliminating exemptions and deductions that benefit some, but not all, taxpayers.  Nonetheless, the fact remains that these proposals' effect on incentivizing investment in public infrastructure relative to other types of investment will likely be negative even though that is not their intended goal.  Absent a momentous lobbying by state and local officials, that negative impact on infrastructure-investment incentives is unlikely to have any significant political impact on the fundamental elements of tax reform.  Having said that, however, thoughtful, forward-thinking policymakers and legislators who genuinely want to accelerate improvements in the quality of the nations' public infrastructure must make some accommodations in tax reform for infrastructure investment to counteract tax reform's potentially negative ripple effects on that sort of investment.

If enactment of a serious infrastructure bill precedes fundamental tax reform, potentially negative effects of tax reform can be blunted by including in that infrastructure legislation a BAB-type option for federally subsidized debt capital and as many other incentives as possible.  However, if fundamental tax reform "goes first," as currently appears more likely, serious consideration must be given to including as many infrastructure incentives as possible in the tax reform bill itself – both as an antidote to the depressive ripple effect other aspects of tax reform are likely to bring to bear on investments in public infrastructure, as well as a convenient way out of a protracted political fight over a standalone infrastructure bill down the road.  In particular, inclusion of generous BAB-type options for federally subsidized debt would provide a subsidy that is immune to the marginal-tax-rate effects of tax reform to which the traditional tax-exempt-bond subsidy is subject.  If some think BABs too reminiscent of a previous Administration, they can always rename them MAGABs.  It should not take long to decipher that acronym, but for those who need help, it would be Make America Great Again Bonds.

Inclusion of infrastructure provisions in tax reform legislation might raise questions of germaneness and pose a choice between foregoing revenue neutrality and fiddling a bit with marginal rates.  However, exclusion of infrastructure provisions may be tantamount to an admission that, despite all of the platitudes emanating from both sides of the aisle, incentivizing public-infrastructure investment remains, yet again, a victim of Washington's own significantly deteriorated political infrastructure.

Charles Almond is a lawyer at Bracewell LLP with over 35 years of experience in client counseling and advocacy on federal tax legislative and regulatory matters relating to public finance. George Felcyn is a senior director at Bracewell's Policy Resolution Group in Washington, DC.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm or its clients.

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