State, local bonds critical to the nation's public infrastructure
One of President Trump's biggest campaign promises was a vow to deliver a massive public infrastructure rebuilding package to Congress within his first 100 days in office. To which, House Speaker Paul Ryan (R-Wis.) noted this was an issue Congress might get to later this year — presumably after dealing with the looming debt ceiling.
During his campaign, then-candidate Trump promised massive transportation investments, with proposals ranging from $500 billion to $1 trillion, with the federal tax subsidies going to private corporations: he claimed that it is cheaper and quicker when private investors are in charge, as opposed to the federal government — or state and local governments — even going so far as to propose $137 billion in new federal tax credits to companies that finance transportation projects, claiming that would unlock $1 trillion in investment over 10 years.
He did not mention what the fiscal impact would be on interest rates, however. Nor did he discuss the critical role of local and state governments in financing the nation's public infrastructure. Nor did he mention that, according to a Congressional Budget Office 2015 report, of public infrastructure projects which have relied upon some form of private financing, more than half of the eight which have been open for more than five years have either filed for bankruptcy or been taken over by state or local governments.
The proposals had a more serious omission: because a federal tax credit would rely on projects which generate revenue, such as toll roads, they would not apply to the vast bulk of critical public infrastructure: think: streets, fire stations, sidewalks, schools, bridges, etc.
In fact, public infrastructure financing in the U.S. is, currently, primarily financed by state and local governments through the use of tax-exempt municipal bonds, where the financing is accomplished by means of local or state property, sales, and/or income taxes, and some user fees. According to the Boston Federal Reserve, annual capital spending by state and local governments over the last decade represented about 2.3% of gross domestic product and about 12% of state and local spending. In fiscal 2012 alone, these governments provided more than $331 billion in capital spending, with local governments accounting for nearly two-thirds of those capital investments — accounting for 14.4% of all outstanding state and local tax-exempt debt. The average real per capita capital expenditure by local governments, over the 2000-2012 time period, according to the Boston Federal Reserve, was $724. That's nearly double state capital spending. According to Census data, state governments are responsible for about one-third of state and local capital financing.
In a time when Alexander Hamilton has become a star again, the former founder had, long ago, written that the "individual States should possess an independent and uncontrollable authority to raise their own revenues for support of their own wants...any attempt on the part of the federal government to abridge them in the exercise of them would be a violent assumption of power unwarranted by any article or clause of the Constitution."
Yet, with Congress set to consider federal tax reform proposals by the new President, the threat to state and local capital infrastructure financing has been unaddressed. Candidate Trump's proposed "American Infrastructure First" plan was composed of $137 billion in federal tax credits — credits which would only be available to investors in revenue-producing projects, such as toll roads and airports — meaning the proposed infrastructure plan would not address the vast bulk of capital investment needs in the nation's public schools, cities, counties, and states. Similarly, because then-candidate Trump's infrastructure plan was based upon only revenue producing infrastructure — that is: less than 2% of the nation's 70,000 bridges in need of rebuilding or repairs — the proposed plan would be of little value. Indeed, the American Society of Civil Engineers estimates that simply repairing existing public infrastructure in the coming decade would cost more than three times as much as the President-elect's proposed plan.
Wells Fargo has estimated that the proposal to federally finance $1 trillion in private sector infrastructure investment in public infrastructure by means of federal tax credits of 82% would amount to federal tax expenditure costs of approximately $137 billion — not counting the costs of federal oversight through the Treasury, IRS, OMB, and the U.S. Department of Transportation. That would mean the vast bulk of America's critical public infrastructure — such as state and local buildings, jails, prisons, roads, bridges, public schools, colleges and universities, water and wastewater systems — would likely be left out, in sharp contrast to the nearly $260 billion invested via municipal bonds into state and local public infrastructure, according to the Census Bureau.
It would also mean, were the exemption erased, states, local governments, and schools/universities would be forced to levy significant user fee increases, property tax levies, and other state and local taxes on Americans — likely leading to a decline in public infrastructure investment by state and local public governments of as much as $100 billion.
Under that hoary old concept of reciprocal immunity, no level of government should be taxing another government's essential activities, such as, say, financing of public infrastructure — a critical issue in the decade to come and one the states and local governments have increasingly funded: The Congressional Budget Office tells us that public spending on transportation and water infrastructure totaled $416 billion in 2014: State and local governments provided $320 billion of it; the federal government, only $96 billion.
As to the federal government, this year will be the sixth year of austerity in domestic appropriations, and the cumulative effects on transportation infrastructure are dramatic: Transportation Department programs funded through annual appropriations are projected to be at their lowest in 14 years.