House Republicans’ Tax Bill Threatens Private Infrastructure Investment


House Republicans’ Tax Bill Threatens Private Infrastructure Investment

One of the provisions in the emerging House tax reform bill could devastate private investment in transportation infrastructure.

One of the provisions in the emerging House tax reform bill could devastate private investment in transportation infrastructure via long-term public-private partnerships (P3s), which most Republicans say they favor.

In the tax bill released by Congressional Republicans today, “Sec. 3601 of Subtitle G, Bond Reform,” would remove federal tax exemption on bonds categorized as Private Activity Bonds (PABs). There are several different categories of these, usable for various private-sector activities. This provision would eliminate the tax exemption for all of them, on the grounds that the government “should not subsidize the borrowing costs of private businesses.” And the Joint Committee on Taxation (JCT) estimates that this provision would increase federal tax revenues by $38.9 billion over 10 years.

I’m concerned here with only one subset of Private Activity Bonds: those authorized by Congress in the SAFETEA-LU legislation reauthorizing the federal highway and transit program in 2005. It authorized the issuance of up to $15 billion in tax-exempt bonds specifically for public-private partnership transportation infrastructure projects. The rationale was that P3s have many benefits compared with conventional highway and transit procurement methods, so Congress should create a level financial playing field for them. And since state agencies can finance such projects using tax-exempt bonds, P3 projects should have the same opportunity. After all, if P3 projects provide benefits to the public and to the state in comparison with conventional procurements, federal policy should encourage—not discourage—the use of this method.

According to Public Works Financing, since 2005, 22 major long-term P3 projects valued at $33.3 billion have been financed, and 17 of them (77 percent) have used PABs totaling $8.5 billion. The U.S. Department of Transportation’s Build America Bureau lists this category of PABs as an important innovative financing tool for P3 infrastructure.

These projects are all public-purpose infrastructure, open to use by the public just as are comparable projects developed under conventional procurement methods by state agencies. The Joint Committee on Taxation (along with the Congressional Budget Office) considers any tax-exempt bond as causing a loss of what would otherwise be tax revenue to the U.S Treasury. But in the case of public-purpose infrastructure, that premise is mistaken. Those agencies assume that, for example, if a P3 toll road project did not have access to tax-exempt bonds, it would be built anyway with taxable bonds. But that is hardly guaranteed.

First, the higher interest cost of taxable bonds would mean higher toll rates would have to be charged to achieve the same bond rating. But higher toll rates would mean lower toll revenues, which might make the project no longer feasible. So the more likely alternative is that the project would be done instead by a state agency—using tax-exempt debt. Hence, no increased revenue to the Treasury.

Second, as P3 infrastructure becomes more common, most of these long-term ventures will be profitable. That means the concession companies will owe federal corporate income taxes on those profits. The Congressional Budget Office, Joint Committee on Taxation, and the Treasury Department never even consider this future revenue when doing their calculations purporting to show revenue losses from PABs used for P3 infrastructure projects.

In short, PABs for P3 infrastructure are not a subsidy. They are a well-justified policy enacted by Congress to create a more-level financial playing field for a worthwhile improvement in the procurement of large-scale public-purpose infrastructure. Repealing the tax-exemption for this category of PABs would harm the continued growth of private capital investment in America’s infrastructure.