The tax plan just passed by House Republicans would destroy any remaining hope the Trump administration has of delivering on the president’s promise of $1 trillion in infrastructure spending and hit Southern California hard.
The House bill makes the mistake of killing tax-exempt private activity bonds for transportation projects. These bonds are a required part of most infrastructure projects built using public-private partnerships, so killing them will destabilize bond markets and derail infrastructure projects across the country.
Private activity bonds allow U.S. municipalities to issue tax-exempt bonds to finance construction of projects serving the public interest, like highways and schools. These bonds are exempt from federal taxes and, in some cases, from state and local taxes.
In the coming decades, private activity bonds could be used to fund Southern California megaprojects that state and local governments have little hope of building without partnering with the private sector. These are projects like an expressway/tunnel between US 101 in the San Fernando Valley and I-10; a new expressway between SR 14 in Palmdale and I-15 in Victorville; a tunnel extension of SR 2 south through downtown connecting to I-110; new express lanes on I-5, I-10, I-405 and SR 57; and new truck toll lanes on I-710 and SR 60.
In all, Reason Foundation’s Southern California Mobility Plan found public-private partnerships, often using these private activity bonds to fund the construction of major projects, could help build over 700 lane-miles of new expressway capacity across the region and build or convert over 3,000 lane-miles of express lanes and truck toll lanes.
In terms of serving the public interest — a goal of the bonds — these types of projects would improve mobility across the region; reduce traffic congestion; improve mass transit service; and deliver faster, consistent travel speeds that also reduce greenhouse gas emissions during rush hour travel periods. But if this provision in the bill passed by the House becomes law, many infrastructure projects like these will have to be abandoned.
The Senate’s tax bill doesn’t contain a similar provision, so, presumably, the House GOP’s attack on these bonds comes from misinformation or is a mistake aimed at sports stadiums. Some private activity bonds have come under fire for financing the construction of sports stadiums. For instance, the renovation of Yankee Stadium in New York used $1.1 billion of tax-exempt bonds. The proposed football stadium in Las Vegas to lure the Oakland Raiders would rely, in part, on tax-exempt bonds. The financial benefits from subsidized sports stadiums often go to the teams’ wealthy owners, not taxpayers. As a result, researchers across the political aisle agree that eliminating favorable tax treatment for sports stadiums would be good public policy.
However, Republicans haven’t surgically targeted sports stadiums. They’ve attacked transportation projects — roadways and mass transit lines that clearly serve the public good. House Republicans incorrectly assume that if public-private infrastructure projects no longer have access to tax-exempt bonds, they’ll just be built using costlier taxable bonds. This would not be the case.
First, consider the fate of a hypothetical Southern California toll road. Without private activity bonds, there would be higher interest costs for the builders of the highway, which would mean higher toll rates being charged to drivers. But higher toll rates would mean that fewer drivers would be projected to use the road, resulting in lower projected revenues. The lower income estimates might cause lenders to view the toll road as too risky to fund or cause builders to view the road as unsustainable and not worth building.
Congress and President Trump have sent many conflicting messages on the president’s pledge to invest $1 trillion to improve America’s infrastructure. If the final tax bill eliminates private activity bonds for transportation projects, one of the primary tools that could’ve been used to fund Trump’s infrastructure promises will have been foolishly discarded.