Ideas. Action. Results.

Infrastructure Big Idea #1: Authorize a New Direct Payment Infrastructure Bond

By Michele Nellenbach, Andy Winkler, Jake Varn

Tuesday, February 26, 2019

This post is the first in a series focused on solving the $2 trillion infrastructure funding gap and positioning the United States for the future.


Like taking out a mortgage to finance the purchase of a home, states and local governments typically borrow money to build large, expensive infrastructure projects. The federal government has authorized a suite of programs to facilitate low-cost financing for such projects, including the Transportation Infrastructure Finance and Innovation Act (TIFIA) program and its water counterpart, WIFIA; the Clean Water and Drinking Water State Revolving Loan Funds or SRFs; and the critical tax exemption for interest paid on private activity bonds and municipal bonds. These programs give state and local governments financing options tailored to their circumstances.

Each program meets a specific need and should remain available to projects that are conventionally delivered and those that involve participation by the private sector. In some cases, the federal subsidy provided by these programs can make the difference between a project happening or not. By reducing the differential between the cost of public capital and private capital, these programs allow the private sector to participate in projects that otherwise may not pencil out as an attractive investment, helping to get more projects completed.

Yet, despite these vital tools, there remains private capital on the sidelines that could be used to repair, replace, upgrade, and modernize the nation’s infrastructure. A direct payment bond program would give governments another option to finance needed projects.

Direct Payment Bonds utilize the existing structure of the tax-exempt debt market. The issuer of the bond would receive a direct payment or tax credit in the form of a percent of the interest costs in lieu of interest. Unlike traditional municipal debt, these bonds are attractive to investors who do not have a federal tax liability, such as pension funds. Moreover, by providing the payment directly to the issuer, these bonds could reduce borrowing costs for public entities and more efficiently subsidize projects.

Other Options: There are a variety of other potential financing options to support infrastructure construction and attract a broader range of investors.

  • The Move America Act: This legislation from Sens. Hoeven (R-ND) and Wyden (D-OR) (S. 146) would expand tax-exempt private activity bonds for a variety of infrastructure projects and establish a new federal infrastructure tax credit to encourage public-private partnerships.
  • Real Estate Investment Trusts (REITs): These companies own or finance income-producing real estate in variety of sectors. Congress could expand the definition of real estate to specifically include infrastructure and allow alternative revenue streams as qualifying income.
  • Master Limited Partnerships (MLPs): These companies have many of the same benefits as REITs but must be expanded to operate outside the energy sector.

For more information, contact Michele Nellenbach, Director of Strategic Initiatives, at [email protected].