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Why Tax Credits Alone Won’t Solve Infrastructure Funding Gap

By Sarah Kline

Wednesday, November 30, 2016

This post is part of The Next Agenda, a series that will explore the main policy challenges facing the next Congress and presidential administration on issues from immigration and infrastructure to economics and energy. Check back regularly for future installments.

The infrastructure debate in Congress has quickly turned to a back-and-forth over the wisdom of using tax credits to upgrade America’s infrastructure. At the center of this conversation is a proposal floated during President-elect Donald Trump’s campaign to use tax credits to incentivize companies to invest repatriated profits in infrastructure.

A central conclusion of a report from the Bipartisan Policy Center Executive Council on Infrastructure was that tax credits, along with other financing tools, can broaden the attractiveness of U.S. infrastructure projects to a larger pool of global investors. Yet, importantly, tax credits are just one way of bringing in private capital and they do not eliminate the need for stable, long-term federal infrastructure funding. As this debate advances, here are a few principles for members of Congress on both sides of the aisle to keep in mind:

  • The devil is in the details. As tools to attract greater private investment, tax credits would complement existing federal grant programs, but there is still a debate to be had about the appropriate level of federal subsidy. The amount of the tax credit envisioned in the Trump campaign’s plan appears to be significantly higher than that proposed in the Move America Act introduced by Sens. Ron Wyden (D-OR) and John Hoeven (R-ND), which would create an infrastructure tax credit alongside a tax-exempt private activity bond program.
  • Private equity has utility. In some cases, private equity can mean the difference between a project being completed or languishing on the drawing board. The utility of private equity is not limited to toll facilities: the PortMiami Tunnel, Portland’s Airport MAX light rail line, and the Long Beach Courthouse all had a private equity component. Making U.S. projects more attractive to private capital through a tax credit on equity investments could help to get more projects built more quickly.

Tax credits are just one way of bringing in private capital and they do not eliminate the need for stable, long-term federal infrastructure funding.

  • We need a project pipeline first. In order to attract private investment on a wider scale, tax credits and other efforts to reduce the cost of capital need to be accompanied by fundamental changes to the way infrastructure projects are developed. America currently lacks a project pipeline—an ongoing, diverse mix of investable projects. Unless we take proactive steps to develop that pipeline, private investors may find that even with tax incentives, they cannot find projects in which to invest.
  • Existing barriers to private investment are significant. Using private equity for infrastructure does not simply mean substituting private money for public. The equity partner in a public-private partnership (P3) takes on a very different role than a public funder, and negotiating the terms of that agreement, which may span several decades, is complex. Many states and localities lack the legal authority to even consider using private capital in a public project. Even where that authority exists, few P3s are proposed. Reasons include fear of public opposition, underappreciation of the long-term benefits of P3s, lack of staff expertise, and the mistaken belief that P3s only work for toll roads. Even if the cost of private capital were to become cheaper through a federal tax credit, these underlying issues must be addressed to create a broader pipeline of investable projects.

Despite these issues, there is a way forward. BPC’s Executive Council proposed A New American Model for Investing in Infrastructure, focused on building up state and local capacity to enter into partnerships with the private sector. A federal infrastructure proposal that expands tax credits must also empower state and local leaders with the tools they need to develop projects across a wide range of infrastructure types that can utilize private equity. Importantly, the council’s recommendations call for an objective analysis before a project moves ahead to determine if private financing would deliver more value for the public than traditional financing. For those concerned that involving private capital in these projects is a form of corporate welfare, under this approach P3s would proceed only when there is a clear public benefit. At times, private capital may make the difference between a project moving forward and no project at all.

Using private equity for infrastructure does not simply mean substituting private money for public.  

BPC’s model also recognizes that while private capital can spur development of many critically needed projects, it cannot by itself address the full range of needs. With the project pipeline still in development, a balance must be struck between the goal of increasing private investment and the continuing need for direct public funding.

Infrastructure has long been an issue that can attract bipartisan support. Introduction of the Move America Act is one recent example; another is the FAST Act, the surface transportation law that passed a year ago with strong bipartisan support from both chambers. We hope that Congress and the new administration will follow those examples, put aside the current rhetoric, and craft an infrastructure package that embraces private capital as a key part of the solution for addressing the nation’s infrastructure needs.

KEYWORDS: 114TH CONGRESS, 115TH CONGRESS, DONALD TRUMP, JOHN HOEVEN, P3S, RON WYDEN, THE NEXT AGENDA SERIES