March 16, 2015
Infra Americas

16 Mar 2015 | USA | Other

Eugene Gilligan

News Analysis: Congress finds common ground on infra

Legislation passed by Congress in 2014 to fund US transportation projects expires in May. Legislators' efforts to find a long-term funding source for these projects continues. A consensus may be emerging on taxing US-based companies’ overseas profits to fund infrastructure projects, despite deep political divisions. Several versions of the plan have the support of some members of Congress and President Obama.

InfraAmericas’ Senior Reporter Eugene Gilligan speaks to legislative and industry experts on the pros and cons of using this funding method, and also looks at where P3s may fit into a new transportation funding bill.

The bill that funds infrastructure projects in the US is again coming close to its expiration date.

Congress passed legislation that extended funding for transportation projects until 31 May 2015 back in in July 2014. Congress could pass another stopgap funding extension before the May deadline, but state departments of transportation have noted this short-term, stopgap approach impedes long-term planning that is crucial for implementing major transportation projects.

The Obama administration, through Vice President Joe Biden and Transportation Secretary Anthony Foxx, have also been vocal critics of these short-term measures.

The search for funding
The federal government funds transportation projects through the Highway Trust Fund (HTF). Money for the fund comes from a USD 18.4 cents per gallon gasoline tax. Many of these short-term extensions have been due to Congress’ inability to find a long-term funding mechanism for infrastructure projects.

The tax is not indexed for inflation, and has not been raised since 1993. Neither Congress nor the president supports raising the tax. Meanwhile, the HTF continues to lose its funding power, due to inflation and more fuel-efficient vehicles traveling America’s highways.

Federal contributions remain crucial to state transportation programs. According to the American Road and Transportation Builders Association (ARTBA), the federal government is the source of, on average, nearly 52% of highway and bridge capital improvements made by states.

Looking overseas
The idea of taxing US corporate profits earned overseas is gaining traction among lawmakers even though Congress is seemingly paralyzed by a deep partisan divide.

President Obama’s USD 4trn FY16 budget includes a six-year, USD 478bn transportation plan called GROW America. The plan would be funded by a one-time, mandatory 14% tax on US based corporations’ overseas profits. The administration has claimed the tax will generate USD 238bn for the HTF, in addition to the gasoline tax.

Federal legislators also have unveiled bills that use taxes on overseas profits to fund transportation projects. Rep. John Delaney (D-Md.), introduced the Infrastructure 2.O Act in January. The legislation, if passed, would earmark USD 50bn for the creation of the American Infrastructure Fund (AIF). The AIF would finance transportation, as well as other types of projects.

The AIF would also be funded by a one-time, 8.75% tax on the overseas profits of multi-national US-based corporations. The corporations would pay that rate instead of the current US corporate tax rate of 35%. The bill stipulates that 35%of the projects funded by the AIF must be P3s.

Delaney says the HTF would receive an estimated USD 120bn from the one-time tax.

Finally, Sen. Rand Paul (R-Ky) and Sen. Barbara Boxer (D-Calif.) are also slated to introduce a transportation bill that funds transportation projects through a tax on US corporations’ overseas projects. The bill would levy a 6.75% tax rate on overseas corporate earnings from US corporations compared to 8.75% for Delaney’s bill.

Boxer’s voice will be an influential one in the debate over transportation funding since she is the ranking member of the Senate Environment and Public Works Committee. The committee will play a lead role in moving a new transportation bill through the Senate.

The plan to tax overseas corporate profits may be gaining favor among legislators, but a source said getting a bill that includes such a complex plan may not happen before 31 May. Another-short term funding bill may be on the horizon.

D.J. Gribbin, Managing Director at Macquarie Group, said he sees “no downside” to using such a plan to fund infrastructure projects, but said some members of Congress may advocate using funds generated by the plan to help fund tax reform for both corporations and individuals.

Strengths and weaknesses
Transportation spending advocates generally see positives in legislators finding a large potential funding source for transportation infrastructure. American corporations are reportedly holding an estimated USD 2tn in overseas profits, according to a statement issued by Boxer and Paul.

Joshua Schank, president and CEO of the Eno Center for Transportation told InfraAmericas that a one-time tax on overseas profits does not address long-term funding needs that are necessary for state Departments of Transportation to plan projects.

The Eno Center released a report that compared how the US funds transportation projects with transportation funding methods used in Australia, Canada, Germany, Japan and the United Kingdom in December 2014.

The report recommends that the US consider a funding its transportation projects through general government revenues. Schank told InfraAmericas that general using government revenues would enable the government to effectively prioritize transportation projects.

“User fees must be returned in large part to users who paid them,” Schank said. “Thus, most of the gas tax revenue at the federal level is simply returned to states from which it came, and to users from which it came, without regard to whether those are the most effective investments of federal money.”

For example truckers do not want diesel taxes they pay to go to rail investments, he said.

“We are limited in our ability to target funds most effectively because we use user fees instead of general funds,” Schank said. “Most other developed nations do not face these constraints.”

He also noted that the US has used temporary cash infusions from general revenues to shore up the HTF and make up for shortfalls in gasoline tax revenues.

“The gas tax has never been a popular tax,” Schank said, adding that the tax, which had been introduced in order to fund construction of the Interstate Highway System, has now “lost a clear purpose.”

User dependent
Marcus Lemon, shareholder and chair of the infrastructure and P3 group at Polsinelli and a Chief Counsel to the Federal Highway Administration in the George W. Bush administration, said that all ideas should be on the table when it comes to transportation funding. He added that plans reliant on taxes can be unreliable revenue sources.

“Those who have to pay will look for ways to avoid paying,” Lemon said.

Lemon also said he is concerned that revenues generated by a tax on overseas corporate profits would be siphoned off to uses other than transportation.

When he was in the George W. Bush administration, Lemon said that only 80% of all federal fuel tax money made it to interstate highways, the rest went to earmarks.

“Even if the funds are dedicated to transportation, what are they defining as ‘transportation’ and does that include pet projects like ‘historic byways’ or other things that do not directly involve interstates?” Lemon asked.

A user pay system, with tolling as the centerpiece, should be the direction that the US should be headed in, he added.

“The environment is ripe” for the increased use of tolling, he said. Where the subject of tolling was once “taboo among Democrats on [Capitol] Hill,” there is a growing acceptance of tolling on that side of the aisle, Lemon said.

DJ Gribbin, managing director of Macquarie Capital, said that while the liberalization of tolling on interstate highways could generate more P3 projects, the trucking industry represents a strong voice against more tolls. He added that conservative members of Congress are questioning whether a toll is not just another form of taxation.

Lemon notes that some existing federal programs could also help solve the transportation funding puzzle. One such program, the Transportation Congestion Relief Program which is overseen by the Federal Highway Administration, seeks to use tolling to improve cross-border travel times. The program favors projects that use innovative project delivery and finance techniques, such as P3s.

Three border crossings in San Diego, Laredo, Tex., and Washington’s Cascade Gateway, were approved for the program in 2008. Lemon said he is not aware of whether the Obama administration asked for funding.

“I doubt they have,” he said.

Another program, Projects of National and Regional Significance (PNRS), requires the US Department of Transportation to develop a list of PNRS projects. The listing is compiled through a survey of agencies including state DOTs, tribal governments, transit agencies and multi-state or multi-national groups. MAP-21 earmarked USD 500m in order to implement PNRS in FY 2013. Congress, however, never appropriated funds for the initiative. Lemon said he does not know why the program has not received the funds, but he suspects it is due to “funding limitations.”

Pushing PABs
Lemon said P3s should play a greater role in meeting the US transportation needs. Notably, he advocates expanding the size and scope of both the TIFIA and Private Activity Bonds (PABs) programs.

A source familiar with federal legislative activities said a separate bill will be introduced in the House of Representatives that will double the current Private Activity Bond allocation from USD 15bn to USD 30bn.

The source also said that Sen. Mark Kirk (R-Ill.) is planning to introduce new legislation that will increase the PAB allocation by USD 4bn. The source said he anticipates that a new transportation bill will leave TIFIA largely unchanged.

The larger question that remains to be answered is whether a new transportation funding bill will fall victim to the rancor that exists between President Obama and many members of Congress, even though both sides may agree on the necessity of such a bill, Gribbin said.

States take the lead
Congress and President Obama are unwilling to raise the USD 18.4 cent federal gasoline tax. However, that reluctance to look at gas tax increases is not present in some statehouses across the country.

Iowa Governor Terry Branstad, in late February, signed a 10 cents-per-gallon gasoline tax increase into law.

According to the Transportation Investment Advocacy Center (TIAC), a division of the American Road and Transportation Builders Association (ARTBA), 12 states—Georgia, Michigan, Minnesota, Missouri, Montana, Nebraska, New Jersey, South Carolina, Texas, Utah and Washington—were considering legislation to increase their gas tax, or the sales tax on gasoline as of 27 February.

“Governors and state legislators recognize the negative impacts of deteriorating road and bridge conditions on the local economy,” ARTBA’s Chief Economist, Alison Premio Black, said in a statement. “At the federal level, Congress should be taking a similar approach to finding a permanent solution for the Highway Trust Fund before highway and transit program funding expires at the end of May.”