What's happening in US





Using tax credits to raise US$1 trillion to replace US Interstate Highways and bridges

The big turnaround project confronting the Donald Trump Administration is the US$1 trillion infrastructure spending programme that stands to energise Middle America.

The US President's troubles with repealing and replacing the Affordable Care Act, otherwise known as Obamacare, has proven problematical just as his plans to reform tax code have stalled.

While there is much to dispute in health care and tax reform, there is little or no argument about the need to replace America's infrastructure, its crumbling highways and bridges, its antiquated air traffic control system among many other things.

What's more, this is politically useful to a Republican administration. Just as the vast dredging of America's ports and harbours was helpful to predominantly Democratic coastal regions, the Interstate Highways system covers the "flyover states" between New York and LA where Republicans are more numerous.

Perhaps that's why Democratic regimes of the Obama and Clinton years were reluctant to spend on shovel-ready projects, preferring to finance further studies of what should be done and in what order. As time went on the US ended up ninth place in global rankings in roads investment and 12th in the Global Competitiveness Index in infrastructure generally.

More than 60,000 American bridges were considered “structurally deficient”. Traffic delays cost the US economy more than $50 billion annually. Typical iPhones were smarter than many of the country's air traffic control systems.

Beyond inconvenience and expense, the condition of these bridges now pose mortal dangers. Ten years ago, 111 vehicles crossing the I-35W bridge over the Mississippi River in Minneapolis plunged into the river 60 feet below, killing 13 and injuring 145. In 2013, a bridge on the I-5 north of Seattle collapsed, injuring three people, when a truck crashed into it. In 2015, a chunk of concrete fell from the bottom of the I-495 overpass in Maryland, crushing a car.

What needs to be fixed in what is officially known as the "Dwight D Eisenhower National System of Interstate and Defense Highways" (commonly known as the Interstate Highway System, Interstate Freeways, or simply the Interstate) is a network of controlled-access highways that form a part of the National Highway System of the United States.

Eisenhower, the commanding general of Allied Forces against the Nazis and later president of the United States, set it up in 1956. As a junior army officer, Eisenhower had had travelled in a military convoy from Washington, DC to San Francisco and was dismayed by what he saw. Later, during World War II, he encountered Germany's far superior Autobahn.

As president, Eisenhower made infrastructure spending a priority. In 1956, he signed a law that established the interstate highways that still traverse the United States. Eisenhower saw infrastructure as both an economic and a national security priority.

There had been talk of federal spending on roads from the early 19th century, but it was thought to be constitutionally impossible. But as a dimension of national defence spending, it became a federal responsibility, hence its official name.

Eisenhower's highways were part of a series of great infrastructure projects that helped usher in unprecedented prosperity. Government investment and private entrepreneurship laid railways across the continent; built huge power plants, such as the Hoover Dam; and provided universal telephone coverage. Those projects generated economic growth and went some distance to unite the American republic.

But they required public investment, and in recent years, that has been lacking. Building new infrastructure is a critical part of any growth strategy. Every $200 billion in additional infrastructure expenditures is reckoned to create $88 billion more in wages for average Americans and increase real GDP by more than a percentage point. Each GDP point creates 1.2 million additional jobs.

Pre-Trump Democratic administrations doubled US debt from $10 trillion to almost $20 trillion. Yet despite this massive deficit spending, less and less was spent on infrastructure.

It is plain, and widely accepted that the US has under-invested in its infrastructure. The federal gas tax is the main source of federal funding for roads, bridges, and subways. But Washington has not increased that tax of 18.4 cents per gallon since 1993.

In real terms, its value has thus fallen by more than 40 per cent. Expert groups such as the American Society of Civil Engineers, business associations such as the US Chamber of Commerce, and unions such as the AFL-CIO have all called for trillions of dollars of new investment. But Washington has failed to act.

The Road Taken, a book by Henry Petroski, a professor of civil engineering and history at Duke University, helps explain why Washington has been unable to solve this problem. In part a history of infrastructure, in part an appeal for greater investment, Dr Petroski's book offers a rare engineer's perspective on a debate too often dominated by economists and politicians. Yet engineers can do only so much on their own. A healthy national infrastructure requires not just competent engineers but also a government - and a publican - willing to pay for it.

The Trump infrastructure plan features a major private sector, revenue neutral option to help finance a significant share of the nation’s infrastructure needs, according to Wilbur Ross, a private equity investor, and Peter Navarro, business professor of the University of California at Irvine. Both were senior policy advisors to the Trump presidential campaign.

"For infrastructure construction to be financeable privately it needs a revenue stream from which to pay operating costs, the interest and principal on the debt, and the dividends on the equity. The difficulty with forecasting that revenue stream arises from trying to determine what the pricing, utilisation rates, and operating costs will be over the decades." said in their paper entitled "Trump Versus Clinton on Infrastructure".

Therefore, an equity cushion to absorb such risk is required by lenders. The size of the required equity cushion will of course vary with the riskiness of the project.

However, we are assuming that, on average, prudent leverage will be about five times equity, said the Ross-Navarro paper. Therefore, financing a trillion dollars of infrastructure would necessitate an equity investment of $167 billion, obviously a daunting sum.

"We also assume that the interest rate in today’s markets will be 4.5 per cent to five per cent with constant total monthly payments of principal and interest over a 20- to 30-year period. The equity will require a payment stream equivalent to as much as a nine per cent to 10 per cent rate of return over the same time periods," they said.

To encourage investors to commit such large amounts, and to reduce the cost of the financing, government would provide a tax credit equal to 82 per cent of the equity amount. This would lower the cost of financing the project by 18 per cent to 20 per cent for two reasons.

"First, the tax credit reduces the total amount of investor financing by 13.7 per cent, that is, by 82 per cent of 16.7 per cent," they said. "The elegance of the tax credit is that the full amount of the equity investment remains as a cushion beneath the debt, but from the investor point of view, 82 per cent of the commitment has been returned. This means that the investor will not require a rate of return on the tax credited capital."

Equity is the most expensive part of the financing; it requires twice as high a return as the debt portion, nine to 10 per cent as compared to 4.5 to five per cent. Therefore, the 13 per cent effective reduction in the amount of financing actually reduces the total cost of financing by 18 to 20 per cent. By effectively reducing the equity component through the tax credit, this similarly reduces the revenues needed to service the financing and thereby improves the project’s feasibility, said Ross and Navarro.

"These tax credits offered by the government would be repaid from the incremental tax revenues that result from project construction in a design that results in revenue neutrality," they said.

Two identifiable revenue streams for repayment are critical here: the tax revenues from additional wage income, and the tax revenues from additional contractor profits.

"For example, labour's compensation from the projects will be at least 44 per cent. At a 28 per cent tax rate, this would yield 12.32 per cent of the project cost in new revenues. Second, assuming contractors earn a fairly typical 10 per cent average profit margin, this would yield 1.5 per cent more in new tax revenues based on the Trump business tax rate of 15 per cent," they said.

Combining these two revenue streams does indeed make it appear that the Trump plan is fully revenue neutral with 13.82 per cent of project cost recovered via income taxes versus 13.7 per cent in tax credits.

Trump’s core concept of tax relief to facilitate project investment is not especially new. It has been used historically to target real estate investment. However, the concept of offsetting a major portion of project cost with income tax credits that are repaid as issued by means of the tax revenues generated just by the construction is new. Because the combination is revenue neutral, whatever taxes flow from the actual operation of the new infrastructure will be additive to tax revenues.

In the end the big job using this and other methods will get done because American is good for it.

* - Indicate required field(s).
Does this plan seem feasible to you? What are the costs and benefits of this and other financing schemes?

* Message :

* Email :  


U.S. Trade Specialists

Shenzhen Shining Ocean Int'l Logistics Co., Ltd.
We Carry to Wherever the Purple Light Rises.