Tax Credits and Public Spending on Infrastructure

by David Driesen

Donald Trump based his candidacy on the claim that he would serve working-class people who established politicians have neglected. He promised $1 trillion of infrastructure investment over 10 years, which could generate a lot of blue-collar employment while potentially repairing crumbling bridges and roads, replacing antiquated wastewater treatment systems (in Flint and elsewhere), and creating a mass transit system that could move us into the 21st century in that realm. A sound infrastructure program, unlike anything else that Trump has proposed, really would grow the economy and help hard-hit workers across the country. 

Unfortunately, he did not propose that government raise and spend $1 trillion on infrastructure. Instead of funding his program with a modest tax increase and bond revenue, he promised a $9 trillion tax cut primarily benefitting wealthy people like himself. 

He has tried to square the circle by suggesting that the government offer $137 billion in tax credits and that this would somehow generate $1 trillion in infrastructure investment. This approach would generate enormous opportunities for profiteering, creation of private monopolies, and exploitation of individual citizens needing transportation, schools, and clean water. Fortunately, he has signaled some flexibility, and his nominee for Transportation Secretary has not ruled out public funding. The Democrats proposed to invest $1 trillion in infrastructure a few days ago while saying that they favor direct public funding. 

Here's why a proposal based on tax credits would enrich the corporate elite while fleecing the rest of us: Nobody will build an infrastructure project just for the tax credit. Businesses exist to make a profit, and a tax credit for private expenditures simply reimburses businesses building projects for expenses. Accordingly, private actors thinking about taking advantage of the tax credit will clamor to build projects that generate revenue. 

If project developers can obtain a contract guaranteeing them a revenue stream, they may be able to raise money from private equity firms to finance projects. The private equity investors, however, will demand a handsome return on their investment, in addition to the profits the builders will insist on. The way to make that happen is to write contracts that extract the maximum amount of money possible from citizens using the infrastructure. If they own the infrastructure they build, the companies could establish a monopoly on vital public services and would be able to extract monopoly rents from hapless citizens.  

This problem is not theoretical. Municipalities have found that private water systems charge 59 percent more than public systems and frequently offer worse service. Municipalities authorizing private companies to build and operate toll roads have been left holding the bag when the companies have gone bankrupt (which they have regularly done), forced to pay back bondholders with interest of as much as 13 percent, a rate of return unheard of in projects financed by straightforward municipal bonds. 

The public would end up paying twice. First, tax credits make the public pay by reducing the revenue government has on hand to provide essential public services, and they add to deficits. Then we the people must pay again through user fees that reflect premiums paid to Wall Street to finance infrastructure expenditures. 

This tax credit approach will not work at all for perhaps the most needed projects, because less wealthy communities cannot afford to pay high user fees. Accordingly, those most in need of infrastructure upgrades will likely be shut out altogether. It is doubtful that this scheme would produce, for example, clean water in Flint. Nor would it rebuild crumbling schools in low-income communities. 

Beyond the affordability and social justice problems with privatizing infrastructure that large numbers of people depend upon, the Trump tax credit plan would also likely line the pockets of companies and contractors that carry out private infrastructure projects that would have been built anyway. For example, pipeline companies will likely argue that their private projects helping the oil and gas industry are now suddenly "public infrastructure" in order to claim tax credits and increase their profit margins at public expense, even though these projects generate sufficient profits to succeed without government investment. 

The way to avoid creating another corporate welfare program that transfers wealth from average citizens to Wall Street and corporations is to have government tax the wealthy to create sufficient funding for adequate investment. That's how we built the interstate highway system in the 1950s and 1960s and the wastewater treatment facilities we installed in the 1970s. 

There is no free lunch. If we want to Make America Great Again, we will have to do what we did when we had the best infrastructure in the world: collect sufficient public revenue to pay our bills.



© 2016 The Center for Progressive Reform