Billionaire businessman Wilbur Ross, whose nomination as commerce secretary comes before Congress this week, has mapped out details to one major policy proposal to boost infrastructure spending — and leading economists say it doesn’t hold water.
“Today, much of America’s infrastructure is crumbling. Much more needs to be built anew,” Ross and Navarro wrote, adding that under President Obama, “urgently needed projects have been routinely delayed for years due to endless studies, red-tape, and obstructionist lawsuits.”
Moreover, Ross and Navarro say the tax credits would cost the government nothing because of increased tax revenue from new private spending, economic activity and employment.
Hogwash, say economists from across the political spectrum. “It is totally ill conceived,” Lawrence H. Summers, Harvard University economist and former treasury secretary, said in an email.
The clash over the plan goes to the heart of one of Trump’s main campaign pledges — to boost infrastructure spending. Trump never laid out whether he would do that through federal spending or through public-private partnerships. And he has not defined what would qualify as infrastructure, potentially triggering a feeding frenzy in Congress as public officials and corporations seek support for their pet projects.
As a result, the Ross-Navarro proposal, unveiled in late October, is the closest thing to an official one. But economists say its flaws are numerous.
First, “it will function largely as a giveaway to contractors on projects that would have happened anyway,” Summers said.
Take the Keystone XL pipeline, for example. TransCanada decided years ago that the project made economic sense on its own merits. Now, if Trump follows his pledge to approve the project’s path from the Canadian border through Nebraska, then the Calgary-based company might make even more money thanks to the new tax credit.
The tax-credit plan would also exclude a wide variety of worthy projects that are unlikely to appeal to private investors, because they don’t generate an identifiable stream of revenue.
“This proposal would work only if you have projects that generate cash flows such as tolls, congestion charges or user fees that can be used to generate the return on equity,” said Douglas Holtz-Eakin, president of the American Action Forum, which describes itself as a center-right policy institute.
One area that doesn't usually generate cash, policy experts say, is maintenance. And U.S. infrastructure is aging fast. Repairing existing infrastructure, such as bridges, can often be the most effective way to bolster communities and spur other investment — even if new tolls or fees can't be imposed.
Moreover, other analysts note, user fees and tolls are regressive, like gasoline taxes, placing a bigger burden on the lower and middle class because they eat up a larger portion of their income. Federal grants for infrastructure, however, would draw on tax revenue raised through the progressive income tax.
In addition, most of the biggest private investors in infrastructure don’t need tax credits, Summers added. That’s because they are tax-exempt entities such as pension funds. Instead, the high tax credit would be more likely to attract those seeking tax shelters, not those seeking the most urgent public needs or efficient investments.
Holtz-Eakin, a former director of the nonpartisan Congressional Budget Office, takes issue with the assumption the tax credits would pay for themselves. “It’s imagining that somehow there will be an immediate macro-feedback,” he said. “It’s not going to be that big.”
He noted that the new capital devoted to infrastructure would “shift from one place to another. For the nation as a whole, a big chunk of that’s a wash.” The increase in wages Ross and Navarro promise, “that’s coming at the expense of something else,” Holtz-Eakin said.
Holtz-Eakin also said that a plan to boost infrastructure must include state and local governments and must also define what infrastructure is. People have called for spending on everything from bike paths and affordable housing to schools and roads.
Summers recently discussed the Ross-Navarro plan on the cable business channel CNBC and summed it up as simply a “Potemkin house of nothing.”
Summers also fired salvos at another paper by Ross and Navarro containing estimates of the impact of trade tariffs. Ross and Navarro said they would boost U.S. gross domestic product. Summers called their calculations the “economic equivalent of denying climate change or being for creationism.”
Ross and Navarro did not return calls or emails asking for comment. Their October paper defends the tax credit for private investors, saying construction costs “tend to be higher” when projects are built by the government rather than private sector. They said that by covering 82 percent of equity needed, the tax credits would ease concerns about forecasts of revenue streams.
Yet Americans apparently don't want to pay bridge and transportation tolls for private infrastructure investors via tax breaks as Ross and Navarro suggest, according to a Washington Post-ABC News poll conducted Jan. 12 to 15. The survey showed that 66 percent opposed such a plan and only 29 percent supported it.
While Republicans were more favorable, at least half of each group, Republicans, Democrats and independents, opposed the idea. The poll was a random national sample of 1,005 adults. The question didn’t mention Trump, Ross or Navarro.
Even economists who favor privatization of infrastructure oppose tax credits as the way to go about that. Steve H. Hanke, a professor of applied economics at Johns Hopkins University, served on President Ronald Reagan’s Council of Economic Advisers, where he was in charge of the infrastructure portfolio.
Hanke believes that infrastructure should be built and operated by private companies, arguing that public infrastructure projects are plagued by “massive waste, fraud and abuse.”
Yet Hanke, too, says that tax credits won’t do the trick. He says that tax credits for financing infrastructure are “an opaque way to finance infrastructure” that would “complicate an already monstrously complex U.S. tax code.”
Moreover, he said, “tax credits are resold from cash-flow-poor developers to a small number of cash-flow-rich banks, institutional investors and corporations who have profits and desire tax credits to offset their income tax obligations.” He said that “these are not boilerplate-type transactions but only for the sharpest of the Wall Street sharpies.”
“My point is that tax credits are fraught with many problems,” Hanke said. “This is not the slam dunk that has been advertised. A very complicated set of issues would have to be addressed before I would consider a thumbs up for tax-credit financing for infrastructure.”
Scott Clement contributed to this report.
