The Footnote to All Those Complaints About Tax Cuts as Stimulus

Transportation reformers and status quo-lovers alike smacked their foreheads in frustration when the White House’s first stimulus plan lowballed infrastructure to make room for tax breaks that had little demonstrable effect on job creation — particularly the $70 billion adjustment of the alternative minimum tax (AMT).

PH2009032801851.jpgHOT lanes on Virginia’s I-495 are one of seven projects approved by U.S. DOT for private activity bonds. (Photo: WaPo)

But the stimulus law included one AMT tweak that ultimately could prove a big boon for transportation. As the American Association of Port Authorities observed yesterday in a letter to Congress on economic recovery strategies, the stimulus helped transportation planners by eliminating the AMT for two years on private activity bonds issued by state and local governments.

So what in the world are private activity bonds? Simply put, they are a still-developing tool to encourage public-private partnerships (PPPs) for infrastructure by allowing private companies to benefit from tax exemptions similar to those enjoyed by municipal bonds (generally issued by public entities for public projects).

As the AAPA wrote in its letter to Capitol Hill:

The AMT reduces the attractiveness to investors of bond issues necessary for infrastructure development projects. As a consequence, public port authorities must discount the bonds; thereby reducing the overall funding available for investment in infrastructure and the attendant jobs and income creation which would have been created. AAPA strongly supports the permanent elimination of the AMT for private activity bonds.

Of course, the virtuousness of private activity bonds — much like that of PPPs overall — depend on the type of project that benefits from the debt issuance. And unfortunately, the bonds have yet to be approved for use on transit.

As of December 2008, the U.S. DOT has okayed private activity bonds for seven projects, totaling $4.9 billion of the $15 billion cap set in 2005. Only one of the seven has actually progressed to issuing bonds: suburban Virginia’s plan to add high-occupancy toll (HOT) lanes to I-495, a.k.a. the Capital Beltway.

Given that the Beltway HOT lanes project is looking more and more like an old-fashioned giveaway to corporate interests, the prospect of more private activity bonds may set transportation reformers’ teeth on edge. But with a nationwide high-speed rail on the horizon, the more funding available for rail improvements, the better.

And in a world where Wall Street lobbyists have long angled for an exemption from the corporate version of the AMT, it’s to be expected that infrastructure planners should reach for funding help, wherever they can get it.

  • So there is an exemption that reduces but does not eliminate the additional capital cost associated with a private firm issuing the debt rather than using public debt.

    And for something like intercity rail or rail electrification, does nothing to change the property tax advantage gained by publicly owned infrastructure charging an access fee to private users.

    But for road infrastructure, where private owners typically do not pay property tax as a condition of being “allowed” to buy an income generating opportunity associated with substantial direct sunk public capital subsidies and hidden ongoing public operating subsidies, the change in the tax structure goes much further to narrowing the capital cost disadvantage that private borrowers face.

    All in order to PERMIT us to use more expensive finance to finance works for the public benefit?

    A far superior way to resolve the limitations that states face in funding infrastructure is to provide sufficient funding at the Federal level where that infrastructure addresses National challenges.

    In transport infrastructure, those challenges include our three-decades-overdue challenge of regaining Energy Independence, which is tied into the century old challenge that we have only started seriously understanding in the last twenty years that CO2 dumped into the atmosphere stays up for a century and we have no reason to believe that we can continue to burn all the carbon available underground at the same rate without devastating climate chaos.

    Turning to the private sector to overcome the state limitation on borrowing seems not merely misguided but obviously foolish: the financing cost is higher, and the things that can refund their finance out of their own revenues leads just as well to public debt that is self-funding.

    It seems that the simplest way to parse the asterisks on the asterisk is just to reset and go back to the beginning: there was too much in tax cuts, but it was the political price for getting an underwhelming amount of direct spending on infrastructure, both useful and soon to be obsolete, passed into law.

  • Absolutely agreed that reliable and sustainable levels of higher funding would be a better solution, Bruce. But given the gridlock and lack of foresight we’ve seen from Congress lately, it might be time to look at less attractive alternatives to generate revenue for worthy projects. It’s also true that the projects getting approved for PABs are not great by any stretch — but again, consider the alternative (no funding).

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