Republicans and Democrats agree that the United States is in desperate need of a major infrastructure overhaul and, at the very least, that Congress should authorize major repairs to roads and bridges.
The fierce disagreement between the two parties begins over what provisions deserve to increase the federal deficit, as well as how to finance such a massive undertaking.
And while Wall Street worries about potential increases in corporate and personal tax rates, Democrats may soon turn to an Obama-era tool to fund their infrastructure projects: Build America Bonds.
BABs are special municipal bonds that allow states and counties to float debt with interest charges subsidized by the federal government. This subscription not only relieved nervous investors following the financial crisis, but also made municipal debt even more attractive with rates sometimes north of 7%.
This approach could be particularly useful to the president. Joe biden’s infrastructure surge, especially after the high price of its $ 1.9 trillion Covid-19 relief package. Even according to the most modest estimates, the cost of repairing the country’s infrastructure reaches trillions of dollars.
The country’s overall infrastructure needs over the next 10 years total nearly $ 6 trillion, according to to a report published earlier in March by the American Society of Civil Engineers. He says there is a backlog of $ 125 billion for bridge repairs, a backlog of $ 435 billion for roads and a backlog of $ 176 billion for transit systems.
Those sums, simply for repairs already deemed necessary, come before the expansive and innovative technologies Democrats hope to include in Biden’s next bill. The White House should present a bill of at least $ 3 trillion and include a litany of infrastructure and social assistance programs.
Vikram Rai, head of municipal bond strategy at Citi, believes Build America Bonds is the answer.
Build America Bonds entered the United States markets more than ten years ago as the Obama administration searched for ways to fund capital projects across the country and kickstart the economy in the aftermath of the Great Recession.
The beauty of subsidizing the interest associated with municipal bonds, Rai argues, is that every dollar spent by the federal government serves to strengthen the integrity of larger spending projects that, legally, only states and communities have the power to pursue. .
The federal government owns less than 10% of the country’s infrastructure, while the rest is managed by states, cities and the private sector.
“This $ 2,000 billion, $ 3 trillion price – it’s not really accurate because the price is only if the federal government grants subsidies to states and local governments,” Rai said in a statement. telephone interview earlier in March.
Instead, when the federal government takes out BABs, it allows states and cities to issue far more debt than investors would otherwise accept with no astronomical interest charges and doubts about their ability to repay.
“What a lot of people don’t realize is that just a few tax increases – like increasing the corporate tax rate or implementing a carbon tax – even these very marginal increases. taxes will be more than enough to fund the initial spending of infrastructure projects, ”Rai said.
“These projects are ultimately self-sustaining,” he added. “There is a magnifying effect, a stimulating effect: it creates jobs, it generates tax revenue. So, it is obvious.”
Rai added at the time that it was almost certain that the White House was considering BABs among a variety of funding options.
Transportation Secretary Pete Buttigieg confirmed later on Friday, after this article was originally published, that the administration considers the obligations among other financing options.
“I hear a lot of appetite to make sure there are sustainable funding streams,” Buttigieg said. Build America Bonds shows “a lot of promise as to how we leverage this type of funding. There have been ideas around things like a national infrastructure bank, too.”
A key feature of BABs is that, unlike 83% of the municipal bond market, they are imposed by the federal government.
Most bonds issued by state and local governments on “normal” terms are attractive to investors because the interest is generally exempt from federal income tax. As a result, American investors are prepared to accept a lower interest rate than they would otherwise ask.
For foreign investors, however, interest on U.S. municipal bonds is still taxable by their home country, so it’s typically apathetic low-yielding debt securities issued in the United States.
But by subjecting BABs to federal taxes, state and local governments are forced to offer higher interest rates on their bonds to guarantee investors the same effective rate of return.
Since foreign investors, with their multi-billion dollar demand base, have expressed an unwavering interest in investing in U.S. infrastructure, they would be keenly interested in a taxable structure. Indeed, from their point of view, BABs are indistinguishable from a conventional taxable obligation, according to Rai.
The downside to BABs, while perhaps more impactful than written grants for an equivalent amount, is that the federal government is still on the hook for billions of dollars in interest charges until the BABs arrive. due.
The Obama-era program, which had no annual cap and subsidized 35% interest charges, expired in late 2010 after states and municipalities sold more than $ 180 billion dollars. ‘bonds, much more than the federal government had originally planned.
Some lawmakers, such as Sen. Ron Wyden, D-Ore., Continue to support the program and are open to the possibility that they may again play a role in future infrastructure initiatives.
“Build America Bonds was a smash hit in the Recovery Act,” Wyden, chairman of the Senate Finance Committee, told CNBC on Wednesday. “I am incredibly proud of this program, and a similar funding structure will be part of the conversation as we move forward.”
Leading Republicans, on the other hand, were fed up with the costs associated with BABs in 2011. GOP lawmakers said the federal government’s commitment to subsidize 35% of interest payments on local bonds was too high.
Former Sen. Orrin Hatch, then a senior Republican on the Senate Banking Committee, said in February 2011 that the bonds were “just a disguised bailout of the state” that was disproportionately helping New York and California.
“These obligations rightly expired at the end of 2010 and I hope the Obama administration will not try to resuscitate such an absurd provision in its next budget,” he said at the time.
Senator Pat Toomey, R-Penn., Member of the Senate Finance Committee, is a “no” to the bond resurrection.
“State and local governments have never been so overwhelmed with cash. In addition to record tax collections last year, Congress sent them $ 500 billion. Despite all this, two weeks ago, Congress sent them an additional $ 350 billion that they did not need, “he told CNBC on Friday. “So no, I’m not in favor of misallocating billions of extra dollars to spur potentially outrageous projects and to encourage insolvent or irresponsible local and state governments to take on even more debt.”
Rai admitted that the appetite for BABs could vary depending on each state’s creditworthiness, with states like New York with stronger balance sheets perhaps a more attractive bet than Illinois.
He countered, however, that even cities in Illinois could see significant revenue generation through BABs if the state worked to support local municipal bonds. The federal government’s commitment to subsidize interest charges could be cut from 35% to 30%, or even 28%, as Democrats proposed in 2011, Rai said.
But with the country’s infrastructure in dire straits, some Republicans may view BABs as a compelling option for funding infrastructure projects that, over time, end up paying for themselves in job creation and tax revenue.
Mississippi Sen. Roger wicker, a GOP ranking member on the Trade Committee, co-sponsored a bill with Sen. Michael Bennet, D-Colo., in 2020 that called for a rebirth of BABs with some improvements.
Like the BABs, their so-called US infrastructure bond program would create a category of taxable “direct pay” municipal bonds to help struggling governments fund critical public projects.
Wicker and Bennet’s bonds would be exempt from sequestration, the process by which Congress gradually eroded the size of its payments to fund the original BAB class.
“Empowering our local leaders to start major infrastructure projects is a proven and cost effective way to help our communities come out of serious financial difficulties with assets that bring value to the region for years to come.” Wicker said in a July press release.