Tax Analysts Blog

Can Multinationals’ Offshore Cash Fund a U.S. Infrastructure Bank?

Posted on Oct 6, 2014

Increased infrastructure spending is economic nirvana. It gives the economy a supply-side boost by increasing capital formation while also providing a demand-side stimulus that creates jobs. It is one of the surest bets for jobs creation in the economics tool kit.

But instead of moving ahead, we are stalling and even threatening to go in reverse. Fuel tax revenues into the Highway Trust Fund are increasingly inadequate because people are driving less and driving more fuel-efficient vehicles, and because the tax is not indexed to inflation. Since Congress last raised it in 1993, the federal tax on gasoline has remained at 18.4 cents per gallon. These events have forced Congress to act -- not something it does well. All members of Congress want better roads in their district, but very few are willing to impose a highly visible tax increase on voters. Add reflexive conservative opposition to any tax hike to this and you have the real possibility of stalling already inadequate infrastructure spending at a time when job creation is said to be the Washington’s top priority.

For the moment, this issue is not making headlines. On August 8 President Obama signed H.R. 5021, which transferred $9.8 billion from the general fund and $1 billion from the Leaking Underground Storage Tank Trust Fund into the Highway Trust Fund. The general fund transfer was offset with a timing gimmick known as pension smoothing ($6.4 billion over 10 years) and a one-year extension of customs user fees ($3.5 billion). This stopgap measure extended highway funding through May 2015, at which time there will be another knock-down, drag-out battle in which everybody will want a long-term solution but we will probably end up with another Band-Aid.

There is no shortage of options to meet the chronic fiscal imbalance in the Highway Trust Fund. As arithmetic suggests, you can cut highway spending or increase highway trust fund revenues (fuel taxes and other transportation-related levies). Or you can transfer money from the general Treasury fund to the Highway Trust Fund and pay for that transfer by increasing taxes or cutting spending or by simply increasing government borrowing.

On June 8 Sens. Bob Corker and Chris Murphy proposed increasing the gasoline and diesel taxes by 6 cents in each of the next two years for a total of 12 cents. This would provide enough funding to offset current projected highway spending over the next decade and replace all of the buying power the federal gas tax has lost since it was last raised in 1993.

Some conservatives want to get the federal government out of the highway-building business. Rep. Tom Graves and Sen. Mike Lee have proposed legislation that over a five-year period would transfer almost all authority over federal highway and transit programs to the states and lower the federal gas tax to 3.7 cents from 18.4 cents over the same period. During the five-year phaseout, states would receive block grants from the federal government with far fewer restrictions than those that come with current federal funds.

Both President Obama and House Ways and Means Committee Chair Dave Camp have suggested using tax reform as a vehicle for infrastructure financing. On July 30, 2013, Obama proposed that temporary tax increases generated by business tax reform revenue be dedicated to job-creating stimulus, including “reducing the backlog of deferred maintenance on highways, bridges, transit systems, and airports nationwide.” In his tax reform discussion draft, Camp dedicated $126 billion of revenue from his one-time tax on unrepatriated foreign profits of U.S. multinationals to fund eight years of highway and infrastructure investment shortfalls.

Another intriguing idea is the creation of a federal infrastructure bank. There are many variations of this approach, but they all follow essentially the same format: A new federally chartered institution would provide loans and loan guarantees to state and local governments and to private entities for infrastructure. The advantage of this to borrowers over independent financing is that they would pay lower rates of interest. The infrastructure bank would have an independent management structure keeping it far from the political process so loans and loan guarantees would go to only the most worthy projects. The bank would issue bonds in the market without any explicit federal government guarantee. The funds the borrowing builders generate (for example, from tolls and taxes) would be paid to the bank, and the bank in turn would use that money to pay interest on its bonds.

The main hurdle here is that like any loan-making institution the bank needs seed capital to buffer the inevitable difference between payments in (from its loans) and payments out (to its bondholders). The most straightforward solution would be for the federal government to shell out a few tens of billions of dollars to get the bank started.

First-term lawmaker John Delaney has an alternative (H.R.208) that has gained the support of 39 Republican and 36 Democratic cosponsors in the House. On the other side of Capitol Hill, Sens. Michael Bennet and Roy Blunt introduced companion legislation with six Democrats, seven Republicans, and one cosponsor. This bill would capitalize an infrastructure bank with $50 billion of bonds sold to U.S. multinationals. The bonds would have a maturity of 50 years and pay 1 percent interest.

Currently, the market yield on 30-year Treasury bonds is 3.12 percent. This implies that the market value of these bonds is less than 47 percent of face value. Why would a multinational pay $100 million in cash to get a bond worth $47 million? The multinational gets to repatriate a multiple of the face value of the bond -- say, $400 million -- free of the U.S. tax that normally is due when profits earned abroad are brought back to the United States. So in this example, the multinational in effect is paying $53 million for the privilege of paying zero U.S. tax on $400 million. At 35 percent, that is a potential tax saving of $140 million (though this amount will usually be less because foreign tax credits reduce the U.S. Treasury’s yield on repatriated earnings).

To determine exactly how much a multinational would get to repatriate, the government would sell the bonds in a Dutch auction. In a Dutch auction, prices start high and go down until everything is sold. Multinationals would submit bids in the form of multiples of repatriated funds to the face value of bonds. Starting with the lowest multiple and proceeding upward, the government would keep accepting bids (up to 6:1) until all $50 billion were sold.

Delaney suggests that the bank could leverage this $50 billion of capital into $750 billion of new infrastructure spending. This extra $700 billion doesn't fall from the sky. If the bank lent all the funds for these projects, it would have to issue $700 billion of its own bonds on the market.

There is no economic magic in the Delaney proposal. Citizens are still paying taxes, and drivers are still paying tolls to finance road building. What is different is that their burden is lightened by favorable loan rates from the new infrastructure bank (or from third parties who accept lower rates because of the bank’s guarantees).

The bank is able to do this because the government is subsidizing its operations. First, there is the cheap capital made possible by the tax break given to suppliers of that capital. Second, there is the implicit guarantee on its bonds (which exists even though the legislation insists the full faith and credit of the U.S. government is not extended to any bank liabilities.) The market recognizes that there is a good chance the federal government would not let its own bank fail.

The magic in the Delaney proposal is political. It has significant bipartisan support at a time when partisanship infighting reigns supreme on Capitol Hill. There is no increase in government spending as we conventionally think of it, so conservatives are happy. Multinationals are happy to have an attractive option for repatriating funds so they can pay dividends, buy back shares, and buy U.S. companies. Road builders, truckers, and local governments are happy to find a new source of long-term funding for infrastructure. Former President Bill Clinton also advocates this approach.

Though they strongly endorse increased infrastructure spending, liberal groups criticize the bill because the repatriation provisions are viewed as an expensive gimmick to allow multinationals to bring cash home. The last time Congress tried to use the lure of tax cuts for repatriated funds to get multinationals to do good things for the economy, it didn't work.

Repatriation and the creation of an infrastructure bank are complex issues and, as a policy matter, completely separable. It would be better from a policy perspective to deal with each one individually. Combining them obfuscates things. But for some the combination is irresistible because it creates intriguing new political dynamics in a situation where gridlock is likely to prevail.

Read Comments (1)

edmund dantesOct 7, 2014

Mr. Sullivan, with all due respect, you've left out the single most important
reason that the Highway Trust Fund is falling short. Fully 25% of the taxes
paid by motorists is being diverted every year to mass transit, bicycle paths,
and similar non-road spending. If we simply dedicated 100% of the fuel tax to
roads, that would achieve a 33% increase in spendable revenue. That would
easily cover the shortfalls.

Why can't that be put on the table, instead of these tax gimmicks? Why can't
mass transit pay its own way, instead of being subsidized by those who don't
use it? Mass transit needs to get its fingers out of the *highway* trust fund.
I know, too revolutionary a concept.

Here's my source.

If you disagree with Heritage, please explain how they are wrong.

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