US infra funding needs more than just a tax hike

I Squared Capital's Sadek Wahba lays out five ways the Biden administration could support infrastructure without increasing taxes.

The US infrastructure crisis continues to deepen. The Biden administration recognises this and is moving fast on infrastructure – as it should. But funding remains a significant hurdle.

In a recent interview, Treasury Secretary Janet Yellen suggested that to pay for the administration’s infrastructure programme, a tax increase would be needed. Yet our infrastructure needs are so great – and the timeline is so short – that no single funding mechanism should dominate. Before committing to a tax increase, I would suggest Secretary Yellen and others in the Biden administration consider these five additional options.

Bring in domestic capital Pensions are the logical source – the funds that manage retirement for teachers, firefighters and nurses. Pension funds are looking to put their money to work. They can bring scrutiny and discipline to the planning process because they operate at the individual state level, where most infrastructure projects are developed. We should encourage their participation by ensuring they have the right vehicles to invest in their own states – and in others – without any political interference.

Allow infrastructure funding via a new individual retirement account Congress should modify section 408 of the internal revenue code to allow for a new type of individual retirement account that invests solely in infrastructure development.

Taxpayers would be able to make tax-deductible contributions of up to $5,000 each year, even after making the maximum allowable contributions to a 401(k) plan or a traditional or Roth IRA. The only available investment for this IRA would be for US infrastructure. The investment could be locked in for at least 10 years. During that period, participants would not change investments or take withdrawals from the IRA. However, as with a traditional IRA, investment earnings would be tax-deferred. There are more than 30 million IRA accounts with over $7 trillion in assets. If a third of IRA account holders opened the new IRA account, we could raise $50 billion annually.

Increasing foreign direct investment is a more efficient way of funding our infrastructure than a tax increase on US taxpayers

Create an infrastructure bank to manage this private investment A not-for-profit ‘infra trust’ could act as the trusted advisor responsible for developing, managing and executing state and local infrastructure projects, and clamping down on private contractors that aren’t delivering projects on time and on budget. The bank – in combination with private funding, including the IRA accounts, which it could invest – would mean there was only a limited need for government to raise additional money.

Bring in foreign capital There is nothing wrong with funding infrastructure with the help of our allies in Europe and elsewhere. Pensions in such countries as the UK and Denmark, and sovereign funds of strategic partners such as Singapore, South Korea and Kuwait, are eager to invest in the US, as they have done successfully in their own countries for decades. US and global pensions combined are worth more than $40 trillion – capital that can be harnessed for our benefit. Increasing foreign direct investment is a more efficient way of funding infrastructure than a tax increase.

Repeal the Foreign Investment in Real Property Tax Act One way to attract foreign capital would be through repealing FIRPTA. A counterproductive special tax on real estate owned by foreigners, FIRPTA was enacted in the 1980s when fears of a Japanese takeover – which never materialised – ran high. It continues to hamper infrastructure projects that have a real estate component, such as roads. Canada has cited it as a barrier to US infrastructure investment. Repeal of FIRPTA to offset infrastructure funding through new taxation would be a sensible policy trade-off.

Sadek Wahba is the founder, chairman and managing partner of I Squared Capital. The views expressed in this article, which has been edited for brevity, do not necessarily reflect those of the firm