The imaginary cost of tax breaks

Considering the abundance of stats and figures that attest to the US’s gaping infrastructure deficit – a $3.6 trillion backlog, a New York City airport comparable to those in a “third-world country”, and a continued decline in the latest World Economic Forum rankings – a proposal aimed at solving the problem is a welcome development.

And that is how many view the Partnership to Build America Act, a bill introduced last May by Congressman John Delaney. The bill had bipartisan support from the beginning with 13 House Representatives co-sponsoring the bill. That support has grown further not only in terms of the number of co-sponsors, which currently stands at 50, but also with the introduction of a companion bill in the Senate.

Introduced by Senator Michael Bennet of Colorado in January, the Senate’s Partnership to Build America Act is fundamentally similar – although not identical – to Delaney’s bill.

Both versions call for the creation of a $50 billion infrastructure bank that would be capitalised through the sale of 50-year bonds. US corporations would be incentivised to purchase these bonds by repatriating tax-free a portion of their overseas earnings – which according to Delaney total about $2 trillion – for every dollar they invest in the bonds.

It is this funding mechanism that has drawn sharp criticism from those opposing the proposed legislation.

“These bills are a mix of good and bad, with the bad being important enough to argue against their passage,” Thomas L. Hungerford, a senior economist and director of tax and budget policy at the Economic Policy Institute, a non-partisan think tank, wrote in a recent policy memo.

Hungerford argues that the funding mechanism proposed would cost the government $70 billion to $100 billion in tax breaks, while a direct appropriation of $50 billion would be more cost effective. It would also avoid setting a “bad precedent” that might encourage corporations to postpone repatriation of foreign earnings in the future in anticipation of the next tax holiday.

However, Hungerford’s argument is based on the assumption that the government would be able to tax corporations on their foreign earnings which, according to the current tax code, is simply not possible.

If companies are neither incentivised nor obligated by law to repatriate their foreign earnings, they won’t. Whether the Partnership to Build America Act is passed or not, the government will still be deprived of this tax revenue. Not passing the bill, however, will contribute to the country’s widening infrastructure gap.

The Brookings Institution, a Washington-DC based think tank, also called for the creation of a national infrastructure bank that would be funded by a one-time repatriation tax holiday.

“Short of comprehensive tax reform, the American government has few options to recoup lost tax revenue on overseas corporate profits,” wrote Robert Puentes, senior fellow of Brookings’ Metropolitan Policy Programme, along with co-authors Joseph Kane and Patrick Sabol in an August 2013 paper.

Citing data from the McKinsey Global Institute, according to which the US will need to spend an additional $150 billion a year through 2020 to meet the country’s infrastructure needs, the authors state that this investment would add nearly 1.5 percent to annual GDP and create at least 1.5 million jobs.

Furthermore, funding the bank through repatriated earnings and not appropriations has the benefit of not burdening taxpayers, not increasing the country’s debt, and not linking the funds to possible sequestrations or the kind of partisan politics that led to a government shutdown last October.