Sadek Wahba: US infra funding needs more than just a tax hike 

The US infrastructure crisis continues to deepen. The massive Texas power failure serves as a powerful reminder of what we can expect on a national scale if we continue to neglect infrastructure investment.

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

In a recent CNBC interview, Treasury Secretary Janet Yellen suggested that to pay for the administration’s infrastructure programme, a tax increase would be needed.

There is nothing inherently wrong with this. Taxes are an appropriate way to pay for public expenditure.

But our infrastructure needs are so great – and the timeline is so short – that no single funding mechanism should dominate. All options should be on the table. Before committing to a tax increase, I would suggest that Secretary Yellen and others in the Biden administration consider these five additional options:

• Bring in domestic capital Pension funds are the logical source – the funds that manage retirement for our 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 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 other states – without any political interference.

• Allow infrastructure funding via a new Infrastructure IRA 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 IRA 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. Today there are over 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, contributed by Americans happy to earn a steady return and proud to invest their retirement capital to improve our roads and airports.

• Create an infrastructure bank to manage this private investment A not-for-profit ‘InfraTrust’ could act as the trusted advisor responsible for developing, managing and executing state and local infrastructure projects, and riding hard on private contractors. The bank in combination with private funding, including the IRA accounts, which it could invest, means there would be only 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 and partners, in Europe and elsewhere. Foreign pension funds 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 United States, as they have done in their own countries successfully for decades. US and global pension funds 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 our infrastructure than a tax increase on US taxpayers.

• Repeal the Foreign Investment in Real Property Tax Act. One way to attract foreign capital is by repealing FIRPTA. An obsolete and now 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. But FIRPTA continues to hamper infrastructure projects like roads that have a real estate component. 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.

It’s urgent that we fund infrastructure – and that we use every mechanism at our disposal. Most of these proposals can be executed as fast as a tax increase. By opening the door to these new funding sources, we can achieve needed funding levels, generate real rewards to pension funds, IRA holders and overseas investors, and still rely on taxation, when taxes make sense, to build our infrastructure back.

Sadek Wahba, PhD, is the founder, chairman and managing partner of I Squared Capital, an independent multi-billion-dollar global infrastructure investment company. The views expressed in this article do not necessarily reflect those of I Squared Capital.