Last week the House Republican leadership unveiled its much anticipated US tax reform bill. The bill proposes the most sweeping changes to the tax code in 30 years—since the 1986 Tax Act, which by the way imposed many of the restrictions on private activity bonds that we operate under today. Among its many provisions would be the outright elimination of tax exempt private activity bonds for a host of public works type projects.
PABs have been the cornerstone of the financing of billions and billions of dollars of new public infrastructure—much of the focus has been on the $6.5 billion of PABs for qualified transportation projects issued since 2005 helping in large part to spark the use of P3’s for highway and transit projects across the country. The use of PABs has helped “leverage” almost $30 billion of new transportation infrastructure investment, including attracting nearly $4.5 billion of private equity. But it isn’t just PABs for transportation projects that would be eliminated—ALL exempt facilities, including seaports, airports, water and wastewater projects that incorporate private equity (and transfer risk to the private sector) would be eliminated. And according to the Joint Committee on Taxation, the elimination of PABs would only produce $38.9 billion of “savings” that would be used to offset the cost of, among other things, the major reduction of the corporate tax rate.
One of the primary policies behind the tax proposal is to stimulate private investment to grow our economy. But without the 21st century infrastructure that can result (and has resulted) from the use of this delivery and financing technique, how is corporate America supposed to get its workers to their jobs and its goods to market? Amazon understands this: among its criteria for selecting a metropolitan area to locate its new headquarters building and make a $5 billion investment and employ 50,000 worker is proximity to mass transit, no more than 2 miles from a major highway and no more than 45 minutes from an international airport.
And without PABs the burden to finance new infrastructure projects would fall squarely on state and local governments. According to a report released today, Fitch Ratings has expressed a concern over the fiscal strain on state and local finances that could result from adoption of the current tax proposal, including “…lowering interest in and feasibility of public-private partnerships, which have increasingly been used to procure transportation projects.” Fitch also noted that the proposed halt to PABs “would raise airport financing costs and possibly cause a reduction in private participation in water projects.”
It’s too early to try to predict how much, if any, of the House tax proposal will survive and in what form. Many industry groups and state and local government organizations have already written letters to House Ways and Means Committee Chair Kevin Brady and Ranking Member Richard Neal expressing their concerns about the current proposal, including the provision that would outright eliminate this valuable financing technique.