Decoding Trump's Infrastructure Plan


By Jeff Davis,

As the administration promised it would, President Trump's State of the Union address laid out a high-level plan for fixing America's infrastructure. In doing so, he implored Congress to "produce a bill that generates at least $1.5 trillion for the new infrastructure investment that our country so desperately needs. Every federal dollar should be leveraged by partnering with state and local governments and, where appropriate, tapping into private-sector investment – to permanently fix the infrastructure deficit."

Without a lot of details, the challenge now is to figure out exactly what he meant by that. Three points of the president's statement need clarification:

$1.5 trillion? Trump's fiscal 2019 budget proposal, due out in mid-February, will include a more detailed proposal to spend $200 billion in federal appropriations over the next 10 years that will, presumably, bring forth the other $1.3 trillion in state, local and non-federal infrastructure investment to get to that aspirational $1.5 trillion number.

However, just a few months ago, the White House's ambition was for a $1 trillion infrastructure plan based on the same $200 billion federal contribution. How has the same $200 billion in "real money" gone from producing an additional $800 billion to producing an additional $1.3 trillion in just a few short months?

Ten percent of the Trump plan's $200 billion would subsidize new low-interest federal loans, as well as new tax-free "private activity bonds" for private infrastructure with a public purpose, like hospitals and airport terminals. The tax cut bill that the president signed into law just before Christmas reduced corporate and individual tax rates, which may have drastically altered the assumptions for how much in loans and bonds can be supported by the $20 billion in credit subsidies and foregone taxes on interest contained in the Trump plan.

Even though the White House says that the amount of financing provided by the plan has jumped from $1 trillion to $1.5 trillion, it's important to remember that the actual amount of federal funding in the plan has remained the same – $200 billion.

Leveraging? If the theoretical face value of the president's infrastructure plan can indeed rise by 50 percent because of a change in income tax rates, this serves as a reminder that the massive leveraging of non-federal money called for in the plan could also be affected by changes in the bond market. (Yields on the baseline 10-year Treasury bond hit a three-year high this week, for example.)

The aforementioned tax reform bill got rid of the ability of state and local governments to refinance existing debt partway through a bond's duration via "advance refunding." It also took away many competing options for wealthy individuals to bring in tax-free investment returns. So new state and local government bonds should be more attractive to markets. At least for a time.

Of course, the big drawback to borrowing money is that it eventually has to be paid back. Governments borrowing money over a 30-year period makes sense if they are financing infrastructure or other assets that also have lengthy lifespans, just like it can make sense for an individual to take out a 30-year mortgage on a house in which they plan on living for decades. But too many states and cities have recently run up a lot of debt to cover operating costs – especially to prop up unstable pension plans.

The assumption that states, cities and counties, and (in some instances) private equity partners can responsibly handle an additional trillion dollars or so in infrastructure debt is far from certain. This also means that the leveraged infrastructure won't be distributed evenly. Governments that are already in deep debt may not be able to issue much more to participate in the Trump plan as other areas.


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