Washington Report: Now Comes the Hard Part - President Trump and Infrastructure

by Craig Piercy, ACPA Washington Advocate

Whether or not you voted for Donald Trump, it is hard to dismiss the sense of optimism about breaking the gridlock in Washington. For the last six years, the Obama administration and the GOP Congress engaged in the political equivalent of trench warfare, each staking out immovable positions on most major issues, leaving very little room for legislative maneuvering other than for “must pass” legislation—for example, preventing government shutdowns, etc.

Now, the script has flipped.

Having control over both the White House and Congress, Republicans are prepared to embark on a legislative onslaught we have not seen since 2008. Repeal of Obamacare is at the top of the agenda, and corporate and individual tax reform is not far behind.

Then there is the issue of infrastructure. Unlike taxes or healthcare, there is broad agreement that our roads, bridges, airports and water infrastructure are in dire need of repair and improvement. Heck, the sorry state of LaGuardia Airport seemed to be the only thing that Joe Biden and Donald Trump could agree on during the 2016 campaign.

It is, however, much easier to recognize a problem than it is to fix it, especially one on such a large scale. The American Society of Civil Engineers estimates that one out every nine bridges in the U.S. is structurally deficient, and that roughly 900 billion gallons of untreated sewage is released into U.S. waterways each year because of aging pipes and inadequate sanitary system capacity. Closer to home, the ASCE reckons that each U.S. household loses $3,400 a year in disposable income as a result of infrastructure deficiencies, and that unless we find a way to address the $1 trillion investment gap, 2.5 million jobs will be lost by 2025.

During the campaign, Trump proposed a twofold approach: lower the corporate tax rate from 35 to 10 percent on income repatriated from overseas accounts, and create an 82 percent tax credit for private investment in infrastructure projects. Taken together, a corporation could return its overseas profits to the U.S., invest in public infrastructure, and essentially eliminate its tax liability. But Trump’s campaign proposal would still require infrastructure projects to generate revenue to cover operating costs and provide profit. While this may be feasible in larger urbanized areas, it’s hard to imagine that private investment will adequately address infrastructure needs throughout the country. Any infrastructure improvement plan big enough to address the problem effectively will likely need other elements to work, such as an Infrastructure Bank to leverage long-term investments, and injections of funding into the federal highway and airport trust funds.

This is where the politics gets interesting. Several times during the campaign, Trump seemed to suggest he would be amenable to increasing federal borrowing to pay for infrastructure projects, which would actually align him more closely with Democrats. Would Trump be willing to cross the aisle to get a package passed through Congress and risk the anger of conservative Republicans? Perhaps. After all, during the campaign season he showed a clear willingness to buck GOP orthodoxy if he felt it was in his best interest.

The more pressing question is how the financial markets will react. Despite the fact that, at the end of the Obama era, our national debt is approaching $20 trillion, the cost of servicing that debt has been manageable because of historically low interest rates. In 2015, the federal government paid $223 billion in interest payments, which is less than what we paid in 2005 when our total national debt was less than half of what it is today.

If rates begin to rise, our interest payments go up—not just on any new debt we incur to finance infrastructure improvements, but also on all the old debt we have to refinance by issuing treasury bonds at higher rates. Just imagine if interest rates go back to their “historical average” of five percent in a few years and we still have $20 trillion on the books—$1 trillion annual interest payments!

In the end, I suspect that President Trump will have to scale back his expectations and settle for a package that is significantly smaller than the $1 trillion promised during the campaign. Even so, an infrastructure package half that size which includes a mix of public and private funding and incentives would still be a significant step forward from the gridlock-driven policies of the last six years.