TO FUND AN INFRASTRUCTURE BILL, TURN TO THE PRIVATE SECTOR

With the $1.9 trillion COVID relief bill in place, the Biden administration now shifts its attention to infrastructure. Meetings with lawmakers are already underway. And partisan wrangling has already broken out over the content of an infrastructure bill and how to fund it.

Wrangling over content is predictable – it’s unlikely that Republicans will support clean energy provisions. Wrangling over funding, on the other hand, is dispiriting. There are many simple ways to raise the necessary funds.

The funding debate centers on taxes. According to CNBC, Republicans want a carbon tax and a trust fund that rolls up tax revenue from multiple sources. Democrats propose raising taxes on gasoline, electric vehicles and corporations. Democrats are even reportedly willing to split the bill into a set of program proposals that might win some Republican support and a set of funding provisions that likely won’t.

These lawmakers on both sides of the aisle should think of new ways. While taxes are an appropriate way to fund infrastructure – a public good – tax revenue alone will never be adequate to meet the need. Neither will deficit spending. To close the infrastructure funding gap – estimated by the American Society of Civil Engineers at $2.59 trillion just to keep existing infrastructure in good repair, let alone modernize it – it will be necessary to draw on every possible funding source.

Pension funds are the first place to turn. These are the funds that manage retirement for our teachers, firefighters and nurses. Pension funds must of course serve their membership and are thus always in search of opportunities to put their money to work. Infrastructure funding is such an opportunity. Infrastructure projects are uniquely suited to the goals of retirement investment. They are highly predictable – power transmission and distribution grids, toll roads, bridges and airports have predictable cashflows often linked to inflation as well as a long-term time horizon – typically 20-30 years. And they are administered by large, established, stable entities – federal and state governments and major infrastructure operators. They are by definition a stable investment.

There is significant benefit to infrastructure development as a result of involving the pension funds. 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 that they have the right vehicles to invest in their own states – and other states – without any political interference.

Of course, there are many retirees not involved in pension funds. For them, 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 U.S. infrastructure. There are already models for such dedicated, focused retirement accounts – 529 Plans for education are the chief example. The Infrastructure IRA investment, like a traditional IRA, will have its investment earnings tax-deferred.

How much investment capital is available through this vehicle? Consider: Today there are over 30 million IRA accounts, with over $7 trillion in assets. If all IRA holders saved $5,000 annually that would generate up to $150 billion of capital each year, contributed by Americans happy to earn a steady return and proud to invest their retirement capital to improve our roads, bridges, airports and power grid.

Next, let’s create an infrastructure bank to manage this private investment. A bank would have the same status as other GSEs and would be responsible for developing, managing and executing state and local infrastructure projects, and riding herd 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.

Let’s also 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. U.S. 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.

To help attract foreign investors, let’s also Repeal the Foreign Investment in Real Property Tax Act. 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 materialized – 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 U.S. infrastructure investment. Repeal of FIRPTA to offset infrastructure funding through new taxation would be a sensible policy tradeoff.

The main point is this: Infrastructure investment capital is readily available. We need the will and the imagination to draw on it. The engineers’ report makes clear the consequences of failure: A cost of $10 trillion in GDP and more than 3 million jobs by 2039, and $2.4 trillion in exports over the next 20 years. It is time for our leaders to step up to the challenge, step beyond convention, and use every possible means to fund infrastructure at the full level our emergency requires.

An advocate for transformative approaches to infrastructure in investment, and a frequent commentator about the need for more investment in infrastructure to promote sustainable economic growth, Sadek Wahba, Ph.D. is the founder, Chairman and Managing Partner of I Squared Capital, an independent multi-billion-dollar global infrastructure investment company.