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The main question standing in the way of a bipartisan deal on infrastructure spending is the mix of revenue offsets in the bill.
A key meeting today will determine the fate of the $579 billion “Gang of 21” infrastructure package. Top White House officials will huddle with senators of both parties to see if a deal can be reached.
With the proposed spending in the bill all part of President Biden’s American Jobs Plan, and with even Joe Manchin warming to a second reconciliation bill for social spending, the main question standing in the way of a deal is the mix of revenue offsets. The two-page fact sheet on the bill laid out 11 possible revenue-raisers, and the Biden administration has all but rejected most of them. Thankfully, that includes most of the privatization schemes that would have been actively harmful to Biden’s agenda.
Asset recycling, the idea of inducing localities to sell off old infrastructure in favor of new infrastructure, was immediately rejected. So-called “direct-pay” municipal bonds were also set aside. Public-private partnerships did not immediately get that treatment; there’s an existing program called the Transportation Infrastructure Finance and Innovation Act (TIFIA) that’s essentially a P3 for transportation. It has little demand, as investors seek better opportunities. But you could see an expansion of TIFIA into clean energy, as a way to get climate mitigation measures into the bill.
I think that’s probably too cute by half—investor-owned utilities do not have a great track record with cleantech, and if it’s just getting private investment for solar and wind farms, you could imagine how that filters down to ratepayers in the form of higher energy prices. It’s also unclear whether Republicans would allow clean-energy P3s into the bill.
Other measures, like deploying “unused” COVID relief funds (the Biden administration insists there aren’t many) or raising user fees like the gas tax or a levy on electric vehicles, are also off the table. According to Sen. John Thune (R-SD), the White House rejected the bill’s conception of an infrastructure bank, which would leverage a small capital base to lend out for projects. There are good and bad versions of that concept, and it wouldn’t surprise me if the bipartisan version was in some way bad.
In one sense, there’s a simple answer for this: Don’t “pay” for infrastructure. Interest rates are incredibly low, and improving America’s built environments pays real dividends, not only in the jobs needed to construct, but in increased efficiency and productivity. But something that sensible runs into the promises of Biden to offset all the spending in his plans, and the predilections of centrists to do the same. So one way or another, it’s likely that this $579 billion will need to be covered.
There’s really only one part of the revenue package that the White House truly finds intriguing: reducing the IRS “tax gap,” which means investing in enforcement as a means to bring back more legally required tax revenues. But there are two key sticking points here.
One is on the size of the investment. The bipartisan group proposed $40 billion in enforcement spending over a ten-year period; the Biden proposal was for $80 billion. But the bigger issue involves the perception of how much money that investment would raise.
The Congressional Budget Office (CBO), by rule, cannot view enforcement measures as producing revenue. There are ways to get the office to score minor savings, but the rule severely limits this. A report that CBO put out last year estimated that $40 billion in tax enforcement would yield just $63 billion in revenue on net. By contrast, the Treasury Department estimated that its $80 billion investment would bring back $700 billion.
That’s a huge gap within the tax gap. If this was destined for budget reconciliation, it would be a real problem. CBO’s score predominates, because the purpose of reconciliation is to hit a particular budget number, and you need some scorekeeper to set those numbers out. But in the bipartisan bill, the two sides could just agree that tax enforcement would yield a certain threshold of revenue. And in theory, going by Treasury’s numbers, that revenue could get you the entire way to offsetting the $579 billion. That’s especially true if you add procedural changes like third-party reporting of financial information from banks, though Republicans have rejected that. (That generates a lot of the revenue in the Biden Treasury estimate.)
So far, Republicans in the Gang of 21 are sticking to the CBO number. As long as they do so, the revenue side is going to come up very short. But moderate Democrats have begun to see enforcement as a bigger revenue-raiser. “I think there’s lots of documentation on the tax gap issue,” Sen. Mark Warner (D-VA) told Insider. “The more you put into the IRS, the better enforcement—that number could go as high as $700 billion.”
If the gang agrees that more can be raised through enforcement, you can see a way to get at least close to the $579 billion number. After that, there are all kinds of minor pay-fors floating around that could fill in the cracks. Republicans have proposed sales of public airwaves to broadcasters and increases to Superfund fees for polluters. If tax enforcement gets you most of the way, some old-fashioned Washington budget gimmickry would get you over the line.
But the tax enforcement piece is the key. If Republicans won’t say that it yields more than $63 billion, there isn’t likely to be a deal. If they relent, you could see a bipartisan agreement.
