The U.S. Congress Joint Committee on Taxation estimates that more than $2.5 trillion of untaxed American multi-national profits are parked offshore. Could some of that cash be remitted to the U.S. to help finance infrastructure in a way that benefits all parties?
It is no secret. America’s infrastructure — its roads, bridges, airports, transit systems, sea ports, rail, energy distribution, etc. — are below par. The American Society of Civil Engineers (ASCE) gives U.S. infrastructure an overall grade of D+. And, its report does not take into consideration that America, unlike its economic competitors, lacks a true high-speed rail (HSR) system.
There may be a glimmer of hope. President Trump, a successful developer, is on record stating that his administration wants to prioritize infrastructure. Congressional leaders like Senate Minority Leader Schumer (D-NY) echoes those sentiments. Large contracting and development corporations are eager for the work. P3 (Public-Private-Partnerships) which leverage risk sharing and profit sharing between the public and private sectors have been embraced. And there is over $2.5 trillion parked offshore by private companies because remitting the money back to the US would result in it being taxed at 35+%. Can a deal be structured that bring all the parties and funding to the table to get some badly needed projects off the ground?
Antiquated US Tax Code
It won’t be easy; there are many moving parts, including the US tax code. Most of the world operates on a consumption-based tax system, called VAT (Value Added Tax). Products are taxed at all stages of production, unless the product is exported, in which case the tax is removed. Typical VAT taxes are in the 15% to 25% range, averaging about 20%. “Tax haven” countries have rates under 10%.
The US taxes income at the federal corporate rate of 35%, the highest in the industrialized world, plus state taxes. When US firms export their goods, there is no relief for income taxes paid. Adding insult to injury, the US goods are slapped with the destination country’s VAT tax upon entry. This is the primary reason why the US has an annual trade deficit of over $500 billion which translates into lost American factories and jobs. The antiquated US tax code discourages multinational corporations from remitting the earnings to the US to invest in factories, infrastructure, and jobs. With one-sided trade policies, the archaic US tax code, and the entrance of China, now a manufacturing powerhouse, into the World Trade Organization (WTO), it is not surprising that the percentage of corporate profits earned offshore since 1990 has more than doubled to over 35% (see chart) and that factories have been moved to outside the USA.
This should in no way be construed as an endorsement of VAT. It too has issues, most notably that it is far too easy to raise VAT rates with little to no oversight. Lowering US federal business income tax rates to the 15% to 20% range is a good first step. Next step is a border adjustment tax that adds a tariff to imports. That tariff would vary by country, and would be at least as large as the VAT rate applied to US products exported to that country. Such actions will level the playing field, greatly improve US international competitiveness, and reduce the crippling trade deficit.
Incenting Companies to Repatriate Foreign Earnings with RIB’s
The unfavorable tax situation will require a permanent fix, but short term, there are some actions that can be taken. These actions can eventually be rolled into tax code overhaul legislation. This proposal is to create a new financial instrument called a Repatriation Infrastructure Bond (RIB, for short) to facilitate remittances. RIB’s would be US government-backed securities, with the characteristics of Treasury bonds. Term would be from 30 to 50 years, available in $1 million denomination. Interest rate would be comparable to T-bonds.
There would be a relationship between the number of RIB’s purchased, and the amount of foreign earnings a multi-national company could remit back to the US, tax-free. Assume a 2 to 1 ratio, i.e. for every two RIB’s purchased ($2,000,000 total), a company could remit $1,000,000, without having to pay the 35% income tax on the remittance. There is an additional benefit that, like T-Bonds, RIB interest is tax-free. A corporation therefore has a very strong incentive to purchase RIB’s and remit offshore cash to invest in its US operations. That translates into improved economic efficiencies and more jobs for Americans.
Infrastructure Bank
The cash generated by the sale of RIB’s creates a US Infrastructure Bank. These funds can be disbursed in various ways. The Democrats’ general preference would be that the federal government fund infrastructure, versus using P3’s. The Republicans, especially President Trump, would prefer P3’s, with a split of 80% private, 20% public money. For arguments’ sake, let’s assume a 40/60 public-private split, knowing full well in the legislative sausage-making process, changes will happen.
Which entities will be permitted to borrow funds from the Infrastructure Bank? A case can be made for private corporations being able to borrow funds, but that would diminish the multiplier effect. A stronger case can be argued that the Infrastructure Bank should be solely for federal contributions. Another question revolves around the interest on RIB’s. How will the interest coupon be paid? Then there are the bonds themselves. Will the federal government “forgive” the bonds and simply add them on to the $20 trillion of existing federal debt? Will the feds demand the bonds be paid back by the borrowing entity? Or will there be some combination of both? Obviously if the bonds are paid back, the Infrastructure Bank is replenished to fund more projects.
Some Numbers
How much money is in play? There is roughly $2.6 trillion offshore, eligible for repatriation. Assume two-thirds, or roughly $1.8 trillion, is repatriated. Using a two-to-one ratio of $2 million in RIB’s for $1 million in tax-free cash, the result would be an Infrastructure Bank of $1.2 trillion. With current T-Bond rates around 4.25%, the annual interest payments would be $50 billion per year. The federal budget would have to comprehend that amount.
With $1.2 trillion Infrastructure Bank, and P3’s using a 40/60 public-private ratio, $3 trillion of infrastructure can be funded. Creative financing methods, including passenger facility charges, user fees, transferable development rights, as well as more typical financing methods such as gas taxes, transportation ticket surcharges, and sales taxes will have to be utilized. Potentially contentious discussions may occur during negotiations regarding how the financing revenues are divvied up among the entities building the infrastructure, recognizing that there are limits on a user’s willingness to pay. If the fees are too high, revenues from the project can be impacted which will adversely affect the project’s Return on Investment (ROI).
Potential Infrastructure Projects
$3 trillion is an impressive amount of infrastructure, but ASCE has stated that the work needed to bring national infrastructure up to a state of good repair (SOGR) actually exceeds that number. It is fair to assume, therefore, that there will be some combination of both SOGR and new infrastructure.
There is no shortage of attractive candidates - NextGEN air traffic control ($35 billion), Gateway Project – NY/NJ ($25 billion), Positive Train Control - freight and passenger rail ($15 billion), California High Speed Rail ($70 billion), Northeast Corridor High Speed Rail ($150 - $250 billion), and many, many more. These numbers do not include hundreds of billions required for water and sewer systems (e.g. Flint, MI), school buildings, inner-city revitalization, and Veterans Administration hospitals - all potential projects that have been mentioned by the Trump Administration.
There is no denying that there is a significant need for infrastructure investment. RIB’s can be the solution that finally compels the US to make significant progress in that direction.
Richard J. Arena is managing partner of ARC Systems International LLC, a consulting firm specializing in high tech business development and smart infrastructure construction. He is president of the Association for Public Transportation and is on the advisory board of the US High Speed Rail Association. He earned an engineering degree from Cornell University and an MBA from Boston University. Arena holds building contractor licenses in both Massachusetts and Florida.
