Pay for new highways with lower corporate taxes?

Does it make sense to fund much-needed roads, bridges, and mass transit with a big tax cut for multi-national corporations? A growing number of Democrats and Republicans seem to think so. But I have my doubts.

At first glance, what could be more appealing? At a time when the Highway Trust Fund is grossly underfunded–thanks to the refusal of Congress to raise the gas tax–Democrats would get more money to build infrastructure and Republicans could take credit for cutting corporate taxes. Billions in new construction. For free. It sounds almost too good to be true.

Of course, it isn’t free. But it is complicated. And there is the near-theological argument about whether the revenue piece is a tax cut at all.

The model is hardly new. The latest version has been sponsored by Representative John Delaney (D-MD) and dozens of House Democrats and Republicans as well as a growing number of senators. Here’s the plan:

First, create a $50 billion American Investment Fund that would provide loans or guarantees to help state and local governments finance infrastructure. States would repay the loans at market interest rates.

The scheme would be funded with 50-year bonds that pay just 1 percent interest. U.S.-based multinational corporations would buy the paper through an auction. Because the bonds would pay a below-market interest rate, the firms would demand significant concessions from Washington to buy them.

The price would be a tax break on their foreign income. Currently, U.S. law allows firms to defer corporate tax on most foreign-source income until those profits are repatriated to the U.S. It then taxes the profit at 35 percent with a credit for foreign income taxes paid. In recent years, U.S. firms have accumulated $2 trillion in assets in their foreign affiliates, much of it in low-tax jurisdictions. They’d benefit enormously if Congress allowed them to bring those profits home and pay low- or no-tax.

Under Delaney’s plan, firms would bid for the right to buy the bonds. For each dollar of bonds a multinational buys, it would be allowed to repatriate tax-free a portion of the amount it pays for the debt.

The firm willing to accept the lowest foreign earnings exclusion per dollar of bonds would bring home that amount of money tax-free (plus it would get the bonds). While the market would set the amount, Delany assumes firms would bring back something like $4 tax-free for every $1 they invest in the infrastructure paper.

There is some urgency to this because the Highway Trust Fund—the federal government’s mechanism for funding roads, bridges, and transit—is busted. The last time Congress increased the motor fuels tax that is supposed to finance the fund was 1993, and inflation and increased fuel efficiency have severely eroded its value. As a result, Congress has looted more than $40 billion in general revenues to pay for construction and made the Trust Fund something of a running joke.

Delaney’s plan would help fill the gap—for now. But the idea seems to be a bit of a shell game. Instead of spending money directly on infrastructure bonds, the bill would give multinationals a tax break to buy the paper at an inflated price. That loss would increase the federal deficit as surely as if it were direct spending through an underfunded Trust Fund. The highway program would effectively become a new tax expenditure—probably the last thing we need.

Some argue that multinationals would never bring the money home at current rates, so whatever tax they pay is gravy. Others, including congressional scorekeepers, disagree. They say repatriating money tax-free is a tax cut. They note, as well, that past tax holidays and promises of new ones may themselves discourage firms from bringing that money back. After all, why pay now if you can just wait ‘til the next holiday.

It is also important to think about this plan in the context of broader corporate tax reform. If Congress repeals the repatriation tax but imposes a new transition tax on past accrued profits, as some lawmakers would, there may no longer be any undistributed earnings to fund this plan. That’s one reason why supporters may want to pass it before corporate reform becomes law.

The plan is quite clever. But in the end I’m not sure it does more than move around a lot of money. It would be simpler if lawmakers bit the bullet and raised the gas tax or, even better, taxed mileage to make the levy a true user fee.