Weekly Report – May 26, 2015

Invest in and Maintain a World Class Transportation System

The U.S. House of Representatives recently voted for the 33rd time since 2008 to extend transportation funding for the short-term, highlighting the fact that there is still no consensus on how to raise the approximately $50 billion that the federal government sends to localities to fund transportation. In the current fiscal year, the Highway Trust Fund is projected to take in $39 billion for highways and transit, while Congress has authorized $52 billion in spending.

House Majority Leader Kevin McCarthy wants to link paying those bills to a sweeping reform of corporate taxation. He, along with others, believe that there is enough bipartisan support for getting this done by the end of this year. Specifically McCarthy thinks “repatriation” is the path forward because U.S. corporations have more than $2.1 trillion in untaxed profits stashed overseas because they want to avoid the 35 percent corporate tax that would be levied if the money were returned to the U.S. McCarthy highlighted an idea, that has been around for a while, in which companies would be allowed to bring the money home at a reduced tax rate and the ensuing windfall to the government would be dedicated to recapitalizing the Highway Trust Fund.

Congressman John K. Delaney (MD-6) is promoting his own bipartisan legislation to address the Highway Trust Fund solvency crisis and spur new infrastructure projects across the country. The Infrastructure 2.0 Act uses international corporate tax reform to patch the Highway Trust Fund hole for six years, creates a new financing tool and establishes a path for broader pro-growth tax reform and improved infrastructure financing.

Delaney’s Infrastructure 2.0 Act would establish deemed repatriation at an 8.75% tax rate for existing overseas earnings. This produces enough revenue to provide an additional $120 billion to the Highway Trust Fund, enough for six years of solvency at increased levels, as well as funding for the creation of a new $50 billion dollar American Infrastructure Fund, which will be leveraged to finance $750 billion in new infrastructure projects in transportation, water, energy, communications and education.

McCarthy is talking in more generalities of combining a longer-term highway trust fund fix with an effort to reduce business tax rates and impose a more territorial tax system. In terms of specifics, those discussions are underway.

It’s About Quality and Not Quantity

In a recent WSJ piece ( http://goo.gl/mBVrdY) Greg Ip argued that any future infrastructure investments be focused more on quality, not just quantity, which would mean we should be funding projects with the biggest payoff in productivity, safety or environmental protection. With interest rates so low, the International Monetary Fund thinks debt-financed investment could virtually pay for itself by boosting demand in the short run and productivity in the long run. Yet measuring the impact of public capital is no easy matter. The CBO believes that, on average, the return on federal investment is only about half that of private investment.

Partly, that’s because some public works have purposes other than raising economic output: monuments boost national pride, medical research improves the quality of life and bike paths reduce pollution. But it’s also because some federal investments are poorly targeted, and in some cases reduce private, state or local investment.

The ideal approach to federal investment would be to rank all possible projects by their return, both monetary, such as user fees, and nonmonetary, such as less time spent in traffic. Those with the highest return get funded first.

But no such system exists. The existing system tends to favor new projects even when a maturing economy with denser cities would favor rehabilitating existing infrastructure or using it more efficiently, such as with electronic tolls, congestion pricing and even apps that find free parking spots.

There are ways around such constraints. In 2010, Britain drew up a national infrastructure plan that prioritizes projects that maximize economic value, for example because they complement a regional transport network or better utilize an existing asset. Canada has set up a government corporation to evaluate and fund “public-private partnerships.”

In the U.S., the equivalent idea is a “national infrastructure bank.” The federal government would seed the bank with capital, with which it would then extend loans or loan guarantees to state, local and private borrowers. A professional staff would choose projects based on economic and technical merits, the contribution to national and regional growth, job creation and environmental benefit.

Both Republicans and Democrats have backed various infrastructure-bank proposals since 2007, but they haven’t gone anywhere. That’s because lawmakers’ political priority is to shore up the Highway Trust Fund, which is running out of money and about to expire unless reauthorized by Congress.

So for the foreseeable future, the U.S. will have to get by with constrained infrastructure budgets, badly targeted.

How Does this Help L.A.?

The Highway Trust Fund is made up of two accounts — one for highways and one for transit. On the local level, Metro currently has $14 billion in transit, highway and other major initiatives currently in the works within Los Angeles County. Approximately $8.5 billion, for example, is being invested in building five new rail lines. Another $4.3 billion is being invested in freeway improvement projects on the I-5, I-10, SR-138 and I-710, and the remaining $1.2 billion will be used to purchase new buses and rail vehicles, as well as to make Metro Blue Line enhancements and to build a brand new bus division near Union Station. The successful completion of these projects depend on the smooth flow of federal dollars into the region.

As to the infrastructure bank – two reasons why we should support it: first, because it would provide a means to accelerate development of our region’s public transit goals; second, because it would enable private investors to get in on big freeway or port improvement projects.

Presidential Race and Tax reform.

With the presidential race beginning to take shape some candidates are testing out their tax reform ideas and I think the piece below is very timely for putting the above discussion and the candidate’s proposals into better context.

Believe It or Not, Corporate Tax Reform Is Doable in 2015

If you look at the details, President Obama and key Republicans share plenty of common ground.
Oct. 8, 2014 

With the current political stagnation in Washington, it is hard to blame anyone for projecting slim odds for corporate tax reform next year. But amid the hand-wringing over congressional inaction, there is far too little analysis of whether the substantive gap between Democratic and Republican leaders is actually so insurmountable. Consider five issues.

Tax rates. Contrary to perception, there is not that wide of a gap between the Obama White House and key Republicans in Congress. The president has called for lowering tax rates from 35% to 28% for corporations and 25% for manufacturers. Republicans have called for a straight 25% tax rate.

But the choice between 28% and 25% is less of an ideological issue than a question of how deeply Congress is willing to cut tax expenditures. The president hasn’t called for rates below 28% in part to preserve and expand the widely backed Research and Experimentation Tax Credit, which supports high-skill jobs in the U.S. Going lower than 28% may require Congress to take even tougher action, such as significantly lowering the tax incentive for debt over equity in corporate financing.

A minimum tax on foreign earnings. Some see the fundamental divide blocking corporate tax reform as disagreement over whether our international tax system should be world-wide (with corporations paying U.S. taxes on all their global income each year) or territorial (with corporations only paying taxes in the country where they claim profits). Yet this is a classic false choice. Our current system is a hybrid of the two, and virtually no one is proposing that we go to a pure territorial or world-wide system.

So the real choice is whether or not we should replace the current system, a broken hybrid that incorporates the worst aspects of both frameworks, with a far smarter hybrid. Imposing the relatively high U.S. corporate tax rate on all income wherever it is earned reduces the global competitiveness of U.S. multinationals. But by allowing companies to avoid U.S. taxes until they bring the money back to the U.S. and allowing endless loopholes and ways for companies to shift profits to tax havens, our system allows some companies to pay far too little in taxes and discourages domestic investment.

The Obama proposal for a minimum tax on foreign earnings finds a sweet spot that restricts companies’ ability to shift profits to tax havens while also giving them more flexible options for moving funds internationally. Under the plan, a U.S. company would pay a minimum amount of taxes on foreign earnings regardless of where they claim profits are made. Thus, if a multinational company shifts profits to a tax haven with a 5% effective tax rate, the company would have to pay the difference between 5% and the new minimum tax on foreign earnings each and every year whether or not it brings the money back.

For those on the left who generally oppose allowing multinational companies to defer taxes on foreign profits, this is a win: Companies would face a world-wide income tax each year up to the minimum tax on foreign earnings. No more completely avoiding U.S. taxes on income parked overseas. For those pushing for a permanent, more flexible repatriation solution—as opposed to another flawed repatriation holiday—this is a win as well: While U.S. companies would pay a new minimum tax, it could be designed so they won’t face tax disincentives for moving funds globally, including back to the U.S.

And for economic soundness, it is clearly a win. While such reforms won’t substitute for a specific fix on corporate inversions, with U.S. tax rates falling to 28% or below and a minimum tax on foreign earnings, there is less incentive for companies to spend time and ingenuity on complicated tax-haven schemes and therefore be freed to spend more of their energy on innovation, competition and strategies to expand investment and jobs.

Revenue neutrality. While the disagreements on this issue seem intractable, Republican House Ways and Means Committee Chairman David Camp’s tax plan offers the framework for an honorable compromise. Currently, Congress tends to pass short-term extensions of a large assortment of “tax extenders” each year without paying for their 10-year, $450 billion cost.

Under Mr. Camp’s plan, revenue neutrality requires that Congress pay for extenders it wants to continue. If we define revenue neutrality in this way, Republicans can claim they aren’t raising long-term taxes, while progressives and deficit hawks can claim the plan would raise $450 billion compared with current practice. For this to work it is critical that tax reform not use gimmicks to shift costs outside the budget window.

Grand bargain on jobs. The one-thing progressives want most is a boost in infrastructure spending. This would increase long-term productivity and provide immediate jobs for those hardest hit by the Great Recession. President Obama recognized the potential for a “grand bargain on jobs” by proposing to combine one-time infrastructure spending with corporate tax reform in 2013.

How does it work? Corporate tax reform will always create one-time revenues because any reform will require some form of surcharge on existing overseas earnings. Because those revenues are temporary, they cannot responsibly be used to lower rates permanently without running up long-term deficits.

The Obama proposal called for using these and other one-time revenues to jump-start infrastructure with a $150 billion investment, while using every penny of long-term savings from limiting corporate tax preferences to reduce corporate tax rates. Rep. Camp has echoed the call to use one-time revenues from reform for a comparable $127 billion infrastructure investment in his own tax plan. This is an idea that everyone can love.

Helping small businesses and pass-through entities. While corporate tax reform must help pass-through small businesses, the insistence by some that it be linked to significantly lowering the top income-tax rate for non-wage income could be a major threat to reform. Again, there is room for common ground. Serious tax incentives can be given to pass-through businesses for job creation, research and investment without another epic battle over the upper-income rate that almost led the federal government over the fiscal cliff in 2013. One example is President Obama’s proposal to allow small businesses to expense 100% of their first $1 million in investment.

There is no question that corporate tax reform in 2015 would be a heavy lift. But it might be a little less onerous if there were more focus on the amount of common ground that President Obama and Rep. Camp have started to unearth.

Mr. Sperling, former director of President Obama’s National Economic Council, currently heads Sperling Economic Strategies.

Develop Los Angeles as a Top Tourism and Convention Center

A few years back the City of L.A. commissioned a design competition for the expansion and modernization of the LA Convention Center in case plans for the AEG/NFL Farmers Field did not work out. That design completion is now coming to a conclusion. The three finalist design teams have submitted their plans. The plans and models will be available for viewing at the Convention Center, Room 403A,  on May 20 to June 4, from 9AM to 5PM. City leaders believe that this $500 million project, which stands at the intersection of two major freeways and is adjacent to LA Live and a booming South Park District will provide a unique opportunity to transform the Convention Center and its surrounding neighborhoods into a bigger jobs generator. They three finalists are: AC Martin Inc. and LMN Architects; Gensler and Lehrer Architects; and HMC Architects and Populous.