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May 1, 2019

Financing infrastructure in the US remains a major challenge

GlobalData expects US infrastructure construction to grow by only around 1% a year in the coming five years.

By GlobalData

On 30 April 2019, President Donald Trump, House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer agreed on a US$2 trillion price tag for a potential investment plan to rebuild the country’s crumbling infrastructure.

US infrastructure financing

Although a positive development, there is still uncertainty as to how the plan will be financed, and GlobalData still expects infrastructure construction in the US to grow by only around 1% a year in the coming five years.

Both Pelosi and Schumer announced on 30 April they will meet with Trump again in three weeks to determine how the president aims to finance the plan.

In a letter a few days before the meeting took place, Pelosi and Schumer urged the president to support a plan that includes investments in renewable energy, broadband, water, school and housing infrastructure as well as investments to make the nation’s infrastructure resilient to climate change risks.

The latest American Society of Civil Engineers’ (ASCE) Report Card for America Infrastructure, which rates the US state of infrastructure on a scale of ‘A’ to ‘F’, has given the country a ‘D’, on average, since 1998 due to the continued lack of investment for maintenance and improvements.

Investment gap

The ASCE estimates that there is a US$2 trillion 10-year investment gap, and calls for the government and the private sector to raise investment from 2.5% to 3.5% of GDP by 2025, in order to meet the country’s future infrastructure requirements and restore its global competitive advantage.

While both Republicans and Democrats have acknowledged the need for more infrastructure investment, neither side seems to agree on how it should be financed or has so far developed a credible proposal that Congress would consider.

In both Trump’s past and recent proposals and the one that Democrats are looking at now, there remain questions about how the federal government would cover these costs. Financing could become an issue, for example, if Democrats insist on Trump reversing his 2017 tax overhaul.

Schumer has said that the federal government could finance infrastructure improvements by rolling back some of Trump’s tax cuts and moderately increasing corporate tax rates. This could complicate chances for compromise as the tax reform is one of Trump’s key legislative achievements.

Federal gas tax

With the annual deficit projected to increase to over US$1 trillion in 2019, there is limited additional cash to adequately finance much-needed investment on infrastructure. Traditionally, the federal gas tax has provided significant funding especially for transport infrastructure, but the rising number of electric vehicles and hybrids, as well as fuel tax evasion, make the gas tax an ever more ineffective funding mechanism. The current gas tax of 18.4 cents per gallon has not been increased since 1993, meaning that the inflation-adjusted value of that income has fallen by about 50% over the last two decades.

A number of industry groups support the prospect of increasing the federal fuel tax for paying for the maintenance and improvements of the country’s transport systems. The US Chamber of Commerce has proposed to increase the federal gas tax by 25 cents per gallon over five years, saying that it would provide US$394 billion in a decade.

Trump has also supported a 25-cent increase to the gas tax but has faced pressure from political opponents reluctant to increase taxes. The American Trucking Associations has also requested a 20 cent increase over four years, saying that it could raise US$340 billion in 10 years.

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