Choose Your Infrastructure Adventure

With Memorial Day kicking off the unofficial start of summer, “Infrastructure Week” is in full swing this month.

When everything is being categorized as “infrastructure” these days, it’s easy to get confused about what exactly is being negotiated. There are three negotiations occurring on the infrastructure front. This includes bipartisan talks on a broader infrastructure deal, bipartisan talks on surface transportation authorization, and Democratic talks on the American Jobs Plan (AJP) and American Families Plan (AFP). All three or none of these infrastructure negotiations could come to fruition in the near term, but how each of them unfold will influence the entire infrastructure agenda out of DC this year.

Talks between President Biden and Senate Republicans will reach a climax over the next couple of days. If a deal isn’t struck, talks could continue, but a lack of a deal is the precursor needed for Democrats to begin their own infrastructure march. House Speaker Nancy Pelosi (D-CA) wants to get an infrastructure bill done by July 4th. Senate Majority Leader Chuck Schumer (D-NY) wants to move forward on infrastructure in July. Biden wants to sign an infrastructure bill this summer. None of these are hard and fast deadlines, but it speaks to Democrats beginning in earnest to put pen to paper and find out what exactly can pass in an FY22 budget reconciliation bill.

The Bipartisan Talks on a Broad Infrastructure Deal

This is where the headlines are these days, but it’s only a part of the infrastructure story out of DC. The talks between the White House and Senate GOP are a mix of baseline vs. additional spending on infrastructure.

• Latest GOP offer: $257 billion in new spending ($928 billion total), paid for in part by supposedly repurposing up to $700 billion in unspent Covid-19 relief aid.
• Latest Biden offer: $1 trillion in new spending, with a mix of pay-for options, including instituting a minimum corporate tax rate of 15 percent (estimated $148 billion raised if same as book tax proposal in Treasury Green Book), increasing IRS enforcement on corporations and the wealthy (estimated $779 billion raised per Green Book), ending the step-up in basis (no specific estimate per Green Book and depends on where capital gains rate lands, but possibly $100 billion), eliminating fossil fuel tax benefits (estimated $35 billion raised per Green Book), and repurposing up to $75 billion in unspent Covid-19 relief aid.
• Negotiating Difference: $743 billion on spending, no agreement on pay-fors
• Outlook for a Deal: Unlikely

These talks are coming to a head in the near future. The Washington Post yesterday reported that Biden offered to nix raising the corporate tax rate from 21 percent in return to instituting a minimum corporate tax rate of 15 percent, along with increasing IRS enforcement. But the latest tax offer speaks to the perception of negotiating in good faith vs. actually negotiating in good faith. Biden can claim that he’s meeting Republicans halfway by respecting their red line of not increasing the corporate tax rate and instead focusing on a politically popular message of cracking down on corporations that pay little to no corporate taxes each year. But raising the corporate tax rate is minor league baseball compared to the fights and complexities over loopholes and deductions that would all be impacted by installing a minimum rate. Republicans have been insistent that they don’t support rolling back their signature legislative achievement of the Tax Cuts and Jobs Act (TCJA). The TCJA included a repeal of the corporate alternative minimum tax (AMT) which is a corollary to a minimum book tax. Increased IRS enforcement is also a challenging area where there may be bipartisan agreement on the concept of better enforcement but the implementation and revenue estimates differ wildly.

While the start of the negotiations provided some promise for a deal to be reached, what has become clear as the two sides traded offers is that the White House sees the act of trying to reach a deal as more important than reaching a deal. A bipartisan deal has always been a means to an end for Democrats. Biden and some White House aides viewed reaching a bipartisan deal as good politics for them. More importantly, they saw it as a way to get buy-in from moderate Democrats to move towards a budget reconciliation bill to get whatever wasn’t in the bipartisan deal done on a partisan basis. Regardless of whether a bipartisan deal was reached, Democrats would have turned to reconciliation. While Biden may have removed raising the corporate tax rate to 28 percent from the bipartisan talks, he is still pushing for it and other provisions in the AJP in what Democrats do by themselves.

Moving Forward: Biden and Senator Shelley Moore Capito (R-WV) are expected to talk again today. The White House’s latest deadline for a deal to be reached is by next week. Of course, this is not a hard deadline, but rather an indication that Democrats in Congress will more publicly begin to move forward on their own. If a deal isn’t reached by then, that doesn’t mean there still won’t be bipartisan discussions. Biden may continue to talk with Republicans and there may be a bipartisan “gang” or two, seeking to insert themselves into the mix.

But bipartisan gangs are effective when there’s a) intractable policy differences between party leadership, b) no partisan path to passage, and c) a political incentive for party leaders to reach a deal but they are being held back by their respective party bases. These three issues were present when a bipartisan group was able to craft a $900+ billion Covid-19 relief deal last December. However, with unified control of government, Democrats do have a partisan path to passage for most (but not all) infrastructure and there isn’t a political necessity for passage among Republicans as they remain confident that being the opposition party to Democrats in DC will serve them well in the midterm elections. These dynamics could change, especially if moderate Democrats oppose doing a reconciliation bill, but we don’t believe that will ultimately be the case.

The Bipartisan Talks on a Surface Transportation Deal

When negotiations are caught between arguing about baseline spending vs. new spending, it’s in reference to the current authorization and appropriations the federal government makes for infrastructure spending. Specifically, these negotiations are occurring in conjunction with an effort to reauthorize surface transportation spending.

The last surface transportation authorization bill, the FAST Act, was passed in 2015. It authorized $305 billion over five years for highways, public transit, motor and passenger safety, and rail. The FAST Act expired at the end of FY20, but Congress was not able to reach agreement on a new authorization bill, so the FAST Act was extended until the end of FY21 (September 30th of this year). Taking into account inflation and the last year of FAST Act spending, the current baseline for the relevant surface transportation measures is $355 billion over five years, according to the Eno Center for Transportation.

• Senate Legislation: Senate Environment and Public Works (EPW) Committee passed a $311 billion highway authorization bill over five years; bills for transit, rail, safety, and pay-fors have not been released from the other relevant Senate committees
• House Legislation: House Transportation & Infrastructure (T&I) Committee today released a $547 billion surface transportation authorization bill over five years, with a committee markup scheduled for next week; there is no timeline for the relevant pay-for section from the House Ways & Means Committee
• Outlook for a Deal: A deal will happen but it’s a matter of timing.

Surface transportation is traditionally a bipartisan endeavor. A big reason why is that there are policy components that can’t be done via budget reconciliation since they would violate the Senate Byrd Rule. While Democrats may be able to find certain workarounds, there are just some things they need to do through regular order on surface transportation. That means a deal will get done, with a rough estimate in the $400–500 billion range over five years. A bipartisan deal would also have to figure out ways to replenish the Highway Trust Fund (HTF) revenue shortfall. The Congressional Budget Office (CBO) estimates at the current baseline, there will be a $70 billion shortfall over five years. That shortfall will be larger with a new deal that has higher levels of authorization. In the past, Congress has opted for general fund transfers that were either deficit financed or paid for by some sort of budget gimmicks instead of increasing the gas tax or instituting a vehicle miles traveled (VMT) fee. Those transfers will likely continue for the foreseeable future, especially if Biden is open to repurposing $75 billion in Covid-19 relief aid.

Moving Forward: The timing of a surface transportation deal depends on the state of the larger bipartisan talks. If a deal is made on the broader talks, any legislation put together between Democrats and Republicans would likely include new baseline spending for surface transportation and other infrastructure like airports and water systems. Hammering out the legislative details won’t be easy, but we’d expect a new surface transportation bill would be done by (or shortly thereafter) the September 30th deadline for the FAST Act.

If a broader infrastructure deal isn’t made, then surface transportation authorization will likely be put off as Democrats focus on budget reconciliation. While the surface transportation bill from the House T&I Committee includes Democratic and Republican earmarks, much of the policy was drafted by just Democrats, leaving it unlikely to receive much, if any, bipartisan support. The FAST Act was extended once and there’s no reason that it can’t be extended again, leaving a bipartisan compromise for another day, perhaps 2022 but potentially post-2022 midterm elections.

The Partisan Talks on “Infrastructure”

The biggest spending and tax negotiations will happen amongst Democrats. It’s what Democrats can pass from Biden’s $4+ trillion in spending and $3+ trillion in taxes in the AJP and AFP, as well as any other Democratic priorities, like drug pricing and healthcare expansion.

• Outlook for a Deal: Likely in the $3–4 trillion range of spending, with $1–2 trillion in taxes over a decade (with taxes possibly extended beyond 10 years)
• Contours of a Deal: FY22 budget reconciliation bill that includes components of both the AJP and AFP; some bipartisan breakoffs (e.g. China competitiveness bill)
• Timing of a Deal: Q4 of 2021

Biden, Pelosi, and Schumer are all indicating they want to pass infrastructure legislation this summer. The House is moving first this month with the Senate looking to act in July. But that timing seems overly ambitious. There are still many unanswered questions about the contours of infrastructure legislation and the strategy for getting the entire Democratic rank-and-file on board.

Moving Forward: What we suspect will happen is that House Democrats will move forward with an infrastructure bill via regular order this month that will include the House T&I Committee’s surface transportation bill plus components of the AJP. But that bill will have to be modified for reconciliation, since components of surface transportation will have to be stripped.

Democrats will have to pass an FY22 budget resolution that opens up the reconciliation path. But they have just one shot at it for the remainder of the year after the Senate parliamentarian ruled that they cannot do a revised budget resolution on a partisan basis. This means what Democrats don’t include in an FY22 reconciliation bill, they’d have to save to FY23. The budget resolution rules dictate that the earliest Democrats can act on trying to pass an FY23 budget resolution on a partisan basis is April of next year.

It’s a big risk for Democrats to wait until the spring and summer of next year to pass legislation via reconciliation. A single Democratic vacancy in the Senate between now and then could leave them out of the majority and out of luck to pass anything. The midterm elections season will also create new challenges for keeping the rank-and-file together on a bill. Waiting would also lead to a lapse of some of the most important AFP policies Democratic lawmakers want to extend from the American Rescue Plan (ARP), including the ARP’s expanded Child Tax Credit (CTC) which is set to expire at the end of this year. In reality, whatever is saved for FY23 may be as much a midterm messaging bill than actual legislation looking to get passed.

This means there will be enormous pressure to combine the AJP and AFP together in an FY22 bill. A larger bill requires more coordination and political maneuvering. That requires more time. Then there are negotiations amongst Democrats about what can get all 50 Democrats in the Senate and all but four Democrats in the House. Moderate Democrats like Senator Joe Manchin (D-WV) may push back on such a big bill and there’s always the risk Democratic leadership cannot wrangle the votes, requiring them to put off the AFP. But at least for now, that’s not our base case.