Vogel Group’s Brian Johnson Gives His Take on Infrastructure

Vogel Group’s Brian Johnson Gives His Take on Infrastructure

Interview originally published in Tax Notes on December 17, 2018.

For lawmakers to advance their common interest in passing a major infrastructure bill, they must solve the age-old challenge of finding money, and the 2017 tax law may have made that harder.

“We passed a tax bill that creates a structural imbalance in this country big-time,” Sen. Jon Tester, D-Mont., told Tax Notes. “And I don’t think you can have an infrastructure bill that’s paid for by debt. We’ve got to figure out how to pay for it.”

Significant infrastructure legislation is needed, but its prospects depend “on where the will is,” said Tester, who serves on the Senate Commerce, Science, and Transportation Committee. The committee’s likely incoming chair, Sen. Roger F. Wicker, R-Miss., told reporters he sees potential for a bill, noting that several states have found ways to make one happen. And while Tester said the Tax Cuts and Jobs Act (P.L. 115-97) has complicated matters, Wicker said it’s helpful.

“I think the tax bill from last year is a huge winner for the American economy,” Wicker said. “So, to the extent that this GDP growth that we’re experiencing can continue, I think it’ll make it easier to pay for a lot of things.”

Senate Democrats in March called for changes to the TCJA, including raising the corporate rate to 25 percent to fund $1 trillion of infrastructure investment. The Republicans’ main objective with the TCJA was to lower corporate tax rates, so undoing the 2017 tax law’s reduction to 21 percent is likely a non-starter, according to Alexander L. Reid of Morgan, Lewis & Bockius LLP in Washington, former legislative counsel with the Joint Committee on Taxation. “The income tax base is tapped out,” Reid said. “It seems unlikely there would be just a raw tax increase to pay for infrastructure spending.”

Ultimately, Reid said the answer for funding infrastructure will be a VAT. “There are no other revenue raisers of that magnitude if you’re looking at lowering rates and broadening the base,” he said. “The only issue with a value added tax is making sure that it’s not regressive.”

A new revenue stream is necessary for a major infrastructure bill, and some sort of consumption tax is, “academically speaking,” the best option, said Brian Johnson of the Vogel Group in Washington. “Yes, in an honest world, that includes a discussion of pricing in energy” and something like a carbon tax, Johnson said. “Are we there or close to there yet? In my humble opinion, no, not yet.”

‘The income tax base is tapped out. It seems unlikely there would be just a raw tax increase to pay for infrastructure spending,’ Reid said.

The destination-based cash flow tax House Republicans proposed and then dropped before introduction of the TCJA is another possible revenue source for infrastructure spending, Reid said. Both it and a VAT are consumption taxes “and at a deeper level are two sides of the same coin,” he said.

“What I find interesting about funding infrastructure spending with a consumption tax on imports is that both policies drive U.S. job growth,” Reid said. “Taxing consumption of imports creates an incentive to produce goods in the U.S., which creates manufacturing jobs. Improving infrastructure creates construction jobs.”

Johnson pointed to Americans for Tax Reform’s anti-VAT caucus. Formed in 2005, it grew to nearly 70 members of Congress that year. “Some are gone, obviously,” but “in 10 years, has the positioning on this changed that much?” Johnson said.

Uphill Climb

Ultimately, anyone who says they know what possible revenue sources are available to support a major infrastructure package is lying, Johnson said. A carbon tax, a vehicle miles traveled (VMT) fee with “congestion carveouts,” targeted corporate tax increases on the energy sector, tolling, and public-private partnerships are all possible sources of funds, he said, but added that none of them is likely realistic.
“A larger, multiyear infrastructure package had funding issues long before the TCJA, and still does,” Johnson said. “However, once you just put a spotlight on lowering taxes, raising them to pay for pet projects will be met with tough resistance.”

The United States has traditionally funded multiple types of infrastructure through user fees, but those haven’t been adjusted in about 25 years, according to Senate Finance Committee member Thomas R. Carper, D-Del. Carper said much has changed since, and he called for a VMT tax. By 2030 a lot of cars won’t be using gas or diesel, Carper said, and he questioned how road maintenance would be paid for with fuel taxes at that point.

“I think we need to put in place over the next 10 years a funding system that is based not so much on buying gas or diesel but on how much we’re using the roads,” Carper said. “What we’re beginning to do is lay the groundwork for a new approach.”
Carper suggested there could be Senate hearings in 2019 to discuss the results of a multistate pilot project on the VMT tax he advocated, citing the Finance and the Environment and Public Works committees. Carper will remain the ranking minority member on the latter committee in the new Congress.

The United States has traditionally funded multiple types of infrastructure through user fees, but those haven’t been adjusted in about 25 years, Carper said.

Oregon started its third VMT pilot program in 2015, and other states have experimented with such a charge. The idea appears to have attracted the Trump administration’s attention. A February report from the White House Council of Economic Advisers mentioned the VMT tax as a possible source of revenue for infrastructure improvements.

President Trump has been interested in the topic. The White House released the Legislative Outline for Rebuilding Infrastructure in America in February — a plan to leverage federal funds to spend $1.5 trillion on infrastructure investment that drew bipartisan criticism.

House Democrats will want to show they can work with a divided Congress, and Trump can cut deals with Democrats, Johnson said. “This is not only a campaign promise of his, but there’s something in here for both sides to get behind,” he said. “That is also what could doom it from the start,” he added, citing divisive topics like labor and environmental issues.