Here’s what you need to know about the recently passed tax bill and the challenges it creates for our underfunded infrastructure sector:

Infrastructure is essential for economic activity and growth in America, but our nation has accumulated an infrastructure “debt.” U.S. public investment has fallen sharply since the 1980s, and with this declining investment our infrastructure systems (roads, bridges, airports, dams, water systems) have aged and deteriorated. The American Society of Civil Engineers recently graded U.S. infrastructure a D+ and estimated that it would take $3.6 trillion in spending to bring our infrastructure to a state of “good repair.”

The impact of the tax law on state and local finances could affect infrastructure spending. State and local expenditures account for roughly 75% of total spending on infrastructure — but state and local governments will likely face an important headwind in raising revenues under the new law. Going forward, federal tax deductions for state and local taxes (the SALT deduction) will be capped at $10,000. This curtailment will hurt the taxing capacity of cities and states — and reduce the resources available to fund new infrastructure investments. The impact of this change in the SALT deduction will be particularly important in higher-income, higher-tax areas such as California.

The new law impacts the municipal bond market — an important source of financing for infrastructure. Proceeds from bond issuance paid for about 32% of infrastructure investment in 2015. The new tax bill will pose some immediate challenges for the municipal bond market. The demand for municipal bonds is partly driven by the tax-exempt status of their interest, which has been preserved in the new tax legislation. But the impact comes from elsewhere in the legislation: the fact that tax rates have fallen both for individuals, and especially for corporations, will mean that the relative yield on municipal bonds will have to rise in order for the bonds to remain competitive as an investment choice — making financing more expensive for infrastructure projects.

A medium-to-longer term impact of the new tax law will come through its impact on our federal fiscal position. The balance of opinion among economists outside the administration is that the new tax bill will significantly increase the federal debt. This move away from federal fiscal balance creates a credible threat to the tax-exempt status of the important municipal bond market, because the government will inevitably need to raise additional funds as it attempts to repay the debt and balance the budget. This does not augur well for future investment in infrastructure and for our ability to close our existing infrastructure gap.

SB 1 is California’s transportation safety net. SCPFJ will work with California Congressional representatives on a federal fix to the state’s transportation fiscal woes.

Source: CBS News