The disconnect is one of several controversies that Biden’s proposal is already facing, especially as the president tries to garner bipartisan votes at a time when the federal deficit is already at its highest level since World War II. While there’s widespread support across the political aisle to upgrade the nation’s infrastructure, critics of Biden’s plan ― and even some of its supporters ― have raised questions whether all the spending in the plan is truly needed, whether the tax increases on corporations are excessive and why the White House is using an unusual accounting approach to capture the deficit impact.
“We’re at a point about where our debt is about to reach unprecedented levels, and that comes with a lot of risks,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a nonpartisan group that advocates for fiscal restraint. “We should put out a bill that is investment in infrastructure and doesn’t fall to the trick of calling everything you want infrastructure.”
Many economic experts agree that significant investments in roads, bridges and other infrastructure is necessary for the country’s long-term health, and spending when interest rates are this low is a wise idea. But some were surprised to see that only about 5 percent of the bill is directed toward roads and bridges, and they question why the administration is mixing other types of policies into a bill designed to upgrade the nation’s infrastructure.
For example, nearly 20 percent of the bill goes toward expanding caregiving for the elderly and disabled by building more care centers and expanding access to home-based care, and another 13 percent goes toward boosting the U.S. manufacturing sector with large investments in semiconductors and green energy. Those investments aren’t typically seen as traditional infrastructure but align with the administration’s focus on caregiving and reviving U.S. manufacturing.
“They have a giant definition of infrastructure,” said R. Richard Geddes, an infrastructure economist who advised President George W. Bush. “These social issues are very important, but they aren’t nuts and bolts. We need to focus like a laser beam.”
But Democrats argue that the nation needs not only to upgrade outdated infrastructure but to make strategic investments to build the economy of the future with electric-vehicle charging stations, high-speed broadband, child care, upgraded schools and more money for clean energy research.
“It’s going to create the strongest, most resilient, innovative economy in the world. It’s not a plan that tinkers around the edges,” Biden said Wednesday in Pittsburgh. “It’s a once-in-a-generation investment in America unlike anything we’ve seen or done since we built the interstate highway system.”
Democratic leaders in Congress are trying to figure out how many more major pieces of legislation they can pass this year. The Senate reconciliation process they used to pass the $1.9 trillion covid-19 relief package with only Democrats can be used only one or possibly two more times. Analysts say the White House wants to get as many policy wins as possible into this infrastructure package, given that it might be the last big victory Biden can get.
A key debate is likely to be the price tag of the package. Federal budgets typically look at costs and revenue over a decade. By that metric, Biden’s plan would require significant borrowing.
Supporters of Biden’s plan argue that it makes sense to pay off these big investments over time, much the way people borrow up front and pay off their mortgage over many years. They also point out that if the corporate taxes remain in place, the plan would actually be a revenue generator after 2036.
“It’s not a permanent spending increase, but the revenues are permanent,” said Joel Friedman, vice president for federal fiscal policy at the left-leaning Center on Budget and Policy Priorities. “If you go 15 years, then it doesn’t add to the debt.”
Some economists even go as far as to argue that Biden can finance the entire $2.3 trillion with more borrowing, and question why there is any controversy over spending on much-needed infrastructure
“I don’t think this should all or even mostly be paid for,” tweeted Jason Furman, chief economist for President Barack Obama. “Given that interest rates are still too low & I’m worried about demand over the medium-term, [$2 trillion] in unpaid for, well-designed investments, some temporary, would be beneficial.”
But many veteran policy analysts are quick to point out that Congress often rolls back tax hikes, making Biden’s policies unlikely to stay in place the full 15 years. Over the past 20 years, Congress has had at least three major tax cuts and only one modest tax hike in 2013.
“Paying for eight years of spending with 15 years of taxes is a classic Washington gimmick that always ends up proving to not work,” said Brian Riedl, a top budget adviser to the GOP presidential campaigns of Sens. Mitt Romney (Utah) and Marco Rubio (Fla.). “By that logic, you can make the same argument that the 2017 GOP tax cuts are paid for.”
“There’s nothing special about a 10-year window. In fact, it is not universally used,” said a senior administration official who spoke on the condition of anonymity because they were not authorized to speak publicly. “This is a situation where we have long-term [infrastructure] investment that will pay dividends over time paired with a significant source of revenue that fully pays off its costs over the 15-year period.”
Biden’s proposal calls for raising the corporate tax to 28 percent, up from 21 percent set under President Donald Trump. It would also ensure companies pay at least some taxes by imposing a 15 percent minimum tax on income and taxing some foreign income of large global corporations to discourage them from moving operations overseas to tax havens.
There are some concerns about U.S. competitiveness if the corporate tax rate climbs too high. There’s a fear companies will hire fewer workers and invest less or even relocate overseas. The U.S. Chamber of Commerce quickly denounced the tax hikes Wednesday as “dangerously misguided.”
But many economists and even some corporate leaders think there is room to raise the tax rate at least somewhat, and the benefits of more government spending and better infrastructure will outweigh the costs. BlackRock Managing Director Rick Rieder recently said that 21 percent is “too low” and that the economy can handle an increase.
“The impacts of the infrastructure programs are likely to be an order of magnitude larger than any disincentive effects from the taxes,” said Harvard University economist Raj Chetty.
Corporate tax revenue as a share of gross domestic product was 2 percent in 2000 and only 1.1 percent in 2019, according to the Congressional Budget Office, a sign of the decline in business taxation.
Trump reduced the corporate tax rate from 35 percent to 21 at the end of 2017. Many business leaders had been hoping for a rate of 25 percent and had indicated something in that range would be workable, noted Shai Akabas, economic policy director at the Bipartisan Policy Center.
Still, there is some frustration that Biden’s proposal puts all the onus of paying for infrastructure upgrades on corporations.
Historically, improvements to roads, bridges and ports have typically come from fees on users such as tolls or the gas tax. Groups as varied at the U.S. Chamber of Commerce and the Bipartisan Policy Center have been urging Congress to increase the federal gas tax, which has not gone up since 1993, or create a mileage-based fee. The administration has pushed back, saying gas taxes would hit middle-class drivers.
“Ultimately taxes on corporations and higher-income taxpayers can’t support everything we want to do economically,” said Akabas.
Biden said Wednesday that the $2.3 trillion package is only the first part of a two-part plan. The second proposal will focus more on boosting human infrastructure through spending on child care, health care, sick leave, parental leave and more.
“Our concept of infrastructure needs to incorporate not just physical infrastructure but America’s most treasured resource, which is its people,” said Darrick Hamilton, professor of economics at the New School, who advised the presidential campaign of Sen. Bernie Sanders (I-Vt.) “We can’t have a limited 20th-century, myopic understanding of what infrastructure means.”
Wall Street firm Goldman Sachs warned clients in a note shortly before Biden spoke that more tax hikes are almost certainly coming if the White House does intend to pay for all — or most — of its proposals.
“We still believe the White House will propose increasing capital gains and individual top marginal rates even though these were not in today’s plan,” wrote Alec Phillips, chief U.S. political economist at Goldman Sachs. “It looks likely that Congress will scale back some of the tax proposals the President will outline today, leaving lawmakers looking for other sources of savings.”
The debates that have emerged within hours of the unveiling of the plan underscore how much harder it will be to pass an infrastructure package than it was to get Biden’s covid-19 relief bill through Congress, which enjoyed wide support from the public and the business community.
But many praised Biden for at least attempting to pay for the infrastructure upgrades, as opposed to simply debt-financing the entire package.
Martin Klepper, worked on Trump’s infrastructure proposal as executive director of the Build America Bureau, said it fell apart because there was no appetite among Republicans in Congress to raise more revenue after just passing a large tax cut.
Trump’s proposal “did not have any significant funding. We talked about a $1 trillion plan, but the White House really came out with a program that did not propose a significant amount of funding. Republicans in Congress had just passed a huge tax bill and had no further interest in increasing the deficit,” said Klepper, who is now chairman of the board of Fengate’s U.S. infrastructure business unit. “Without any funding, there was not a lot of interest in moving forward.”
Klepper said he was “really excited” about the Biden plan. While there were many details yet to be worked out, he applauded the magnitude and ambition of the package.
Others on the right were not as complimentary as they looked at the plan’s proposals to spend $300 billion on U.S. manufacturing, including $50 billion for semiconductors, “incentives” for companies to locate in the Rust Belt and “support” for clean-energy projects.
“It’s one of the biggest surges in corporate welfare that I’ve ever seen,” said Riedl, who is now a senior fellow at the right-leaning Manhattan Institute. “I’m stunned by the amount of corporate welfare.”