It’s Day 4 of the Trump administration’s Infrastructure Week—and of course nothing infrastructure-y has happened. Yes, Trump gave a speech in Ohio on Wednesday that was putatively about the need to invest in infrastructure. And, yes, the administration has outlined an extremely vague plan to use a meager $200 billion in federal money over 10 years to mobilize $800 billion in private capital to support the construction of much-needed infrastructure. The theory, of course, is that enlisting Wall Street, asset managers, and very rich people seeking tax-advantaged returns could attract significant capital to major infrastructure projects.
The leaders of states and cities, who benefit greatly from infrastructure investment and suffer when infrastructure crumbles—are hoping this effort will be their salvation.
Here’s the reality. If you’re a governor counting on the federal government to deliver money so you can build a new tunnel under the Hudson River or shore up local bridges or improve inland-waterway navigation, you should stop waiting for Congress to pass a plan. As with every other economic plan or proposal that this administration has come up with—the budget, tax reform, health care—there really is no Trump infrastructure policy. The Republican Congress won’t undertake the obvious, and easy, steps that could provide a much-needed jolt to spending—borrow money at very low rates and then appropriate it. And, perhaps most significantly, states and cities already have a very powerful financing tool at their disposal that enlists Wall Street, asset managers, and very rich people to fund infrastructure on a tax-advantaged basis. All they have to do is use it. It’s called municipal bonds. And they’re not being used enough.
Municipal bonds—the debt issued by states, cities, and nonfederal public authorities—occupy an important niche in the financial lives of Wall Street and America’s wealthy. Issuers sell the debt to finance basic operations, as well as for specific purposes: to build sewers, roads, public hospitals, housing projects, and ports. And in many instances, the bonds are backed by streams of revenue from the private sector—interest and principal on Bay Area Toll Authority Bonds is funded by the tolls that drivers pay to cross the seven San Francisco–area bridges the authority controls.
Municipal bonds are the fourth-biggest class of debt behind federal debt, mortgages, and corporate debt. Last year, according to the Securities Industry and Financial Markets Association, some $445 billion in municipal bonds were issued, and there were some $3.8 trillion in municipal bonds outstanding. And Wall Street plays an important role in mobilizing private capital to fund all this activity and investment. Underwriters collect commissions on every issuance (as they do with initial public offerings or other bond offerings). Every major asset management firm has funds that manage and trade municipal bonds.
And here’s the punchline: As an investment, municipal bonds deliver enormous benefits to the richest among us—the very people Trump’s theoretical plan would help the most.
Interest on corporate and federal government bonds is generally taxed at the same rate as ordinary income.* If you are a married couple making $75,000, you pay a low 15 percent rate on any interest income you make. But if you’re wealthy, and are already in the top bracket ($470,000 or above for married joint filers), then you pay a hefty 39.6 percent on all income, including interest. And if you live in one of the high-tax states where rich people live, like New York or Connecticut, you’ll pay another 6 or 7 percent in state income taxes. So if you have a bond worth $100 that pays 5 percent interest, or $5, after tax you’re only getting $2.75 a year.
But municipal bonds—alone among the major classes of debt—are tax-exempt at the federal, state, and local level. The income they throw off is entirely untaxed. That doesn’t provide much of a fillip for low earners. But it has enormous implications for the very rich. A $100 bond paying a 3.5 percent interest (municipal bonds tend to offer lower interest rates than corporate or government bonds, precisely because of the tax advantage) gives you $3.50 post-tax each year. The richer you are, the more the after-tax income associated with municipal bonds rises in comparison with other types of financial instruments.
For this reason, the portfolios of the clients of family offices, private wealth managers, and just plain-old rich people are stocked with municipal bonds. They provide a way of delivering tax-free income to multiple generations. And since states and cities almost never file for bankruptcy, they’re extraordinarily reliable.
To a large degree, then, municipal bonds already provide a method to do at the state and local level what many conservatives say they would like to do with an infrastructure plan: Raise money from private capital in a way that disproportionately benefits Wall Street firms and the ultra-rich without imposing new obligations on the typical taxpayer.
The issue, of course, is that too many cities and states sell new debt to fund operations and investments and then don’t bother to set up the dedicated revenue streams to pay them back. Which is why state and cities hope and expect that the federal government will come in and simply provide cash for construction. But as long as Republicans hold the purse strings, the prospect of an aggressive federal role in new infrastructure spending is unlikely—and it’s particularly unlikely for the blue states like New Jersey and New York that are most in need of the investment, the ones whose train systems are literally breaking down.
The road map is clear. Want a new bridge? Issue municipal bonds that are specifically backed by the tolls paid by drivers. Want to build new sewers or water pipes? Issue bonds that are specifically backed by the user fees and water bills of homeowners and business owners. Want to invest in roads? Issue bonds that are backed by revenues from a gas tax collected by the state. Want a new subway line? Issue bonds backed by fees or higher taxes to be paid by the building owners and developers who will see their holdings skyrocket in value once the subway extension is completed.
That can’t be the only solution, of course. The federal government has a greater capacity to borrow than any individual state or city, and a lot of the infrastructure that needs fixing courses through several states rather than just one. Which means a federal infrastructure funding strategy is essential. And in a normal, reasonable world, Congress and the White House would work together to appropriate a bunch of money and then spread it around the country in a rational manner. But governors and mayors—and the nation’s drivers, shippers, and commuters—can’t afford to wait any longer for nonexistent help to materialize from Washington.
*Correction, June 9, 2017: This article originally misstated that interest on municipal bonds is generally taxed at the same rate as ordinary income. Interest on corporate and federal government bonds is generally taxed at that rate, while municipal bonds are tax-exempt. (Return.)
