- In his new budget, Obama is proposing to spend $478 billion over the next six years to upgrade America's roads, bridges, transit, and freight.
- He wants to pay for this by raising $238 billion from a one-time tax on companies holding cash abroad. This is part of his new corporate tax-reform proposal.
- Obama's plan is designed to temporarily patch a huge flaw in US transportation policy: the federal gas tax isn't high enough to cover highway spending, and Congress is reluctant to raise the gas tax.
- Some members of Congress have floated a different approach: give corporations a tax holiday to bring overseas profits back home — which, they say, could also raise revenue to pay for highways.
- In the past, Obama has been opposed to such holidays, arguing they would actually lose money in the long run. So expect more fighting over this.
Why Obama wants to tax corporations to pay for roads
Start with a basic premise: The way the federal government currently pays for roads, bridges, and public transit is ludicrous.
Congress now spends more than $50 billion per year on transportation (which supplements state and local funding). Traditionally, lawmakers have paid for this with federal gas-tax revenue. But the gas tax has been stuck at 18.4 cents per gallon since 1993 and hasn't kept up with inflation. Plus, Americans are driving less. So the gas tax only brings in $34 billion per year these days:
That's why Congress keeps running out of money for roads and periodically has to come up with goofy funding gimmicks, such as tweaking pension rules, to fill in the shortfalls. They did that last July — but we're scheduled for another highway-funding crisis on May 31, 2015. Lawmakers have to scrounge up money from somewhere or many road projects will screech to a halt.
So, in its FY2016 budget released Monday, the administration put forward an idea to fix this — at least temporarily. Obama is proposing to spend $478 billion over the next six years "to repair existing roads and bridges and modernize our infrastructure with new investments in highways, freight networks, and bus, subway, rapid transit, light rail, and passenger rail systems."
That amounts to about $79.7 billion per year — considerably more than Congress has been spending of late. The rationale here is that the US is falling behind in maintaining its infrastructure and needs to catch up. (Infrastructure advocates often point to gloomy, self-serving assessments by the American Society for Civil Engineers that give America's roads a D and its bridges a C+.)
The trick, as always, is how to pay for all this. Hence, as part of a broader corporate tax reform proposal, the Obama administration is asking Congress to levy a one-time tax of 14 percent on cash that US companies are holding abroad. This would raise about $238 billion that could supplement existing gas-tax revenue and pay for a temporary boost in transportation spending.
Note that this would only fill the shortfall for six years — it's not a permanent fix the way raising the gas tax would be.
What's more, this is only a proposal (and it's similar to one Obama proposed last year). It still has to get through Congress first. And Congress may have other plans...
Some members of Congress prefer a corporate tax holiday
Some members of Congress — Republicans and Democrats — have also been thinking about using corporate tax reform to pay for highway spending. But they have a very different plan than Obama does.
Here's the basic situation: There are lots of US companies that earn profits overseas. But many of those companies tend to keep that money abroad, because if they brought it back to the United States, it would be subject to a 35 percent corporate tax rate.
In his budget, Obama is proposing to levy a one-time tax of 14 percent on all those overseas profits (whether they're brought home or not) — and then enact other tax reforms that would give US companies less incentive to stash their money abroad. Doing so, the White House estimates, would create a one-time $238 billion surge in revenue.
By contrast, in the Senate, Rand Paul (R-KY) and Barbara Boxer (D-CA) have proposed a different approach — known as a "repatriation holiday." Basically, they'd tell US companies that they can bring their foreign profits back to America in the next five years and the money will only be taxed at a low 6.75 percent rate. The idea is that this would bring in revenue that could be used for roads.
The problem? Obama has been opposed to these sorts of holidays, arguing that they just give companies incentives to keep future profits overseas and then lobby Congress for more holidays. Indeed, the Joint Committee on Taxation has estimated that a holiday would raise money in the short term but lose money over a 10-year period (as companies stashed more cash abroad).
Is there a middle ground between the two? Maybe. Rep. John Delaney (D-MD) has put forward his own bill to tax overseas profits at an 8.75 percent rate and end deferrals. (This is somewhat similar to Obama's idea, albeit with lower rates.) He estimates that bill would raise roughly $170 billion, enough to maintain highway funding for six years.
Currently, some Republicans, including Sen. Roy Blunt (R-MO), have been looking more closely at proposals like Delaney's, and it's possible there's some bipartisan deal to be had.
Either way, a highway crisis is coming on May 31, 2015
Lawmakers will have to figure something out soon, though. The Highway Trust Fund is set to run out of money again on May 31, 2015. At that point, Congress will only be able to use gas-tax revenue to pay for roads — and, again, that revenue isn't enough to maintain current spending levels.
So either Congress starts massively cutting highway spending to the states — an unpopular move likely to create disruptions and stalled projects around the country — or it finds some fresh revenue to pay for spending. The dueling corporate tax reform proposals are two options here, but they're not the only ones.
Some lawmakers have suggested that it would be simpler to just raise the gas tax and fix this problem for good. An upside of this approach is that it would bring back the principle that drivers should pay for the roads they use. What's more, with gasoline prices at their lowest levels in years, this would be one of the least painful times to raise the gas tax:
Back in December, Reps. Tom Petri (R-WI) and Earl Blumenauer (D-OR) were touting a bill that would slowly lift the federal gas tax an extra 15 cents over the next three years — and then peg it to inflation. This would bring the gas tax to roughly the level it would be at if it had been pegged to inflation back in 1993. And it would raise roughly $170 billion and allow Congress to maintain current transportation spending levels indefinitely. The problem is that gas tax hikes tend to be politically unpopular with both parties.
A few other Republicans, meanwhile, have been touting a bill that would expand oil and gas drilling on federal lands and use the influx of royalties to pay for highway spending. Democrats have long opposed this idea, however.
So there aren't really any shortage of ideas for how to pay for transportation. Getting everyone to agree on one of them is the tricky part.
* Correction: I originally lumped Rep. John Delaney's (D-MD) proposed bill in with the repatriation holiday proposals. That's incorrect. Delaney's bill would subject all overseas profits to a mandatory tax (albeit at a lower rate than Obama would) and end deferrals.