“Largely As Expected”: Goldman Recaps Biden’s Infrastructure Plan

Following our earlier preview, Goldman’s chief political economist Alec Phillips is out with his own post-mortem of the White House infrastructure bill which he says was “mostly as expected”, proposing around $1.7 trillion/10 years in investment in physical capital and R&D. Another $500bn would go to workforce incentives and Medicaid benefits.

As Phillips continues, the proposed corporate tax increases were also largely as expected and would cover around half of the spending over the next ten years. Goldman believes that the White House will propose increasing capital gains and individual top marginal rates even though these were not in today’s plan, and expects the spending from this plan to take a few years to ramp up, with its forecast already assuming a spending path similar to what we believe would occur under this proposal.

Below we excerpt the key points from the Goldman report:

1. The White House proposes to spend roughly $2.2 trillion over ten years.  The Administration expects most of this spending to be complete after 8 years. This appears to be mostly new money with less double-counting of existing spending than in last year’s $1.5 trillion House bill.  Of the $2 trillion, around $558bn appears to go to traditional heavy infrastructure projects like highways, transit, water, and sewer. Another $374bn would go to high-tech areas, such as broadband, grid modernization and clean energy and storage, and electric vehicle-related spending.$378bn would go to the building and upgrade of residential and non-residential structures. R&D and manufacturing incentives would total $480bn. $500bn would be dedicated to caregiving and workforce development. These numbers all look generally similar to the Biden campaign proposals.

2. The spending from this plan would likely take a few years to ramp up. We have noted before that increases in traditional infrastructure funding often take a few years to reach the higher run rate, with a rule of thumb being that an increase in federal funding of $1 in one year increases federal spending by only about $0.40 the following year. That said, some of the spending could happen more quickly. For example, tax incentives to the private sector to install recharging stations for electric vehicles might spur investment more quickly, as might some of the federal procurement programs.  Taking the White House description at face value, the plan would average around $275bn (1.25% of GDP) over the next 8 years. Using the rule of thumb just noted, this would suggest that it could boost federal spending by a little over $100bn (0.5% of GDP) next year, and perhaps $150-200bn (0.7%) in 2023. This is similar to the additional infrastructure spending we assume in our economic forecast.

3. The types of spending the plan includes indicates which proposals the President believes are most important.  The plans includes mostly investment in physical infrastructure, but also around $500bn in various benefits including a substantial increase in Medicaid spending. This is despite the fact that the White House has already indicated that the President will announce a second proposal in April dealing with “human infrastructure.” To the extent that the White House believes Congress will consider these plans separately, with this plan passed first and the second piece to follow, it suggests that the benefit programs in this proposal are a higher priority than the child care, health care, and education proposals that the President will propose next month.  That said, it will be up to Congress to decide how to pass this proposal and whether to combine it with any other proposals the President might make in April.

4. The plan would be paid for with corporate tax increases that the Administration says would fully offset the 10-year cost after 15 years.  The key elements of the tax proposal are:

• A 28% corporate rate. President Biden proposed this during the presidential campaign. Each percentage point of corporate tax rate increase raises a little over$100bn over ten years in tax revenue, so this proposal would raise between $700-800bn/10 years. We think Congress can raise the rate to 24-25%, but might start to run into resistance among centrist Democrats between 26% and 28%.

• Tightening GILTI. Similar to the Biden campaign proposal, the White House proposes to raise the effective tax rate on Global Intangible Low Tax Income (GILTI) to 21% from an effective rate of 10.5% today, move the system to a country-by-country basis that would keep companies from using tax credits from high tax jurisdictions to offset GILTI earnings in low tax jurisdictions, and rescind the policy that applies the tax to income only above a 10% return on physical capital. This would mean that the GILTI regime would apply to most companies with foreign income rather than just to IP-intensive industries like healthcare and technology, and would likely also raise taxes for companies that currently have little to no GILTI exposure. The Tax Policy Center estimated the campaign proposal would raise $442bn over ten years.

• Other international tax changes. The White House release appears to contemplate replacing the Base Erosion and Anti-Abuse Tax (BEAT), saying that it would replace “an ineffective provision in the 2017 tax law that tried to stop foreign corporations from stripping profits out of the United States.”  It also proposes to eliminate Foreign Derived Intangible Income (FDII), which encouraged US-based companies to hold their IP in the US by setting an effective tax rate on that income similar to the effective tax rate on IP held abroad and taxed through the GILTI regime.

• A minimum tax on book income. The proposal would also establish a 15%minimum tax on corporate book income reported to investors, which would serve as a check against companies that report large profits to shareholders but no profits to the IRS. The campaign proposal would have applied this globally on a country-by-country basis, but the White House release indicates only that it would apply this only to “the very largest corporations.”

• New restrictions on inversions. The White House does not define what this would be, but inversions are likely to play a larger role in tax policy if the rest of the proposal were to pass, as the US would then have a high tax on the foreign earnings of multinationals compared with most other developed countries that rely on mainly territorial tax systems.

5. Capital gains and individual tax changes are absent from this proposal but are likely still coming. This proposal only deals with corporate taxes.  However, we still expect the White House to propose other tax increases, like an increase in the long-term capital gains rate and a higher top marginal rate for individuals.  In theory, these other taxes would go to pay for other forthcoming proposals dealing with child care, health care, and education. However, these other taxes could come into play to offset some of the cost of an infrastructure package, for two reasons. First, 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. Second, it is unclear whether a third major fiscal package will actually pass, and congressional leaders might ultimately decide to combine today’s proposal with elements of the other package the President plans to propose in April.

6. This proposal is likely to pass through the reconciliation process. This would allow the package to pass with only 51 votes (and probably only Democratic votes) in the Senate. President Biden has emphasized an interest in working with Republicans on this package, but this looks very unlikely as he is also proposing to dismantle nearly all of the biggest piece of legislation that congressional Republicans passed when they had control of Congress.  The only opportunity for bipartisan support we see is the surface transportation component of the package, which might need to be split off from the rest because elements of it might not be able to pass through the reconciliation process. However, this is more of a technicality and Republicans look unlikely to have much influence over the total amount of spending. If Democrats use the reconciliation process to pass President Biden’s fiscal proposals, they will need to decide whether to pass a single reconciliation bill that combines today’s infrastructure proposal with the other proposal Biden looks likely to outline in April, or to leave the two proposals separate and pass infrastructure first, with a separate reconciliation bill following later this year. Either is possible, but we believe it is more likely that Democratic leaders will decide to pass a single reconciliation bill to avoid forcing their members to take two separate votes to raise taxes.

7. Full details in May.  The White House will release additional budget details this week when it submits the discretionary spending portion of the annual budget proposal to Congress. However, the full details of what the White House will propose on fiscal policy are likely to wait until May, when the full budget comes out. From there, two processes could move in parallel. First, the committees with jurisdiction over the various programs involved are likely to write detailed legislation. Second, at some point in May and perhaps not until June, the House and Senate are likely to pass another budget resolution that lays the groundwork for the next fiscal package. Specifically, that resolution will need to instruct the relevant committees to increase or decrease revenues, spending, and/or the deficit by specific amounts. This will set the overall parameters for the legislation, which the individual committees might have in some cases already drafted. In light of this potential schedule, it looks unlikely that the next major fiscal legislation will reach the President’s desk before late July or early August, and there is a good chance it could take until September, after Congress returns from the August recess.  

Appendix: The “American Jobs Plan”

• Traditional transportation infrastructure: The President proposes to spend an extra $447bn on transportation infrastructure. This includes $115bn for highways (a roughly 40% increase over the 10-year baseline), $85bn for transit (70% over the baseline), $80bn for passenger rail (many times the current run rate, though similar to the $60bn proposed in last year’s House Democratic bill), $25bn for airports (a 75% increase), and $17bn for waterways and ports.

• Transportation electrification: The White House proposes $174bn in funding for electric vehicles (EVs). This figure includes point-of-sale consumer rebates and tax incentives to purchase US-made EVs and establish grants for the state and local sector and tax incentives for the private sector to build a network of 500,000 charging stations. This figure also includes the cost of replacing 50k diesel transit vehicles (i.e., buses) and replacing the postal vehicle fleet.

• Clean water: The White House proposes $111bn for clean water initiatives. He proposes $45bn for the Drinking Water State Revolving Fund, more than the $25bn in last year’s House proposal and substantially more than the roughly $10bn/10yr baseline. $66bn would go to other water improvements, also an increase over the$40bn in last year’s House bill.

• Broadband: The White House proposes $100bn in funding, similar to last year’s House proposal and the Biden Campaign’s proposal. This would provide funding to expand coverage in underserved areas and would prioritize non-profit and government-affiliated providers.

• Electricity modernization: The White House proposes $100bn in funding. Among the proposals are an investment tax credit for high-voltage capacity power lines, and an extension and phase-down of the investment tax credit and production tax credit for clean energy generation and storage.

• Affordable housing: The White House proposes $213bn in spending to build and retrofit affordable housing units. This looks comparable to the $189bn in last year’s House bill ($100bn in spending, $89bn in tax incentives).

• Building schools: The President proposes $100bn to upgrade and build schools, similar to last year’s House proposal and the campaign proposal.  An additional $12bn would go to community college capital projects.

• Health and child care construction: The White House proposes $25bn to upgrade child care facilities, $18bn for VA hospitals, and $10bn for federal buildings. This is slightly more than what House Democrats proposed last year.

• Caregiving incentives: The President proposes $400bn in funding to expand access to home- or community-based care for the elderly and people with disabilities. The Medicaid program would be the primary vehicle for this.

• R&D incentives: The President proposes $180bn in R&D funding, including $50bn for the National Science Foundation (NSF), $30bn in other incentives, and $40bn in federal funding for upgrading research plant and equipment, including computers and networks, and would be allocated to federal research agencies including the Department of Energy.  An additional $30bn would be devoted to climate-related research, and $25bn to research at historically black colleges and universities.

• Manufacturing incentives:  The White House has proposed $300bn in manufacturing incentives, including $50bn to support production of critical goods,$50bn for semiconductor research and manufacturing incentives, $30bn in pandemic preparedness, $46bn in federal procurement of clean power-related products, $52bn to subsidize manufacturers, including bringing back something similar to the Advanced Manufacturing Tax Credit, and $31bn for small business credit and R&D assistance.

• Workforce development: The White House proposes $100bn for job training, apprenticeships, and other programs.