Yesterday, reporters following infrastructure negotiations between Senate Democrats and Republicans unearthed a document summarizing the $1.2-trillion “hard” infrastructure deal and outlining the “pay-for” items that would be used to offset its cost. The agreed-upon compromise of spending clawbacks, tax and fee increases, and enhanced reporting requirements clears a major hurdle for negotiators who have spent weeks attempting to finalize a deal. With the “who pays for it” question now seemingly addressed, it appears that the Senate will vote on the compromise legislation sometime over the coming days.
While some key details remain murky or unclear, from what we know so far, the “pay-for'' section leaves much to be desired. Certainly, attempting to pay for the deal is a much-needed change from how Washington typically spends, but unfortunately most of the “pay-fors” rely on questionable math or gimmicky behavior. Additionally, taxpayers should be concerned by comments from President Biden and Congressional Democrats that suggest the bipartisan deal will only be enacted into law if Congress simultaneously passes trillions of dollars in additional “infrastructure” spending, which may be paired with trillions of dollars in tax hikes that will harm economic growth.
Below we analyze the offset provisions in the bipartisan agreement:
One of the more surprising revenue sources included in the infrastructure deal is an extension of a unique fee the two government-sponsored enterprises (GSEs) place on mortgages, known as a “guarantee fee,” or g-fee. For unfamiliar readers, the g-fee compensates the GSEs, and by extension the federal government, for retaining the risk that borrowers might default or fail to repay their mortgage obligations. In other words, when GSEs purchase mortgages from lenders and pool them into mortgage-backed securities that investors buy, the g-fee surcharge from Fannie and Freddie is layered into a homeowner’s mortgage and used to pay off investors in the event the loan defaults.
According to the vague summary in the pay-for section, the extension of a 10 basis point (.10 percentage point) g-fee is expected to raise about $21 billion over ten years. This would indicate that the expiration of this fee (slated to end this year), which was included in a tax relief deal from 2011, is no longer going to happen. As a result, the fee will remain in place for another ten years and will expire in either 2031 or 2032, depending on when it takes effect.
This is certainly bad news for potential homeowners who could have seen a slight reduction in their monthly mortgage payment. It should be noted, however, NTU is supportive of raising g-fee rates in certain circumstances, so long as the additional revenue actually goes towards protecting the GSEs from potential losses. For example, increasing g-fees would help recapitalize Fannie and Freddie so they can have a stronger capital buffer in the event of a future downturn in the mortgage market and thereby insulate taxpayers from covering the losses for the two companies. Additionally, higher rates would be a slight reduction in the competitive advantage of the GSEs compared to private sector actors, as the GSEs generally have much more attractive rates.
In this case, it is misguided to use g-fee dollars to pay for hard infrastructure (a fee on homeowners to pay for roads, bridges, and broadband, among others). Lawmakers are asking potential homeowners to help finance infrastructure, a violation of the “user-pay, user benefit” model. In short, g-fees can, and arguably should, be raised but in this setting it would be misguided to do so.
Superfund Excise Tax
The bipartisan infrastructure agreement would reimpose the “Superfund excise tax,” which hasn’t been in effect since the mid-1990s. Further, the Senate deal would tax certain chemicals at twice the rate of prior levels, which would raise roughly $13 billion over the next ten-year period - or about $1.2 billion annually. This would be a direct tax increase on American producers and would likely be a significant expense for businesses in the near term as they attempt to navigate the tax.
A tax increase on job creators, individuals, or consumers is always a precarious endeavor, but in the midst of a recovery from a downturn precipitated by the response to the pandemic it could threaten our economic vitality in the years to come. On this point, a recent economic analysis regarding the impact of a “Superfund Tax” shows thousands of jobs at risk, particularly along the Gulf Coast. Fewer people working means less money in pockets and less money to spend around the economy—a scenario that benefits no one.
Consumers are also not likely to be spared from the consequences of this tax. As is typically the case with tax increases at the producer level, these added operating costs are almost certainly passed along to consumers in the form of higher prices. As a result, goods that use the more than 40 inputs impacted by this tax would likely be more expensive. Products such as light vehicle components, building and construction materials, water purification systems, and even “green” energy implements could end up being more expensive. Given the real-life concerns of the public and economists of rapidly rising inflation, government policies that would artificially raise prices are the wrong approach at the worst possible time.
Earlier this month, NTU led a coalition of nearly a dozen taxpayer, consumer, and free market advocacy groups in a letter opposing the inclusion of this tax in an infrastructure package. We are extremely disappointed this concerning tax increase has made it into the final package.
Revenue from the Strategic Petroleum Reserve
The Strategic Petroleum Reserve (SPR) was established as an emergency stockpile but has often been used as a political tool to manipulate oil prices (or at least to appear to do so). This “pay for” was in the Bipartisan Budget Act of 2015, another package to increase spending caps up front with offsets down the road. Proceeds from the SPR drawdowns go to the SPR Petroleum Account which can be used to fund drawdown activities, transportation, and purchase of additional petroleum to replenish the stockpile.
According to the vague summary of the pay-for section, the sale of assets in the SPR will result in additional revenues of $6 billion. As of this writing, the current selling price for one barrel of oil is $75, meaning the U.S. will need to sell around 80 million barrels worth of oil to meet this revenue goal.
Also included is $6.1 billion from adjusting customs user fees, which NTU Foundation’s (NTUF) Demian Brady noted in June is a go-to gimmick:
User fees are normally intended to cover the costs of the goods or services provided through a federal program. The customs user fees are assessed by U.S. Customs and Border Protection (CPB) on imported and exported goods. The fees had been in effect through September 30, 2029 until a law last year extended them through October 21, 2029. Extending customs fees far in advance is an oft-repeated gimmick to increase offsetting receipts years from now in order to “offset” current year spending hikes. Moreover, as CPB notes, these user fees “defray certain costs related to the provision of services that ensure that carriers, passengers, crew members and their personal effects comply with customs laws.” Extending the fees will offset the CPB’s costs but will have little to do with the infrastructure spending in this package.
Repurposing Unused COVID Relief Funds:
The largest single “pay for” in the bipartisan Senate deal is $205 billion “from repurposing of certain unused COVID relief dollars.” It is unclear as of this writing where those dollars will come from, given Inside Health Policy reports (paywall) -- via a Republican aide -- that lawmakers will not source from the Provider Relief Fund. NTU previously advocated for clawing back anywhere from $10 billion to $30 billion in undistributed Provider Relief Fund dollars, pointing out our “ongoing concerns about provider relief funds going to well-off hospitals and about fraudulent payments within the program.” Furthermore, the nonpartisan Government Accountability Office (GAO) has called out the Department of Health and Human Services (HHS) for lacking “documented policies for reviewing [Provider Relief Fund] payments to prevent fraud.” It also seems unlikely that a significant portion of repurposed funds would come from the American Rescue Plan Act (ARPA), given the Biden administration has shown little appetite for reopening their recently-passed and (thus far) single major legislative achievement. NTU recently offered up to $300 billion in potential spending offsets from ARPA that would not substantially impact ARPA’s stated purpose of combating the immediate economic and public health impacts of the COVID-19 pandemic.
In short, it is unfortunate that neither ARPA nor Provider Relief Fund dollars are on the table, and it leaves open many questions as to exactly which COVID relief funds are being used to pay for the bipartisan infrastructure bill. Given the gimmicky pay-fors that pervade throughout this deal, count NTU as concerned until we see the details.
Delaying an Already-Delayed and Unimplemented Medicare Part D Regulation:
This phantom $49 billion “pay for” was called “Washington at its worst” by one health industry lobbyist speaking to The Washington Post. In short, the Biden administration has delayed until 2023 a Trump administration regulation that would change how prescription drug discounts are handled by insurers and pharmacy benefit managers (PBMs). Because the Congressional Budget Office projected that the so-called rebate rule would increase federal spending in Medicare and Medicaid by about $177 billion over a decade, due to a rise in Medicare premiums (and therefore, taxpayer-funded subsidies for Medicare premiums), lawmakers get to count a further delay in the rule (beyond the Biden administration’s one-year delay) as “savings” for the federal government. Reports indicate Congressional Democrats may use additional phantom “savings” from the rebate rule in their larger reconciliation bill by repealing the rebate rule entirely.
If this seems like a clever game, that’s because it is one. This rule has never been implemented, and there’s no clear indication that the Biden administration would have followed through on implementing the regulation even after their one-year delay. And even if the Biden administration had implemented the rule, there’s little clarity as to whether the rebate rule would have actually cost federal taxpayers over $177 billion over the decade. In short, delaying the rebate rule does not present real, tangible savings to taxpayers, like a reduction in federal spending would.
Pursuing Fraudulent Unemployment Insurance (UI) Payments:
It is admirable that lawmakers see an urgent need in recouping some of the potentially tens of billions of dollars federal and state governments have made in fraudulent unemployment insurance (UI) payments during the COVID-19 pandemic and economic downturn. Recovering fraudulent payments is easier said than done, though -- especially given some of the fraud is driven by organized crime -- and lawmakers should not rely on a CBO estimate of what could be recovered by federal and state authorities as a “pay for” in the infrastructure bill.
A recent ProPublica report sheds some new light on the scale and scope of UI fraud. It cites a report that NTU has also referenced before, that the Department of Labor Inspector General “estimates that at least $87 billion in fraudulent and improper payments will have made their way through the system by the time pandemic-linked jobless aid programs expire in September.” This is an extraordinary amount of fraud, and federal and state law enforcement should work together in the months and years ahead to recoup as many of those fraudulent payments as practicable.
The fraud will be extremely difficult to recover, though. According to a Thomson Reuters analyst interviewed by ProPublica, “one U.S. state … received fake claims — all purportedly from state residents — that originated from IP addresses in nearly 170 countries.” And ProPublica reports:
...that much of the fraud has been organized — both in the U.S. and abroad. Fraudsters have used bots to file online claims in bulk. And others, located as far away as China and West Africa, have organized low-wage teams to file phony claims
In short, going after international and/or organized criminal fraud will be a complex and time-consuming effort for both federal and state authorities, with few to no guarantees of success. It is far too early in the fraud recovery process to rely on fraud recovery as a “pay for” in the infrastructure bill. Lawmakers should instead pass legislation that makes it easier for federal and state authorities to work together on UI fraud recovery, and returns those funds to either federal or state coffers as recovery occurs.
Extending the Mandatory Sequester
Extending the mandatory sequester is, unfortunately, a tried and true “pay for” gimmick from lawmakers, and it is disappointing to see this $9 billion phantom offset in the bipartisan infrastructure deal. As NTU explained a short while ago:
More than $9 billion would come from extending the mandatory sequester, something Congress has already done five times since 2013. NTU explains more in this paper from January.
...Congress should stop extending the mandatory sequester. A more acceptable pay-for would be strengthening the mandatory sequester by eliminating the dozens of carve-outs in the process.
Another budget gimmick is using revenue from both past and future spectrum auctions as a pay-for. Specifically, this pay-for totals $87 billion, with $20 billion coming from future spectrum auctions and $67 billion from the February 2021 C-Band auction. Spectrum auctions are an important tool the Federal Communications Commission (FCC) uses to allocate a scarce resource. Allocating spectrum will be vital to building a faster and more powerful 5G network. However, this isn’t a new revenue source. Outside of expenses incurred by the FCC, revenue generated from spectrum auctions are largely designated to the U.S. Treasury. Essentially, this “pay-for” would take $67 billion from the Treasury, money that could be used to reduce our $28 trillion debt, and would repurpose it for infrastructure. Similarly, the $20 billion from future spectrum auctions is likely revenue that was already going to be generated. This may be a convenient revenue stream for legislators, but a pay-for that actually generates new revenue to cover this new spending would be in the best interest of taxpayers.
Information Reporting Requirements to Cryptocurrency
Cryptocurrencies, like Bitcoin, have grown in popularity and the market cap topped $2 trillion for the first time this year. Privacy is one of the principal factors that draw consumers to cryptocurrencies, but this also presents issues for taxpayers and tax enforcers. Currently, the Internal Revenue Service (IRS) considers cryptocurrencies to be “property.” Unclear tax reporting requirements for cryptocurrencies can lead to tax evasion. However, confusion on how to claim cryptocurrencies on tax returns can make it difficult for taxpayers looking to follow the law to appropriately file. NTU wrote in 2017 on how these confusing requirements can affect even well-meaning taxpayers:
The complications of the Bitcoin classification as a property do not end here. Not only are gains taxed at a ridiculous rate, but Bitcoin users must keep track of every purchase made using their bitcoin, and track the value that bitcoin has gained since the time it was purchased. This even further complicates the bookkeeping required to own and trade Bitcoin, as well as raises questions about potential grey areas…
Lawmakers and the IRS should work to simplify this burden on taxpayers and look to appropriately tax cryptocurrencies. However, estimates on the tax gap, like the outlandish $1 trillion estimate, are largely overstated. While the IRS requested $32 million for fiscal year 2022 to enhance cryptocurrency operations, it’s unclear whether the $28 billion windfall from cryptocurrency includes an increase to the IRS budget, something that has been a contentious issue throughout the infrastructure negotiations. A lack of details on how $28 billion in additional tax revenue would be generated and over what period of time is cause for concern for NTU and taxpayers.
While NTU is deeply concerned with some of the gimmicky “pay fors” and offsets proposed by Senators in the bipartisan infrastructure package, we have a robust bank of potential offsets that lawmakers could use, and that would actually represent meaningful and immediate spending reductions elsewhere in the federal government. These options include:
- As mentioned above, up to $300 billion in potential offsets from the recently-passed American Rescue Plan Act; many of these proposed offsets are not scheduled to be spent until months or even years from now, which challenges the notion that all the spending in APRA is for immediate COVID relief;
- Additional offsets contained in NTU’s Budget Control Act of 2021 paper, which envisions a path to more than $3 trillion in 10-year deficit reduction by lawmakers as they look toward a new budget and spending deal for regular appropriations.
Any of these offsets would be preferable to the collection of questionable “pay fors” included in this latest infrastructure announcement, and NTU would be eager to work with any lawmakers interested in real, robust spending offsets to an infrastructure package.