Let’s start with the first and most important thing about President Obama’s proposed tax-reform-for-transportation-spending budget: it’s not going to happen.
That said, the budget the president proposed this week is a starting point in negotiations with Congress over what eventually will go into the budget, so it’s important even if it is theoretical.
The president wants a one-time, 14% tax on foreign profits currently being held outside the US. The revenue from that tax would fund a six-year, $US478 billion surface transportation (that’s roads and bridges and railroads) plan, which would increase spending on infrastructure and transportation by about 25%.
Further, the president wants to introduce a 19% tax on foreign earnings in the future and lower the corporate tax rate domestically to 28%.
Predictably, Republicans think the tax rates in Obama’s proposals are too high. Senators Rand Paul (R-KY) and Barbara Boxer (D-CA), meanwhile, introduced a bi-partisan proposal for a tax holiday, which temporarily lowers tax rates to 6.5% for companies that voluntarily bring back overseas profits.
Goldman Sachs’ global macro research team says that infrastructure spending probably won’t happen without tax reform. And while everyone kind of agrees that tax reform should happen, it probably won’t anytime soon because no one can agree about what tax reform looks like. Even if the two sides can agree on a rate (they’re currently at 19% on the Democratic side and 1.25% on the Republican side), there are still questions about how small businesses with foreign profits will be taxed. Not to mention the lobbyists that are guaranteed to be all over this.
The Alternate Solution
The interesting thing that the Goldman note brings up is there might actually be a way to raise the infrastructure spending without finding a compromise on corporate tax reform: the gas tax.
A higher gas tax is theoretically an easy fix. Because oil prices have collapsed and gas is cheap, it wouldn’t hurt consumers right now as much as it might have back when gas was still over $US4 per gallon.
But there’s no support for that, either.
Earlier in January, Greg Valliere, chief political strategist at Potomac Research Group, sent out a note suggesting that the likelihood a hike in the gas tax could pass have increased since the oil price has fallen, but are still only at about 25%.
Ironically, when prices are lower, it might actually be harder to pass a gas tax. When consumers aren’t feeling a pinch in prices, it’s harder to argue that a tax is needed to reduce consumption.
And so here we are, unable to fund fixing the roads because consumers would rather spend that money on driving more. It’s a vicious circle.
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