Legislation that would fund infrastructure projects through a controversial way of generating revenue is being considered in Congress and has picked up a substantial amount of bipartisan support. While expanding investments in infrastructure is popular with many as a way to meet pressing national needs and create jobs, why is the legislation so controversial?

Recently the Economic Policy Institute’s (EPI) Thomas Hungerford penned a report entitled, “How Not to Fund an Infrastructure Bank,” that puts together the main reasons why the legislation is bad idea.

The legislation is the “Partnership to Build America Act” (H.R. 2084 in the House and S. 1957 in the Senate). The bill would establish an infrastructure bank (called the American Infrastructure Fund) to provide funds and guarantees for investments in certain infrastructure projects undertaken by state and local governments. The initial funding for the bank would be $50 billion and would be acquired from multinationals that invest in 50-year bonds to finance the bank.. In exchange the multinationals would be allowed to repatriate earnings held overseas tax-free (a “repatriation tax holiday,” in budget jargon).

Hungerford, a veteran budget analyst and researcher who was at the Congressional Research Service for eight years before going to EPI, has been deep in the weeds on American tax policy for a long time. He took some time to answer some of our questions related to the legislation and his recent report.

Center for Effective Government: Are these legislative proposals a good way to fund infrastructure? What are other ways?

Hungerford: The proposed financing mechanism for the infrastructure bank critically relies on the assumed behavior of multinational corporations with foreign-source earnings sitting overseas. I think it is quite possible that the cost of this particular method of funding would be more than $50 billion in reduced corporate income tax revenue. There is also a risk that this method could raise less than the anticipated $50 billion and still reduce corporate tax revenues by more than the initial funding. It doesn’t make any sense to increase federal debt by, say, $70 billion (plus increased net interest payments on the federal debt) to provide $50 billion for infrastructure investment.

Of course, there is a better way to obtain the initial funding and that would be to directly appropriate the $50 billion for the infrastructure bank. This method has the benefit of raising exactly $50 billion for the bank with a cost to the government of $50 billion (plus any additional net interest payments if it is deficit financed). Bipartisan bills to create an infrastructure bank funded by a direct appropriation have been introduced in Congress in the past: Senators Kerry and Hutchinson cosponsored a bill in 2011 (S. 652), Senator Klobuchar also introduced a bill in 2011 (S. 1769), and Senators Warner and Blunt introduced a similar bill in 2013 (S. 1716). The President has also proposed an appropriations-funded infrastructure bank in past budget submissions.

Center for Effective Government: If this bill passes, what sort of precedent might it set in terms of meeting other pressing needs?

Hungerford: Congress enacted the American Jobs Creation Act of 2004 (AJCA). One of the provisions of the AJCA was a repatriation tax “holiday” or, more formally, “incentives to reinvest foreign earnings in the United States.” The provision was explicitly labeled an economic stimulus and Congress emphasized “that this is a temporary economic stimulus measure, and the there is no intent to make this measure permanent, or to ‘extend’ or enact it again in the future.” In was expected that the repatriated monies would be a source of funding for hiring and training, infrastructure spending, increased research and development, and capital investments. Unfortunately, things did not turn out this way. The Senate Permanent Subcommittee on Investigations in 2011 found that the firms with the largest repatriations under the AJCA did not increase their research and development spending and actually reduced the number of U.S. jobs.

The repatriation holiday was a failure—it neither boosted economic growth nor created jobs. And to add insult to injury, it reduced corporate tax revenues: the Joint Committee on Taxation estimates that if the repatriation holiday were to happen today, it would reduce tax revenues by about $70 billion over 10 years. Although the repatriation holiday was supposed to be a one-off deal, multinational corporations have been aggressively shifting profit overseas in the expectation there will be another holiday. Proponents tried to attach an amendment to the 2009 stimulus bill (S. Amendment 112) for another repatriation holiday; the amendment was voted down. But many business organizations include a repatriation holiday on their tax policy wish lists.

If the Partnership to Build America Act were to become law and succeed in raising the desired initial funds for the infrastructure bank, I would expect that this funding mechanism would be used for other projects both worthy and unworthy in the years ahead. This bill is a bad use of tax policy and would be just one more contributor to depleting our already badly eroded corporate income tax base.

Center for Effective Government: What steps should we take to get corporations to use their offshore profits to invest productively in America?

Hungerford: The principal problem with the current corporate tax system is the erosion of corporate income tax base. Multinational corporations have used aggressive tax planning techniques to shift profits from the U.S. (and other high-tax countries) to tax havens, which has led to a dramatic build-up of earnings in tax havens over the past 10 to 15 years. Consequently, many large corporations pay low or even no federal income taxes. And, despite rising corporate profits, corporate tax receipts have been falling as a proportion of total federal revenue. Money sitting in tax havens is money that is not invested productively in the United States (or anywhere else for that matter).

But the solution is fairly simple—eliminate the largest corporate tax expenditure, which is deferral. As long as multinational corporations can defer paying U.S. income tax on foreign-source income, they have an incentive to shift profits and “invest” overseas. Eliminating deferral eliminates this incentive and could increase corporate income tax revenues by $50 billion per year. Firms would no longer base investment decisions on the tax implications of those decisions. Of course, not all of the overseas income of U.S. multinational corporations would be invested in the U.S., but more would be invested in the U.S. than is the case now.