TRIP Bonds

Following the Congressional Budget Office's (CBO) announcement that the Federal Highway Trust Fund has a much deeper deficit than previously believed, a bipartisan coalition of lawmakers from both houses of Congress held a press conference to urge their colleagues to look at tax credit bonding to fund important infrastructure projects. U.S. Senators Ron Wyden (D-Ore.) and John Hoeven (R-N.D.) and Reps. Leonard Boswell (D-Iowa) and Ed Whitfield (R-Ky.) have introduced legislation known as Transportation Regional Infrastructure Project (TRIP) bonds which would leverage public financing to fund transportation infrastructure projects in all 50 states.

Archived video of the press conference on 1/31/2012

The lawmakers were joined by current American Action Forum president and former- CBO director Douglas Holtz-Eakin and the Chief Operating Officer of the American Association of State Highway and Transportation Officials (AASHTO) Jack Basso, both of whom have endorsed tax credit bonding for transportation infrastructure projects.

Senate & House TRIP Bond Bill Introduction Press Releases:

Additional Resources:

 

Background

Transportation and Regional Infrastructure Project Bonds (TRIPs) will provide $50 billion in new transportation infrastructure funding through a one-time bonding program and will empower states and local governments to complete significant new projects across all modes of transportation including roads, bridges, transit, rail, and waterways.  These funds will generate significant economic growth, improve transportation infrastructure and save lives through enhanced transportation safety without a tax increase.  The mechanism would make available $50 billion in infrastructure funding at an estimated scored cost of $12.3 billion (JCT score of tax credits over 2011-2021).

How TRIP Bonds Work

TRIPS Flowchart

The legislation, drafted to be part of a long-term transportation reauthorization, will allow State Infrastructure Banks (entities authorized by the NHS Act of 1995, TEA-21, and SAFETEA-LU) to issue $50 billion in bonds over a six year period.  The proceeds of the bonds will be used to fund the construction of significant new projects across all modes of transportation including roads, bridges, transit, rail, and waterways.

An annual amount of approximately $900 million from customs user fees will be placed in a TRIP Bond Trust Account and invested for the life of the bonds (30 years) which will generate more than enough to repay the entire $50 billion principal amount.  That means the only additional cost to the government is the “interest portion” on the bonds, which is in the form of tax credits.  In lieu of interest, the bond holders will receive tax credits that can be applied against the holders’ federal income tax liability.  After all of the bonds have been issued, the annual cost of the tax credits is estimated to be less than $2 billion. 

Each state infrastructure bank will be authorized to issue $1 billion over six years for project in their state, and they may combine to work together on larger projects of regional and national significance. 

Time to Act is Now

  • According to the National Surface Transportation Policy and Revenue Study Commission, we need to invest at least $225 billion on all modes.  Right now, we invest less than 40 percent of this target.
  • The last long-term surface transportation authorization, SAFETEA-LU, expired in September 2009.  We’re currently operating on a sixth short-term extension since then.  Combined with inadequate revenues in the Highway Trust Fund to meet current spending levels, there is little predictability for state transportation departments that require long-term stability to carry out their capital programs.
  • Given the difficulty of finding new revenues, let alone raising existing taxes, to pay for infrastructure, TRIP bonds can provide a significant boost to funding levels in the next transportation bill with minimal budget impact.

Important Features of TRIP Bonds

TRIP Bonds can help to effectively address transportation and tax policy goals across the country:

  • TRIP Bonds are targeted specifically to new transportation projects – roads, bridges, transit, rail, ports, and inland waterways
  • TRIP Bonds have a defined volume cap of $50 billion.  In addition, the amount of interest subsidy for each bond issue is established by the U.S. Treasury, not the bond underwriter.  The maturity of the bonds is also defined by the federal legislation.  This allows a much more accurate estimate of the fiscal impact to the federal government.  
  • TRIP Bonds require a 20 percent state matching fund component which leverages additional funding above the $50 billion that will be raised via the sale of taxable bonds.
  • TRIP Bonds insulate project sponsors from having to incur debt; the states and localities receive the proceeds as grants.
  • TRIP Bonds’ principal payments are fully offset by customs user fees in a trust account. 
  • TRIP Bonds would be issued by State Infrastructure Banks, avoiding the need to establish a new federal agency.  State Infrastructure Banks have been in place since the mid-1990s.
  • TRIP Bonds address regional equity concerns by allocating two percent of total issues to every state to help meet their unique needs.
  • Earmarks are prohibited under this program.  States, from their two percent formula allocation, determine eligible uses of infrastructure investment among qualifying modes of transportation (highway, bridge, transit, rail, and waterways). 
  • TRIPs use the tax code to attract private capital to meet long-term infrastructure needs. 
  • TRIP Bonds can serve as a complementary financing option to existing mechanisms as Congress looks to a new surface transportation reauthorization.

Issuance Breakdown, 2011-2016

  • FY 2011: $5 billion
  • FY 2012: $5 billion
  • FY 2013: $10 billion
  • FY 2014: $10 billion
  • FY 2015: $10 billion
  • FY 2016: $10 billion

Frequently Asked Questions

Why are you introducing this legislation now? 

America has overwhelming needs for repair and construction of transportation projects.  The American Society of Civil Engineers just issued a report saying that without long-needed investment in transportation, the economy will lose more than 870,000 jobs, and the GDP will be suppressed by $3.1 trillion by 2020. At the same time, revenue raisers such as the gas tax have difficulty rallying support to pay for these projects. TRIPs provides a bipartisan, affordable way to inject much needed funding for transportation infrastructure investments, getting projects off the ground quickly and putting Americans back to work.

How many jobs is TRIPs expected to create? What's the basis for that estimate?

$50 billion of tax credit bonds would create 1.5 million new jobs.  Per an inquiry from Senator Wyden , U.S. Transportation Secretary LaHood confirmed that the same number of jobs would be created from bond financing for transportation projects as from transportation spending. Based on USDOT's estimate of 30,000 jobs per $1 billion of transportation funding, TRIPs should yield approximately 1.5 million jobs.

Why tax credit bonding?

Issuing bonds is a widely used and successful financing tool to pay for infrastructure projects. This legislation would empower the U.S. government with the same tool to finance transportation projects that state and local governments and the private sector already have. 

How do tax credit bonds differ from tax-exempt bonds?

With tax-exempt bonds, investors may avoid income taxes on the interest earned from bonds they buy.  This effectively provides a tax shelter for the rich, who can put many of their assets into tax exempt bonds and avoid a federal tax liability.  With tax credit bonds, like TRIPs, investors still pay taxes, but they are granted a credit on their overall tax level.  As such, investors who purchase tax credit bonds contribute a fairer share to the treasury, and receive set by Congress for specific projects, rather than exemptions for a variety of projects that may not meet federal, regional, or state needs.  Because TRIPs allow for the tax credit to be “stripped” from the underlying bond, they will be attractive to a wider range of investors than tax exempt bonds, including pension funds, institutional and international investors.

Is there really a market for federal tax-credit bonds?

Mercator Advisors, a respected finance firm, says this approach will work.  Folks asked the same questions about Build America Bonds – which was a huge success.  There is a market for tax credit bonds – billions of dollars of tax credit bonds at the federal level have been bought in the past.  Even with those successes, there’s never been a tax credit bond out there before that is this attractive to the market.  Issuing such a large volume - $50 billion - will encourage the tax credit bond market.  TRIPs includes language that allows for these tax credits to be stripped and sold on the secondary market, which will have the effect of opening up TRIPs for purchase by pension funds, institutional and international investors in a robust secondary market. 

Where will this money come from?

Part of the funding to get TRIPs up off the ground will come from custom user fees – fees paid by exporters and importers when they bring goods from outside the country into the US.  Much of the financing will be from private capital that wants to invest in US infrastructure.  Senator Wyden is fully dedicated to making this bill paid for – custom user fees pay for the principle on these bonds in the version of TRIPs introduced today.  Senator Wyden plans to work with the Finance committee going forward to make sure that this proposal pays for itself. 

Who will purchase TRIPs?

Because the tax credits in TRIPs are strippable, meaning they can be sold separately from their related bonds, they open up the market for the tax credits to investors without tax liability such as pension funds, international investors, and businesses that have limited or no tax liability over a year.  As such, the potential pool of investors in TRIPs is the same as the pool for any other more traditional bond purchaser.

How are TRIPs different than Build America Bonds?
  1. TRIPs are capped at $50 billion dollars whereas Build America Bonds did not have a statutory limit.
  2. TRIPs are specifically targeted for transportation projects only.
  3. TRIPs do not have a direct pay option, reigning in spending.
  4. They set the credit rate at a revenue-neutral rate (long-term corporate debt) giving both taxpayers and investors a good deal.Critics of Build America Bonds claimed higher than needed rates were often set
What about Build America Bonds?  They worked, why aren’t you pushing to reauthorize them?

Build America Bonds are just not politically feasible in this Congress.  But that political opposition isn’t a reason to give up on the idea of leveraging private capital via bonding to pay for sorely needed transportation projects.  That’s why Senators Wyden, Hoeven, and Begich have crafted a bipartisan proposal that has a real shot at getting passed.

There isn’t the mechanism that exists yet to track stripping of tax-credit bonds – how will you do so?

The IRS is already working to develop just such a mechanism.  As for Wall Street folks who say it’s too complicated to do this, these are the same folks who came up with credit default swaps – they can handle a much simpler transaction than that.

What about underwriting fees in BABs?  Weren’t they are problem?

While the underwriting fees for BABs were initially higher than traditional tax-exempt bonds, once enough were issued, market certainty improved, and they were perceived as less risky.  As a result, after about a year of issuance, the underwriting fees decreased to comparable levels to other tax-exempt bonds.  Additionally, even when the underwriting fees were higher, the decreases in the cost of the bonds for taxpayers overall far outweighed the small increases in underwriting costs. 

Statements of Support

TRIPs has been endorsed by a wide range of state and local officials as well as business and labor leaders including including: American Association of Road and Transportation Builders, American Association of State Highway and Transportation Officials, American Highway Users Alliance, Associated General Contractors of America, International Union of Operating Engineers, Laborers’ International Union of North America, National Association of Manufacturers, U.S. Chamber of Commerce, American Society of Civil Engineers (Download Letter of Support)

Additional Statements of Support:

  •  “We endorse Senator Wyden's and Senator Hoeven’s efforts to attract private investment capital into the transportation sector through targeted federal tax code incentives.  A $50 billion program of qualified tax credit bonds, properly structured, should attract considerable interest from capital market participants and has great potential to help advance major infrastructure projects.” -David Seltzer, President, Mercator Advisors LLC
  • “The Transportation and Regional Infrastructure Project, Wyden-Hoeven TRIP Bonds program, would provide $50 billion in new transportation infrastructure funding without a tax increase. That's really a $50 billion Jobs Bill that states and local governments can use to create much-needed jobs put people to work right now by making much-needed improvements to our roads, bridges, transit and rail systems. I applaud Senators Wyden and Hoeven for introducing this legislation and I encourage both houses of Congress to work expeditiously to pass it.” -Democratic Mayor Antonio Villaraigosa, Los Angeles, California
  • “Our nation desperately needs to reinvest in our roads, bridges and transit systems. The Wyden-Hoeven TRIP Bonds program provides for a bipartisan, common-sense approach for levering limited resources to provide crucial infrastructure.  It's encouraging to see Washington provide additional tools for state and local governments that will create jobs and encourage economic development.” -Republican Mayor Scott Smith, Mesa, Arizona
  • “I commend Senators Wyden and Hoeven for their leadership on an innovative finance idea that will create jobs throughout the nation.  If passed, the TRIPs legislation will help jump-start the construction industry and fund the building of critical new infrastructure projects in every state.” -Karl Watson, President, Cemex USA
  • “It is clear that there is no singular solution to addressing the funding and financing challenges facing our transportation system.  We must continue to think creatively and embrace a variety of options – including the TRIP bonds proposal put forth by Senators Wyden and Hoeven.   Our nation’s continued economic competitiveness is dependent upon a modern and reliable transportation system and we need every tool that is available to help in achieving that goal.  TRIP bonds can be a vitally important addition to that tool box.  I applaud Senators Wyden and Hoeven for working together in a bipartisan way to find solutions to finance our transportation system.  Such bipartisanship in facing one of America’s important challenges will be welcomed by all of our citizens.” -Former Pennsylvania Governor Ed Rendell, Co-Chair of Building America’s Future
  •  “Given the tremendous benefits of transportation investments in contributing to America’s economic competitiveness, creating and supporting jobs, and enhancing mobility, we applaud Sen. Wyden and Sen. Hoeven’s introduction of TRIP bonds. This is exactly the kind of new tool—when added to current investment levels—that allows states to improve the nation’s transportation infrastructure in a fiscally responsible manner.” -Jack Basso, Director of Program Finance and Management, AASHTO, Former CFO, US Department of Transportation
  • “With significant needs and a limited pool of resources, we need to be as creative as possible in providing options for transportation funding. Provided that budget scoring is acceptable, TRIPs deserves strong consideration alongside other options as a way to move forward on a well-funded transportation reauthorization bill." -Janet F. Kavinoky, US Chamber of Commerce

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