Blog No. 290. Infrastructure: A Possible Path to a Deal

Everyone wants an infrastructure deal, but no one seems to have figured out how to get one. Doing so may be difficult, but it need not be impossible.

On Thursday, President Biden and members of his administration met for 90 minutes with six Republican Senators, with both sides seeking a route to agreement on an infrastructure bill. The Republican delegation was led by Senator Shelley Moore Capito of West Virginia and included ranking members on committees with jurisdiction over infrastructure: Senators John Barrasso of Wyoming, Roy Blunt of Missouri, Mike Crapo of Idaho, Pat Toomey of Pennsylvania and Roger Wicker of Mississippi. In addition to the President, administration representatives included Vice President Kamala Harris, Commerce Secretary Gina Raimondo and Transportation Secretary Pete Buttigieg.

After the meeting, participants described it in positive terms and a further meeting is planned for this week. Nevertheless, there appeared to be little sign that the parties had found a means of resolving the two principal obstacles to agreement: defining the scope of the infrastructure to be provided, and finding a way to pay for it. Both obstacles are substantial, but neither is insurmountable.

In terms of scope, the Biden $2.25 trillion American Jobs Plan addressed physical infrastructure, such as roads bridges, rail, and airports, but the bulk of it is devoted to expenditures bearing little connection to “traditional” infrastructure. For example, the largest single element is $400 billion to improve access to quality, affordable home or community-based care for the elderly and people with disabilities. Republicans, on the other hand, insist on a bill focused only on physical infrastructure. A Republican proposal for a bill with such a focus, and totaling $568 billion, was offered nearly a month ago, but drew little support from Democrats.

Republicans may be willing to enlarge their previous proposal to some degree, but they will clearly not come near the Democrats’ expansive menu. Nevertheless, the best response for Democrats might be to take the most they can get from Republicans and move on. Moving on would not mean giving up on the other program elements they believe are important; rather it would simply mean addressing those elements in one or more separate bills which could then be passed, if necessary, through the reconciliation procedure. Whatever the merits of those other elements, providing for roads and bridges and other urgent needs, should not be held hostage as leverage to secure their passage.

On the question of funding, Biden proposed to pay his infrastructure investments by an increase in the corporate tax from 21% to 28%. For Republicans, raising income taxes is an anathema and they have suggested financing the bill through user fees such as the gas tax. On Friday, however, White House press secretary Jen Psaki categorically ruled out an increase in the gas tax or other user fees, saying that such measures would violate a “red line” from President Biden not to raise taxes on Americans making less than $400,000 a year. Hence, the appearance of a genuine impasse. There may be, however, another available source of funds: getting more tax revenue without raising tax rates or imposing new taxes: tapping the “tax gap.”

The tax gap refers to the billions of dollars lost in the chasm between the taxes owed by taxpayers under existing laws and what they actually pay because of errors or deliberate tax evasion. Recovering the lost revenue in the tax gap would require a substantial investment for IRS personnel and technology resources that would take time to put in place, but there is little doubt that the investment would be recovered many times over.

A leading advocate of attacking the tax gap is Charles Rossotti, a former Commissioner of the IRS, who developed some time ago a plan, Shrink The Tax Gap. According to Rossotti, his plan would recover $1.4 trillion in taxes over a ten year period. Rossotti’s plan has drawn wide approval and has bipartisan support on Capitol Hill. On May 11, Rossotti was prominent among the witnesses who testified at a hearing of the Senate Finance Committee, “Closing the Tax Gap: Lost Revenue from Noncompliance and the Role of Offshore Tax Evasion.”

A version of Rossoti’s plan is already reflected in Biden’s other ambitious proposal, the American Families Plan. The Families Plan includes $80 billion in additional funding for the IRS over 10 years to increase enforcement and crack down on tax evasion. According to the administration, that investment would produce $780 billion in revenue over 10 years. While estimates vary as to both the amount of the tax gap and the portion that can be recovered, there is ample reason to believe that the latter would, at a minimum, approximate the cost of the current proposals for physical infrastructure.

At present, however, tax gap revenue is misplaced by its inclusion not in the Jobs Plan, but in the Families Plan. Unlike the physical infrastructure components of the Jobs Plan, no portion of the Families Plan has significant support from Republicans – and the provision for tax gap revenue is unlikely to generate any such support. But that circumstance suggests a creative legislative strategy for the Biden administration that could yield at least one major piece of bipartisan legislation: extract the tax gap proposal from the Families Plan and incorporate it in a physical infrastructure bill.

That approach would have something for both parties. Republicans would gain some defense to the charge of being purely naysayers, and Democrats would be able to show that they have some capacity to govern and to get things done. Best of all, the country would benefit.