How Will the Proposed Infrastructure Bill Impact the Economy?

The latest spending push from the Biden administration is an expansive infrastructure bill. The proposed bill is projected to be around $2.3 trillion in size, and the scope expands far beyond repairing highways and bridges. Many industries, from elder care to broadband internet providers, could see a surge in demand if the infrastructure plan is signed into law.

Proposed Infrastructure Bill – More Than Roads and Bridges

The $2.3 trillion sum is projected to be spent over a 10-year period, and the initial tax proposal is expected to recoup about $2 trillion of that sum over a 15-year period. Moody’s predicts that the passage of this bill will create 2.5 million jobs and result in a GDP increase of $700 billion by 2025. This would be strong progress towards helping the nearly 10 million unemployed people in America while providing a sizable increase to GDP.

The general theme of the bill is shifting to cleaner, more renewable energy sources and promoting racial equality in the economy. While roads and bridges are not the primary focus, they still get a significant piece of this massive bill.

The current proposal intends to modernize 20,000 miles of roads and 10,000 smaller bridges. Ten of those bridges are the most travelled in the country. Many of these changes are long overdue and maintain bipartisan support, but the bulk of the debate centers on the other provisions in the plan.

Infrastructure Plan Focused on Jobs

As it currently stands, the proposed package is as much a jobs program as it is an infrastructure bill. The jobs created by the plan are mostly in industries with healthy wages. For example, the median wage for construction workers is over 15% higher than the median worker in the U.S.

There is also a plan for the rapidly expanding employment of in-home care providers, who average just $13 per hour. Funds directed at this industry intend to raise the wages for an occupation that currently employs a disproportionate amount of women. In fact, the largest single component of the bill sets aside $400 billion to improve access to in-home or community-based care for the elderly. Other notable recipients are $174 billion for electric vehicle charging stations, $213 billion for retrofitting older properties, $100 billion to expand high-speed broadband access, and another $100 billion to upgrade the electrical grid.

Funding Primarily from Tax Hikes on Corporations and Wealthy

Thus far, President Biden has maintained his position that he will not increase the tax burden of individuals making less than $400,000. The proposed funding plan for the infrastructure bill follows this philosophy.

As it currently stands, one major source of funding for the bill would be a rise in the corporate tax rate to 28% from 21% – halfway back to the 35% tax rate that was in force before the passage of the Tax Cuts and Jobs Act.

Tax Cuts and Jobs Act Takes a Hit with Latest Infrastructure Proposal

Much of this tax plan counteracts the business-friendly changes to the tax code that were made with the Tax Cuts and Jobs Act [TCJA]. Some leaders took exception to the TCJA because of the limited economic benefits beyond its first year of implementation. Another issue was the lack of corporate investment following the tax cuts. Instead, many corporations opted to reward shareholders with stock buybacks, a potential reason for the plan’s limited impact.

Growth rose from 2.4% in 2017 to 2.9% in 2018 but fell back to 2.3% in 2019. Projections from the CBO estimate the TCJA will raise GDP by 0.7% over the 2018-2028 period, which is smaller than the estimated effects from the current infrastructure spending proposal.

The proposed changes to the tax code would bring the U.S. back above the average global tax rate of just under 23%. In addition, Treasury Secretary Yellen supports a provision of the plan that targets tax havens by discouraging the offshoring of profits. This would be accomplished by strengthening the global minimum corporate tax on U.S. firms.

Net Effects of the Infrastructure Plan

Raising the U.S. corporate tax rate to 28% would raise the federal-state combined tax rate to 32.34%, the highest of any G7 nation. The Tax Foundation projects that such an increase would reduce long-run output by 0.8%, reduce employment by 159,000 jobs, and reduce wages by 0.7%. However, when combined with infrastructure spending, the net projected increase in employment is still over 2.3 million jobs and a net increase in output of over 2%.

Nothing has been set in stone, and Republicans in the Senate have already presented a $568 billion plan to counter the proposed infrastructure bill. There also has been some resistance to tax hikes within the Democratic Party. As a result, President Biden has considered a corporate tax rate hike to 25% rather than 28% and instead raising the top income tax bracket back to 39.6%. This would be accompanied by increasing the capital gains tax rate to 39.6% on earnings over $1 million.

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