03/21/17 : Emma Gilmore

Eye on Infrastructure Series: Examining the Role of Tax Policy and Finance

This is the first post from the Alliance’s “Eye on Infrastructure” blog series, which will highlight how policymakers can work to ensure energy security, economic competitiveness, and savings for American taxpayers by considering the role of energy efficiency in rebuilding America’s infrastructure.

 

With two hearings in the Senate Energy and Natural Resources Committee focused on infrastructure just in the last month, it is apparent that the Trump administration’s pledge for a $1 trillion infrastructure package has created buzz among policy makers and stakeholders. Proposals to modernize roads, bridges, railroads, and airports have dominated discussion at the state and federal levels in the last two months. But our aging infrastructure has serious implications for the energy sector as well.

The unseen components that make American cities tick – such as the pipes, facilities, wires, and waterways that provide energy, water, and transportation – are just as critical to daily life. In this year’s report card from the American Society of Civil Engineers, America’s energy infrastructure received a D+, indicating a clear need for investment to update and innovate. Ensuring security, reliability, and resiliency has never been more important as increased distributed generation and more frequent severe weather events threaten American safety and economic security.

Some parts of energy infrastructure, such as a small part of the U.S. electric grid, predate the turn of the 20th century. Most transmission and distribution lines were constructed in the 1950s and 1960s with a 50-year life expectancy, and were neither engineered to meet today’s demand, nor designed to withstand severe weather events. With more than 640,000 miles of high-voltage transmission lines across the lower 48 states, the power grid is being pushed beyond capacity, resulting in questions about the ability to continue to deliver affordable, reliable power. In the decade preceding 2012, weather-related outages alone cost the economy between $18 and $33 billion a year. But the momentum for innovation in our energy infrastructure presents an opportunity to improve energy productivity.

With that in mind, the Alliance held a briefing on Capitol Hill on March 16 to hear from stakeholders at Southern Company, Schneider Electric, American Water, and the National Governors Association about these less-understood aspects of our infrastructure system. Through this dialogue, attendees learned that any policy blueprint for tomorrow’s infrastructure must also incorporate the roles of buildings, transportation, water, and the grid.

In this first blog post in our infrastructure series, we examine two key areas of tax policy and financing that can help achieve these goals.

Preserving Municipal Bond Tax Exemption

Interest on municipal bonds issued by state and local governments to finance infrastructure projects have generally been exempt from federal and state taxes. The $3.8 trillion municipal bond market has financed almost 75 percent of all core infrastructure in the U.S., including projects to update grid reliability and efficiency. By allowing power companies and other entities to make integral infrastructure investments in this way, we help keep electricity service affordable and help communities keep up with an increasingly complex energy sector as more distributed energy resources come online.

On February 21, a coalition of 375 businesses, utilities, and associations sent a letter to House leadership stating that a reduction or elimination of the tax exemption for municipal bonds could raise infrastructure costs by 10 to 12 percent. On March 10, a bipartisan group of 156 U.S. representatives signed a letter advocating for the preservation of tax-exempt municipal bonds. The letter noted that the bonds had funded more than $1.9 trillion worth of infrastructure construction since 2005 for water and sewer facilities, utilities, and public transit, among others, with over $400 billion in infrastructure spending supported by the bonds in 2015.

It is evident from the widespread, bipartisan support for, and taxpayer dollars saved by, the tax-exempt status of municipal bonds that Congress and the Trump administration must think long and hard about the importance of these bonds in infrastructure investments when considering tax reform.

Leveraging Qualified Energy Conservation Bonds to Spur Investment

Qualified Energy Conservations Bonds (QECBs), created in 2008 under the Energy Improvement and Extension Act, are used by state and local governments to finance various energy projects. In 2009, as part of the economic stimulus package, Congress boosted QECB allocations from $800 million to $3.2 billion. So far, the most popular use of QECBs has been energy efficiency, dominating 67 percent of bond issuances. This indicates a level of appreciation municipalities have for investments that pay for themselves in savings. But as of August 2016, only 40 percent of those bonds were issued, leaving almost $2 billion in funding on the table. Many local governments are unaware of this potential resource.  When the Energy Program Consortium contacted local governments to ask why bonds had not been issued, over a third of respondents reported that they were unaware of their QECB allocations. To contribute to a modernized energy system, states must be aware of these opportunities to innovate in their local communities.

Although other barriers to financing continue to challenge state and local policymakers, it is critical that state and local governments encourage the uptake of financing mechanisms that encourage the infrastructure investments taxpayers need to save money and use energy more wisely. With an investment gap of $177 billion between 2016 and 2025 for electricity infrastructure, every dollar really counts.