I noticed on the site for HR 8127 that a CBO Cost Estimate for the bill hasn’t yet been done. Not surprising considering it’s still in an early stage of the process.
If or when a cost estimate is done, presumably there’ll be some review by CBO’s Joint Committee for Taxation (JCT) for any impact on federal tax revenue that the proposed WIFIA amendments might have. The tax revenue impact comes from JCT’s assumption that when WIFIA makes a loan for 49% of the cost of a public-sector water project, the project will issue tax-exempt bonds (which wouldn’t have been issued otherwise) to finance some, or all, of the 51% balance.
Recent JCT Tax Revenue Cost Estimates
In the America’s Water Infrastructure Act of 2018 (S 2800), the tax revenue hit to WIFIA due to assumed tax-exempt issuance was $2.6 billion over ten years — much higher than the program’s discretionary appropriations for the period. From my analysis of the numbers, it appears that JCT made the maximum assumption that every $49 of WIFIA lending will result in $51 of tax-exempt bonds. Based on WIFIA’s actual loans to highly rated public water agencies for essential, non-optional projects, this is almost certainly wrong. In fact, the opposite assumption that WIFIA loans displace tax-exempt bonds if far more consistent with the program’s results to date. Here’s a post I did at the time: Yes, Get WIFIA’s Budget Scoring Right. Underlying analysis here — The Economic Cost of WIFIA’s Current Loan Portfolio Part 2: Federal Tax Revenue Impact — and a one-page letter, Letter to JCT on WIFIA Assumptions.
JCT also scored the Infrastructure and Investment Jobs Act of 2021(HR 3684) about $1 billion cost for tax-exempt issuance assumed to be caused by grant funding to SRFs. It was assumed that SRFs would leverage the additional capital with tax-exempt bonds. While this is a plausible — and arguably hoped for — outcome, it doesn’t reflect the long-standing reality that few SRFs consistently use leverage or that they might borrow from SWIFIA instead, which has no tax revenue impact. Here’s a post on that: WIFIA Loans to SRFs Will Pay for Themselves.
What I did not see in the CBO/JCT cost estimate for the IIJA is any reference to a tax revenue impact of the $75 million funding for the Corp’s WIFIA section, CWIFP. I could be missing something — perhaps the correct estimate is elsewhere? But if not, it raises a question about why this additional funding for WIFIA loans doesn’t have the same type of tax revenue impact that JCT assumed for other WIFIA spending in S 2800. It’s possible that the funding amount and potential impact was simply immaterial in the context of the giant IIJA — CBO/JCT would have had plenty else to do. However, if JCT consciously decided that CWIFP loans have a different tax revenue impact than other WIFIA loans, what was the basis of their decision? The $75 million will be used to support loans for rehabilitating dams owned by “state, local government, public utility, or private” entities and any federal ownership is disqualifying. Based on ownership, and the program’s minimum investment-grade standard and public sponsorship requirements, a lot of CWIFP projects should in theory be able to issue tax-exempt bonds. A CWIFP loan is generally limited to 49% of project cost, so 51% will need to be financed elsewhere, just as in typical WIFIA loans. Perhaps JCT is assuming that CWIFP dam projects, even if creditworthy, will be more idiosyncratic and complex than typical WIFIA water system projects, and hence more likely to seek capitalization (state grants or loans, P3 equity, etc.) outside the tax-exempt market. That assumption likely reflects reality to some extent — certainly more so than JCT’s overall assumptions about other WIFIA loans.
Tax Revenue Impact of 55-Year Term Amendment
With the above background, there are a few points to consider in anticipation of CBO/JCT’s cost estimate for HR 8127.
The only item in the bill that would seem to affect future spending is the amendment in Section 6 that authorizes unspecified appropriations for CWIFP for 2022-2026. I don’t know how CBO looks at this, but with regard to the tax impact of possible increases in CWIFP funding, I would guess that JCT will take a view consistent with IIJA scoring — it’s either immaterial or CWIFP loans do not cause more tax-exempt debt to be issued. But not necessarily — it’ll be interesting if they take a different position for HR 8127.
The FCRA amendment and other clarifying items about small communities, eligibility for transferred and congressionally authorized projects, and collaborative delivery will likely accelerate CWIFP applications — and maybe even add a few to EPA’s WIFIA program. But I don’t think these will have either a spending or tax impact since they don’t change the level of authorized appropriations.
The maturity date amendment in Section 5 will probably be seen by CBO/JCT in the same way — that it affects only program utilization but not spending or tax impact. But I think that is not quite correct. This is because the 55-year maximum term will apply to EPA’s WIFIA loans (which JCT has assumed will cause more tax-exempt issuance), not just CWIFP (where they apparently don’t). Currently, WIFIA loan terms aren’t that different from those for bonds in the tax-exempt market, regardless of project useful life. But for long-lived projects, a 55-year WIFIA loan at UST pricing will be significantly different than a 30-year tax-exempt muni bond. A highly rated public water agency financing an essential long-lived system (e.g., pipe replacement) might decide that a WIFIA loan with a 35-year term was not worth the effort and to go with 100% muni bonds to finance the project. A 55-year WIFIA loan could change their decision to a 49% WIFIA/51% muni bond mix — in effect, the WIFIA loan’s longer term is causing tax-exempt issuance displacement. And that results in more, not less, federal tax revenue.
The same concept would apply if a limited buydown amendment is added to HR 8127. There is no equivalent to the limited buydown in the muni bond market, and the usefulness of the feature might prompt water agencies to opt for a WIFIA loan instead of bonds. There’s a general principle here, I think — for EPA WIFIA’s highly rated public agency borrowers, the more non-market features a WIFIA loan has, the more likely it will be used to displace tax-exempt market bonds. This is already demonstrable from WIFIA’s success to date with the post-execution construction rate lock and reset, features that allowed the program to compete head-on against muni bonds right from the start. Adding more features will augment this competitive advantage, increasing tax revenue while providing financing that should improve US water infrastructure.
I don’t know the protocols behind a congressional request for a CBO/JCT cost estimate on a bill. But if it’s possible to request a specific focus, that might be worth doing for HR 8127 with respect to the tax revenue impact of the 55-year term. At least it would surface JCT’s underlying assumptions about WIFIA and CWIFP, and perhaps they’ll be open to revising their models to incorporate WIFIA’s actual results to date and take a more data-driven approach going forward. At best, the cost estimate for HR 8127 might include revised estimates of tax-exempt issuance for WIFIA altogether, a negative overall cost for the bill, and positive implications for future infrastructure loan program development.