Costs Mount for Delaying Infrastructure Overhauls

Jonathan D. Miller

Both presumed Presidential nominees have decried the state of the nation’s infrastructure and say they want to fix it. Donald Trump aptly characterizes US transportation networks as “an embarrassment” compared to other parts of the world, and Hillary Clinton pledges to bring our public works systems into the 21 ^st century. But so did President Obama, who ran into an implacable Congress which has shifted the spending burden down to hard-pressed states and cities and encouraged one-off public-private partnerships for projects, which don’t change the ultimate cost equation. Our  infrastructure problems extend not only to traffic clogged roads, inadequate mass transit and airports,  but also to sewer and water systems, dams, and the electric grid—all are outmoded and in various stages of decrepitude. The costs for modernizing add up into the trillions of dollars. Doing nothing risks stunting economic growth, potential crises, or disasters—what happens when power systems shut down or a dam bursts? Is Katrina only a distant memory for New Orleans? But essentially nothing is what we have been doing for the past two decades—because the short-term costs fall on all of us, and the anti-tax, small government crowd has blocked necessary initiatives like raising the gas tax or creating new user fees. Real estate players should be major proponents and supporters of funding infrastructure overhauls and improvements. What’s been hotter than transit-oriented development in recent years? Good roads are essential to propping up real estate values and water, or lack of it, is becoming a huge development issue in increasingly parched parts of the West and in Florida, where salt water infiltration threatens supplies. Airport and port facilities drive commercial activity, which underpins real estate growth. And who wants to live in places where sewers start to back up? But then who pays gets in the way of rational policy. In the end, it’s the taxpayer who must bear the cost for infrastructure improvements. Real estate as well as most business interests have lobbied their pocketbooks out, seeking wherever possible to limit their tax exposure to help maximize profits and gains from projects and investments. Carried interest, stepped up depreciation, 1031 exchanges, mortgage interest deductions, and a slew of various loopholes help pad returns and limit tax liabilities. Trump refuses to release his tax returns, some observers suggest, because they would show how little he pays thanks to various perfectly legal tax dodges enacted by business friendly legislatures (comprised of elected representatives who receive beaucoup campaign contributions from monied interests). Where real estate owners feel increasing tax pain is at the property level—rising property taxes are a direct result of local communities finding themselves pinched by reduced funding from state and especially federal sources that used to pay for roads, sewers, and water lines, but no longer can be counted on. In places where residents just can’t afford the higher tax bills, move-outs just accelerate local decline, evident in unrepaired streets and faulty systems—Flint, Michigan is the poster child. Most major cities just cut corners. Washington DC now requires a total makeover of its 40-year-old Metro and New York struggles to maintain basic service as subway ridership grows—both need major federal infusions of aid—and disruptions to local economies and the impacts on real estate values could be considerable without it. As just one example, all those recent real estate plays in Williamsburg, Brooklyn have lost a touch of luster in the wake of the pending closure of the L-train line into Manhattan for a two-year repair of an ageing, storm-damaged tunnel.  This hot neighborhood will cool down fast when nobody can get to it or out of it by convenient mass transit. Delaying infrastructure investments means paying a higher price in the future with greater risks and lower rewards in the meantime. Is anybody in the investment savvy real estate industry volunteering to pay higher taxes to help fund infrastructure now?