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AAA estimates that 41 million Americans will travel for the July 4 holiday, including 34.8 million who will travel by car — the highest numbers since before the recession put a damper on holiday travel. Those travelers stuck in traffic bottlenecks may wonder why our government — you know, the one we fought the Revolution to have — can’t provide something as basic as roads and bridges that meet our needs. Infrastructure experts are also wondering that, and in fact, the American Society of Civil Engineers has given the U.S. infrastructure a D+. Now things are about to get worse because, once again, some lawmakers refuse to raise revenue to pay for anything.
Most federal funding for highways comes from the federal Highway Trust Fund, which will face a shortfall starting in August because Congress has not adjusted the 18.4 cent per-gallon gas tax and 24.4 cent per-gallon diesel tax, which are not indexed for inflation, since 1993. The fact that they have not been increased to keep up with the rising costs of construction or adjusted to account for reduced fuel consumption now means that these taxes no longer raise enough money to fund our infrastructure needs.
The straightforward solution would be to raise the fuel taxes, a reform that ITEP has called for before. As usual, many lawmakers oppose this simply because they oppose any and all tax increases even to fund something as basic and popularly supported as highways. Some lawmakers have turned to gimmicks that do not actually raise revenue, which CTJ has criticized.
If lawmakers cannot bring themselves to provide the most obvious solution, an increase in fuel taxes, a second best solution would be to raise revenue by closing corporate tax loopholes. It would be impossible for corporations to profit if the U.S. did not have the roads, bridges and other infrastructure that makes commerce possible, so it’s only reasonable that they pay some taxes to support the federal government and it’s reasonable for Congress to close loopholes allowing corporations to shirk that duty.
Two proposals introduced in Congress recently would raise $19.5 billion for the Highway Trust Fund by closing the loopholes that allow corporations to “invert.” In an inversion, an American corporation reincorporates itself abroad and claims to be a foreign company that is mostly not subject to U.S. taxes even if it is still managed from the U.S. and conducts most of its business in the U.S. There are many more corporate tax loopholes that must be closed, and much more Congress needs to do to provide adequate infrastructure funding. But it certainly makes sense to start by stopping the worst corporate citizens from avoiding taxes.
The existing tax rules prevent an American corporation from simply reincorporating itself in a tax haven and declaring itself “foreign.” But a loophole allows inversions to take place when an American corporation merges with a smaller foreign corporation, even if the management and most of the business of the newly merged company stays in the U.S. In theory, the profits that any corporation (even a “foreign” corporation) earns in the U.S. are taxable in the U.S., but inversions are often followed by earnings stripping, which makes U.S. profits appear to be earned offshore where they won’t be taxed.
A proposal to close this loophole was first put forward as part of President Obama’s most recent budget plan and was introduced in Congress following the recent news of Walgreens, Pfizer and eventually Medtronic all pursuing inversions over the last several months.