Tax code incentives are an important federal policy tool for stimulating investment in targeted sectors. Unlike direct grants, which are fully scored upfront, or federal credit, where the present value of the interest subsidy and/or default risk is scored when the loan or guarantee is obligated, the tax expenditures (foregone Treasury revenues) associated with tax code measures are scored annually. This spreading of the fiscal impact produces a better alignment of costs and benefits associated with long-lived infrastructure investments, and it effectively enables quasi capital budgeting at the federal level.
Over the last decade, Mercator has worked with several public agencies and trade organizations in advancing tax code incentives to help finance critical infrastructure. One of the most promising proposals—especially in an era of constrained grant resources—is qualified tax credit bonds.