Asked to handicap what’s ahead for federal legislation affecting construction equipment markets, Star Wars’ Jedi Master Yoda would likely respond, “Clouded, the future is.” He’d be right.
First, there’s the uncertainty created by the 2010 congressional elections. As of this writing, the Democrats are in big trouble. Despite the fact that Ds have strong majorities in the House and Senate, both are “in play” this year.
Democrats currently control 59 Senate seats, while Republicans have 41. To take the Senate, the GOP needs to win every competitive Democratic seat that’s up this year (Illinois, Nevada, North Dakota, Arkansas, Delaware, Indiana, Pennsylvania, Colorado, Wisconsin, Washington and California) and successfully defend all competitive Republican seats (Kentucky, Ohio, Missouri and Florida). Based on current polling (which changes almost hourly), if the elections were held today, the next Senate would have 51 Democrats and 49 Republicans. Democrats will still likely control committee gavels and the chamber’s agenda, but Republicans will see their influence surge and will have much stronger hand in shaping policy.
On the House side, the GOP’s prospects look even better. House Democrats currently control 255 votes to the Republicans’ 178 (two House seats are vacant). To win, the GOP needs to pick up 39 more seats. According to pundit extraordinaire Charlie Cook, 43 Democratic seats are toss ups (where either party’s candidate could win) and 29 races for Democratic seats “lean Democrat” (where Democratic control is in doubt). In stark contrast, only three Republican-held seats are toss ups and only three are rated as “lean Republican.”
The math, atmospherics and momentum favor the GOP. Among other things, Republicans have led in congressional generic ballot polls all year (as the Democrats did in 2008) and GOP turnout in primaries has surged this year to exceed Democratic turnout for the first time in 80 years. It all adds up to a reasonable presumption that Republicans will control the House next year (albeit by narrower margins than the Democrats currently enjoy). So what does it all mean for legislation that affects equipment markets?
SAFETEA-LU, the most recent federal highway law, expired on Sept. 30, 2009. Since then, money for road and bridge construction has continued to flow thanks to a series of short-term extensions (the most recent runs to the end of 2010). The highway reauthorization bill is critical to equipment markets because it establishes a predictable, multi-year blueprint for federal surface transportation spending. A study conducted on behalf of the Associated Equipment Distributors (AED) in 2008 found that each dollar of highway spending creates 6.4 cents in equipment market opportunity (equipment purchase, rental, leasing and product support).
The federal government currently invests about $40 billion per year in roads and bridges. In order to address deteriorating infrastructure, worsening traffic congestion and increased safety risks from road conditions, AED and allies are working to substantially increase highway investment during the current reauthorization cycle.
The political shift on Capitol Hill will impact the highway debate. Infrastructure advocates will no doubt encounter challenges from new Tea Party Republicans, who have expressed hostility to government spending and federal taxes on the campaign trail. The challenge for our industry will be to help these new members of Congress understand that there is a difference between investment in long-term infrastructure and wasteful spending, just as there is a difference between taxes and user fees like the federal gas tax (all of which is spent on transportation programs).
Some of the uncertainty surrounding the federal road program will be resolved shortly after the elections, when Congress meets for a “lame duck” session to consider a handful of must-pass bills. At the top of the list is a continuing resolution to keep the government running into early next year (in light of the fact that Congress has failed to finish a single appropriations bill this year!) Another must-pass priority is a further short-term extension of the highway program.
Among the open questions “clouding” the future: How long will the next highway extension be, and will Congress use the bill as an opportunity to pump more money into infrastructure in 2011, as President Obama proposed on Labor Day?
Whatever happens in the lame duck, the good news is that we’ve gotten signals that Republicans, particularly in the Senate, are anxious to hit the ground running with the highway bill early in the next Congress. Look for Sen. Jim Inhofe (R-OK), the senior Republican on the Senate Environment & Public Works (EPW) Committee, to become the leading force in the debate. Inhofe’s conservative credentials are beyond reproach and he’s an unabashed supporter of increased infrastructure investment. He can become the bridge between Republicans and Democrats on Capitol Hill and the Obama White House (which apparently plans to make highway reauthorization a top priority next year).
If the stars align properly and the industry stays engaged, it’s not impossible to think that a multi-year bill increasing highway and bridge investment could be done by next September. If it’s not, it’ll mean trouble because the legislation (and related funding issues) could become a political football heading into the presidential primaries.
According to a 2009 survey of National Utility Contractors Association (NUCA) members, each dollar invested in sewers and drinking water systems yields 12 cents in equipment market opportunity (almost twice the impact associated with a dollar of highway investment). That means the equipment industry also has a big stake in the outcome of the ongoing debate over federal water infrastructure.
Because the overall investment amounts are lower (the federal government is likely to spend just $3.2 billion in water systems next year, less than 10% the amount that will be invested in highways), legislation to increase investment has been less controversial than the road bill. In fact, legislation to significantly increase sewer and drinking water construction spending passed the House and was reported by the Senate EPW Committee in the current Congress. The Senate bill would authorize $35 billion for drinking water and sewer construction over five years, which would create $2.28 billion in new market opportunity for the equipment industry between now and 2015.
Whether a water bill will be completed during the lame duck (perhaps as part of the continuing resolution) or next year remains to be seen. However, in addition to direct federal funding through grant and loan programs, another way to increase water infrastructure investment would be to remove the cap on Private Activity Bonds (PABs), allowing municipalities to float more tax free bonds. The Environmental Protection Agency estimates that this minor policy change could generate up to $6 billion in new private capital spending. AED estimates this additional investment would add $720 million annually to equipment markets. Legislation during the lame duck to extend some or all of the Bush tax cuts (and other expiring tax provisions) could provide a vehicle for language eliminating the PAB cap.
Tax Incentives for Equipment Purchasing
There’s also enormous uncertainty surrounding the U.S. tax code. Unless Congress acts during the lame duck, dozens of tax provisions expire at the end of the year, which is making it difficult for businesses to plan. Additionally, the estate tax will return on Jan. 1, 2011 with a $1 million exemption and a prohibitive 55% top rate, which will put further pressure on the capital-intensive family business-dominated construction industry.
But with the uncertainty, there’s a sliver of good news. Prior to adjourning in September, Congress sent President Obama legislation that creates powerful new incentives for equipment purchases and addresses credit challenges that have plagued many construction industry firms (AED estimates $1.2 billion in lost equipment sales over the past two years because contractors were unable to obtain financing). Among other things, the small business tax and credit bill signed by President Obama on September 27:
The future may be cloudy, but one thing’s for certain: If individuals in the business community and equipment industry don’t stay politically engaged, the prospects for accomplishing our priorities will be even dimmer. Learn more about the issues and how to get involved at http://www.AEDaction.org.
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