Breaking down tax reform, what’s ahead for infrastructure

The following transcripts were edited from two concurrent discussions at this year’s Pit & Quarry Roundtable & Conference.

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P&Q: What is your reaction to the Tax Cuts & Jobs Act, and what impact do you anticipate the tax reform bill to have on your business? Additionally, considering the Tax Cuts & Jobs Act will reportedly decrease federal revenue by $1.5 trillion over the next decade, how optimistic are you about the prospect of Congress and the president coming to terms on some sort of federal infrastructure package this year? What are your feelings on the current political environment in Washington? Is the environment conducive to getting business done?

Brendan Devereaux (HAMM): What we should all be optimistic about is our industry’s efforts to get something done. We’re starting to be a driving force in the process. But I have some skepticism about getting something done.

To be quite frank, it’s going to take compromise, which has somehow become a pretty dirty word. But we’ll be optimistic. Our industry will probably continue on the path we’re on, so it gives us more optimism for the future.

Alton Hudson (Trimble): I participated for the first time in the NSSGA event (the inaugural Legislative & Policy Forum). We were on the Hill and we visited all of the Texas delegation. There was not a lot of interest in anything associated with taxes – not one bit.

Hal Williford (Memphis Stone & Gravel): I’m optimistic that the president talked about [infrastructure] in the State of the Union address. It was one of his hot topics. It’s great that that’s out in front of the American public and maybe something can get done.

Scott Alexander (ACG Materials): I’ve been up on the Hill many times for several years. I used to feel that going up there and speaking to our elected officials was a good thing. But this last visit, which I participated in as well, I kind of left there feeling people were listening to us.

They understood the need for more infrastructure spending. But at the same time we were getting a strong message because of the partisan politics being stronger than ever. There’s a pessimistic outlook in terms of anything happening because there seems to be a big wall trying to prevent the current administration from having any accomplishments, even though it’s recognized that there’s a strong need for our products and growth in the construction materials industry.

Everyone is well aware of how far behind we are on keeping up with our current infrastructure system. If you talk to any of the politicians individually, they would, regardless of the party, be in support of it. But, again, because of their affiliation, they seem to be preventing any forward movement there.

Alexander Kanaris (Van Der Graaf): I’ve seen both sides from the Canadian side and the U.S. side. There is a great need for infrastructure and also touching on mostly immigration. From our side, we have a very hard time finding skilled people. There are a lot of people looking for work, but nobody is qualified to do the work we want them to do. Infrastructure and immigration reforms are needed. We don’t have that on the Canadian side, and we feel the effects. We hope here in the United States things like this will change.

Gary Hirsch (Bramco-MPS): I think one of the things we’re going to see out of this tax reform [bill], which is going to be huge, is reducing the corporate tax rate from 35 percent to 21 percent. It’s going to lead to a higher level of foreign investment and other countries investing in the U.S. with facilities. This is going to demand structures to be built and aggregate to be produced. I think we’re going to see that. It’s not going to happen overnight, but I think over the next couple years we’re going to see a lot more of

that.

Kanaris: I am very positive that we will see that. We have already started considering that our tax burden is going to be less. We’re also trying to reduce the price of our products, and that’s all due to the tax benefits we’re going to be enjoying.

Kevin Cadwalader (REMco): In reaction to the tax cuts, I think overall it’s going to be good for business. When you look at all of the construction materials that are used, because these companies are able to recreate funding they would otherwise never bring home – I mean, you’re not going to bring home profits from overseas and get punitively taxed, right? So by lowering that, companies like Apple and others are really pushing to do other things and announcing huge investments. That’s going to draw a demand for aggregate because they’re going to be building facilities and so on.

When this money comes in, they’re going to put it to work. If you look back at the stimulus some years ago, our government spent billions of dollars trying to stimulate the economy. This is going to stimulate the economy, and it cost the government nothing because this money wasn’t coming anyhow.

Williford: If you sat down 95 percent of Congress in your living room and had a conversation with them, they would all agree we need to increase funding, yet they can’t come to an agreement on that. It [requires] a bipartisan effort, and it ought to be something they are able to agree on. A lot of it is having the political courage and finding the funding.

Paul Ross (Douglas Manufacturing): The bottom line of the tax cuts for us is we have a lot of hourly wagers. When we get those tax tables uploaded into the system, we’ve gone through every single one of them to see how their net take-home pay is actually affected. You do have a significant number of people who add $50 a week to their net take-home pay, and that’s a really big deal. And what they do with it is anybody’s guess.

The infrastructure bill, meanwhile, is going to come down to compromise. I read one article about a tunnel in the Northeast that they’re saying should have been shut down five years ago. They said it was paralyzing the economy in the Northeast because people can’t get to work. When you get to those major metropolitan areas, it’s a huge deal.

When I drive outside the country, I’m astonished that the infrastructure is better in developing countries in some respects than it is in California. I rent a car in California and I get the insurance because I’m not sure if my axles are going to get worn off. Texas, to its credit, has done a wonderful job managing the state. They are a shining example to the rest of us about how to attract business, how to manage your infrastructure and how to get things done.

Still, it doesn’t mean they don’t have traffic problems. Austin is terrible. It’s growing so fast.

But back to tax reform, and the take-home pay is the biggest single deal. The money that was supposedly saved by reducing the tax rate will go directly back into equipment purchases because the depreciation schedule has changed. It’s doubled, which is a lot more money than most of these companies will actually spend on capital equipment. Some companies are big enough to take advantage of that and reinvest in people as the next big thing.

Brian Hollrah (Alleyton Resource): It’s excellent that the corporate tax rate went down. The one piece that I’m a little skeptical about is the changing of the deductions, because now there’s less incentive to buy a house and get a mortgage interest deduction. When people realize that they’re just using the standard deduction versus itemizing, it’s going to be interesting to see what actually happens. Are people going to rent more instead of buy? That leaves it to be determined.

Kanaris: Seventy-five percent of what the government collects goes into entitlements and social problems. You just don’t have enough to put money into other areas. So this is going to require a balancing act because. Everybody likes to have candy, but nobody wants to go to the dentist. The time has come that we must to do some of the dental work.

John Garrison (Superior Industries): Tax reform is going to be great for people to take that money and reinvest in equipment. As an industry it’s very impressive that we’ve recovered to the point we have without any support from the federal government.
For everybody that went to Washington [last September], I left there shaking my head because everybody says, ‘Yes, this is the right to do.’ But everybody says there is no way that’s it’s going to get done. So as far as optimism for something to get passed, even if it does get passed it’s not going to be enough.

Unfortunately, I think it’s going to take another bridge collapse or some horrific event to bring enough attention to it. Everybody in our industry needs to educate people on this view because I know in Michigan we have some of the worst roads I’ve ever driven on. It’s impressive to go somewhere like South America and see that their roads are better than ours. It’s actually a little depressing.

Alexander: I think we’re going to see more of the public-private partnerships out of necessity. There are a lot of people who don’t like to pay tolls, but that’s had limited success in the country so far. I think you’re going to see more of it as the states recognize they’re not going to get the support from the federal government that they need. So they’re going to be forced to look at other methods.

Mike Johnson (NSSGA): When we look at an additional $1.5 trillion in debt that we incurred to do this tax bill, that is money that we don’t have to go to infrastructure investment. So as an industry, again, partnering with the Chamber [of Commerce] and partnering with the truckers, we’re going to have to continue to push members of Congress to make a revenue vote to find the money they need to do infrastructure investment.

I think it’s possible this year, but it’s going to take a real concerted effort on the part of the business community – not just those of us who make construction materials or who build things with those materials, but the people who use the infrastructure are really going to have to step up their attitude to members of Congress to get them to take a vote that none of them want to make. It’s also going to take leadership out of the White House.

Pat Short (Cornejo & Sons): Funding for us in Kansas is probably kind of unique at the state level. We’ve got our own crisis, if you will, and I think we’ve got to get through that as a state before we really see some benefits from a federal infrastructure bill.
We’re probably less optimistic than most in 2018. Certainly, the federal infrastructure bill would take care of all of the state-level purchasing before I really see some optimism there.

Mike Levan (Okada America): We’re kind of new to the association (NSSGA). We deal more with equipment dealers and rental companies at this point.

We see a great sense of optimism because of the tax cuts. I deal with the rental companies – smaller companies, smaller dealers and some of the larger manufacturers. There seems to be a great sense of optimism that the tax cuts are going to be a positive.

Some of the contractors I deal with are on roadway utility. There seems to be a great sense of optimism there. They already have more backlog than they had in a number of years, and it’s affecting us. We’re ramping up in some of those areas. To prepare, we’ve added some people, inventory and parts.

P&Q: Now that we have a tax law passed, consumer confidence will likely go up. That will help buying habits in 2018. Certainly, there’s going to be a change and some trickle-down effects?

Johnson: Yeah, it can. I mean, the problem right now is if you look at the national polling on the tax reform measure that was just passed, most people in the country don’t believe that it’s going to positively impact them by a large margin.

We need presidential leadership. We need a consistent strategy among the Republicans and Congress to go out and talk about this in a big way; to say this is a good thing, this is how it’s going impact you.

Jeffrey Gray (Telsmith): I guess the intent of lowering the corporate tax rate is to help us be competitive globally, too. That’s probably something we’re not really saying here. We compete as domestic manufacturers against imports.

Jarrod Felton (Superior Industries ): It’s definitely going to impact people’s decision on where they expand their capacity. Will you put your plants in Ireland or will you put your plants in Iowa [The tax bill] will have an impact on where the next one goes. On the corporate side, it’s very impactful. It will drive things for several years on where the corporations decide to put additional capacity. Now, they have to get people to cough up several trillion dollars to fix the infrastructure. I think it’s a very low probability that they’ll get it done, because it’s a difficult thing. They made something that was very easy look really difficult.

[Congressmen consider] is it good for my party or is it good for their party? Can we give up a win or do we have to be obstructionists? During the State of the Union, they (Democrats) wouldn’t applaud. Some folks in the room wouldn’t applaud very positive things. Why? Because it would give President Trump a win. They can’t afford any tailwind for him.

So as long as there’s that partisan politic game, which looks like it’s inevitable, we’re on our own. It’s really what we make of it.

Johnson: When you poll this kind of stuff and talk to members of Congress, there’s huge bipartisan support for the concept. When you get into how to pay for it, that’s when everything gets difficult.

We got Congress to make walking and chewing gum look near impossible, but this year with the Republicans and the situation they’re in with the numbers looking as bad as they do on holding the House majority – and what should be an amazing year for them to poll and pick up Republican Senate seats – you have 10 Democrat senators up for re-election. I think eight of those are in states Trump carried.

So you have a unique opportunity, it would seem, to maybe even get to 60 votes in the Senate, which is the magic number. But it’s not working for them right now. The poll numbers aren’t there. Increasingly, as we get closer to the [midterm] election, they’re going to feel like they need something that’s demonstrable, something where they can say, ‘We can govern, we can make this work.’ People aren’t buying tax reform. Really, was that the solution?

I think what you’re going to find out is that our traditional allies who typically are easier to get on infrastructure spending votes may not want to cast the votes. They want to help the majority parties hold their majority. So the politics piece that will come into play again would be pushing a different type of Congress to do something that we had before.

But, that’s what gives me the optimism. I think they’re going to come up between a rock and a hard place. People are going to say, ‘You’ve done nothing meaningful.’ They’re going to want to have something to show.

The other thing out there when you talk about corporations and factories and new building: Yeah, the tax cut helps. We went from 35 to 21 [percent]. Ireland is still at 13, right? So there are other countries with lower corporate tax rates. You couple that with the fact that they also have higher rated infrastructure. I mean, the United States has fallen to 10th in the world overall. You get into the specific modes of infrastructure and we’ve fallen even further.

You can talk to the folks at the Chamber of Commerce who are out there trying to bring business in, and they’ll tell you one of the key factors that will inhibit somebody from making a decision to come here rather than going someplace else is infrastructure.
Caterpillar is a great example. Cat stayed in America and manufactures in America, but they have to ship a lot of what they make in pieces into Canada where they can get it onto a container ship to send it overseas. It’s because the infrastructure they can take advantage of there is better than what they have here.

We just haven’t kept up with infrastructure to keep us competitive or encourage major manufacturing companies in the United States.

And that’s before you even get to the workforce issues – not just availability, but the cost of the workforce is so much higher than it is almost everywhere else in the world. Infrastructure, looked at the right way, backs an economic incentive that helps to get it done.

P&Q: Is the Trump infrastructure approach realistic or practical, or is it pie in the sky?

Johnson: It’s awfully difficult to figure out how $20 billion a year – so $200 billion over 10 years – gets you to $1 trillion over 10 years. I don’t know how that incentivizes enough to raise 80 percent of what you need from either states raising revenue or from public-private partnerships. There’s going to be more money in the game.

I don’t think there are many members of Congress who want to see the traditional federal role in infrastructure turn on its head, going from 90 to 10 [percent] on interstate highways to 20 to 80. That’s a huge change.

Reddin: I’ll put a plug in that’s a little bit more optimistic about the short-term impact. I think that the manufacturing side here could expect throughout the year a mentality of, ‘Let’s go make that big purchase, because we get to deduct that purchase through the new bonus appreciation rules immediately’ – not over five or seven-plus years like we were doing before.

So just the financial implications of that short-term [impact], coupled with the optimism for ‘do we get on that infrastructure when the stock market is doing well, consumer confidence is doing well?’ I think there are going to be a lot of financial decisions this year where the trigger is pulled just because of economics of the short-term write-off associated with that.

I think it’s going to shake mergers and acquisitions, which is where I work, because now acquirers can take the purchase price that they pay for something and take the component of that that’s allocated to plan for the equipment and depreciate it immediately in your world.

Companies that own businesses that are maybe non-quarry, that are C corporations, have never sold because of the comparable negative tax implications. Now, they have a much different tax situation. I think we’re going to have an active merger and acquisition environment in the next year.