Between the trend lines
The big news this week is the Biden administration’s $2.3 trillion package to boost post-pandemic recovery and address infrastructure needs, like deferred maintenance on roads, bridges, and ports. “There is more negotiation ahead, but the broad strokes are the solutions that are required right now for this economy,” says AIA’s Chief Economist Kermit Baker, Hon. AIA. “If you had to pick a topic to find consensus across party lines, infrastructure would be at the top of the list. How it’s defined and paid for is another story though.”
In the following interview, Baker offers context to this development and some of the ways it could impact architects.
Why does this infrastructure plan matter?
The Biden administration has come out of the gate strong with a big number to cover an ambitious program. The controversy has been about two things. The first is there is a lot in there not traditionally defined as “infrastructure,” and the second is about how we’ll pay.
But before we talk about that, we have to talk about the plan itself. One, it deals with infrastructure and transportation. This is traditional and central to the entire $2.3 trillion proposal. Two, is broadband and clean water. This is also traditional. Both of these come to about $1 trillion, or less than half the package. Third is jobs, innovation and worker training. This is usually found in jobs or energy packages, rather than an infrastructure package, so it’s less traditional but makes sense within the context of the sweeping plan. Fourth, is in-home health care and extending Medicaid. Again, not very traditional. The fifth is really what architects do: homes and buildings, both new and retrofitted.
This plan is ambitious in its scope and is part of a continuum of sweeping physical and social infrastructure plans in the 20th century, but why now?
Infrastructure has been talked about for a long time. It was a priority during the Trump administration and now has become one for the Biden administration. It’s been kicked around for a while, this idea, and it comes down to the fact that we just haven’t invested as well as we should have in infrastructure. And that shows up when our economy doesn’t work as efficiently as it should. Now is also a good time to borrow money, so that’s a factor. Lastly, now that we’ve passed the third major stimulus package, there is an idea that we need to lay the groundwork for future stability and growth. A lot of what’s in this package has a fairly long fuse, so there’s a lot of years ahead.
One thing you can measure, and it’s not a traditional indicator, is the construction supply chain, which is having a lot of problems. It’s hard to get products to the worksite for a lot of reasons. But some of the money in this plan is going to ports to try to address issues there, for instance. So bottlenecks clearing up seem like a good, obvious signal that the plan is working.
One of the plan's proposals is to build, preserve, and retrofit more than 2 million homes and commercial buildings. How does this figure relate to what we build, preserve, and retrofit annually as a nation?
Architects have long demonstrated an interest in clean energy and a lot of the other aspects of the bill. But, in looking just at the buildings aspect of it, it’s $400 billion of the $2.3 trillion spent over eight years. That’s $50 billion a year for that term, and on the building side, that’s 3 or 4 percent of the retrofit market. For homes, it’s $30 billion a year, or about 5 percent of the homebuilding and remodeling market. So we are talking about a lot of money and opportunity here. Based on this and the other aspects of the bill, Dodge updated their forecasts from 4 percent growth on average for the next few years to 5.5 percent over the next few years.
How will the corporate tax rate increase associated with the plan affect architecture firms?
This is a good question. Ninety-five percent of architecture firms are small businesses, so a lot of the corporate tax rate hike discussion wouldn’t apply to them directly. Construction is a very localized industry, so many of them within the broader AEC industry are small business, too. I’m guessing the impact on architecture firms of this rate hike will be on a case- by-case basis since everyone runs their businesses a little differently.
To answer the question a little differently, it’s a trade-off between new work, a stronger economy, employee benefit, and tax burden. What do architecture firms pay in taxes? Are they sheltered in ways like equipment depreciation? I think there’s a historical perspective here worth considering: The tax rate was 35 percent up until a few years ago, then it was a lot lower, owing to the Tax Cuts and Jobs Act. Did that drop do anything good for the economy? Maybe. I think it helped shareholders. But it didn’t create new jobs, necessarily, and we didn’t have the kind of reinvestment within companies one might have hoped for. So this bill is significant because it seems to strike at some of the challenges we all experience every day related to traffic jams on a crumbling bridge or health care concerns for our loved ones or even childcare for busy parents who need affordable options. Even if we talk about the plan in spectacularly big numbers, it will translate to benefits that will be tangible. We just have to see how it shakes out in Congress.