Following the passage of his $1.9 trillion American Rescue Plan, President Biden recently unveiled the next part of his agenda: infrastructure. His new proposal, called the American Jobs Plan (AJP), would cost an estimated $2.25 trillion. It focuses on infrastructure, corporate taxes and other spending priorities. In our view, a plan of this size is bold, and would certainly shape the corporate landscape going forward.
While the package is expected to change as it progresses through Congress, it’s apparent that the spending portion of a potential bill would touch many sectors. Within investment grade credit, the biggest impacts from increased spending are likely to be on the utilities, construction machinery and building materials sectors. If passed, higher corporate taxes would affect all sectors to varying degrees.
For regulated utilities, we believe the AJP will have a positive impact from both spending and tax perspectives. An extension of renewable tax credits, combined with new tax credits supporting battery storage and transmission buildouts, provides growth visibility at lower cost. Investments in electric vehicles, and electrification of federal buildings and new housing, would likely support long-term demand. Taxes are a pass-through cost for utilities, and due to cash tax mechanics, utilities are likely to see credit metrics improve if corporate tax rates go up. However, we believe the benefits of these positive tailwinds would largely be passed onto shareholders rather than bondholders.
Smaller sectors including construction machinery and building materials could benefit from investments in roads, bridges and other construction-related projects. Several other sectors should see incremental benefits from the vast spending plan, although those would be mitigated by higher taxes.
Even with the range of potential outcomes, we expect the AJP to have a limited impact on investment grade credit. Higher taxes would be a headwind for most sectors, but likely offset by benefits from large-scale spending and improving cash-flow profiles as the economy recovers. That said, many changes are likely to happen between now and final passage. We will monitor those specifics as they become clearer.