Infrastructure plan will likely 'take most of this calendar year to negotiate': Morgan Stanley's Michael Zezas

Michael Zezas, Morgan Stanley Head of U.S. Public Policy Research and Municipal Strategist, joins Yahoo Finance's Brian Sozzi, Julie Hyman and Myles Udland to discuss the likelihood of an infrastructure package in the next year and much more.

Video Transcript

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JULIE HYMAN: Well, we are having our own infrastructure week here at Yahoo Finance. We're calling it Rebuilding America, and we're digging into different aspects of infrastructure with different folks across the industry. Michael Zezas is joining us now. He's Morgan Stanley head of US public policy research and a municipal strategist. And he's joining us on the phone.

Michael, you know, it seems like maybe it's actually going to happen this time in terms of getting infrastructure passed. That said, even though Democrats have a majority in Congress, it's a majority that is, at times, tenuous, right, in terms of the Democrats all voting together. What is this bill going to look like?

MICHAEL ZEZAS: Yeah, you're right to point out there's been so many false starts on the major infrastructure spending plan. But there's a few reasons it makes sense in this configuration. One, as you point out, Democrats are in control. And it's not that Republicans have not expressed the desire to spend more on infrastructure. But they haven't been able to agree on how to finance it. We think Democrats will be more than happy this time mostly deficit financing it, particularly coming out of a sharp recession.

But to answer your point, there's probably a couple of constraints here. Democrats have a very slim majority. And so that means a couple of things. One, it means it's probably going to take most of this calendar year to negotiate this plan. It's not just about pouring more asphalt and filling in potholes. There's difficult labor issues, environmental issues. That takes time.

And then, two, because you're going to have to pass this with probably just 50 votes in the Senate, you're going to have to use that Budget Reconciliation process. Your next opportunity to use that is probably later this year when the new fiscal year starts, which would be after October of this calendar year.

BRIAN SOZZI: Michael, where-- we haven't talked much thus far yet on potential tax increases. And a lot of folks, they're zeroing in on potential increase of the corporate tax to perhaps fund part of this plan. But what about the gas tax? How much could that go up?

MICHAEL ZEZAS: Yeah, so it's a good question. We don't actually have an increase in the gas tax penciled in, right? So some of these same constraints that make this process take quite a bit longer, we actually think also direct this process in a way where it doesn't have to be fully tax financed and probably won't be fully tax financed.

And what we think you end up with is taxes that can partially offset infrastructure spending. And those are the taxes you can get 50 Democratic senators to agree on. There doesn't appear to be complete consensus in the party on the gas tax. There is consensus on taking the corporate tax rate up a couple of points. There is consensus on taking the highest marginal personal rate up a couple of points, any capped gains on incomes above a million a couple of points.

You raise that, that's about $500 to $600 billion of revenue to offset what we think is at least a trillion and a half dollar plan. And we think that deficits can do the rest because there's a consensus in the party about the sort of benefits of deficit expansion. And I think the politics of it are pretty good. Any voter survey you look at will tell you voters aren't particularly concerned about deficits and don't think they should constrain the more popular spending initiatives.

MYLES UDLAND: You know, Michael, I'm curious also what role the health of state and local governments plays at this point in the conversation. Because I do think that state and local governments, at least as I kind of see the lay of the land-- I'm curious of your thoughts-- are in better shape than many thought they would be maybe six or nine months ago, and how does that impact any plans that the Biden administration might want to get through on additional support there and then investment, I guess, on the infrastructure side.

MICHAEL ZEZAS: Yeah, I mean, I agree. They're definitely in better shape certainly than we thought. We had forecast it would be about $270 billion short on revenue through the end of calendar 2021. And that number is probably too high, considering the actuals coming in. And on top of that, in the stimulus plan, there's about $350 billion of revenue earmarked for state and local government.

So you're probably going to turn back the clock to pre-COVID in terms of the state and local finances, which had its challenges for sure, but you sort of wipe away the effects of what happened with COVID. That's important infrastructure because state and local governments control the vast majority of infrastructure and infrastructure spending.

And if you didn't have that, then you could see a situation where the federal government spending more on infrastructure ends up putting more resources towards maintenance, instead of growing infrastructure. So this kind of step function of shoring up state and local finances first, then having the federal government bring more money to the table should be more effective in actually achieving new project financing.

BRIAN SOZZI: Michael, how should investors be positioned today for a potential infrastructure bill? What stocks should they be buying?

MICHAEL ZEZAS: Yeah, I think the way that our colleagues in equity research and equity strategies have thought about it is that this is a program that at a macro level reinforces a V-shaped economic recovery, reinforces therefore almost all things cyclical. So those are the sectors you want to look for, not just-- consumer sectors have obviously done quite well, but your other more traditional cyclical sectors should also do quite well. So think about this more in terms of the theme of cyclicality. That's what we expect to be clear beneficiaries on a fundamental basis.

JULIE HYMAN: Michael, thanks so much. Really appreciate it. Michael Zezas, Morgan Stanley head of US public policy research and municipal strategist. And stay tuned all day and all week here to Yahoo Finance. We'll be talking much more about infrastructure.