New Tax Law Boosts School Construction with Public-Private Partnership

A little-known provision in the major tax bill that President Bush signed into law on June 7, 2001, will give towns and cities throughout the country the opportunity to build public school facilities faster, better, and at lower cost by forming public-private partnerships with qualified real estate investors and developers. Under this approach-pioneered in England, Scotland, and Nova Scotia, as well as in the states of Florida and Texas-public school systems can now form partnerships with private-sector investors who fund the construction of public school buildings and lease the facilities to public school systems at annual costs that are below the costs that communities would incur if they built the schools on their own.

This important reform is encouraged by the provisions of Section 422 of the Economic Growth and Tax Relief Reconciliation Act of 2001 (H.R. 1836) that extend the privilege of using tax-exempt, private activity bonds to qualified public education facilities. 1 Until now, the ability to issue bonds that earn interest exempt from federal taxation was largely limited to state and local governments. This benefit provides an unfair competitive advantage for these public entities, allowing them to borrow at interest rates that are about one-third lower than the rates individuals or private companies would have to pay on their borrowing.

As a result of the privileged tax-exempt status for state and local government borrowing, the private sector was at a significant, though artificial, cost disadvantage whenever it attempted to work with communities to construct and own public infrastructure such as schools, roads, wastewater treatment plants, and airports that in turn could be leased back to the community.

The new tax bill ends that competitive disadvantage regarding the construction of public school facilities by extending the tax-exempt borrowing privilege to developers who are willing to invest their funds in ways that will help to alleviate the classroom shortage in fast-growing but cash-strapped suburban communities or help replace and renovate obsolete and deteriorated inner-city schools in financially troubled cities.