The Australian Government introduced an infrastructure borrowings taxation scheme in 1992 which was designed to stimulate private investment in infrastructure with a tax exemption of interest derived from qualifying loan facilities. The program was modified and extended in 1994 as the Infrastructure Borrowings Taxation Concession and replaced in 1997 with the Infrastructure Borrowings Tax Offset Scheme. The latter program was limited to large scale land transport projects and was not widely used. Each of these programs granted a tax benefit to secured private lenders but not the unsecured risk-taking equity investors. Accordingly, the scheme was mainly employed by promoters to develop hybrid tax advantaged debt securities for high net worth individual investors. The scheme was phased out in 2004.
The United States has long supported tax exempt bonds as a method of raising private infrastructure finance for state and local governments. The program authorises state and local governments to issue tax exempt bonds for investment in ports, urban transport, public schools, waste management systems, energy, water, intercity rail services, public housing and airports. The scheme has been criticised for many years as an inefficient method of attracting private infrastructure investment. The major objections concern:
● The low equivalence between the tax benefit granted to corporate and high net worth individual investors and interest savings to state and local governments (average marginal tax rate saving 35.7% and interest rate savings of 1.80% per annum)
● The tax exemption to investors with high marginal rates of tax fails the test of Pareto efficiency
● The arrangement operates as a transfer payment to state and local governments with authority to issue the bonds at the discretion of state and local governments
● The extension of the program to quasi-social infrastructure such as sports stadiums and public entertainment facilities
● Eligibility for the tax exemption is denied to lending institutions, public and private pension funds and institutional investors (Regan 1999).
Alternative arrangements include direct federal government interest rate subsidies for state and local infrastructure borrowings and the issuance of tax exempt debt securities which permit the separation of the tax exemption component for sale in capital markets which is a variation to a carbon trading scheme.