In most parts of the world, tax codes do not differentiate between government and private bonds for infrastructure projects.[295] However, in the United States, the financing of public works projects by State and local governments has traditionally enjoyed a unique advantage.[296] Tax-exempt bonds may be issued for projects that are owned and operated solely by State and local governments. [297] Conversely, the availability of tax-exempt bonds is sharply limited if private for-profit companies are involved in the ownership or operation of the very same types of facilities, even when such projects serve a traditional public purpose, such as public transportation.[298] Current tax law sharply restricts the ability of private developers to finance construction of public infrastructure facilities via tax-exempt bonds.[299] As a result, the Internal Revenue Code tends to favor public development of infrastructure facilities over private development, because public development of infrastructure can reduce financing costs by 20-25 percent due to the ability of the public sector to issue tax-exempt bonds.[300] This Federal tax benefit can reduce interest rates as much as two-percentage points below rates on comparable taxable bonds.[301] For example, on a $100 million bond, this differential would mean a debt service cost savings of $2 million per year.[302] The Administration's SAFETEA proposal would expand the use of private activity bonds to include highway and freight transfer facilities. This proposal is discussed in more detail in Chapter VI.
The two-tiered tax structure, involving private taxable bonding and public tax-exempt bonding, is a disincentive for public-private partnerships.[303] Highway development costs are substantial and mostly incurred early in the life of a project, while revenue streams tend to develop slowly but come in over long periods of time.[304] Thus, higher taxable rates impose an extra disincentive for public-private transportation projects.[305]
Another reason that the two-tiered tax structure is a disincentive is that the level of user fees required to support taxable debt service may have to be raised beyond the point of diminishing returns; thus the project is simply not financially feasible on a stand-alone basis.[306] If other public subsidies or capital contributions are available to support the project, the lack of tax-exempt financing merely serves to shift the increased cost to the State and local level.[307] Without tax-exempt bonds, some projects will not be built at all; others will only be built in later years at a higher cost.[308] For example, during the competitive procurement phase of California's AB-680 program, several other projects, in addition to SR-91, were evaluated, but dropped because of the high taxable debt payment hurdle.[309] To overcome this problem, tax provisions should be amended to allow the issuance of tax-exempt debt for public highways and intermodal transportation facilities developed through public-private partnerships.[310]