Published August 25, 2011
When President Obama gives his highly anticipated jobs speech next month, he will likely have a bust of Abraham Lincoln nearby. "Upon the subject of education, not presuming to dictate any plan or system respecting it, I can only say that I view it as the most important subject which we as a people can be engaged in" advised Honest Abe.
America once strove to have the best educated work force on the Planet. It is no coincidence our biggest educational advantage coincided with the period of greatest growth in real wages and opportunities for the middle class.
So let's accept the wisdom of the man who saved our Union when others were ready to junk it: America's future is to marry the immediate need to put people back to work with the long-term requirement of the best educated workforce. Here are three things we need to do now:
1. IT IS TIME FOR THE BUSINESS COMMUNITY AND MIDDLE CLASS TO MAKE A DEAL
The business community is correct in saying our tax code sometimes makes the cost of capital too high. But they need to acknowledge that the middle class and those aspiring to get there to have an equally valid point: the costs heaped on human capital in America are far too high, and not only for the poor.
Seventy-five percentage of Americans in the prime of youth flunk the entrance exam to the Army. Thirty percent of high school graduates tested have been proven unable to complete 10th grade work. Of those graduates able to get into a 2 or 4 year college, at least one third need remedial courses.
America needs to get smart: the time has come to trade an admittedly generous one-time benefit to corporate America for the far more valuable lifetime benefit for the middle class. Our children need to work harder. But we adults likewise need to take responsibility for not helping them enough.
Business community leaders want a new law lowering the tax rate to repatriate over $1 trillion dollars in profits made by foreign subsidiaries. They claim it will produce jobs. But a previous repatriation effort didn't.
This time, let's do it smarter.
The average K-12 school facility is obsolete, with nearly one-third of facilities so old that they qualify as "historic" structures.
How can America compete when the nation's most important assets -- its children -- attend school in such antiquated facilities?
In 1986, knowing our country couldn't let this happen, Republican President Ronald Reagan and and a Democratic Congress worked together to enact the "federal rehabilitation tax credit". The country's infrastructure needed a reboot. Private investors who were willing to risk their own capital to modernize an old building would earn tax credits equal to 20% of the modernization costs for fixing a qualifying "historic" structure. The tax credit has been hugely successful, except for one unintended consequence.
Our leaders didn't know about an obscure IRS provision called the "prior use" rule. It denies these "historic" credits in a few situations, one being local school modernization projects on the grounds that the post-modernization use of the building remains the same as the prior use. This makes such projects unattractive to investors who would do better financially with a non-school building.
A decade ago, a smart lawyer found a way around this "prior use" rule for a unique regional school project. By using the tax credit law, the city of Richmond saved 40% on the project.
That is why three Virginia lawmakers -- Democratic Senators Jim Webb and Mark Warner, along with Republican House Majority Leader Eric Cantor -- have previously introduced bills to exempt local K-12 school projects from this "prior use" rule.
It has been dubbed "SMART," for School Modernization and Rehabilitation Tax Credit. They realized the benefits from giving localities this cheaper, more efficient option. Based on studies, it could potentially fix 10,000-20,000 crumbling schools, create 2,000,000 jobs, save localities tens of billions of dollars, while giving million of children a school built to provide a 21st century education.
2. THE ART OF THE DEAL
But so far, the business community has not been willing to help get the IRS code changed even though it is a huge supporter of the "federal rehabilitation tax credit" law.
So we propose a win-win deal: Allow the corporations to bring the $1 trillion back to America tax-free -- a better deal than last time -- provided they loan (interest free) $200 billion of this cash to a new SMART Trust for qualifying school modernization and/or repair projects.
They would also be allowed to count the SMART fund monies as an immediate tax-deductible expense, not a capital contribution.
Additionally, they get a dollar for dollar tax write-off for any of the money contributed to the SMART Trust not repaid within 10 years. This is a pro-America offer no American company can refuse.
In return, the SMART Trust, using state governors as intermediaries, will provide localities with 1 percent, 30-year loans for projects that are deemed to qualify under the 1986 law. These loans will be interest-only for the first seven years.
If, during this period, the student bodies at such a modernized and/or repaired school achieve the national academic standards set by the Secretary of Education, the loan principal is forgiven and the locality owns the school. It's an offer no local school district committed to giving America the best possible workforce can refuse.
Will this plan give the business a huge new $100 billion tax break as the naysayers will claim? Not in the real world.
Without an incentive, this money is never coming to America. Moreover, SMART funded school projects will generate $30-40 billion in new tax revenues. These new schools will save additional $ billions in lower operating costs over time. Local property values rise as local school performance increases. States and localities would have a $200 billion dollar financial incentive to dramatically improve test scores so they can own these building at nominal cost.
Finally: What is the value of allowing a child to better achieve his or her potential? Priceless.
Right now, we rely on expensive federally subsidized bonds to fix schools. The SMART approach eliminates the use of such bonded debt. A new school admittedly is no guarantee of better education. But a "construction initiative" will produce an "instruction" initiative as educators think through what they need for the future. Studies show smarter school design improves learning.
There are those who claim Congress will appropriate tens of billions of dollars in new government spending for school fix-ups. Maybe so. But what's wrong with providing a better private capital option?
The SMART approach will also help solve the issue of crumbling schools on military bases serving the children of our brave fighting men and women, a subject of a recent letter from Democratic and Republican Senators to the Defense Secretary.
The "prior use" rule has lost jobs, and raised costs for 26 years. Enough is enough. It is time to give this proven capital option a chance to provide jobs and better skills to American families.
Joe Trippi is a Democratic strategist and a Fox News Channel contributor, Paul Goldman is former chairman of the Virginia Democratic Party and a legal expert on the SMART credit. Mark J. Rozell is professor of public policy at George Mason University.