Governor Bob McDonnell today issued the following statement regarding the need to update the IRS code to allow the federal Historic Rehabilitation Tax Credit, passed on a bipartisan basis in 1986, to apply to local school modernization projects. The governor's statement follows a meeting this afternoon with Paul Goldman, former chairman of the Democratic Party of Virginia, and long-time proponent of "fixing the glitch", as he calls it, due to the unintended negative consequences which have long been documented.
"I enjoyed meeting with Mr. Goldman and his team this afternoon to discuss a potential school construction initiative that can have the practical impact of being a major "instruction initiative" at the same time. It is harder to ensure that a child gets the very best possible 21st century education when he or she attends a school originally built 50 years ago. Unfortunately, when President Reagan and lawmakers passed legislation to encourage renovation of the nation's declining infrastructure, they didn't fully appreciate all the implications in the new language in the federal tax code. The problem we face is called the "prior use rule" and it applies in a limited number of circumstances, such as when a tax-exempt local school board wants to modernize an aged K-12 facility for continued use. Since the post-modernization use remains the same as the pre-modernization use - a local K-12 facility - it falls under the "prior use rule." This rule says private investors, willing to take on all the risks of modernizing the school to the requirements of the school board, cannot earn the so-called "historic" tax credits. But if the same investors use the same amount of money to modernize the same building into a new use, then they earn the "historic" credits.
"This distinction makes no economic sense, and it serves no useful public policy given the nation's pressing need for modern schools. I have previously joined Senator Mark Warner, Senator Tim Kaine, Majority Leader Eric Cantor, and many others in publicly supporting eliminating the "prior use rule" block to historic credit financing for qualifying school facilities. We all agree: we are handcuffing the private sector while our school buildings continue to age. As Senator Kaine wrote while serving as Governor, this issue has ultimately raised the costs of many vital education projects to the point that they are unaffordable. Indeed, the practical effect is to force localities to pay 30-40% more than would be the case if this policy were eliminated. If localities could utilize these tax credits, they would save dramatically on local construction costs. Those savings would then be available to go into the classroom for instruction, without raising local taxes.
"In 2009, I first voiced my support of former-Governor George Allen and Paul Goldman's efforts to make this change to the federal tax code. Senator Kaine demonstrated how the use of the tax credit for the improvement of a school, Maggie Walker High School in Richmond, could produce tremendous savings for taxpayers, while providing students with a world-class learning facility. Eliminating the "prior use rule" would unleash the private sector to not only help modernize schools across the Commonwealth, but such projects would create tens of thousands of jobs, and enable hundreds of thousands of students to get a better education, besides all the financial benefits previously discussed.
"While it will take the Congress and the President to enact this fix, states and localities are the ones ultimately responsible for educating our children. Washington policy makers need to address this as part of their tax reform and job creation agendas. In that regard, I am pleased to see this often overlooked issue gaining prominence in the campaign for Governor this year with Mr. Cuccinelli and Mr. McAuliffe in support. I hope they both will continue to propose ways by which we can improve education infrastructure in the Commonwealth. Those states that out compete us on education today will have the skilled population necessary to attract the job-creating private sector businesses of tomorrow. We can't fall behind in the ongoing effort to ensure that our economy continues to grow. That starts with ensuring every student gets a world-class education.
"I look forward to working with leaders on both sides of the aisle in Virginia and in Washington to get this long overdue fix passed into law, and to continue to improve our significant reforms to public education in our Commonwealth."