Instead of paying the interest and the principal on school construction bonds, the average issuer would be responsible only for repaying the principal. The federal government would provide tax credits to the bond holders in lieu of interest payments. While tax-exempt bonds usually have lower interest rates than taxable bonds, tax credit bonds would typically have no interest costs for the issuer. Tax credits could be used by states and districts that do not issue bonds for school construction and instead use other forms of debt financing . Tax credits could be used to pay interest on all forms of debt instruments for school construction, such as tax anticipation notes, certificates of participation, revenue anticipation notes, bank loans, etc.
Tax credits allow states to determine who can use the school modernization bonds in their states.
Once the bond allocations are made among the states, each state has the discretion to determine how they will be used within the state. Tax credits would be valuable to all investors regardless of their tax liability . The proposal includes two options that make tax credits valuable to organizations, such as non-profits and pension funds that do not have tax liability. Stripability allows tax credit payments to be stripped from bonds just as interest payments can be stripped from other financial instruments. Repurchase agreements enable organizations with no tax liability to receive the cash value of the tax by temporarily selling the bond to another organization that can take advantage of the tax credits.