Question: Various Federal stimulus provisions were designed to assist state and local governments in borrowing funds, leveraging the gross income exclusion for such bond interest so that such jurisdictions would have increased access to funds. One of the justifications for these provisions was that state and local governments cannot run budget deficits and cannot "print money," so the recent recession put them in a difficult cash-flow position.
Audits of the use of these borrowed funds showed that some of the bond proceeds were used by the jurisdictions to participate in "public-private partnerships," where government funds were used to assist private entities in expanding in or relocating to the jurisdiction. Specifically, bond proceeds were found to have been used to provide targeted road-building and utility construction projects to benefit large commercial entities.
Is this an appropriate use of the gross income exclusion for state and local bond interest? Why or Why not?