WASHINGTON — Municipal market groups are pushing the Bush administration and Congress to include proposals that would ease restrictions on bonds in the economic stimulus package currently being developed.
Many of the proposals would provide aid to the housing sector, which is reeling from record defaults in subprime loans, but others focus on bank-deductible and industrial development bonds.
The calls for easing muni bond restrictions came as President Bush on Friday threw his support behind drafting a bipartisan stimulus package.
“After careful consideration, and after discussions with members of Congress, I have concluded that additional action is needed,” he said at a press conference. “To keep our economy growing and creating jobs, Congress and the administration need to work to enact an economic growth package as soon as possible.”
Bush said the package must be no more than 1% of gross domestic product, which would amount to between $140 billion and $150 billion, and should include tax incentives for businesses and income tax relief to spur both business and consumer spending.
Even before Bush made his speech, the Securities Industry and Financial Markets Association sent a letter to Treasury Secretary Henry M. Paulson Jr. urging that the tax law be amended to temporarily allow state and local governments to issue tax-exempt mortgage revenue bonds to refinance existing subprime loans. Currently, MRBs can only be used to aid first-time homebuyers. The group also called for an increase in the tax-exempt private-activity bond volume cap for MRBs, so that states will have additional capacity to meet their housing finance needs. PABs are debt instruments issued by state and local governments where the bond proceeds are used to benefit a private entity. States are limited in the number of such bonds they can issue by a formula that is based on their population figures,
“As the [Bush] administration and Congress explore options to jump start the economy and especially the housing sector, SIFMA is suggesting changes to the mortgage revenue bond program, which will enhance the flexibility and capacity of state and local governments,” Scott DeFife, senior managing director of government affairs at SIFMA, said in a release Friday that summarized the letter. “Tax-exempt qualified mortgage revenue bonds are an important tool to finance low-cost mortgage loans for low- and moderate-income families. We look forward to working with Congress and the administration on these and other mortgage issues.”
The group also suggested temporarily exempting housing bonds from the alternative minimum tax, which it said would make the bonds more attractive to investors and reduce the cost of MRB-financed mortgages by as much as half of a percentage point.
In addition, SIFMA recommended the repeal of the so-called 10-year rule. The rule forces housing agencies to use mortgage prepayments that come in more than 10 years after mortgage revenue bonds are issued to retire the debt — a requirement that effectively prevents the payments from being recycled into new mortgages.
While details of the stimulus package are still being determined, housing advocates were disappointed that Bush did not specifically call for aid to the sector to be included in plan.
“It’s make a lot of sense to include it in this package,” said Barbara Thompson, executive director of the
National Council of State Housing Agencies. “We are disappointed obviously that the administration seems to be suggesting that while that’s still important, they feel like it needs to wait for another opportunity.”
“The time is now, people need help now,” she said. “We don’t understand, why wait on this? It makes a lot of sense, let’s do it now. It takes time to do tax legislation and who knows how long it will be until we get a second bite of this apple.”
Other industry groups focused on different aspects of the muni bond section of the tax code.
The Independent Community Bankers of America recommended increasing the number of state and local issuers that could issue bank-deductible bonds. These are public purpose or 501(c)(3) bonds for which banks can deduct 80% of the carrying costs. Under the current tax law, such bonds can only be issued by states and localities that issue $10 million or less of debt annually. ICBA wants the annual limit increased to $30 million.
“It would get local economic projects done much more quickly and more cheaply,” said Paul Merski, ICBA’s chief economist and director of tax policy. The current $10 million limit forces issuers with larger projects to develop them over several years so they can qualify for bank-deductible bonds, he said.
The Council of Development Finance Agencies suggested changing the definition of manufacturing to allow issuance of industrial development bonds to finance high tech, biotech and “innovation economy manufacturers.”
“The inclusion of CDFA’s IDB legislation in the economic stimulus package is exactly the right message for Congress to send to our nation’s communities,” said CDFA chief executive Toby Rittner. “This measure will allow bond issuers to more readily assist small to medium size manufacturers through IDB issuances for new investment. These investments would create jobs and build industry, which will in turn stimulate the economy nationwide.”
The National Association of Health and Educational Facilities Finance Authorities said the tax code should be changed to permit financial institutions to determine their interest expense deduction without regard to tax-exempt bonds issued to provide certain small loans for heath care or educational purposes. Former Rep. Bobby Jindal, R-La., introduced similar legislation last year. Jindal is now governor of Louisiana.
The National Association of Local Housing Finance Agencies, has been talking to lawmakers about injecting $5 billion into the Department of Housing and Urban Development’s community development block grant program. CDBG provides grants to state and local governments to help fund economic development projects
Lawmakers are also floating proposal for the stimulus, including Rep. Thomas M. Reynolds, R-N.Y., who has recommended including one year of AMT relief in the package.
The AMT, which applies to interest earned on private-activity bonds, as well as some governmental and 501(c)(3) bonds, is designed to target high-income households, which are eligible for so many tax breaks that they pay little or no taxes. However, the AMT is not indexed to inflation, so more taxpayers become subject to it each year. AMT relief was in effect for the 2007 tax year, but is set to expire after that.
Transportation and infrastructure lawmakers have also recommended including funding in the stimulus plan for projects that can immediately begin construction, but it is unclear if they will be in the final package.
“We are having a bit of a discussion here as to what would constitute an effective stimulus package for the American economy,” Rep. Peter DeFazio, D-Ore., chairman of the House Transportation and Infrastructure highways and transit subcommittee, said at a hearing last week. “Many of us on this committee believe investment in infrastructure would [be immediately economically beneficial]. [But] we are getting some pushback from those in our leadership who believe it couldn’t happen soon enough.”
Andrew Ackerman, Lynn Hume, and Peter Schroeder contributed to this story.