New Bills May Block Tax-Credit Stripping

WASHINGTON — The Senate’s top Republican taxwriter has introduced legislation that would block the stripping and selling of tax credits from three kinds of tax-credit bonds. At the same time, Treasury Department and Internal Revenue Service attorneys are working to write stripping rules sought by muni market participants who contend they are needed to jump-start the programs.

Sen. Charles Grassley, the ranking minority member of the Senate Finance Committee, has introduced two bills that would extend programs for qualified zone academy bonds, qualified school construction bonds, and new clean renewable energy bonds. However, the Iowa Republican’s bills, which he introduced last month, also include provisions that would prevent the stripping of credits from the bonds.

The stripping bans were included in the bills because Grassley is concerned the IRS would be unable to properly trace ownership of the strips and prevent abuse, an aide said yesterday.

If passed, the legislation could stifle stripping before it has had a chance to begin.

Congress granted tax-credit bond issuers and investors the ability to strip credits in June 2008 as part of the farm bill, but market participants have been waiting for the Treasury to write rules that shine some light on a litany of questions. Treasury officials have said for months that while stripping guidance is a priority, the work has been bogged down by a number of ­complicated issues, including how to track the credits.

Grassley’s legislation has some market participants scratching their heads, as stripping was touted as a promising way to expand the current paltry market for tax-credit bonds by making the bonds and tax credits marketable to a broader base of investors.

“Allowing stripping for QSCBs would be hugely beneficial to the program and ultimately to the schools,” Scott Minerd, chief investment officer at Guggenheim Partners LLC, the biggest purchaser of QSCBs, said yesterday.

“Without stripping, there’s a limited appetite for these securities in the long run ... You’ve eliminated at least 85%-90% of all the buyers of bonds in the world, if not more,” he warned.

Guggenheim has purchased $1.2 billion of QSCBs, nearly half of the $2.5 billion that have been issued. The privately held financial services firm had planned by the end of last year to strip and sell the credits from bonds it purchased this fall from the Los Angeles Unified School District, with or without Treasury regulations. However, that attempt hit a wall when rating agencies refused to rate the stripped credits without the Treasury rules, Minerd said.

The viability of traditional tax-credit bonds also has come under question from lawmakers in the House, who last month approved a jobs bill that would allow state and local issuers of QZABs and QSCBs to receive direct Build America Bond-style payments from the Treasury instead of investors receiving tax credits.

Currently, Grassley’s bills have been referred to the Finance Committee, but if they are to gain any legislative momentum, they probably would need to be included in the so-called extenders package, annual legislation that Congress passes to extend expiring tax provisions.

Grassley and Finance Committee chairman Max Baucus, D-Mont., said before the Christmas break that extenders would be one of the first things they tackle in 2010, after spending much of December consumed with health-care reform legislation. The House passed its extenders bill last month, but it did not include any provisions blocking stripping. An aide declined to comment yesterday on whether Baucus supports Grassley’s legislation.

In addition to the proposed ban on stripping for the three kinds of tax-credit bonds, one of Grassley’s bills, S. 2851, would permanently extend the QZAB and QSCB program and authorize an additional $700 million annually for QZABs. The $700 million would be indexed to inflation. Under the bill, QZABs and QSCBs also would no longer have to comply with the Davis-Bacon Fair Labor Act. QSCBs would not be granted any additional authority beyond the current $22 billion authorization.

Grassley’s other bill, S. 2826, would authorize an additional $2.2 billion for CREBs.

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