WASHINGTON — Build America Bonds will cost $26 billion more over the next 10 years than previously estimated, the Congressional Budget Office said in a report issued yesterday.
The higher price tag could give lawmakers pause about broadly expanding the program, according to market participants.
The CBO also said that for fiscal 2010 it expects a budget deficit of $1.35 trillion, or 9.2% of gross domestic product, which would be smaller than the 9.9% deficit-to-GDP shortfall posted in fiscal 2009.
The agency’s estimate of BAB costs, which was part of a report updating budget and economic outlooks for the next 10 fiscal years, grew mainly because the program has proved to be far more popular than originally anticipated, according to the report.
“Participation in the program has already risen to a level significantly higher than CBO’s ... original estimates — over $60 billion in new bonds have been issued since the program began in April,” the report stated. “That higher-than-expected issuance prompted CBO to add $26 billion to its projection of outlays for the program between 2010 and 2019.”
The estimates do not consider whether the program will be extended beyond 2010 or if the subsidy level will change.
Though the CBO said BABs are costlier than originally estimated, its last budget estimates released in August did not contain separate break-out costs for the taxable bonds. Instead, the costs of the BAB program were grouped with several tax credits, including the Making Work Pay and first-time homebuyer tax credits.
But it is clear from the two documents that BABs were significantly more costly than the CBO originally predicted. It estimated in the earlier document that all of those tax credits would cost just $1 billion a year from fiscal 2012 through fiscal 2019. BABs alone are now expected to cost $3 billion annually from fiscal 2011 through fiscal 2019.
The CBO figures on BABs are nearly identical to numbers released almost two weeks ago by the congressional Joint Tax Committee. In a report on federal tax expenditures, the JTC determined that the federal government would forgo $12.5 billion in tax revenue from the BAB program from fiscal 2009 through fiscal 2013.
Matt Fabian, managing director at Municipal Market Advisors, said the higher numbers “shouldn’t surprise anyone.”
MMA’s own projections estimate that BABs sold through the end of 2010 will cost the federal government between $2.5 billion and $3.5 billion a year, he said. Both the Joint Tax Committee and the Congressional Budget Office peg BABs as costing $3 billion a year beginning in fiscal 2011.
“It follows that for every year issuers are allowed to sell BABs, the annual federal cost grows by about $2 billion,” Fabian said.
But the higher cost of BABs could mean Congress will be less inclined to significantly broaden the program, according to Fabian. He said that while some extension is “extremely likely,” the cost could mean a shorter extension, a temporary extension rather than a permanent one, or that BABs will not be expanded to include refundings.
There have been a wide range of BAB estimates in the past. The Obama administration — which will release a budget Monday that is likely to include another set of BAB cost projections — estimated in an appendix to its fiscal 2010 budget request last year that the program would cost $91 million in fiscal 2009 and $340 million in fiscal 2010.
Those estimates included Recovery Zone economic development bonds. An analytical perspectives budget document released soon after that contained estimates of $50 million and $192 million for BABs during those two years.
The Joint Tax Committee, in a report on the American Recovery and Reinvestment Act last year, estimated BABs would result in lost revenue of $53 million and $323 million in fiscal 2009 and 2010, respectively, and a total of $4.3 billion through 2019.
Meanwhile, the projected deficit for fiscal 2010 was revised down by $32 billion, or 2.3%, from the CBO’s last estimate in August. The reduction was due mostly to the expected decrease in the cost of the Troubled Asset Relief Program. The CBO estimated the cost of TARP will decrease by $147 billion to $99 billion, mostly related to the auto industry bailouts and the Home Affordable Mortgage Program.
Revenue from corporate and individual tax receipts also is expected to be lower than previously estimated. The CBO projections assume that the tax cuts enacted in 2001, 2003, and 2009 will expire as scheduled and that temporary changes that have kept the alternative minimum tax from affecting many more taxpayers will not be extended. Total revenue will be $4.5 trillion lower if all expiring tax cuts, except the AMT exemption, are extended over the 2011-2020 period, the report said.
Last year’s deficit was the largest as a share of GDP since the end of World War II. The fiscal 2010 deficit could increase, and even exceed last year’s if legislation is enacted that lowers revenue or increases spending, the CBO said.
CBO director Douglas Elmendorf outlined the risks prolonged federal budget deficits will have on the Treasury market. He said the ratio of all U.S. debt held by the public to GDP was 41% in 2008, increased to 53% in 2009, and will rise to 60% by the end of fiscal 2010, the highest level since 1952. The ratio would reach 98% in 2020 if all the tax provisions were extended and brackets for the AMT were indexed for inflation from their 2009 levels, he said.
“Those are numbers that are not very common among developed countries,” Elmendorf said. “We are pushing our way toward debt levels that we don’t have experience with in this country,” and that raises the risk that “people will be concerned enough not to want to buy so much U.S. debt at current interest rates.”
The danger is a “precipitous withdrawal of capital from the U.S.” that would push down the value of the dollar, he said, adding that growing levels of debt historically have “negative effects on productivity and incomes.”