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BAB Program's Extension Not a Sure Thing for Tax Compromise Bill

DEC 6, 2010 7:07pm ET
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While federal lawmakers are nearing a compromise on tax legislation that would extend many expired and expiring tax provisions as well as the Bush-era tax cuts, it is not certain the measure will continue the popular Build America Bond program, sources said.

That's because the Senate's lead Republican negotiator, Jon Kyl, R-Ariz., has been a harsh critic of the program, which is set to expire on Dec. 31. In May, Kyl complained to colleagues that BABs reward states and localities with lower credit ratings because they sell BABs at higher interest rates and receive higher subsidy payments from the U.S. Treasury.

Sen. Charles Grassley, R-Iowa, the Senate Finance Committee's ranking minority member, also has been a harsh critic of BABs but last month predicted the extension would go forward. However, sources said while Grassley might have been willing to go along with a BAB extension in return for continued ethanol subsidies, Kyl opposes both programs.

Meanwhile, the Joint Tax Committee released updated revenue estimates for the Middle Class Tax Cut Act of 2010 that committee chairman Sen. Max Baucus, D-Mont., introduced last week. That bill would extend the BAB program through the end of 2011 but reduce federal subsidy payments to 32% from the current 35%, as well as extend tax cuts for the middle class and other expiring tax provisions.

The JTC estimated the one-year extension of BABs at the lower subsidy rate would result in revenue losses of $50 million in fiscal year 2011, $310 million in 2012, $306 million in 2013, $301 million in 2014, and $297 million in 2015. It was by far the costliest muni bond-related provision.

The next most costly bond provision would extend for another year and allocate more authority to recovery zone bond programs, which are designed to rejuvenate areas hit hard by the recession. The JTC estimated it would result in revenue losses of $14 million next year, $91 million in 2012, and roughly $155 million in each of the next three years.

Exempting private-activity bonds, as well as refundings of PABs issued after 2003, from the alternative minimum tax for another year would result in revenue losses of $13 million in 2011, and $25 million in each of the next four years, the committee said.

A year-long extension of the greater small-issuer exemption for bank-qualified bonds would reduce revenues by $5 million next year, $22 million in 2012, $35 million in 2012, and $38 million in each of 2014 and 2015. The provision would allow banks to deduct 80% of the cost of buying and carrying tax-exempt debt sold by issuers who sell not more than $30 million of tax-exempt bonds per year, up from $10 million.

Allowing federal home loan banks to provide letters of credit for tax-exempt bonds for another year would result in revenue losses of only $2 million in 2011, $10 million in 2012, and $15 million in each of the next few years, the JTC said.

Excluding water and sewer exempt facility bonds from state private-activity bond volume caps in 2011 would reduce federal revenues by only $1 million that year. But permitting Indian tribes to issue tax-exempt bonds for water and sewage facilities for a year would actually add $4 million in revenue for the year, the JTC said.

The committee found that increasing the exemption from arbitrage rebate requirements to $15 million from $10 million for issuers who sell $15 million or less of bonds per year and use $10 million of them to finance public school construction would result in a revenue loss of $9 million in 2011.

But allowing tax-exempt private-activity bonds to be issued in states in amounts up to $10 per capita for elementary and secondary public school facilities owned by private, for-profit corporations but operated by public agencies under certain public-private partnership agreements would add $4 million of revenue during the fiscal year.

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