Key GOP Senators Back Tax-Credit Bonds

Top Republican on the Senate Finance Committee showed support for Democratic Sen. Ron Wyden’s transportation tax-credit bond proposal Tuesday, indicating for the first time that the GOP may back the taxable bonds if they don’t add to federal spending.

Speaking Tuesday during a committee hearing on infrastructure, Sen. Orrin Hatch, R-Utah, referring to tax-credit bonds, said Republicans “are not against Build America Bonds without a direct pay-model.” 

For the past two years, Republicans have hammered BABs, claiming they provided lucrative fees for underwriters, increased costs to taxpayers, and encouraged state and local governments with lower credits to borrow more because their bonds have higher coupons and they receive higher subsidy payments from the Treasury. 

But the Treasury Department reported on Monday that BAB issuers saved an average 84 basis points on interest costs for 30-year BABs and also received significant savings on shorter maturities compared to traditional tax-exempt bonds. It estimated BAB issuers saved an estimated $20 billion on borrowing costs.

Now lawmakers are concerned about BABs’ impact on the federal deficit.

During the hearing, Hatch said the Obama administration’s fiscal 2012 proposal to reinstate BABs permanently with a 28% “revenue-neutral” subsidy rate would add $60 billion in federal spending.

Municipal Market Advisors director Matthew Posner, noting MMA supports the use of BABs and tax-credit bonds for infrastructure financing, said his firm’s best guess at a revenue-neutral rate for BABs is 20% to 25%, depending on the underlying assumptions, which are “very unclear.”

With the concerns about spending, Oregon’s Wyden and others believe they can more effectively subsidize transportation projects with tax-credit bonds rather than direct-pay, BABs-like securities.

Former Pennsylvania Gov. Edward Rendell, now co-chairman of Building America’s Future, a bipartisan, nonprofit proponent of infrastructure financing reform, told committee members that while BABs were “enormously successful,”  Wyden’s Transportation and Regional Infrastructure Project proposal, “improves upon BABs.”

Legislation that would create TRIP bonds, which an aide said Wyden is expected to introduce soon, would allow up to $50 billion of tax-credit bonds to be issued over six years through an independent transportation finance corporation.

The bonds would offer investors a tax-credit instead of issuers a direct payment from the Treasury.

However, the current market for tax-credit bonds is relatively small as the debt has not been widely appreciated by investors or issuers.

The existing tax-credit bonds “haven’t really been able to take hold,” Posner said, though he supported Wyden’s TRIP bond proposal.

During the hearing, Rendell made several recommendations for solving infrastructure financing problems. He called for the money the U.S. spends on the Afghanistan war, which he estimated at $104 billion a year, to be diverted to infrastructure spending as that conflict winds down. He said returning soldiers could be put to work on infrastructure projects.

He also proposed lifting the current restrictions on tolling previously untolled interstate roads.

“For lord’s sake lift the cap,” he ­implored.

Rendell also urged Congress to raise the volume caps for private-activity bonds used to finance infrastructure.

He called for Transportation Infrastructure Finance and Innovation Act assistance to be quintupled. TIFIA provides $122 million annually in secured loans or loan guarantees for infrastructure projects — a fraction of the bids state and local governments have submitted for funding.

Rendell also called for creation of an infrastructure bank that would finance projects while making money for the federal government, as such banks in Europe do. He supported legislation introduced earlier this year by Sens. John Kerry, D-Mass., and Kay Bailey Hutchison, R-Texas, to establish such a bank.

Posner cautioned against sweeping changes to the municipal market. Several deficit-cutting commissions and think-tank groups have recommended eliminating tax-exempt interest for all or some new muni bonds as part of the tax reforms.

He warned that “without the tax-exempt market, some issuers may be priced out of whatever alternatives you create.” Posner said a two-pronged approach to municipal finance, with tax-exempt bonds complemented by taxable alternatives, is the best way for state and local governments to fund infrastructure projects.

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Transportation industry Washington
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