House Speaker John Boehner's "Plan B" backup proposal to prevent some tax rate increases would make permanent two muni bond provisions that were originally enacted along with the 2001 and 2003 Bush-era tax rate cuts.
The first proposal would increase the arbitrage rebate exception for qualified school construction bonds to $15 million from $10 million on a permanent basis. This would cost $72 million over 10 years, according to an analysis the Joint Committee on Taxation released Wednesday.
Since 1986, governmental bond issuers have been able to avoid worrying about rebate as long as they don't issue more than $5 million of bonds each year. The idea behind that was if localities are only issuing small amounts of bonds, they shouldn't have to worry about the expense of doing a rebate calculation.
In 2001, Congress gave issuers the ability to bump that limit up to $15 million each year as long as the additional $10 million goes to qualified school construction expenditures, such as public school construction.
The entire bill that included this provision expired at the end of 2010, but was extended for two years. However it is set to expire again.
Linda Schakel, a partner with Ballard Spahr LLP, said this provision is currently irrelevant because no issuer is earning arbitrage that must be rebated.
"This is meaningless and doesn't give issuers anything," she said. "It just means they don't have to pay rebate but they aren't earning arbitrage now anyways."
Issuers aren't earning arbitrage because investment rates are hovering around 0.12%, she said.
The second bond provision in the proposal deals with the private activity bond category for public education facilities and would also be permanent. Under this provision, tax-exempt private activity bonds could be issued for qualified education facilities in states with annual volume caps that are the greater of $10 per resident or $5 million.
The idea is that a private corporation could borrow money to build a public school and then lease it to the public school for an amount equal to the bond debt. At the end of the term of the bonds the building would belong to the school district without the district's having to pay additional money.
However, Schakel made the point that school districts can already issue bonds and she questioned whether any of these bonds have ever been issued. Schakel said this provision might have been extended for so many years by Congress as a "force of habit."
The total cost to make permanent these and certain other tax cuts enacted in 2001 and 2003 would be $1.83 billion over 10 years, according to JCT. The total cost of the entire proposal, including increasing tax rates for those earning more than $1 million, patching the alternative minimum tax, and addressing estate taxes, would amount to $4.1 trillion, JCT estimated.
Boehner's plan would also increase the alternative minimum tax exemption to $50,600 for individuals and $78,750 for couples in 2012. The plan would index the AMT exemption amount, beginning in 2013. This would cost approximately $1.88 billion over 10 years, according to JCT. Private activity bonds are subject to the AMT.
Boehner is expected to move forward with a House vote on his Plan B legislation Thursday. During a brief press conference on Wednesday, he claimed that it would have enough votes to pass the House.
Boehner made his comments after President Obama threatened to veto the plan if Congress passed it. But Obama vowed to continue negotiations with the Speaker and other lawmakers to find an agreement on a year-end budget deal.
Meanwhile, the Internal Revenue Service Acting Commissioner Steven Miller sent a letter to Congress on Wednesday that said, "absent enactment of a new patch in the near future, nearly 30 million additional taxpayers will become subject to the AMT on their 2012 income tax returns."
Miller emphasized that most taxpayers may not be able to file their 2012 tax returns until late March 2013 or even later.
"As we consider, the impact of the current policy uncertainty on the upcoming tax filing season, it is becoming apparent that an even larger number of taxpayers — 80 to 100 million of the 150 million total returns expected to be filed — may be unable to file," Miller wrote.
The IRS can't process taxpayer returns whose return characteristics do not allow the agency to differentiate them from those whose tax liability would be altered by the AMT expiration, Miller said.
