WASHINGTON — The American Bar Association in a letter to lawmakers recommended that Congress reenact the taxable Build America Bond program.
The recommendation was one of 11 suggestions the ABA's taxation section provided on how to simplify and reform tax-exempt bond financing as part of a comprehensive tax reform plan.
The tax group made its recommendations in a 23-page letter sent to the Senate Finance and House Ways and Means Committees on Monday.
BABs should be reenacted at a 28% subsidy rate with expanded authorization to include refinancings, governmental working capital financings and financing for 501(c)(3) nonprofits, the group wrote.
"By offering refundable tax credits in lieu of tax-exempt interest, they opened up the municipal securities market to nontraditional investors that do not benefit from tax-exempt interest," the ABA group said.
BABs contributed to stabilizing the demand for state and local debt, improved the under-capitalization of the tax-exempt market and lowered borrowing costs, the letter said.
The BAB program was created in 2009 under the American Recovery and Reinvestment Act and expired at the end of 2010. Issuers sold more than $181 billion of BABs and received subsidy payments from the federal government equal to 35% of their interest costs.
Last week Democrats on the Ways and Means Committee proposed legislation that would permanently reinstate the BAB program with a 32% subsidy rate for 2012, with that rate to be reduced by one percentage point each year until it reaches a permanent rate of 28% in 2016.
Despite the push from Democrats, the Obama Administration and other groups, it is unlikely reinstating BABs will gain traction, due to fierce Republican opposition.
Similar to the proposal in President Obama's fiscal 2013 budget, the ABA group suggested lawmakers ease tax-law restrictions to allow current refundings of state and local government bonds that satisfy size and maturity limits. The issue price and weighted average maturity of the newly issued bonds could be no greater than the remaining principal amount and weighted average maturity of the original bonds.
"This option would be limited to current refundings and would therefore permit the refunding bonds and the refunded bonds to be simultaneously outstanding for no more than 90 days," the ABA group wrote.
To simplify treatment of categories of tax-exempt bonds, the group suggested exempting all tax-exempt bonds from the alternative minimum tax. Currently, private-activity bonds are subject to the AMT.
"Repealing the AMT's application to tax-exempt qualified private-activity bonds would simplify the tax-exempt interest exclusion, eliminate confusion among potential purchasers of tax-exempt bonds, enhance market demand for these bonds and increase market efficiency," the ABA group wrote.
The ABA group recommended that lawmakers make permanent the ARRA temporary increase in the small-issuer exemption for bank-qualified bonds to $30 million and apply it to conduit financings. The ARRA provision allowed banks for one year to deduct 80% of the cost of buying and carrying tax-exempt bonds sold by issuers whose annual issuance was $30 million or less, up from $10 million. The $10 million limit has not been increased since 1986 and the ABA group argued that the cost of capital projects has increased dramatically since then.
Issuer groups, including Bond Dealers of America, have been actively lobbying Congress to make permanent the ARRA bank-qualified provision since it expired.
Lastly, the ABA group recommended lawmakers increase the small-issuer exception from arbitrage rebate to $30 million, index it for inflation and remove the general taxing power eligibility requirements. The rebate requirement has remained at $5 million since its enactment in 1986.
"Increasing the amount and providing for future inflation adjustments could broaden the utility of this exception and alleviate administrative burdens on small issuers," the group wrote.
They also suggested repeal of the $150 million non-hospital bond limitation on all qualified 501(c)(3) bonds.