WASHINGTON — Municipal market participants are disappointed that the tax bill signed into law by President Obama Friday does not extend the Build America Bond program and other key bond-related tax incentives, but will urge lawmakers to reconsider them next year.

“We’re disappointed that the tax act doesn’t include the extension of BABs, the higher issuer limit for bank-qualified bonds, or the alternative minimum tax exemption for private-activity bonds,” said Michael Decker, managing director co-head of the Securities Industry and Financial Markets Association’s municipal securities division.

“We’d love to see Congress revisit these programs,” Decker added.

“We are hopeful that in 2011, Congress will work to reinstate these programs,” said Susan Gaffney, director of the Government Finance Officers Association’s federal liaison center.

“GFOA and the other state and local government organizations have been asking for changes to many of these programs for years — especially the bank-qualified debt issue and exempting the AMT from private-activity bonds,” she said. “Therefore, we hope that Congress will continue to share its bipartisan support for these issues, and that they can be brought back to life soon after the New Year.”

Rep. John Mica, R-Fla., the incoming chairman of the House Transportation Committee, told Bloomberg News on Friday that he plans to introduce a bill next year to resurrect the BAB program, ­causing a stir in the muni market.

A spokesman for Mica said he made the remark in the context of moving forward with a multi-year transportation bill without raising the gas tax.

BABs were mentioned as an example of a number of potential options that ­Congress could look at more closely as a transportation bill is developed, the spokesman said.

William Daly, senior vice president of government relations for the Bond Dealers of America, said: “BDA is encouraged that incoming chairman Mica, and we hope other members, recognize the long-term benefit of the municipal finance provisions that have been in effect over the last two years, not only BABs but the bank-qualified provisions, the AMT relief, and others. We will work in the next Congress to ensure a strong municipal market.”

But several market participants said he could face an uphill battle because key Republicans in the House and Senate oppose BABs.

“It’s encouraging, but it will still be a steep climb to get the program resurrected,” Decker said.

“I think it’s going to be very difficult in the short term,” said Charles Samuels, a member of the law firm Mintz Levin Cohn Ferris Glovsky and Popeo PC. “Obviously the incoming chairman of the House Ways and Means Committee went out of his way [Thursday] night to criticize BABs and that’s not really good.”

According to Rep. Dave Camp, R-Mich., the BAB program, which he said was created by the “failed stimulus” law, “simply subsidized state and local governments going deeper into debt.”

Samuels pointed out that the second highest-ranking Republican in the Senate, Minority Whip Jon Kyl, R-Ariz., also opposes BABs and worked to keep them out of the tax act.

“It’s very disappointing that state and local governments and nonprofits were left out” of the tax act, Samuels said. “It’s also disappointing that distinctions were not made between the bond provisions,” with foes of BABs also criticizing almost all of the muni bond-related provisions.

Samuels said it’s very possible that “the market will become quite roiled next year,” and “that will show that these provisions were not just two-year wonders and that we still need them.”

The $858 billion Middle Class Tax Relief Act of 2010 was passed by a vote of 277 to 148 in the House late Thursday, with a surprising number of Democrats supporting the measure, after the Senate passed it Wednesday by a vote of 81 to 19 on Wednesday.

The law extends the Bush administration tax cuts for two years and unemployment benefits for 13 months, as well as reinstates the inheritance tax for estates of $5 million or more for individuals.

Liberal Democrats complained the measure will benefit millionaires and billionaires, but it ultimately passed because it was a compromise measure between Republicans, the White House, and some Democrats that was also designed to help the middle class.

However, the tax act fails to extend a number of bond-related tax incentives provided by the American Recovery and Reinvestment Act, which are set to expire on Dec. 31. Besides BABs and the $30 million small-issuer limit for bank-qualified bonds, and the AMT exemption for private-activity bonds, these include the recovery zone bond program, the exemption of water and sewer bonds from state PAB volume caps, and the authority for federal home loan banks to issue letters of credit for tax-exempt debt.

The act extends qualified zone academy bonds through 2011 and authorizes $400 million more for them, but only as tax-credit bonds without any direct-pay option, similar to BABs. However, it does not prevent muni issuers from continuing with the direct-pay option  to sell qualified school construction bonds, qualified energy conservation bonds, and clean renewable energy bonds already allocated, or slated to be allocated, under previous laws, even after 2010.

QSCB issuers get payments from the federal government equal to the lesser of the bonds’ actual interest rate or the tax-credit rate. QECB and CREB issuers get payments equal to 70% of their interest cost.

The law also would increases the exemption from arbitrage rebate requirements to $15 million from $10 million for issuers who issue $15 million or less of bonds in a year and use $10 million of them to finance public school construction expenditures.

It allows tax-exempt PABs 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 educational agencies under public-private partnership agreements that meet certain criteria.

The authority to issue New York Liberty Zone bonds and Gulf Opportunity Zone bonds are extended through 2011, along with certain tax incentives associated with them.

The ability to deduct state and local sales taxes in lieu of state and local income taxes also are extended through 2011.

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