BABs May Get A Break

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WASHINGTON — Leaders of the House and Senate tax-writing committees yesterday planned to unveil legislation that would temporarily extend the Build America Bond program as well as several other municipal bond provisions set to expire at the end of the year.

Senate Finance Committee chairman Max Baucus, D-Mont., and House Ways and Means Committee chairman Sander Levin, D-Mich., released a summary of the American Jobs and Closing Tax Loopholes Act that would extend the BAB program to 2012 and gradually reduce its subsidy payment rate to 30% from 35%.

The legislation is to be introduced as an amendment to the so-called extenders package that preserved several expiring or expired tax breaks. The House and Senate each approved extenders bills but had not resolved their differences. The amendment also would include provisions found in a jobs bill that was passed by the House in March but has since stalled in the Senate.

The proposed BAB extension would be three months shorter than the one previously approved by the House in an earlier jobs bill. That bill would have extended BABs until April 1, 2013, and lowered the subsidy payment rate to 30% over the three-year period.

This new legislation would contain the same reduction in the subsidy rate over a shorter period of time. Issuers would receive direct payments equal to 32% of interest costs for BABs they sell in 2011 and 30% for those issued in 2012. President Obama and market participants had been calling for a permanent BAB extension, but congressional leaders warned it would be difficult to find the revenue needed to pay for that under pay-go budget rules where revenue losers must be offset by revenue raisers. The two-year extension would cost an estimated $4 billion over 10 years.

The legislation also would include another provision that has strong advocates in the muni market — a one-year extension for a greater small-issuer exemption for bank-qualified bonds.

The American Recovery and Reinvestment Act had allowed banks to deduct 80% of the costs of buying and carrying tax-exempt debt sold by borrowers whose annual issuance is no greater than $30 million, an increase above the previous limit of $10 million.

The stimulus law also allowed for the $30 million limit to be applied to individual borrowers participating in conduit deals, rather than the conduit issuer. That provision is set to expire at the end of the year, but the new bill would extend it through 2011, and allow it to continue to be applied to borrowers. The provision is estimated to cost $254 million over 10 years.

Thirteen muni groups applauded the provision, sending a letter to the lawmakers thanking them for their efforts.

“We are delighted with the House and Senate committee action. Although we would prefer a permanent provision, we understand the fiscal and political realities,” said Charles Samuels, counsel to the National Association of Health and Educational Facilities Finance Authorities.

However, the bill would not include another ARRA provision that encourages financial institutions to buy munis by allowing them to invest up to 2% of their total assets in tax-exempt bonds without a loss of interest deductions. While the two bank provisions were often lumped together, market participants said the “de minimis” provision was more costly and not as helpful as the small-issuer exemption.

The legislation also would extend for one year the exemption from the alternative minimum tax for all private-activity bonds, including those issued to refund debt sold after 2003. That provision would cost $224 million over 10 years.

In addition, the bill would allocate additional recovery zone bonds nationwide; tweak the formula so every municipality would receive an allocation equal to at least its share of national unemployment at the end of 2009; and extend the program for another year, through 2011. The estimated cost would be $2.4 billion.

Federal Home Loan Banks, which gained the ability to guarantee tax-exempt bonds as part of a housing bill passed in 2008, could continue to do so for another year, through 2011, at a cost of $148 million over 10 years. Water and sewer exempt facility bonds would be permanently exempt from the PAB volume cap, at an estimated cost of $372 million over 10 years.

The bill would change a provision from the jobs bill enacted in March that proved contentious. It would distribute $932 million among the states based on the share each received from fiscal 2009 highway funds. Previously, the money was to be distributed to only 29 states and the District of Columbia, based on past earmarks.

The measure would allow New York City issuers to sell Liberty Zone bonds through the end of 2010. Liberty bonds are a special type of private-activity bond created to help boost economic development in lower Manhattan following the Sept. 11, 2001, terrorist attacks. The authority to issue the bonds expired at the end of last year. The extension would cost an estimated $152 million over 10 years.

The bill also would extend for another year relaxed mortgage-revenue bond requirements for areas affected by federally declared disasters so that issuers could sell tax-exempt housing bonds to finance the repair or reconstruction of homes or rental units that were damaged or destroyed.

Finally, it would extend by one year the tax incentives for District of ­Columbia empowerment zones — economically ­distressed areas where businesses are ­eligible for tax incentives, including tax-exempt bonds, to spur development. Those provisions would cost $70 million and $85 million over 10 years, respectively.

Audrey Dutton contributed to this story.

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