WASHINGTON — The federal government should both exempt private activity bonds from the alternative minimum tax and create a national public-private partnership office to help state and local governments put together deals which are becoming increasingly large and complex, Brookings Institution said in a series of reports issued Tuesday.

The new series, titled “Remaking Federalism, Renewing the Economy,” focuses on federal policy recommendations aimed at supporting state and local growth. AMT relief for PABs and an increased focus on P3 development are strategies that the U.S. government should embrace to help municipalities overcome shrinking federal infrastructure funding, Brookings says.

“Over the past decade, the federal government has contributed to only about 25% of total public spending on transportation and water infrastructure, while overstretched state and local governments have covered most capital expenditures as well as maintenance and operation expenditures,” Brookings scholars Robert Puentes and Joseph Kane wrote in support of AMT relief. “Given the declining rate of growth in public infrastructure investment, additional channels of funding are essential for municipalities.”

PABs are a frequent vehicle for financing water and sewer projects as well as certain transportation infrastructure and other projects. But federal tax policy imposing the AMT on PAB interest, a tax that was temporarily lifted in 2009 and 2010 as part of the American Recovery and Reinvestment Act, restricts the appeal for many investors.

“State and local governments, as a result, must pay higher interest rates on PABs — more than 25 basis points on average compared to other tax-exempt bonds — to compensate investors for their tax liability, which in turn leads to higher infrastructure costs,” the Brookings report states.

Airports, which rely heavily on PAB funding, have been an especially loud voice on the issue, along with other lobbying and market groups and the U.S. Department of Transportation. The American Association of Airport Executives and Airports Council International-North America both prominently supported the AMT exemption during the negotiation of the most recent surface transportation bill, though that provision was stripped from the language before passage. In September, ACI-NA adopted a new resolution reaffirming its commitment to the cause.

The DOT has also supported the idea, but it has not been palatable to some congressional Republicans, along with other ARRA provisions. The Joint Committee on Taxation has estimated the policy would cost about $50 million annually over the next five years.

“While some may emphasize the cost of an AMT exemption for PABs, the return on such an exemption far outweighs the expenditure,” argue Puentes and Kane. “By making PABs more attractive to private investors, an AMT exemption can promote private and public sector involvement.”

The government can also help spur private sector involvement by creating a national entity to help state and local governments orchestrate P3 deals, another Brookings report authored by Puentes asserts. The U.S. is a latecomer to P3 deals, executing only about 9% of global transactions from 1985-2001, according to the report. But though localities are increasingly turning to the private sector for help with infrastructure finance, not all municipalities have the technical knowledge or experience to execute deals effectively. At the same time, P3 projects are beginning to break new ground in complexity, utilizing combinations of bond financing and federal grants and loans for projects that involve multiple government authorities- sometimes even across state lines. There has also been some concern that P3 deals do not protect the public interest, and projects like the Indiana Toll Road concession have met with some political backlash. Those are concerns a national P3 unit could address, Puentes contends.

“Countries and states around the world with well-developed [P3] markets have built such units to help with quality control, technical assistance, standardization, promotion, and policy guidance,” his report states. “The federal government can provide considerable assistance to those states, cities, metropolitan areas, and private sector entities that need and request it.”

Puentes estimated that such an office would cost no more than $3 million per year, and could be created by executive order.

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