Efforts to extend the Build America Bonds program and other temporary bond provisions enacted as part of last year's stimulus act took a major step backwards last week when Senate Democrats tabled the tax package including the extensions after yet another failed procedural vote.
Late Thursday, the American Jobs and Closing Tax Loopholes Act was again blocked, despite repeated attempts by Senate Democrats to pare down the bill to gain needed support from moderate Democrats and Republicans. The vote to limit debate on the package, which required 60 votes, garnered only 57.
Following the failed vote — the third this month on the legislation — Senate Majority Leader Harry Reid, D-Nev., tabled the package.
"Until Republicans join us in supporting this legislation that will help the middle class and strengthen the economy, we will not be able to move forward," a spokesperson for Reid said Friday. The House had approved a similar package on May 28 by a vote of 215 to 204.
Opposition to the package was focused primarily on items pricier than the bond provision extensions, as Republicans argued the bill would add to the growing federal deficit. Nonetheless, extensions anxiously sought by muni market participants have now stalled as the clock continues to tick towards the provisions' Jan. 1 expiration date.
"It's very disappointing. It will hurt small governments and charities," said Charles Samuels, a lawyer with Mintz Levin Cohn Ferris Glovsky & Popeo PC and counsel to the National Association of Health and Educational Facilities Finance Authorities.
The group is a strong advocate for the increased small-issuer exemption on bank-qualified debt originally enacted as part of the American Recovery and Reinvestment Act, which is set to expire at the end of the year and would have been extended through 2011 in the stalled bill.
"Hopefully, Congress will find a way to extend the provision by the end of the year," he said.
The bond provisions, particularly BABs, have vocal supporters on Capitol Hill, including Ways and Means Committee chairman Sander Levin, D-Mich, who could continue pushing for the provisions. But if the tax package is not resurrected, the extensions would need to find a home in different legislation, market participants said. But no alternate legislative vehicle is immediately apparent.
"It's too early to tell," said Michael Decker, managing director and co-head of municipal securities at the Securities Industry and Financial Markets Association. "I'm sure supporters will look for another vehicle if this one isn't revived, but I can't say yet what that will be."
Market participants also were concerned that the work in Congress could be cut short this year as lawmakers gear up for November's elections.
The BAB extension currently in the stalled measure would extend the program for two years, and would lower the current 35% federal interest rate subsidy level to 32% for bonds sold in 2011, and 30% for those sold in 2012. The tax package also includes a one-year extension to the recovery zone economic development and facility bond programs, which would also be allocated another $25 billion in bond authority.
The package also would have extended by one year the greater small-issuer exemption for bank-qualified bonds. The ARRA 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 from the previous limit of $10 million.
It also allowed for the $30 million limit to be applied to individual borrowers participating in conduit deals, rather than at the conduit-issuer level. The tax bill would extend these measures through 2011. The bill also would have extended for one year the exemption from the alternative minimum tax interest on all private-activity bonds, including those issued to refund debt sold after 2003.
The package also included several extensions that would rejuvenate provisions that already expired at the end of 2009.
New York City issuers would have regained the ability to sell Liberty Zone bonds through the end of 2010 under the bill. 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 bill would have extended through 2010 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.