WASHINGTON - House appropriations and tax committees yesterday described several municipal bond initiatives among the $550 billion of spending provisions and $275 billion of targeted tax cuts to be included in economic stimulus legislation, which lawmakers hope to take up beginning next week.

The American Recovery and Reinvestment Plan's muni bond provisions would repeal the alternative minimum tax for new private-activity bonds, allow financial institutions to purchase more municipal bonds, and authorize additional tax-credit bonds. They would also provide $30 billion for highway and bridge construction, $8 billion for clean and drinking water state revolving funds, and $1 billion for community development block grants.

The tax provisions would authorize clean renewable energy bonds, qualified energy conservation bonds, and tax-exempt and tax-credit bonds specifically for areas with high unemployment, foreclosures, or poverty. They would as well provide a taxable option for governmental bonds and a one-year deferral of the law requiring state and local governments to withhold 3% of payments to government contractors for taxes.

"This recovery package will provide tremendous tax relief," said House Ways and Means Committee chairman Charles Rangel, D-N.Y. "We have ... designed specific provisions to help state and local governments fund critical infrastructure projects to improve our roads, schools, bridges, and airports, while also maintaining and creating good-paying jobs for working families."

The bill will be introduced soon and the committee is expected to vote on it next Thursday, the same time the Senate Finance Committee is expected to take up its version of the tax package, which has not yet been released.

Republicans complained yesterday that they were not consulted about the tax provisions and were still unaware of their details.

"It certainly makes up in length what it lacks in details," said David Camp, R-Mich., the committee's ranking minority member.

Nevertheless, municipal market participants seemed generally pleased with the muni bond provisions.

"Based on the summary information released today by chairman Rangel, it appears the House package includes several provisions related to municipal bonds that could help jump-start the market," said Scott DeFife, senior managing director of government affairs for the Securities Industry and Financial Markets Association. "It appears these include suggestions that SIFMA and other market participants made to ensure that states and local municipalities have the ability to build projects despite the difficult fiscal situation they face."

Rangel's package would repeal the AMT, which applies to interest earned on private-activity bonds and some governmental and 501(c)(3) bonds, from all new PABs issued after the legislation's enactment. Market participants have long complained that the AMT, which is designed to ensure wealthy individuals and corporations do not have so many tax breaks that they pay no taxes, is costly to bond issuers.

The provision that would allow financial institutions to purchase bonds is believed to refer to an increase in the tax code's so-called bank deductibility limit to $20 million from $10 million to allow banks to buy more muni bonds, sources said.

Under the current provision on bank deductibility, banks are allowed to deduct 80% of the costs of purchasing and carrying tax-exempt bonds issued by states and localities whose annual bond issuance does not exceed $10 million. Muni market participants have been pushing to raise the annual limit to $30 million. .

The bill also would include proposals to authorize more school construction bonds, clean renewable energy bonds, and qualified energy conservation bonds, but the specific amounts were not disclosed.

Another provision would authorize tax-exempt and tax-credit bonds for so-called recovery zones. These bonds could be used for a wide variety of economic development projects, including job training and education. A recovery zone would be an area within a state, city, or county that has exhibited high unemployment, foreclosures, or poverty. The bonds would be allocated automatically to states and large municipalities based on the number of unemployed individuals within that area.

Susan Gaffney, director of the Government Finance Officers Association's federal liaison center, said GFOA is appreciative of many of the provisions included in Rangel's package. However, the group hopes to permanently repeal instead of delay the provision that would implement a 2005 law requiring state and local governments to withhold 3% of any payments made for property or services. Government groups including GFOA have strongly opposed the law, calling it an unfunded mandate on state and local governments.

"While a one-year deferral is appreciated, state and local governments have been strongly encouraging Congress to repeal the withholding tax on government contractors, and are hoping that a full repeal can either be incorporated into stimulus or in another piece of legislation this year," Gaffney said.

Sources said the provision that would provide a "taxable bond option for governmental bonds" may allow state and local governments to opt to issue taxable bonds in exchange for a cash payment.

In 1994, several government groups, including GFOA and the National Association of Counties, discouraged then-President Bill Clinton from considering such a provision in a legislative package for infrastructure financing. The groups were concerned issuers would not be able to rely on Congress to consistently renew appropriations for the subsidy, especially as congressional lawmakers struggled with the federal deficit.

Meanwhile, the House Appropriations Committee also unveiled its spending portion of the recovery bill. Chairman Dave Obey, D-Wis., hopes to hold a markup session on the proposal Wednesday. The Senate Committee on Appropriations had not released details on its proposal as of yesterday.

Under the House Appropriations package, clean water state revolving funds and drinking water state revolving funds would receive $6 billion and $2 billion, respectively, for states to provide low-cost loans to localities.

Funds would be distributed to programs that already exist, using current formulas. The House Appropriations proposal would create a seven-member Recovery Act Accountability and Transparency Board to monitor spending and management of the funds.

The package also would include $32 billion for transportation projects, $30 billion of which would pay for highway and bridge construction. It would also provide a total of $32 billion for an energy overhaul that would modernize the nation's energy grid and help to develop battery technology for low-emissions vehicles.

The proposal would provide $6.9 billion in block grants to state and local governments for investments "that make them more energy efficient and reduce carbon emissions," as well as another $1.5 billion that would be pledged for grants and loans to local governments, municipal utilities, and schools for energy efficiency and sustainability projects.

An additional $6 billion would be provided for broadband Internet expansion in rural and under-served areas.

The committee would authorize $1 billion in grants for new commuter or light rail, $1.1 billion to expand and speed up intercity passenger rail service, $8 billion for transit systems and buses, and $3 billion for airport improvement grants. The airport grants are used to back bonds or in conjunction with other revenue sources such as bond proceeds.

House Speaker Nancy Pelosi said the recovery legislation will contain no earmarks, or targeted funding for pet projects that lawmakers slip into spending bills.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.