Legislation has been introduced in both the House and Senate that would exempt water and sewer bonds from states’ private-activity volume caps.

Separately, a bill is pending in the House that would permit Indian tribal governments to issue tax-exempt bonds like any other state or local government as long as 95% of the proceeds are used for facilities on an Indian reservation. Rep. Tom Cole, R-Okla., introduced the bill two weeks ago.

Sen. Robert Menendez and Rep. Bill Pascrell, both Democrats from New Jersey, introduced identical water and sewer PAB measures last Tuesday, framing them as an opportunity to create jobs while giving municipalities greater access to capital.

“Taxpayers cannot be expected to foot the entire bill for all of the repairs and updates that our water infrastructure needs,” Pascrell, a member of the House Ways and Means Committee, said in a press release.

Liberated from the volume cap, the water and sewer bonds could generate $50 billion in investment and 28,500 new jobs, he said.

Menendez sits on the Senate Finance Committee.

The legislation has Republican support from Sens. Mike Crapo of Indiana and Geoff Davis of Kentucky.

Both Davis and Pascrell compared water and sewer PABs to public-private partnerships, saying the bonds bring private capital to the governments that issue the debt.

If the bill is signed into law, water and sewer private-activity bonds would join airport, high-speed rail, and solid-waste disposal PABs, among others, that are not subject to the state volume caps, according to the lawmakers and the Internal Revenue Service.

State and local governments can issue up to $32.441 billion of PABs this year, up 5.1% from 2010, the IRS announced in December.

The increase is based on population figures released by the U.S. Census Bureau and a PAB cap formula published by the IRS.

The Census Bureau estimated late last year that the U.S. population, including Puerto Rico, would hit 312.47 billion in 2010, up from 310.97 billion the previous year.

The IRS formula for determining the caps, published in October, is $95 per capita or $277.82 million, whichever is greater.

Total PAB issuance was $11.9 billion in 2009, a decline of 12.7% from the previous year, according to the Council of Development Finance Agencies.

Issuance of exempt facility bonds, which includes sewage facilities and water facilities, among other projects, was $2.4 billion in 2009, a 12.2% or $325.7 million decrease from 2008.

Momentum for the water and sewer bond PAB legislation might be blunted by lawmakers’ concerns over the federal deficit, sources said.

The tax-exempt status of municipal debt is being examined by Congress and tax-exempt legislation “that has any revenue implications” faces a long road ahead, said Rick Farrell, executive director of the Council of Infrastructure Financial Authorities.

PABs were exempted from the alternative minimum tax for 2009 and 2010 by the American Recovery and Reinvestment Act, but the provisions of that act expired on Dec. 31.

The ARRA also eased tax restrictions for bonds issued by Indian tribal governments similar to the ones proposed by Cole, but those provisions have also expired.

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