WASHINGTON — The Senate Finance Committee on Tuesday approved by a vote of 17-6, a transportation revenue measure that would increase the limit for bank-qualified bonds and exempt private-activity bonds from the alternative minimum tax through this year as well as authorize state infrastructure banks to issue tax-credit bonds for transportation.
The bill also would exempt water and sewer bonds from states’ private-activity bond volume caps.
Senate Finance Committee chairman Max Baucus, D-Mont., added the bank-qualified bond, PAB, and TRIP provisions to the measure before the vote after muni market groups voiced strong support for increasing the limit for bank-qualified bonds to $30 million from $10 million in a letter to a committee member, Sen. Jeff Bingaman, D-N.M. Bingaman had been prepared to offer an amendment to the limit before Baucus added it to the measure.
The water and sewer bond provision was an amendment, sponsored by Rep. Bill Pascrell, Jr., D-N.J., that was approved by the committee by voice vote. The amendment was taken from the Sustainable Water Infrastructure Investment Act that Pascrell and Rep. Geoff Davis, R-Ky. proposed last May.
Baucus’ bill, the Highway Investment, Job Creation and Economic Growth Act of 2012, primarily aims to redirect certain taxes to finance a two-year, $109 billion highway reauthorization bill sponsored by Sens. Barbara Boxer, D-Calif., and James Inhofe, R-Okla.
The addition of the new provisions, which may ruffle Republican feathers, comes after Boxer guided her bill through committee with unanimous bipartisan support. However, muni market groups said that several committee Republicans support the bank-qualified provision.
The bank-qualified bond provision would allow banks to deduct 80% of the cost of buying and carrying tax-exempt bonds sold by issuers whose annual issuance is $30 million or less throughout 2012. It would also allow the limit to be applied on a borrower-by-borrower basis instead of aggregating all bank-qualified bonds issued by a conduit issuer.
Susan Gaffney, director of the Government Finance Officers Association federal liaison center, said the $10 million limit on bank-qualified bonds has been a problem since it was created in 1986. She estimated that if it had been indexed for inflation, it would only be worth about $5.4 million today.
“Getting this included is a very positive and needed step,” Gaffney said. “We’ve been asking for this for many years.”
The GFOA and 18 other groups representing states, local governments, bond lawyers, dealers and others sent a letter to Bingaman on Monday praising his forthcoming amendment, a modified version of which Baucus absorbed into his finance bill. They estimated it will lower borrowing costs for small governments by up to 50 basis points.
“Thousands of local governments, schools, hospitals, colleges and other entities will be able to more easily access the capital markets, and sell debt in an efficient, less costly manner, which will ultimately result in a savings for taxpayers,” they wrote.
The provision is estimated to cost $356 million over 10 years, according to the Joint Committee on Taxation.
“We’re always concerned about the way these provisions are scored, but at the end of the day this provision will save money for taxpayers” Gaffney said.
Bob Scott, chief financial officer with Carrollton, Texas, a suburb of Dallas, said his city would like to take advantage of bank-qualified bonds but due to high costs it seldom sells issues of less than $10 million. Increasing the debt limit “would offer us a great opportunity to expand our market, hopefully lower our issue costs, and make our bonds much easier to sell,” Scott said.
Pascrell on Wednesday estimated his amendment exempting water and sewer bonds from the PAB cap would allow water systems to access capital throughout the nation and would help fill a projected $500 billion gap in funding for water infrastructure. He pointed to a report by the American Society of Civil Engineers that found that by 2020, the U.S. will have fallen $84 billion short of the investments needed in our critical water systems. The provision is estimated to cost $305 billion over 10 years, according to the Joint Committee on Taxation.
The modified bill also contains a provision that would allow state infrastructure banks to issue tax-credit transportation and regional infrastructure bonds, which were created and initially proposed by Sens. Ron Wyden, D-Ore., and John Hoeven, R-N.D. The bipartisan duo have a TRIP bond bill pending in the Senate.
Wyden has said that he turned to TRIP bonds after it became clear that an encore run for Build America Bonds would not be able to get enough support to become law. Most Republicans oppose BABs.
Wyden said in a press conference last week that TRIP bonds would be strippable, meaning they could be stripped from the principal of the bonds and sold separately to a bigger pool of investors. He said they also would cost the federal government only $12 billion in lost revenue over 10 years, far less than tax-exempt bonds.
The TRIP proposal has the backing of many transportation advocates, including the American Association of State Highway and Transportation Officials, but muni market participants have never warmed to tax-credit bonds. In the two years of the BAB program, which gave issuers a choice of direct-pay or tax-credit options, nobody issued tax-credit BABs.
If the bill passes through the Finance Committee and gets approval on the Senate floor, where it could land as soon as this week, it will be at odds with the six-year, $260 million surface transportation proposal pending in the GOP-dominated House.
An attempt by Rep. Richard Neal, D-Mass, to add the increased limit for bank-qualified bonds and the exemption of private-activity bonds from the AMT to the revenue measure before the House Ways and Means Committee last week was shot down by committee Republicans last week.