WASHINGTON — A Republican proposal that would have allowed the Build America Bond program to expire at the end of the year was defeated Thursday, as Senate lawmakers continued working toward passing legislation to extend several expiring tax breaks, including for BABs.

The GOP measure, which did not include extensions of two recovery zone bond programs or BABs, had been offered by Sen. John Thune, R-S.D., to eliminate the tax increases and wasteful spending that he claimed was in broader legislation passed by the House and supported by many Senate Democrats.

Thune’s amendment was defeated on a procedural vote of 41 to 57, at which point it was withdrawn.

Senators then turned their attention to a new package offered by Finance Committee chairman Max Baucus, D-Mont., that was slimmed down from the previous version defeated earlier in the week. The new proposal removes or tweaks some provisions of the previous one, but leaves the muni bond provisions intact.

It also includes a new provision that would allow special low-income housing tax credits allocated to areas recovering from Hurricane Katrina and Midwest flooding to participate in a program under which the credits can be exchanged for cash. Housing proponents have been pushing for such an exchange program for more than a year.

Votes on the new package were unlikely last night, but could come sometime Friday. However, it remains unclear whether Senate leaders have changed the package enough to win over reluctant Democrats and Republicans.

Specifically, the legislation would allow special low income housing tax credits, or LIHTCs, allocated to Gulf Opportunity Zone and Midwestern flood areas to be exchanged for federal cash grants under a program created by the American Recovery and Reinvestment Act. That program was designed to alleviate the lack of investors in the tax-credit market due to the credit crisis, but it was unclear if the disaster credits could be exchanged for cash.

Housing agencies and lawmakers in the gulf states and Midwest asked the Treasury Department in April 2009 for clarification on the matter. But Treasury officials told them that the department could not allow the credits to be exchanged for cash because the disaster credits were authorized under a different section of the tax code than regular LIHTCs, and the exchange program only applied to credits authorized under the tax-credit section.

The new extenders package would provide a legislative fix that would allow such exchanges.

The new package retains a provision to extend the BAB program for two years and reduce the current 35% subsidy rate to 32% for BABs sold in 2011 and 30% for BABs sold in 2012. It also would extend the recovery zone economic development bond and recovery zone facility bond programs by one year, through 2011, and allocate an additional $25 billion in bond authority for the programs.

Another provision retained in the new package would extend by one year a greater small-issuer exemption for bank-qualified bonds. 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 of 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 the conduit issuer. The new bill would extend these measures through 2011.

The legislation also would extend for one year the exemption from the alternative minimum tax for all private-activity bonds, including those issued to refund debt sold after 2003. That provision is also currently set to expire at the end of the year.

In addition, New York City issuers would be able to sell Liberty Zone bonds through the end of 2010 under the new 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 extend for another year 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. It also would extend by one year the tax incentives for District of Columbia empowerment zones — economically distressed areas where businesses are eligible for tax incentives, including tax-exempt bonds, to spur development.

The bill also would extend by six months, through June 2011, the enhanced Federal Medical Assistance Percentage, which provides funding that states receive from the government for health care. States have received an enhanced federal match for FMAP since ARRA was enacted last year.

Democratic governors and senators earlier this week lobbied lawmakers to include the extension in the extenders package. Thursday, 21 state and city chief financial officers told Senate leaders that the enhanced FMAP has provided “critical federal support [that] has allowed states to better weather the economic downturn without slashing jobs and vitally important programs.” They called for it to be extended in a letter sent to Senate Majority Leader Harry Reid, D-Nev., and House Speaker Nancy Pelosi, D-Calif.

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