The federal government is expected to forego more than $26 billion in annual revenue each year from fiscal 2008 through fiscal 2012 because of what tax-exempt bond financing of infrastructure projects costs federal coffers, the Congressional Budget Office and Joint Committee on Taxation
The groups concluded that, “in principle,” replacing tax-exempt bonds with tax-credit bonds could make tax-preferred financing more efficient partly by returning more of the foregone revenue to the borrowers.
In addition, the lack of cost projections that would be calculated through the appropriations process for municipal bonds makes it “all the more important” for the federal government to ensure a cost-effective design of tax-preferred investments, the report said.
The CBO and JCT said that newly created tax-credit bonds from the American Recovery and Reinvestment Act — including qualified school construction bonds, and Build America Bonds with their option for a tax credit — will help the groups predict the potential benefits and downsides of tax-credit bonds. There are currently eight categories of tax-credit bonds.
But the report said two possible advantages of tax-credit bonds are already apparent. First, the full amount of forgone federal revenue is transferred to borrowers that issue tax-credit bonds instead of benefitting individuals who have a high marginal tax rate, it said.
“Second, although tax-credit bonds have tended to provide a subsidy that is close to 100% of interest costs, the amount of the tax credit can be adjusted,” the report said. By adjusting that amount, Congress could exercise more control over exemption amounts and “tailor the federal subsidy to the public benefit” that it predicts would result from the bond-financed project.
But the report included a caveat in its analysis. Bond buyers have not flocked to the tax-credit market “for a number of reasons, including the limited size and temporary nature of tax-credit bond programs” and the lack of rules for stripping.
“That situation is likely to change” in the wake of ARRA-implemented tax-credit bond programs, the report said.
The report also provided a tally of tax-preferred debt issuance for infrastructure. The groups said a total of $1.7 trillion of new tax-preferred debt was issued for infrastructure projects between 1991 and 2007. About 75% of the proceeds from those bond deals were for capital spending by states and localities. The remainder was for private investment “for projects that serve a public purpose, such as schools and hospitals,” the report stated.
The public and private sectors in the U.S. spend more than $500 billion annually on infrastructure projects including surface transportation, airports, water and sewer, energy, schools, hospitals, and other facilities, the CBO and JCT found.
Total state and local spending on infrastructure in 2007 was about $215 billion, and the federal government spent a total of about $68 billion, they said.
The report added that the $26 billion of estimated foregone annual revenue between fiscal 2008 and 2012 from tax-exempt bonds includes both new issuance and refinancing of existing debt.
The CBO has previously said tax-exempt bonds are inefficient. In 2006, then-acting director Donald B. Marron told the House Ways and Means Committee’s select revenue measures panel that tax-exempt bonds were “not a cost-effective means of transferring resources from the federal government to state and local governments.”
At the time, tax-credit bonds were relatively new to the municipal debt market, and Marron told the panel that direct fund transfers, such as appropriations, could be a less expensive way for the federal government to provide financial aid to states.
