WASHINGTON — Congress is expected to soon pass tax compromise legislation that would allow the Build America Bond program and other key muni tax incentives to expire at the end of the year and there is little hope that they will be revived next year, congressional aides and market participants said Friday.

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act, introduced Thursday night by Senate Majority Leader Harry Reid, D-Nev., would not extend BABs. It also would not extend the increased small-issuer limit for bank-qualified bonds, the alternative-minimum tax exemption for private-activity bonds, recovery zone bonds, or authority for the federal home loan banks to issue letters of credit for tax-exempt debt.

The bill would extend the Bush administration tax cuts for two years, unemployment benefits for 13 months, and exempt taxes on estates of $5 million for individuals. It contains few bond provisions. It would extend through 2011 and authorize $400 million more for qualified zone academy bonds, but only as tax-credit bonds without any direct-pay option similar to BABs.

However, the bill would not prevent muni issuers from continuing to sell qualified school construction bonds, qualified energy conservation bonds, and clean renewable energy bonds already allocated with the direct-pay option, even after 2010. QSCB issuers get payments from the federal government equal to the lesser of the bonds’ actual interest rate or the tax credit rate. QECB and CREB issuers get payments equal to 70% of their interest cost.

The bill also contains a two-year extension, through 2012, for an arbitrage-rebate exception for school construction bonds and would allow issuers to sell private-activity bonds outside of state volume caps for certain qualified education facilities.

The authority to issue New York Liberty Zone bonds and Gulf Opportunity Zone bonds would be extended through 2011, along with certain tax incentives associated with them. The ability to deduct state and local sales taxes in lieu of state and local income taxes also would be extended through 2011.

While liberal Democrats railed against the bill on the Senate floor Friday because it would extend tax cuts for the wealthy, sources predicted Reid will have the votes for a cloture motion Monday to limit debate on the bill and pave the way for its passage in the Senate. Even though more than 50 Democrats in the House voiced opposition to the measure last week and issuers, transportation groups and dealers urged lawmakers to include a BAB extension and other bond provisions in the final bill, sources said the current compromise measure is expected to pass the House as well without any changes.

White House press secretary Robert Gibbs told reporters Friday that there will no further additions to the tax measure, which is supported by Republicans, President Obama and some Democrats.

The BAB program and other muni incentives are not likely to be revived next year because Rep. Dave Camp, R-Mich., incoming chairman of the House Ways and Means Committee, has staunchly opposed BABs and anything stimulus-related, sources said.

BABs were created by the American Recovery and Reinvestment Act that was enacted in February 2009, which also included muni tax incentives for bank-qualified and other bonds. But these provisions all expire at the end of the month.

California Treasurer Bill Lockyer warned Friday that ending the BAB program will increase borrowing costs for taxpayers across the nation by $14.8 billion to $29.6 billion for bonds issued in 2011. He based the estimate on a projection by market analysts that the elimination of BABs will increase the yields on tax-exempt munis by 50 to 100 basis points, assuming issuers sell $232.7 billion of fixed-rate, tax-exempt bonds in 2011.

“The BABs program has been a great success story,” he said. “It has helped finance critical infrastructure investment across the country and in the process created thousands of jobs and saved taxpayers’ billions of dollars.”

Republicans have criticized the program for encouraging lower-rated states like California to borrow more because their interest rates are higher and they received bigger federal subsidy payments, which are equal to 35% of the cost of interest.

But Lockyer disputed that claim, saying that as of Dec. 2 states had completed 2,060 BABs deals since the program’s inception and that California’s share of these deals was only 7% or 144 deals. However, by dollar amount, the state’s BAB sales have totaled $36.15 billion, almost 33% of the $174.13 billion and 2,248 issues sold through Dec. 9, based on state and ­Thomson Reuters data.

Muni market groups also bemoaned the lack of a BAB extension and bond incentives in the bill.

“We are disappointed that an extension of the [BAB] program is not included in the Senate’s tax legislation,” said James Lewis, president of the National Association of State Treasurers and treasurer of New Mexico. “BABs have proven their benefit to every state by helping keep municipal bond rates down and providing competition in the market. If BABs are not extended for another year, we can expect state and local taxpayers to have to pay more to build the highways, bridges schools and other capital projects that are so vital to our country’s economy. I am hopeful that the House version of this bill will include a BABs ­extension.”

“It is unfortunate that Congress did not include ... BABs and other key municipal bond provisions that expire at the end of the year, in the proposed tax compromise legislation,” said Michael Decker, managing director and co-head of the Securities Industry and Financial Markets Association’s municipal securities group. “States and localities are facing extraordinary fiscal stress and these provisions have been vital in giving state and local governments continued access to the capital markets at reasonable terms. Without BABs, state and local borrowing costs will rise significantly.”

“Small communities and nonprofits will be negatively affected by the scaled-back small issuer bank-qualified limit, leaving fewer buyers for their bonds and issuers of tax-exempt private-activity bonds, including airports and public-private partnerships, will see costs rise significantly if the [AMT] exemption isn’t extended. SIFMA urges Congress to reconsider including these provisions in the compromise legislation,” Decker said.

William Daly, the Bond Dealers of America’s senior vice president for government relations, said: “The BDA is extremely disappointed that the tax bill does not include an extension of the bank-qualified provisions, AMT relief for private-activity bonds, recovery zone bonds or [BABs] .... We hope that next year Congress will take another look and we will work to try to bring that about.”

Susan Gaffney, director of the Government Finance Officers Association’s federal liaison center, also expressed disappointment and said: “The reality is that the $10 million bank-qualified limit, which was set in 1986, is equal to $5 million today, which means that going forward only the smallest of governments will be able to take advantage of the program.”

“If this bill stays the same,” said Charles Samuels, partner at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC, “it’s very disappointing that small nonprofits, particularly in health care and education — from dependency treatment centers to rural hospitals and struggling colleges without large endowments — will once again be shut out of or penalized for small borrowings that are of little or no interest to the public market.”

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