Want a Quick Stimulus? Make Private-Activity Bonds Not Subject to AMT

In the frantic discussion regarding the spending of billions of taxpayer dollars on new infrastructure to stimulate the economy, a simple and painless way to free up $25 billion of currently authorized transportation bonds has been seemingly overlooked.

Under current regulations, interest paid on tax-exempt private-activity bonds for transportation projects is subject to the alternative minimum tax. As a result, these bonds are not marketable and the approved projects intended to be financed are not moving forward. Making private-activity bonds no longer subject to the AMT is one action that would immediately allow for the issuance of billions of dollars of tax-exempt PABs for infrastructure, with virtually no cost to the federal government.

The ever larger focus on the over $1 trillion planned for bailouts and economic stimulus should not distract Congress from fixing current programs that have denied participants intended benefits due to poor design. Before additional taxpayer dollars are committed. Congress should undertake a simple repair of this program that could provide immediate investment in public infrastructure by state and local governments and the private sector.

PABs subject to the AMT are producing no discernible public benefit while actually costing taxpayers money. The preponderance of airport revenue bonds, as well as the entire $15 billion of Federal Highway Administration's PABs program for surface transportation, are subject to the AMT. A backlog of projects that are ready to go could be immediately enabled if Congress eliminates the AMT provision for such bonds.

Subjecting PABs to the AMT has never produced a desired public policy benefit. Even in the best markets, bonds subject to the AMT have paid a premium of 30 basis points or more above comparable non-AMT bonds. In the current market the premium has moved well north of 100 basis points if in fact any buyers can be located. However, since the buyers of those bonds have almost exclusively been investors not subject to the AMT, the U.S. Treasury has never received a meaningful revenue benefit.

The issuers of AMT bonds, however, pay significantly higher cost for their funding, and recently those costs have become unmanageable. AMT spreads have widened because of uncertainties regarding the tax - which taxpayers will be subject to it and whether will Congress continue to extend the exemptions.

Uncertainty has greatly undermined the market acceptance of these bonds and the potential buyer base has become increasingly narrow. There have been no sizable new issues of AMT bonds brought to market since mid-September. There is now a substantial backlog of deals and few identified potential buyers. There is no market expectation of improving receptivity for AMT bonds any time soon.

Given the backlog of pending bond issues for established borrowers and the allocated-but-unused PABs for surface transportation, immediate economic stimulus will be achieved if the bonds were no longer subject to the AMT. This past July, with the passage of the new Housing and Economic Recovery Act, most tax-exempt housing bonds were exempted from the AMT and that market immediately benefited.

As AMT bonds are either not being sold at all or being placed only with the limited and shrinking universe of buyers not subject to the tax, freeing transportation private-activity bonds from the AMT will deliver a similar and immediate benefit with no cost to the Treasury. While this solution does not have the headline-grabbing potential of billion-dollar spending programs, it is a sound and simple fix to assist in the effort to get America moving again.

Dan Heimowitz is a managing director at RBC Capital Markets U.S. infrastructure and project finance group.

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