New Tax Bill Threatens Future of Build America Bonds

The tax bill the White House has negotiated fails to renew the popular Build America Bonds program, which makes borrowing less expensive for local governments.
by , | December 8, 2010

The program that created Build America Bonds — debt instruments that allowed local governments to get funding at a lower cost than usual – is set to expire at the end of the year after legislators failed to reauthorize the program in the new tax bill.

Though the legislation has not been passed, and some Democrats are angry that the White House negotiated a deal with the GOP, renewal of the bonds is not present in the deal that stands.

According to the Bond Buyer, Republication negotiator Sen. Jon Kyl scuttled renewal of the program. He has previously argued that Build America Bonds rewarded localities that had low credit ratings by giving them more affordable financing than they would have ordinarily received.

The bonds, created as part of last year’s stimulus package, were intended to spur job growth by making it less expensive for local governments to borrow money for new capital projects.

Earlier this year, Governing columnist John E. Peterson gave a good explanation of how the bonds work:

Build America Bonds are different from traditional, tax-exempt municipal bonds: The interest income on BABs is fully taxable by the federal income tax. This would normally be unattractive to issuers — if the interest rate is taxable to investors, issuers must pay those investors a higher rate. But with BABs, the federal government pays the state or local issuer a subsidy equal to 35 percent of the interest rate.

Government issuers must run the numbers to see if, at the time and under the circumstances they are coming to market, BABs are less expensive than selling a traditional muni bond. When Washington state issued its first BABs in October 2009, it found that the $500 million offering for transportation projects had significant interest-rate savings over a tax-exempt version. "Without the Build America Bonds program," said State Treasurer James McIntire at the time, "these bonds would have cost taxpayers another $62.4 million over the life of the bonds — enough to buy another passenger ferry."

The program was a success by most accounts. Through November, state and local municipalities had sold 2,060 Build America Bonds totaling more than $165 billion. The figure represents 22 percent of all municipal bonds.

Use the form below to search Governing’s database of all the Build America Bonds projects issued since the program’s inception.

Click here to load this Caspio Online Database app.

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