Build America Bonds Would Be Extended to 2012, Have Subsidy Cut Under Bill
U.S. President Barack Obama speaks in the Rose Garden of the White House in Washington. Photographer: Joshua Roberts/Bloomberg
Build America Bonds, the fastest- growing part of the $2.8 trillion municipal bond market, would be extended and their subsidy cut under a jobs bill scheduled for a vote in the U.S. Congress next week.
The bond program, created last year in President Barack Obama’s economic-stimulus package, is set to expire at year-end. The American Jobs and Closing Tax Loopholes Act would extend it to 2012 and reduce the subsidy the federal government pays to issuers on the bonds’ interest to 30 percent from 35 percent.
About $104 billion of the debt has been sold since the University of Virginia and the University of Minnesota brought the first issues to market in April 2009. The program saved municipalities about $12 billion in its first year, the Treasury said this month. States and local governments embraced the program to finance public works amid declining revenue from the deepest economic slump since the Great Depression.
“The goal of the Recovery Act program was to encourage state and local governments to launch building projects and put people back to work,” said Alan Krueger, the Treasury Department’s chief economist, in an interview this month. “The fact that issuance has surpassed $100 billion is an indication of how successful it’s been in achieving that goal.”
Reconciling Versions
House and Senate negotiators are reconciling their versions of the bill, which also contains a proposal to more than double taxes on managers of buyout firms, delay cuts in Medicare fees to doctors and raise taxes on lawyers, oil companies and businesses that use offshore tax havens.
The bill also gives states $24 billion to pay costs of Medicaid, the federal health-insurance program for low-income people. Many states are counting on the money to balance budgets for the fiscal years that begin for most on July 1. Florida Governor Charlie Crist proposed a $69.2 billion budget in January that assumes $1 billion of federal Medicaid payments.
Democratic leaders reached agreement yesterday on the tax increase for buyout managers. House leaders delayed until next week a vote on the bill that had been planned for today.
The bill would cut the Build America interest subsidy to 32 percent for bonds sold next year and to 30 percent for 2012. The measure would also permit the use of the sales’ proceeds to refund existing Build America issues, allowing municipalities to take advantage of any decline in interest rates.
‘Revenue Neutral’
Interest on Build America Bonds is taxable, expanding the market for municipal securities, which are typically exempt from state and federal taxes, to pension funds and international investors.
The Obama administration’s fiscal 2011 budget proposes making Build Americas permanent with a 28 percent subsidy. The Treasury calls that amount “revenue neutral,” meaning the costs of the subsidy would be balanced by the amount of extra revenue collected from taxes on interest.
Municipal debt sales will total about $10 billion this week, a third more than last week, as tax-exempt yields fall to two-month lows. Taxable sales, buoyed by Build America issues, tallied $3.5 billion, according to data compiled by Bloomberg.
To contact the reporter on this story: Jerry Hart in Miami at jhart@bloomberg.net.
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