Build America Extension Left Out of Bill to Block Tax Increases

The U.S. Senate kept a continuation of the Build America Bond program out of a bill to extend income-tax cuts made in 2001 and 2003, according to a draft of the legislation.

The federal subsidy for debt to finance bridges, roads and other infrastructure wasn’t among changes made to win support for the measure, the text released last night shows. The subsidy pays 35 percent of the interest on qualified state and local government bonds. At least nine Democrats sought to attach an extension of the program, which ends Dec. 31, to the tax bill.

The failure is the latest in efforts to keep the Build America program going for at least another year. The prospect of its end has weighed on the $2.86 trillion municipal bond market as public officials have rushed to borrow money at subsidized rates and as investors expressed concern that traditional tax-exempt debt issuance may surge next year.

“Allowing the BABs program to die would undermine the economic recovery and harm taxpayers and working families across the country,” Tom Dresslar, spokesman for California Treasurer Bill Lockyer, said yesterday by telephone. “I know that stimulus has become a dirty word but you’d be hard-pressed to find an economic recovery program that has worked better.”

State and local issuers in the biggest U.S. state by population have sold about $37.2 billion of the taxable debt, according to data from Lockyer’s office.

Climbing Yields

The average yield on taxable Build America securities climbed to an 11-month high of 6.37 percent this week as investors demanded a larger premium to buy the municipal debt, according to a Wells Fargo index. The yield on 30-year Treasury bonds touched 4.50 percent this week, the highest since May.

Because they carry taxable rates comparable with corporate debt, state and local issuers have marketed Build America securities to pension funds, offshore investors and others who don’t typically buy municipal securities. That has curbed the supply of traditional tax-exempt bonds, sought by individuals who can use the income-tax break, and buoyed their prices.

“This in effect was one of the approaches that attracted a significant amount of private capital,” Oregon Senator Ron Wyden, a Democrat and early champion of the program, said last night in an interview outside the Senate chamber. “This has significantly changed the municipal-bond market.”

More than $178 billion of the securities have been sold since April 2009, when the program began, making them the fastest-growing segment of the municipal market, according to data compiled by Bloomberg. Without that alternative, cash- strapped cities and states may need to finance public works through tax-exempt borrowing.

Extension Support

While President Barack Obama and Democrats have supported prolonging the program, which was created under Obama’s $814 billion economic-stimulus package, Republicans have opposed it. Earlier extensions have passed the U.S. House of Representatives only to stall in the Senate. Build America subsidies are expected to add $36 billion to the national debt over 10 years, according to the nonpartisan Congressional Budget Office.

The Senate bill puts in place a compromise Obama and Republican leaders reached to extend current income-tax rates. In exchange for meeting Republican demands to keep taxes from rising for the wealthiest Americans, Obama won an extension of unemployment benefits and a temporary cut in Social Security payroll levies, to 4.2 percent from 6.2 percent, on income of up to $106,800 next year.

With Republicans poised to take control of the House next month, local governments, banks and other advocates have pressed to extend the Build America program during the current so-called lame-duck session of Congress.

Earlier Failure

Senate Finance Committee Chairman Max Baucus, a Montana Democrat, included a Build America extension in a bill to prolong income-tax rates adopted during President George W. Bush’s first term. That measure failed because it didn’t keep levies from rising for top-earners, which Republicans opposed.

Baucus this week said the lame-duck session will only have time for one major tax bill. Analysts including those at JPMorgan Chase & Co. had anticipated that a measure to prolong Bush-era rates would be the vehicle for Congress to extend the Build America program.

While supporters may try to revive the subsidy in the next Congress, the Republican control of the House presents a hurdle. U.S. Representative David Camp of Michigan, a Republican who is set to become chairman of the tax-writing Ways & Means Committee, has criticized stimulus spending.

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