Though the tax deal negotiated by President Obama and Congressional Democrats includes an extension of a handful of Recovery Act provisions, like the expanded Earned Income and Child Tax credits, one potential for inclusion that was ultimately left on the sidelines was an extension of the expiring Build America Bonds (BABs) program.
This program has the federal government pay 35 percent of the interest on bonds that states issue to fund transportation, infrastructure, and school construction projects, allowing them to initiate projects (and create jobs) that they otherwise wouldn’t have, given their budget woes. Last month, BABs issues surpassed $150 billion, as governors from both parties took advantage of the program.
But as Reuters reported today, Congressional Republicans are ready to bring it to a halt:
Congressional Republicans will block any inclusion of Build America Bonds, a taxable bond program popular with states, cities and other muni issuers, in the tax deal they clinched with President Barack Obama, a Republican aide said on Tuesday. “We have a very firm line on BABs — we are not going to allow them to be included,” a congressional Republican aide said.
Today, New Jersey is using the BABs program to raise money for work on the New Jersey Turnpike. In all, 1,912 bond issues have been made by state and local governments, funding everything from school construction and water projects to roadwork. “Build America Bonds have provided crucial support for state and local governments at a time when they faced unprecedented stress raising funds,” wrote Princeton economics Professor Alan Kruegar. “State and local governments have used BABs savings to create jobs and reduce taxes.”
“Once we emerge from these difficult times, investments made with Build America Bonds will be one reason that communities that are now suffering will once again be thriving,” added Gov. Ed Rendell (D-PA). “Extending the life of this innovative bonding program will ensure that growth continues and that our country will remain competitive.”
As The American Prospect’s Tim Fernholz explained, Build America Bonds “is one of the most successful programs of the American Recovery and Reinvestment Act, spurring productive investment, job creation, and creating a more progressive and democratic method of local finance.” CAP’s Seth Hanlon, Jordan Eizenga, and James Hairston noted that the bonds also save taxpayer dollars, make the government more efficient, and are “far more transparent than tax-exempt municipal bonds.”
Reuters’ James Pethokoukis predicted today that allowing BABs to expire is part of a GOP strategy to push troubled states into bankruptcy and cripple public employees unions.
Hanlon and Eizenga also noted today that allowing BABs to expire would force states to rely on tax-exempt bonds, creating a back-door tax cut for wealthy investors:
The Treasury Department estimates that before Build America Bonds were established in 2009, 20 percent of the federal subsidy intended for states and localities was captured by the wealthiest bond investors…Removing Build America Bonds from the market would force states and localities to rely only on tax-exempt bonds, as they did prior to 2009. Estimates indicate that this glut in supply of tax-exempt bonds will increase interest rates on tax-exempt bonds by 12 to 25 basis points. Higher interest rates on tax-exempt bonds mean more opportunities for high-income investors to shield their income from federal taxes. The expiration of the Build America Bonds program would therefore result in a backdoor tax cut for top-bracket investors.