Alert December 22, 2010

No BABs Extension in Tax Compromise Bill

President Obama recently signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, an $858 billion compromise tax bill that does not include an extension of the Build America Bonds (“BABs”) program past its scheduled expiration on December 31, 2010.

BABs provide tax credits and interest subsidies that enable state and local governments to finance capital projects with taxable bonds, which bonds appeal to a wider universe of investors. BABs represent one of the more successful programs created under the American Recovery and Reinvestment Act of 2009 (“ARRA”). Over $160 billion in BABs have been issued since the inception of the program.

Although the new tax bill allows the BABs program to expire at the end of 2010, the bill includes a few provisions that will benefit the bond industry. For instance, the bill authorizes $400 million in additional qualified zone academy bonds ("QZABs"), but only as tax-credit bonds, and extends that program through 2011. In addition, the bill does not prohibit issuers from selling qualified school construction bonds (“QSCBs”), qualified energy conservation bonds (“QECBs”), and clean renewable energy bonds (“CREBs”) with the direct-pay option if the bonds are already allocated, even after 2010. The bill also extends through December 31, 2012, the authority to issue tax-exempt private-activity bonds outside state volume caps, in amounts up to $10 per capita or $5 million, for public school facilities owned by private, for-profit corporations but operated by public entities.

Meanwhile, municipalities are scrambling to issue BABs before the December 31, 2010, deadline, in order to take advantage of the 35% federal tax credit/interest subsidy. In fact, the volume of BABs is rising so quickly, the monthly volume of taxable debt in the municipal market may exceed the volume of tax-exempt debt for the first time in history.