Alert April 29, 2011

Tierney Bill Favors BABs Over Tax-Exempt Debt

Representative John Tierney (D-MA) plans to introduce a bill next month as part of Congress’s tax reform efforts.  Tierney’s bill, dubbed the “Tax Equity and Middle Class Fairness Act of 2011,” would require all new municipal debt to be issued in the form of taxable direct-pay bonds with a 25% federal subsidy rate.

Proponents claim the bill will save the federal government $60 billion by eliminating tax expenditures or preferences. Tierney asserts that the direct-pay bond provision alone will create a savings of approximately $92 million in one year.

Market participants have advocated for the reinstatement of the Build America Bonds program since its termination in 2009. However, issuers and underwriters have questioned Tierney’s approach, arguing that a 25% subsidy rate is too low, and that the elimination of tax-exempt bonds would damage an already weakened municipal bond market.

See also “Will Tax Reform Hurt the Municipal Bond Market?” in this issue.