May 20, 2010 / 4:31 PM / 9 years ago

Congress closer to extending Build America Bonds

WASHINGTON (Reuters) - Congressional leaders will introduce a bill on Thursday to extend the stimulus plan’s Build America Bond program while gradually lowering the federal subsidy paid to those who sell the popular debt.

The taxable Build America Bonds were created in the stimulus plan passed last year and pay issuers a federal rebate of 35 percent. The program is set to expire along with the stimulus at the end of the year. Leaders in the House of Representatives and Senate say it should be extended to keep credit flowing to financially struggling states and cities.

The bill, written by Senate Finance Committee Chairman Max Baucus and House Ways and Means Committee Chairman Sander Levin, would extend Build America Bonds by two years but lower the subsidy to 30 percent, according to a summary released early on Thursday.

The legislation also extends unemployment and other benefits for millions of Americans, and faces hurdles in Congress, given its size and controversial provisions.

President Barack Obama had suggested in his proposed budget making the BABs program permanent, but lowering the subsidy to 28 percent. Last month, Levin told Reuters a permanent program would be too expensive.

The legislation is the closest step yet for keeping BABs alive, just as the debt grows more popular with foreign buyers and with issuers. A total of $102 billion of the bonds have been sold so far, financing infrastructure projects across the nation.

BABs represent 20.5 percent of new issues in the municipal bond market and have largely been credited with breaking a freeze that spread through the market at the end of 2008.

According to the summary, the BABs extension would likely cost the federal government $4.042 billion over 10 years.

The legislation would also extend other stimulus provisions related to the municipal bond market that were designed to help states and cities cope with the longest and deepest economic recession since the end of World War Two.

It would extend the Recovery Zone bond program that functions similarly to BABs but offers a steeper rebate of 45 percent.

The bonds were intended to alleviate the stress of unemployment in areas where joblessness is high. The formula for allocating the bond issuance to local governments proved cumbersome and cities and counties have been racing to try to meet the requirements before the stimulus ends.

Under the bill, the formula would change to consider unemployment rates instead of net job losses and the allocations would increase. The program would also continue through 2011.

The legislation would continue to exclude private activity bonds, or those sold for projects that fall outside the bounds of typical civic activities, from calculations of an individual’s alternative minimum tax through 2011.

It would also eliminate bonds for water and sewers from the volume caps imposed on states for private activity bonds.

The stimulus redefined a small bond issuer as one who issues $30 million in tax-exempt debt from one who sells $10 million in bonds annually. That allowed more issuers to qualify for an exception in the tax law that allows financial institutions to buy tax-exempt debt and deduct a portion of the interest. Thursday’s bill would also extend this through 2011.

Reporting by Lisa Lambert, additional reporting by Kim Dixon; Editing by Andrew Hay

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