Provisions Set to Expire December 31 Unless Congress Takes Action
On June 30, 2010, the latest of several attempts to move toward a vote on the American Jobs and Closing Tax Loopholes Act of 2010 (H.R. 4213) was unsuccessful. The bill, if enacted, would extend several of the tax-exempt and tax credit bond provisions enacted under the American Recovery and Reinvestment Act of 2009 (Stimulus Act) that are currently set to expire on Dec. 31, 2010.
With this latest setback, however, concern is mounting that several of the Stimulus Act’s successful and popular programs credited with buoying the municipal bond market will be unavailable after Dec. 31, 2010. Such programs include, among others, the Build America Bond program, the Recovery Zone Bond program, the exemption from the alternative minimum tax (AMT) for interest earned on certain private activity bonds, and the liberalization of the “bank-qualified” bond rules.
In addition, without action by Congress, the bill’s other favorable bond provisions, including the extension of federal home loan bank guarantees to tax-exempt bonds, and a new initiative under which water and sewer exempt-facility bonds would be excluded from state volume caps, will fail to become law.
1. Build America Bonds
Under current law, issuers of Build America Bonds (BABs) receive a direct subsidy from the federal government equal to 35% of the interest paid on such bonds, and BABs must be issued by no later than Dec. 31, 2010. Under the bill, the Build America Bond program would be extended for two years, through the end of 2012. The subsidy would be reduced from 35% to 32% in 2011, and 30% in 2012.
2. Recovery Zone Bonds
Currently, Recovery Zone Bonds (RZBs), which include Recovery Zone Economic Development Bonds (RZEDBs) and Recovery Zone Facility Bonds (RZFBs), must be issued by no later than Dec. 31, 2010. Under the Stimulus Act, each state received an allocation of RZEDBs and RZFBs (which were then sub-allocated to certain political subdivisions within each state) based on the state’s job losses as a percentage of national job losses in 2008. The bill, however, would extend the authorization for issuing RZBs through 2011. In addition, the bill would make further allocations of RZBs, based on a new formula that would ensure that each political subdivision receiving an allocation receives a minimum allocation based on its share of national unemployment in 2009.
3. AMT Exemption for Private Activity Bonds
The Stimulus Act changed the tax law to exempt from the AMT the interest earned on private activity bonds issued in 2009 and 2010 (i) to finance “new money” projects, or (ii) to currently refund private activity bonds issued after 2003. Interest on private activity bonds issued in 2011 for such purposes also would be exempt from the AMT under the bill.
4. “Bank-Qualified” Bonds
The Stimulus Act liberalized the rules governing bank-qualified tax-exempt bonds for bonds issued in 2009 and 2010, permitting (i) issuers to issue up to $30 million of bank-qualified bonds each calendar year, (ii) each 501(c)(3) borrower to be treated as an issuer for purposes of the $30 million limit, and (iii) “pooled” financings to be bank-qualified, regardless of the aggregate amount of the pooled financing, provided each loan to be made from the financing did not exceed $30 million. The bill would extend these liberalized rules through 2011.
5. Federal Home Loan Bank Guarantees for Tax-Exempt Bonds
The Housing and Economic Recovery Act of 2008 permits tax-exempt bonds issued before 2011 to be guaranteed by a federal home loan bank. The bill would extend this option to tax-exempt bonds issued before 2012.
6. Water and Sewer Exempt Facility Bonds
Currently, exempt facility bonds issued to finance water and sewer facilities are subject to state volume caps. The bill would permanently exclude such bonds from state volume caps.
In the coming months, we will continue to monitor the status of the bill, as well as other proposed legislation that may extend the Stimulus Act’s bond programs. If you have any questions regarding the bill or any of the particular provisions described above, please contact the authors or visit McGuireWoods’ Public Finance practice. You can also refer to prior legal updates in our news archive and the Stimulus Package section for more updates on the Stimulus Act.
1. The Small Business and Infrastructure Jobs Tax Act of 2010 (H.R. 4849), which includes similar extensions and was briefly described in a footnote in our prior update, has been stalled in the Senate’s Finance Committee since March.
2. This legal update focuses on Build America Bonds (Direct Payment) only, although the Bill would affect both Build America Bonds (Direct Payment) and Build America Bonds (Tax Credit). For more information on Build America Bonds, see our prior update.
3. For more information on RZEDBs and RZFBs, see our prior update.