WASHINGTON — The Build America Bonds program would be extended for three years, but the direct-pay subsidy rate would shrink from the current 35% of interest costs to 33% in 2011, 31% in 2012 and 30% in 2013, under a draft of a second jobs bill unveiled yesterday by House Ways and Means Committee chairman Sander Levin, D-Mich.

The bill also would exempt private-activity bonds from the alternative minimum tax for another year, permanently exempt water and sewer exempt-facility PABs from state volume caps, and extend the recovery zone bond programs for another year while modifying the allocation formula to ensure that areas of the country that were previously overlooked can issue some of the bonds.

However, the bill would not extend a pair of popular provisions that encouraged banks to purchase more tax-exempt debt, even though several state and local groups sent a letter last week to Levin and other leading lawmakers urging the provisions be made permanent.

The committee plans to vote on the bill Wednesday, according to a release issued by Levin.

“The Ways and Means Committee is acutely focused on legislation that will help spur job growth in our communities,” he said. “This bill ... extends effective financing measures like the Build America and Recovery Zone Bonds so that they can continue creating new jobs while making critical improvements to our communities.”

Levin’s draft legislation, called the Small Business and Infrastructure Jobs Tax Act of 2010, comes on the heels of another jobs bill pending in the Senate. That measure, which would allow four types of tax-credit bonds to be issued as BAB-type debt, with direct payments to issuers instead of tax credits to investors, has already been approved by the House. The Senate was expected to vote late yesterday on whether to limit debate on the bill.

Levin’s draft includes an extension of BABs that was widely expected in the muni market, but differs significantly from the Obama administration’s 2010 budget proposal for BABs. Under the draft, the direct-pay subsidy rates of issuers that sell BABs in 2011 would gradually decrease, bottoming out at 30% in 2013. The program would expire at the end of that year.

President Obama has called for making the program permanent, allowing charitable organizations to issue them, and expanding their utility to refunding existing debt and financing short-term working capital. Levin’s bill would only expand the use of BABs to allow them to be used for current refundings of existing BABs. In addition, Obama had proposed a 28% subsidy rate for the permanent program — a rate that the administration contends would be revenue neutral but that market participants warn would be too low to maintain interest in the program.

The American Recovery and Reinvestment Act, which was enacted last February, created BABs and also exempted private-activity bonds sold in 2009 and 2010 from the AMT. Levin’s draft would extend that provision for one year, allowing AMT-free bonds to be sold through 2011.

Bonds sold to finance water and sewage facilities would no longer be limited by a state’s PAB volume cap under Levin’s bill. State and U.S. territory issuance of PABs are capped annually based on their population figures, but some types of PABs are excluded from the caps.

Levin’s draft also would extend two RZ bond programs — recovery zone economic development bonds and recovery zone exempt facility bonds — for another year through 2011. Those bonds help areas hard hit by job losses to finance infrastructure, job training, education and economic development projects.

Levin’s draft also would assuage fellow lawmakers’ complaints that their districts were unfairly passed over for recovery zone bond allocations. Seven lawmakers wrote to the Treasury Department this summer complaining that although their districts had some of the highest unemployment rates in the nation, they received no RZ bond allocations because the allocation formula laid out in the ARRA is based on net job losses, not unemployment. For a variety of reasons, those districts — which were in California, Arizona and Nevada — saw spikes in both unemployment and employment, resulting in small net-job loss figures, possibly due population ­increases.

A summary of Levin’s draft said that an “additional allocation” of recovery zone bonds would be made, ensuring each local municipality received an allocation equal to at least its share of national unemployment as of December 2008.

Reaction to the bill was generally positive from market participants. Mike Nicholas, chief executive officer of the Regional Bond Dealers Association, highlighted the BAB and AMT provisions as particularly good for the muni market, adding that issuers would like the gradual reduction in BAB subsidy as opposed to the administration’s proposal of a one-time slash to a lower rate.

But market groups are still pushing for the draft to extend or make permanent two stimulus provisions encouraging banks to buy munis. The first provision increases the small-issuer limit for bank-qualified bonds to $30 million from $10 million and allows the limit to be applied to individual borrowers participating in conduit deals, rather than the conduit issuer. The second provision modifies the 2% de minimis rule for financial institutions to include banks. Both expire at the end of the year under the ARRA.

Nicholas sent a letter to Levin yesterday calling for extensions. Michael Decker, managing director and co-head of the muni division of the Securities Industry and Financial Markets Association, said he believes there is strong congressional support for the provisions and hopes they will end up in some form of tax legislation this year.

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