A Massachusetts Democrat has introduced a bill that would permanently extend Build America Bonds with a subsidy rate that drops on a phased-in basis and a provision that ensures sequestration would not result in reduced Treasury subsidy payments to issuers.

Rep. Richard Neal, a member on the House Ways and Means Committee, formally introduced The Build America Bonds Act of 2013 (HR 789) in the middle of February.

The bill would make BABs permanent as of Jan. 1, 2013 and gradually reduce subsidy payments by 1% each year after the program is reinstated. BABs would have a 32% subsidy rate in 2013 that would drop to 31% in 2014 and 30% in 2015. The subsidy rate would be 28% of interest costs, which the administration has estimated would be revenue neutral, in 2017 and thereafter.

“As a former Mayor, I know how important infrastructure tools are to lowering costs and making it possible for state and local governments to build and renovate schools, bridges, roads and hospitals — and the Build America Bond program is at the top of the list in terms of its success,” Neal told The Bond Buyer.

BABs have been hugely popular in the Bay State, which has issued close to $5 billion of them, he said.

Neal said he introduced the legislation to make the BABs program permanent “because of its proven record of creating jobs and improving our schools, highways and bridges.”

“Strengthening our nation’s infrastructure is not a Democratic or Republican issue, it just makes common sense,” he said.

Neal said that the BAB program helped create 12,000 construction jobs in Massachusetts and will result in hundreds of structurally deficient bridges being rehabilitated.

BABs were created in 2009 under the American Recovery and Reinvestment Act, but the program expired at the end of 2010. Issuers were given the option to issue BABs as tax-credit bonds, where investors receive tax credits, or direct-pay bonds, where issuers receive subsidy payments from the Treasury equal to 35% of their interest costs. A total of almost $182 billion in BABs were issued in 2009 and 2010.

Neal’s bill differs from others that have been introduced because it contains a “gross-up of payment to issuers” provision, under which the Treasury Department and the Internal Revenue Service would continue to carry out the sequestration cuts that went into effect on March 1, but would increase the subsidy payments to issuers so they would be paid what they were originally owed.

His bill would mitigate the results of sequestration, under which BAB subsidy payments are to be cut by 8.7% this year.

Muni market participants praised the Neal bill and the gross-up provision.

“I think it’s a really important potential solution that would help to mitigate the damage sequestration does to Build America Bonds going forward,” said Susan Collet, senior vice president of government relations with Bond Dealers of America.

“The fact that sequestration has occurred and issuers will be reluctant to issue direct pay-bonds in the future with this risk out there,” said Scott Lilienthal, president of the National Association of Bond Lawyers and a partner at Hogan Lovells LLP.

This isn’t the first time lawmakers have tried to resurrect the BAB program since it expired. Neal introduced a bill last July to reinstate BABs. He was one of five other members of Congress who filed similar legislation.

One other lawmaker has offered BAB legislation this year. Rep. Gerry Connolly, D-Va., introduced a bill on Feb. 6 that would make the BAB program permanent at a 25% subsidy rate. His bill, like Neal’s, was referred to the House Ways and Means Committee.

President Obama has also proposed reinstating BABs several times, most recently in his FY 2013 budget at a 28% subsidy rate.

Key Republicans on both the House Ways and Means Committee and the Senate Finance Committee have opposed to the BAB program, calling it a form of bloated government that heavily subsidizes issuers with lower credits and provides underwriters with lucrative fees. With a Republican at the helm of the House Ways and Means Committee, Rep. Dave Camp., R-Mich., it seems unlikely that any of the BAB bills will be voted on this year.

However, BABs may have been discussed in some of the recently-formed 11 tax reform working groups created by Camp and ranking minority member Rep. Sandy Levin, D-Mich.

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