WASHINGTON — Sens. Ron Wyden, D-Ore., and Judd Gregg, R-N.H., said they included provisions to halt the issuance of tax-exempt bonds beginning in 2011 in their tax reform bill to make the tax code fairer for all investors and to help offset proposed revenue losers.

They issued a joint statement yesterday to explain the rationale for the provisions, under which issuers would stop issuing tax-exempt bonds and instead begin issuing taxable tax-credit bonds that provide investors with tax credits equaling 25% of interest costs. The bill also would prohibit advance refundings.

“Wyden-Gregg changes tax-exempt bonds to tax-credit bonds as part of its overall effort to lower tax rates by broadening the tax base. This was a sensible option for not only broadening the base but for making the tax code more equitable, because — unlike a tax exemption — a tax credit allows taxpayers at all income levels to realize the same tax benefits,” they said.

“Overall, the significant reduction in tax rates made possible under Wyden-Gregg will give a much-needed boost to individuals and businesses across the board. Not everyone will be happy with the revenue offsets in the bill, but [we] believe they are worthwhile since they allow a much more favorable tax climate that will encourage job creation and economic growth.”

The bill has drawn strong opposition from several municipal market groups that point out the existing tax-credit bond programs have never really taken off in the market for many reasons, including that they create administrative headaches and that investors’ need for tax credits vary from year to year.

Meanwhile, the Senate’s top Republican tax writer has asked Goldman, Sachs & Co. whether it is collecting “double-digit underwriting fees” for participating in the Build America Bond program.

Sen. Charles Grassley, the ranking minority member of the Senate Finance Committee, posed the question in a letter sent late Wednesday to Goldman chairman Lloyd Blankfein. The letter asks how much the firm made underwriting BABs, how the fees were determined, and whether it made more money underwriting BABs than traditional tax-exempt bonds.

“I’m interested in finding out whether the big Wall Street investment banks being so involved in, and profiting from, the [BAB] program siphons off a lot of taxpayer dollars that are meant to help cities and states,” he said.

The Iowa Republican noted in his letter that BABs are likely going to grow in significance in the future, given that both the House and Senate have approved expansions to the program in their respective jobs bills, and the Obama administration has recommended making BABs permanent at a reduced subsidy rate.

Grassley was spurred to make the request after some market participants suggested that issuers were paying more to underwriters for BABs than tax-exempt bonds and Goldman purchased a full-page advertisement in a Washington newspaper calling itself one of the principal underwriters of BABs, his office said.

A spokesman for Goldman Sachs responded to the Grassley letter yesterday, saying BABs are a relatively new tool, various factors go into determining underwriting fees, and banks have to compete for BAB business.

“[BAB] underwriting fees are typically lower than investment-grade corporate bonds of similar maturities and slightly higher than similar maturity tax-exempt securities. Bond underwriting fees are determined by a variety of factors — complexity of the financing, credit quality and ratings, maturity, deal size, breadth of distribution required are among the key factors,” said spokesman Michael Duvally.

“BABs are a new product, which have opened up an entirely new investor base for municipal bonds, which has helped municipalities lower their borrowing costs,” he said. “While Goldman Sachs is a prominent underwriter of Build America Bonds, there are a dozen other banks that compete for business and fees, which are publicly disclosed and set on the basis of that competition.”

Meanwhile, a draft version of Senate Majority Leader Harry Reid’s “extenders” package emerged this week and includes a number of muni bond provisions.

The draft provisions mirror those originally included in a large jobs bill drafted by Senate Finance Committee chairman Max Baucus, D-Mont., and Grassley, but the Reid split the legislation into two parts. The first part — which would expand the BAB-like interest subsidy to four tax-credit bond programs at reduced subsidy levels and extend surface transportation laws — was included in a bill approved by the Senate Wednesday.

A spokesman for Reid earlier this week said the plan was to consider the bill after the Senate cleared a more immediate package of short-term tax extensions — none involving munis — and a travel promotion bill.

However, those plans hit a snag late Wednesday when Republicans blocked an attempt to obtain unanimous consent on the short-term extenders package, which could move consideration of the second, larger extenders bill into next week.

The larger draft bill would extend New York City’s Liberty Zone bond program through the end of the year. That would give city issuers another year to sell Liberty bonds, a special type of private-activity bond created to help boost economic development in lower Manhattan following the 9-11 terrorist attacks.

It also would extend for another year relaxed mortgage-revenue bond requirements for areas affected by federally declared disasters. Under the measure, issuers in designated areas could issue tax-exempt housing bonds to finance the repair or reconstruction of homes or rental units that were damaged or destroyed by a federally declared disaster.

Another provision would extend by one year the tax incentives for the District of Columbia empowerment zones — economically distressed areas where businesses are eligible for tax incentives, including tax-exempt bonds, to spur development.

Tax-exempt bonds can be issued in these areas to provide low-cost financing to private businesses, provided that at least 35% of the business’ employees are residents of the zones for the life of the bonds.

An additional provision would extend through 2010 the ability of taxpayers to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction typically permitted for state and local income taxes.

Even though the various provisions were mirrored in the Baucus-Grassley measure, as well as an extenders package the House passed in December, Reid’s office could not be reached to confirm whether the draft is what he plans to introduce in the near future.

Register or login for access to this item and much more

All Financial Planning content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access