As Congress and the administration work toward a compromise on extending the Bush tax cuts and emergency unemployment benefits, another tax cut should also be extended: the Build America Bonds (BABs) program. Build America Bonds have provided crucial support for state and local governments at a time when they faced unprecedented stress raising funds. And, that's right, BABs were structured as a tax program.
Build America Bonds are taxable municipal bonds, for which the federal government pays a subsidy via I.R.S. to the issuer to offset interest costs. Build America Bonds have democratized municipal finance. Unlike tax exempt bonds, which disproportionally help wealthy investor to avoid taxes, BABs provide an equal subsidy to all investors, regardless of their income. Build America Bonds are set to expire at the end of this month.
When BABs were enacted as part of the Recovery Act there was rare bipartisan support for the innovative program. Since then, all that we have learned is that BABs have been remarkably successful. State and local governments have issued $165 billion of BABs, greatly reducing their borrowing costs and expanding their access to investors. State and local governments have used BABs savings to create jobs and reduce taxes. Yet the bipartisan support has evaporated as some members of Congress are reluctant to give the President a victory by extending a successful Recovery Act program -- even though the idea has been around for 40 years.
The Recovery Act intentionally set the BABs subsidy at a high rate of 35 percent. This was done to encourage state and local governments to invest in capital projects during the worst part of the recession. The need for greater state and local government investment in infrastructure, as well as a large supply of unemployed construction workers, continues. In its budget, the Obama Administration proposed extending the BABs program and reducing the subsidy rate to 28 percent, a level at which the Federal government would not lose revenue from BABs as compared to tax exempt municipal bonds.
The availability of BABs has broadened the investor base for municipal bonds. Unlike tax exempt bonds, BABs are an attractive investment for low and moderate income investors, pension funds, philanthropies and foreign investors. The availability of BABs has enabled state and local governments to issue fewer tax exempt bonds, which has lowered their borrowing costs in the tax exempt market. If the BABs program is allowed to expire, state and local governments will issue more tax-exempt bonds, which will put upward pressure on their borrowing costs and reduce their investor base.
The criticisms levied at the BABs program do not hold up to scrutiny. Underwriting fees have come down over the life of the program as competition has increased. BABs have not subsidized some states at the expense of others, because BABs are principally an alternative to tax exempt bonds, which entail subsidies through foregone tax revenue. Foreign investors would have bought other taxable bonds, such as corporate bonds or Treasuries, so there is no revenue loss from them. And BABs have not caused a state and local government debt binge. If anything, BABs have provided a less risky, less costly and more transparent longer term borrowing instrument.
At a time when sovereign credit markets in Europe are again under extreme stress, it would be irresponsible to allow the BABs program to expire. BABs are a more efficient, more transparent and more fair way of supporting state and local governments' borrowing needs than traditional tax exempt bonds. Extending BABs at a revenue neutral subsidy rate would support state and local governments to carry out crucial investment projects, reduce the risk of a municipal bond market meltdown, and provide investment opportunities for all classes of investors -- all at no additional cost to federal taxpayers. An extension of BABs should be part of any compromise worked out over extending other tax cuts.
Alan B. Krueger is the Bendheim Professor of Economics and Public Affairs at Princeton University, and was Assistant Secretary for Economic Policy and Chief Economist at the U.S. Treasury Department from February 2009 until November 2010.
Primitive civilizations such as early pioneers and settlers of the USA had to provide their own military defense, police, firefighters, teachers, medicine, water, sewer, roads, bridges, welfare and other services as best as they could.
After the early pioneers and settlers could produce enough necessities of life for themselves and also to also support a rudimentary civilization, would they then combine their meager resources/or and tax themselves to hire bureaucrats as soldiers, teachers, water system operators, police, firefighters, and other services but limited these bureaucrats to the number that they could afford. These bureaucrats did allow the producers to become more productive by not having to worry about providing those services for themselves (and for their own families).
We have more government - at all levels - than we can afford. A certain amount of government is necessary and helpful. But we are long past that point. We need to trim a LOT of overhead.
At what point does everyone realize we are only re-arranging chairs while the ship is sinking?
I'm tired of this WH Admin and Progressives believing we should keep placing band aids while ingoring the actual problem.
The wild speculation helped to cause the current situation. I say don't give the problem chronic gamblers new poker chips. Instead, shut the casino down, and let's find a better way to operate, nationally.
Although one might rightly consider states' ability to raise funding at low cost a good thing, the piper will be paid in time. If issuing BABs gets states and municipalities through their current ruts without addressing the core budget deficiencies, you're just kicking the can down the road, with worse consequences to come.
Also ask yourself why congress is paying investors to buy these bonds.
What I do not know; is there an agency , AIG, that insures these bonds in case of non payment?
If a city or state or government would default on a bond or bonds how long afterwords would it take, now that they are solvent again before nations and financial interest would be willing to buy a bond from them again. Finally, with an inability to pay, California or many cities and other states plus countries are such a position, and many governments came together and said they are broke what would the bond market do? I ask this because Germany during the war years took out loans, what happened to those loans when she and Japan were defeated? Were they trashed or did the kind old American tax payer pay them off in another financial behind the back move.
To you, if you have read this far, understand, I think it would be better for these cities, states and governments to default, like a citizen they are not washed out forever and I would suspect that governments and insurance companies would have to pay the bill!