The Tax Reform Bill which passed the Senate and House last week and was signed into law is a far from perfect piece of legislation. It contained an elevated estate taxes and a seemingly unending extension of employment benefits. On the bright side, it extended current tax rates for two years when hopefully Washington DC will consider and enact real tax relief. the sunset of the Build America Bonds program which was abused by states like Illinois and California. “The deal in the Senate leaves out renewal of a popular bond program expiring this month, Build America Bonds, which funds infrastructure projects, favored by Democrats, cities and investors.” Source here.
Build America Bonds (BAB) was adopted on Feb. 13, 2009, when Congress passed the American Recovery and Reinvestment Act of 2009 at the urging of President Obama who then signed it into law. BAB subsidizes States and Municipalities Bonds with the Federal Government paying up to 35% of the interest payments on issued tax exempt State and Municipal Bonds. The program effectively bailed out states like California and Illinois whose massive spending and fiscal mis-management resulted in their earning poor credit ratings. They then used the program to lower those higher borrowing costs in order to mask further State and Municipal spending excesses and deficits. The immediate result of the termination of this program will be higher borrowing costs especially for those offending States. “As a result, prices of tax-free municipal bonds, particularly with longer maturities, are apt to fall, along with capital spending by states and local governments.” Source here. Falling bond prices result in higher interest costs. Faced with higher borrowing costs, State and Local Politicians will be under increasing pressure to act in a more fiscally responsible manner by reducing unnecessary spending and balancing their budgets. They will no longer have the benefit of a Federal safety net.
Obama has signaled he would like an extension of Build America Bonds passed next year. Others in Congress promise to help resurrect it in the next session including some Republicans including Republican Representative John Mica, “Mica said the bond program may be part of a broader measure he intends to introduce that would include spending for roads, transit, railways and waterways.”Source here.
But given its high price tag $185 Billion+ cost and its encouragement of fiscal insanity, one suspects Congress should Build a better American Budget by permanently axing it!
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