that I can live with. Not the Japan story. How bad could this get? It’s
difficult to put bounds on it. Nothing to do but wait for clarity. I hate waiting.
In the meantime I am trying to focus on the usual things. They don’t
seem to have much significance. In more normal times the following info
would be worth noting. I think it closes the door forever on the BABs
program. A bit of the history:
The Build America Bond program came out of the 2008 stimulus
legislation. It was a subsidy for Munis. Washington paid 35% of the
interest expense for new muni bonds. The program was very popular with
State Treasurers and Wall Street.
The program expired at the end of 2010. Obama, the Democrats and the big
Blue states (Cali, NY & Il) and every lobbying outfit in DC (paid
by Wall Street) pushed to get BABs extended with the rest of the tax
cuts. The Republicans nixed it.
In the President’s budget there is another request for a new BABs deal. The proposal is for a rebate of 28%.
A group of Democratic Congressmen has sponsored new BABs laws. H.R. 992 sets the rebate at 32% in 11’ and 31% in 12’.
I actually believe that BABs is a significant piece in the puzzle. The absence of BABs is not a crisis. But it is another chink in the muni armor.
Without it, states will not be able to issue as much debt. Interest
expense is likely to rise as a result. Projects will be shelved or
delayed. Economic growth will suffer. Jobs will be lost and
infrastructure will get more neglected. We know the formula, Debt=Growth.
I also find the BABs story fascinating as it is central to the
Republican effort to strangle Blue states. This is all about
presidential politics. The “Reds” think that if they make things even
tougher on the poor folks in Illinois they just might win the White
Well here is the ammunition those Reds need:
The critical issue on BABs has always been the actual Federal tax
receipts from investors holding the BABs securities. In a perfect world
investors would be in a 32% tax bracket, therefore a 32% subsidy is
I (and many others) have maintained that the BABs bonds went to non-tax hands. My guess is that the IRS would be lucky if they got 15% back. So the true subsidy by federal taxpayers was 20% of the interest on muni debt. A very big deal for Cali, NY and Il.
I have been working to get the answer to the question, “What are the actual tax receipts for BABs?”
I asked the CBO. They are supposed to “score” H.R. 992. To value the bill they would have to come up with a number for tax income. They did not answer me.
I asked the OMB. This is the White House budget so I thought they would have a basis for their proposal. They did not answer either.
The IRS is where this data is. So I wrote them too. Guess what? I got an answer: (my emphasis)
In response to your request for the percentage of tax collections from bonds associated with Build America Bonds, we will not be able to answer your request. Unlike tax-exempt bonds build America bonds are taxable, but the IRS Tax-Exempt area collects no data on the tax obligations associated with them.
So there is no data. Period. After two years and ~$200b of bond issuance nobody really has a clue what it is costing us. And for that reason alone any talk of a BABs revival is D.O.A.
I’ll send this to the Republican leaders. The absence of information
needed to make an informed vote is a good place to hide behind. They might just need some cover on this one. I can’t think of a presidential election that was won without California and New York playing a role. Net-net the Reds are spiving the two biggest states.
The guys who wear the white spats on Wall Street play hardball for money. The guys in DC do it for power.