Direct Subsidy & Tax Credit Bond Programs
Direct subsidy and tax credit bond programs were authorized through the American Recovery and Reinvestment Act of 2009 (ARRA) and provide tax advantages for municipal issuers financing public infrastructure. Build America Bonds (BABs) and Recovery Zone Economic Development Bonds (RZEDBs) were taxable direct subsidy bonds. The bonds must have qualified as tax-exempt although even though the interest paid on these bonds is taxable to investors. BABs entitled the issuer to a payment of 35% of the interest paid on the bonds, known as a subsidy payment, for the lifetime of the bond. RZEDBs entitled the issuer to a 45% subsidy rate. Issuers were authorized to issue BABs and RZEDBs until the end of 2010.
ARRA also authorized the issuance of tax credit bonds, including Qualified Zone Academy Bonds (QZABs), Qualified School Construction Bonds (QSCBs), New Clean Renewable Energy Bonds (New CREBs), and Qualified Energy Construction Bonds (QECBs). These bonds may be issued as qualified tax credit bonds, which allow a tax credit to investors, or specified tax credit bonds, under which the issuer elects to receive a direct payment subsidy rather than a tax credit to investors. The federal government allocates amounts to be administered through each state, and states with unused allocations may continue to issue these bonds until the allocation is used.
In 2013, Congress reduced subsidy payments for the aforementioned bonds through sequestration (automatic cuts in federal spending). Some direct subsidy and tax credit bonds include an option for issuers to redeem bonds upon a reduction in direct subsidy payments.
- Federal Stimulus Programs for Municipal Bond Issuers
- ARRA: Financing Opportunities for California’s Public Agencies
- Structuring and Marketing BABs
- ARRA: Build America Bonds
- School Bond Program ABCs
- RZEDBs: Summary of Major Provisions
- Navigating the New Stimulus Legislation’s New Municipal Bond Provisions
Internal Revenue Service (IRS) Resources
- Guidance on ARRA Bond Provisions
- Frequently Asked Questions (FAQs) on BABs and RZEDBs
- FAQs on Qualified/Special Tax Credit Bonds
- Effect of Sequestration
Municipal Securities Rulemaking Board (MSRB) Resources
- BABs and Other Tax Credit Bonds
- BABs: Reminder of Customer Confirmation Yield Disclosure Requirement