–Would Be Appropriate to Expand Eligible Uses of BABs
–Administration Proposes Extension of Short-Sale Tax Waiver

By Denny Gulino

WASHINGTON (MNI) – While the Obama administration FY2013 budget
proposes to restore, expand and make permanent the Build America Bonds
program, the fact it is part of a package that includes a renewed
proposal to cap the amount high-earners can claim in tax-exempt interest
appears to relegate it to wish-list status, with little hope for
Republican votes outside of massive tax reform.

Build America Bonds are taxable and before the program expired at
the end of 2010 had captured over 25% of the total dollar supply of
state and local government debt. Popular with both sides of the aisle
for its government subsidy, the program’s renewal has foundered on
disagreements over how big the government subsidy rate should be going
forward.

In the administration’s proposal, a 28% subsidy rate is again
specified, described as a “revenue neutral” rate that would be similar
to the effective government subsidy given tax exempt bonds.

But the lower revenue-neutral rate would be phased in under the
proposal to “help state and local governments accelerate important
investments.” To begin with the subsidy rate would be 30%.

Under an ultimate revenue-neutral rate, it would be “appropriate to
expand the eligible uses for Build America Bonds to include other
program purposes for which tax-exempt bonds may be used,” according to
the proposal.

Some of the new eligible uses envisioned in the proposal would be
to refund capital projects already financed, as long as the refunding
took no longer than three months; for short-term governmental working
capital to replace seasonal tax and revenue anticipation borrowings; and
to finance nonprofit entities such as hospitals and universities.

While that proposal could count on a massive amount of positive
grass-roots lobbying from local governments, the Treasury Department
also again proposes a bitter pill for Republicans, a cap on tax-exempt
interest for earners making more than $250,000 a year.

The FY2013 budget proposal would reinstate a limitation on many
itemized deductions for those high-income earners — including muni
investment interest — so that the deductions would be reduced to what
they would be under a 28% tax rate, instead of the more valuable
deductions available under a 39.6% tax rate.

“The income exclusions and deductions limited by this provision
would include any tax-exempt state and local bond interest,
employer-sponsored health insurance paid for by employers with
before-tax employee dollars, health insurance costs of self-employed
individuals, employment contributions to defined contribution retirement
plans” and several other categories, the proposal reads.

The Treasury tax proposals also include an extension of the
short-sale tax waiver that expires at the end of this year through 2014
for transactions agreed to by that time. When mortgage debt is forgiven,
much of the foregone interest is otherwise included by the IRS in
taxable income.

Treasury would also exclude from taxation any student loan debt
forgiveness.

In a cluster of “upper income” tax increases, generally considered
dead on arrival on Capitol Hill again this year, the administration
would end the “carried interest” tax loophole except for REITs.

The tax proposals repeat those which would raise the maximum tax
rate on stock dividends to expire at the end of the year for those
making over $250,000 a year, as well as restoring a tax rate as high as
39.6% for long-term capital gains. Even the standard personal income tax
deduction would be eliminated for individuals earning more than $173,650
a year.

Adding insult to many of what Republicans would see as injuries,
the administration would also amend the charitable contribution
deduction provision to prohibit any contribution of property that is, or
is intended to be, used as a golf course.

The area of proposed tax provisions is such a legislative mine
field that many if not most of those proposed could only survive if
wrapped into a massive tax reform proposal, in which they would be chips
traded in highly partisan negotiations.

Administration officials conceded as much in an afternoon briefing
on the budget proposals, saying lightning-rod proposals such as trading
a “Buffet Rule” that would equalize tax rates across income categories
for the alternative minimum tax are being offered only in the context of
massive tax reform for individuals.

The administration appears to have more hope for near-term
corporate tax reform, preparing to offer more specifics of that proposal
later this month.

** Market News International Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,MFU$$$,MCU$$$]