Last week I wrote a defense of the Build America Bonds (BAB) program after the Washington Post ran a story about the program's critics. Now that the New York Times has hopped on the bandwagon, it's time to rehash a few key points:
- Even though the bank fees are somewhat higher, states and cities are still saving billions of dollars in costs. Those fees continue to fall as the market in these bonds grows larger. I'd underscore that Wall Street supporting a program doesn't necessarily make it bad.
- The IRS won't give the tax subsidy to states and towns that owe the government taxes. This seems like common sense to me: Of course the government won't give you a tax credit if you owe back-taxes, although presumably that credit would reduce what you owe, in effect remaining a subsidy. I'm still looking into this issue, but it doesn't seem like an argument against the program -- it seems like an argument in favor of paying your taxes.
- Neither of these articles mentions that the current subsidy on municipal bonds is a costly tax break for the wealthy. Before BAB, municipal bond interest payments were tax exempt, allowing wealthy investors to reap billions of dollars in subsidies without actually improving access to credit for towns and cities. Like the mortgage interest deduction, tax exempt municipal bonds make the tax code inefficient, regressive and opaque.
This is discussed at some length here, but these reporters are making the mistake of looking at Build America Bonds in a vacuum, rather than comparing it to the status quo. On one hand, the fact that Wall Street banks are profiting and tax collection is a challenge might make them seem problematic, but when you realize that hard-hit local governments are save billions of dollars -- rather than wealthy investors getting a handout from the government -- the program looks much stronger.
Going forward, the Obama administration wants to keep BABs but lower the subsidy to make it deficit-neutral.
-- Tim Fernholz
