CRS Examines Tax Credit Bonds

Almost all state and local governments sell bonds to finance public projects and certain qualified private activities. Most of the bonds issued are identified as tax-exempt bonds because the interest payments are not included in the investor's federal taxable income. In contrast, Tax Credit Bonds (TCBs) are a type of bond that offers the investor a federal tax credit or the issuer a direct payment. This report explains the tax credit mechanism and describes the market for the bonds. Build America Bonds, which are no longer issued, are a type of TCB.

There are a variety of TCBs. Qualified zone academy bonds (QZABs), which were the first tax credit bonds, were introduced as part of the Taxpayer Relief Act of 1997 (P.L. 105-34) and were first issued in 1998. Clean renewable energy bonds (CREBs) were created by the Energy Policy Act of 2005 (P.L. 109-58) and "new" CREBs by the Emergency Economic Stabilization Act of 2008 (P.L. 110-343). Gulf tax credit bonds (GTCBs) were created by the Gulf Opportunity Zone Act of 2005 (P.L. 109-135), but authority to issue GTCBs has expired. Qualified forestry conservation bonds (QFCBs) were created by the Food, Conservation, and Energy Act of 2008 (P.L. 110-246). Qualified energy conservation bonds (QECBs) and Midwest Disaster Bonds (MWDBs) were created by the Emergency Economic Stabilization Act of 2008 (P.L. 110-343).

The American Recovery and Reinvestment Act of 2009 (P.L. 111-5, ARRA) included several bond provisions that use a tax credit or issuer direct payment. Specifically, ARRA created Qualified School Constructions Bonds (QSCBs), Build America Bonds (BABs) and Recovery Zone Economic Development Bonds (RZEDBs). Unlike other tax credit bonds, the interest rate on the BABs and RZEDBs is a rate agreed to by the issuer and investor and the issuers receive direct payments from the Treasury. In contrast, the Secretary of the Treasury sets the credit rate for the other TCBs. The authority to issue BABs and RZEDBs expired after 2010.

Each TCB, with the exception of BABs, is designated for a specific purpose, location, or project. Issuers use the proceeds for public school construction and renovation; clean renewable energy projects; refinancing of outstanding government debt in regions affected by natural disasters; conservation of forest land; investment in energy conservation; and for economic development purposes. All of the TCBs are temporary tax provisions.

The QZAB and QSCB credit rate is set at 100% and the "new CREB" and QECB credit rate is set at 70% of the interest cost. In contrast, the BAB tax credit rate is 35%. There were several bills introduced in the 111^th Congress that would have extended all of the tax credit bond programs including BABs. Only QZABs were extended for the 2011 tax year with $400 million of capacity (P.L. 111-312).

The President's FY2013 budget proposes extending BABs permanently with a 30% credit through 2013, dropping to 28% thereafter. In the 112^th Congress, several bills have been introduced to extend and expand a modified version of BABs, including H.R. 11, H.R. 736, H.R. 747, and H.R. 992. In the Senate, S. 796 would extend QZABs and QSCBs and S. 727 would require all municipal bonds to be issued as tax credit bonds. S. 3521 would extend QZABs with $400 million for each of 2012 and 2013. Another bill, S. 1436, would provide $50 billion of bond capacity for state and local government investment in transportation infrastructure.

This report will be updated as legislative events warrant.

                               Contents

Almost all state and local governments sell bonds to finance public projects and certain qualified private activities. Most of the bonds issued are tax-exempt bonds because the interest payments are not included in the bondholder's (purchaser's) federal taxable income. Naturally, interest payments not included in taxable income escape federal income taxation. In contrast, interest payments from other types of bonds, such as corporate bonds, are included in a bondholder's taxable income. Because of the difference in taxability, state and local government tax-exempt bonds -- often referred to as municipal bonds -- offer a lower pre-tax interest rate than corporate bonds.¹

The value of the subsidy provided by the tax exemption, however, varies considerably with market conditions more than with taxable tax credit bonds. For example, on November 13, 2008, the average high-grade taxable corporate bond rate was 6.37%, and the average high-grade municipal bond rate was 5.14% (see Figure 1).² Without the tax exemption, the issuer would have had to pay 123 basis points more for each dollar borrowed (6.37% is 1.23 percentage points greater than 5.14%).

 

Figure 1. Interest Rates for Municipal,

 

10-Year Treasury, and Corporate Bonds

 

 

Weekly averages January 4, 2007, to July 22, 2011

 

 

 

Notes: The municipal bond rate data correspond to the dates listed. The Treasury and corporate bond data are the weekly average as of the day after that listed on the graph.

The turmoil in financial markets later in 2008, however, had reversed this spread. In early December 2008, the municipal bond rate (5.33%) was actually higher than the taxable high-grade corporate bond rate (4.72%) and that spread grew to 61 basis points (municipal bonds were 0.61% higher) by December 25, 2008. This relationship has since reversed again. For the week of July 22, 2011, the average municipal bond interest rate was 4.46%, the corporate bond rate 4.91%, and the Treasury rate was 2.97% (See Figure 1).³ The July 22, 2011, TCB rate for a 17-year bond was 5.23%.

Currently, there are a variety of TCBs. Table 1 lists the existing TCBs and their authorization levels. A more detailed description of each type of bond is provided later in the report. Note that P.L. 110-246, enacted in June of 2008, created Section 54A of the tax code. This section contains many parameters common to all TCBs. This revision of the tax code was intended to "standardize" some of the TCB parameters.

               Table 1. Authorization Levels of Tax Credit Bonds

In the 111^th Congress, P.L. 111-147 expanded the direct payment option beyond BABs to include issuers of new CREBs, QECBs, QZABs, and QSCBs. The QZAB and QSCB credit rate is set at 100% and the "new CREB" and QECB credit rate is set at 70% of the interest cost. In contrast, the BAB tax credit rate is 35%. There are several bills in the 112^th Congress that would extend BABs or create new TCBs. QZABs were extended for the 2011 tax year with $400 million of capacity (P.L. 111-312).

Each TCB (with the exception of BABs) is designated for a specific purpose, location, or type of project. For example, issuers of QZABs are required to use the proceeds to finance public school partnership programs in economically distressed areas. CREBs are designated for clean renewable energy projects. MWDB proceeds are for the refinancing of outstanding government debt in regions affected by the Midwestern storms and floods in the spring and summer of 2008. QFCBs are intended to help non-profits or government entities purchase and conserve forest land. QECBs are for investment in capital projects that improve energy conservation. QSCBs are for school construction, BABs are for any governmental purpose, and RZEDBs are for economic development purposes.⁵ This report will rely on acronyms to reference the numerous tax credit bonds. Table 2 summarizes the acronyms for the bonds examined in this report.

                   Table 2. Tax Credit Bond Acronyms

TCBs generally allow either the investor or issuer to claim a tax credit equal to a specified credit rate as determined by the Secretary of the Treasury for 100% credit rate bonds or by bond counterparties for the other TCBs. The rate of credit is set by the Secretary of Treasury such that the bonds need not be sold at a discount (for a price less than the face value) or with interest costs to the issuer. Following is a description of the TCB mechanism.

The Mechanics of TCBs

The method for determining the tax credit rate is generally the same for 100% and 70% credit TCBs.⁶ Since July 1999, the Secretary of the Treasury has established a national credit rate that is intended to allow issuers of TCBs to sell their bonds at par (face value) without additional interest expense. The rate calculation is

For example, the annual tax credit rate for investor credit TCBs was 4.96% on August 1, 2011 (the term was 17 years).⁸ The bonds sold on that day would allow the taxpayer to claim a federal tax credit equal to 4.96% multiplied by the face value of the bond. Thus, a $100,000 bond issued on August 1, 2011, would yield an annual tax credit of $4,960 for the bondholder. However, unlike interest on municipal bonds, which does not create a taxable income stream, the credit amount is included in the bond holder's gross income.⁹ The credit is limited to the bondholder's current tax liability; it is "non-refundable." Unused tax credits can be carried over to the succeeding tax year.

The credit was reduced for some TCBs. CREBs and QECBs allow for a credit equal to 70% of the full credit described above. Thus, for these bonds, the investor receives 70% of the annual tax credit described above or $3,472 (70% of $5,050). In contrast, BAB and RZEDB credits are 35% and 45%, respectively, of a market-determined taxable bond interest rate for the specific issuer, not the Secretary of Treasury.

Tax Credit Bonds vs. Other Bonds

The Treasury-determined credit rate for investor credit TCBs is set higher than the municipal bond rate to compensate for the credit's taxability noted earlier. Generally, to attract investors, the credit rate should yield a return greater than the prevailing municipal bond rate and at least equal to the after-tax rate for corporate bonds of similar maturity and risk. And for issuers, the interest cost should be less than, or at least equal to, the next best financing alternative. In almost all cases, tax-exempt bonds would be the next best alternative for governmental issuers. Following is a brief analysis of the tradeoff between tax credit bonds and other bonds from the prospective of investors and issuers.

Investors

An investor's marginal tax rate is critical in determining the attractiveness of bond investments. Consider the following example where we assume an average 4.53% interest rate on municipal debt. Investors in the 15% income tax bracket would need a credit rate of at least 5.33% (4.53% divided by (1 - 0.15) is 5.33%) to choose TCBs over municipal bonds. Investors in the 35% bracket would require a credit rate on TCBs of 6.97% (4.53% divided by (1 - 0.35) is 6.97%). Generally, the TCB credit rate would have to exceed the after-tax return on municipal bonds and the after-tax return on taxable bonds of like term to maturity. The investor credit TCB rate is set at the higher amount to ensure the market for the bonds clears.

The summary below describes how a potential bond investor would begin to evaluate the attractiveness of a tax credit bond relative to two other bond investments. Bondholders in the highest tax bracket find the tax credit relatively less attractive than do bondholders in the lower brackets. However, the tax credit is fixed at the same rate for all buyers. For TCBs that offer a reduced credit rate, such as CREBs and QECBs, the issuer would augment the tax credit with an interest payment or discount pricing.

Issuers

The objective of issuers is to borrow at the lowest possible interest cost. TCBs under both the investor credit model and the issuer credit model are typically lower cost than the next best alternative, tax-exempt bonds. Proposals to reduce the issuer credit rate, to 25% or 28% for example, increase the likelihood that issuers will opt for traditional tax-exempt bond finance.

TCB issuers may also establish a bond reserve fund (or sinking fund) for the eventual repayment of the bond principal. Generally, IRS rules allow reserve funds to accumulate just enough to repay the bond principal.¹⁰ The sinking fund provision for TCBs significantly reduces the interest cost to the issuer. On August 1, 2011, the allowable rate for the "Permitted Sinking Fund Yield" to repay the issue was 4.16%.¹¹ The TCB rate was 4.96% on that day.

Tax Credit Bond Stripping

The credits on TCBs are "strippable," or the credits can be separated from the underlying bond.¹² Allowing the separation of the credit from the underlying bond improves the attractiveness and marketability of the TCBs to issuers, investors, and financial intermediaries. Generally, a financial intermediary could buy the TCB, sell the principal to an investor looking for a longer-term investment, and sell the stream of credits to another investor seeking quarterly income. For example, assume a financial intermediary buys the $100,000 TCB presented above. The intermediary sells the right to the principal portion (the $100,000) of the TCB to a pension fund for $90,000 and sells the stream of credits ($1,980 every quarter for 15 years) to another investor for $90,000. The stripping provision makes TCBs more competitive with traditional bonds.¹³

The Term of TCBs

The maximum term (the number of years for which the credit will be paid)

Application of Davis-Bacon Labor Standards

ARRA included a provision that requires some of the TCBs to abide by the labor standards as mandated under the Davis-Bacon Act of 1931. Generally, Davis-Bacon requires that contractors pay workers not less than the locally prevailing wage for comparable work. The following bonds are subject to the Davis-Bacon labor standard: new CREBs, QECBs, QZABs, QSCBs, and RZEDBs.

Allocation and Purpose of Tax Credit Bonds

The authority to issue TCBs is usually capped with a national limit or with a state-by-state cap. BABs were the exception. In addition, some of the TCBs include set asides for sub-state governments or other entities. What follows is a brief overview of how and to whom each bond program allocates the authority to issue the bonds.

Qualified Zone Academy Bonds

The limit for QZAB debt was $400 million annually from 1998 through 2008, $1.4 billion for each of 2009 and 2010, and $400 million for 2011.¹⁵ A limit is allocated to each state, the District of Columbia, and territory based upon their portion of the U.S. population below the poverty line.

States are responsible for the allocation of the available credit to the local governments or qualified zone academies. Unused credit capacity can be carried forward for up to two years.

Individual public schools use QZABs, through their participating state and local governments, for school renovation (not including new construction), equipment, teacher training, and course materials. To qualify for the program, the school must also be a "Qualified Zone Academy." A "Qualified Zone Academy" is any public school (or program within a public school) that provides and develops educational programs below the postsecondary level if

Qualified School Construction Bonds

These bonds had a national limit of $11 billion in each of 2009 and 2010. An additional $200 million in each of 2009 and 2010 was allocated to Indian schools. The bonds generally are allocated to states based on the state's share of Title 1 Basic Grants (Section 1124 of the Elementary and Secondary Education Act of 1965; 20 U.S.C. 6333, BG). The District of Columbia and the possessions of the U.S. are considered states for QSCBs. The possessions other than Puerto Rico (American Samoa, Commonwealth of the Northern Mariana Islands, Guam, and U.S. Virgin Islands), however, are allocated an amount on the basis of the possession's population with income below the poverty line as a portion of the entire U.S. population with income below the poverty line.

As noted above, 40% of the bond volume ($4.4 billion) is dedicated to large LEAs. A "large" LEA is defined as one of the 100 largest based on the number of "children aged 5 though 17 from families living below the poverty level." Also, one of not more than an additional 25 LEAs can be chosen by the Secretary if the LEA is

States are currently authorized to issue $3.2 billion of QZABs and were authorized to issue $22 billion of QSCBs. QZAB allocations will be made through 2011 and may be carried forward up to two years. QSCB allocations will also be made through 2010 but can be carried forward indefinitely. On August 1, 2011, the credit rate on QZABs and QSCBs was 4.96% and the term 17 years. As noted earlier, issuers of QZABs and QSCBs could have chosen the direct payment option before 2011.

There has been recent interest in extending the two tax credit bond programs for school infrastructure spending. In the Senate, S. 796 would extend QZABs and QSCBs and S. 727 would require all municipal bonds to be issued as tax credit bonds. S. 3521 would extend QZABs with $400 million for each of 2012 and 2013.

Clean Renewable Energy Bonds¹⁸

As authorized by P.L. 109-58, the original CREBs, which could have been issued through 2009, had a national limit of $1.2 billion of which a maximum of $750 million can be granted to governmental bodies. In addition to governmental bodies, cooperative electric companies and a "clean renewable energy bond lender" can issue the bonds. A clean renewable energy bond lender is defined in the tax code as

The term and credit rate for CREBs were determined in the same manner as the other TCBs. These original CREBs offered a 100% credit.

CREBs are available to finance qualified energy production projects which include (1) wind facilities, (2) closed-loop bio-mass facilities, (3) open-loop bio-mass facilities, (4) geothermal or solar energy facilities, (5) small irrigation power facilities, (6) landfill gas facilities, (7) trash combustion facilities, (8) refined coal production facilities, and (9) certain hydropower facilities.

New Clean Renewable Energy Bonds

As originally authorized in P.L. 110-343, the new CREBs have a national limit of $2.4 billion to be issued before December 31, 2009. In contrast to the original CREBs, as noted in Table 1, the credit rate on new CREBs is 70% of the credit rate offered on the original CREBs. Not more than one-third of new CREBs may be allocated to any of the following: (1) public power providers, (2) governmental bodies, or (3) projects of cooperative electric companies. For public power providers, the Secretary determines the qualified projects which "are appropriate for receiving an allocation." Each will receive a share of the allocation based on the ratio of the projected cost of the project relative to all other qualified projects receiving an allocation.²² Governmental bodies and co-ops receive an allocation in an amount the "Secretary determines appropriate."²³ As with original CREBs, there is not a state-by-state minimum or formula allocation mechanism. As noted earlier, issuers of new CREBs can choose the direct payment option.

Qualified Energy Conservation Bonds

QECBs were first created under P.L. 110-343 with a national limit of $800 million.²⁴ The program was expanded with an additional $2.4 billion under P.L. 111-5 for a total available authority of $3.2 billion. Similar to the new CREBs, these tax credit bonds offer a credit rate that is 70% of the credit rate offered on old CREBs and other TCBs. The authority to allocate QECBs does not expire.

QECBs were allocated to states based on the state's share of total U.S. population. The District of Columbia and the possessions of the U.S. are considered states for QECBs. Large local governments, defined as any municipality or county with population of greater than 100,000, are eligible for a direct allocation. Counties that contain a large city can be eligible if its population less the large city population is still greater than 100,000.

These bonds are to be used for capital expenditures for the purposes of (1) reducing energy consumption in publicly owned buildings by at least 20%; (2) implementing green community programs; (3) rural development involving the production of electricity from renewable energy resources; or (4) programs listed above for CREBs. Also included are expenditures on research facilities and research grants, to support research in (1) development of cellulosic ethanol or other nonfossil fuels; (2) technologies for the capture and sequestration of carbon dioxide produced through the use of fossil fuels; (3) increasing the efficiency of existing technologies for producing nonfossil fuels; (4) automobile battery technologies and other technologies to reduce fossil fuel consumption in transportation; and (5) technologies to reduce energy use in buildings. Energy saving mass commuting facilities and demonstration projects are also included in the list of qualified purposes.

As noted earlier, issuers of QECBs could have chosen the direct payment option.

Forestry Conservation Bonds

QFCBs were limited to $500 million to be allocated before May 22, 2010 (24 months after enactment of P.L. 110-246), in a manner "as the Secretary determines appropriate."²⁵ Once the bonds are issued, the proceeds must be spent within three years. A unique feature of QFCBs is the allowance for an allocation amount to be used to offset any taxes due the federal government. Any allocation amount used to settle outstanding federal tax debts cannot be used for bond issuance. A qualified issuer is a "State or any political subdivision or instrumentality thereof or a 501(c)(3) organization."²⁶

For purposes of the QFCB program, a qualified forestry conservation purpose must meet the following criteria:²⁷

MWDBs were designated for areas impacted by the severe storms and flooding in the Midwest that occurred between May 1, 2008, and August 1, 2008. Each affected area could have issued an amount based on the population of the affected area. States with over 2 million affected residents were authorized to issue up to $100 million and those with less than 2 million and more than 1 million could have issued $50 million. States with an affected population under 1 million were not eligible to issue MWDBs. Based on IRS guidance, Illinois, Missouri, and Nebraska could have issued up to $50 million each. Indiana, Iowa, and Wisconsin could have issued up to $100 million.²⁸ These bonds could have been issued in calendar year 2009 only and unlike the other TCBs, had a maximum term of two years. The credit rate on the bonds reflected the relatively short term of the bonds.

The bonds were intended for states to use to help those sub-state jurisdictions which were under fiscal stress. Specifically, the proceeds from MWDBs were to be used to pay the principal and interest on any outstanding state bonds or the bonds of any affected political subdivision within the state. The proceeds could also have been loaned to a jurisdiction for the same purpose. The provision required the issuer to issue an equal amount of general obligations for the same purpose, akin to a matching requirement.

Build America Bonds

BABs were not targeted in their designation as were other TCBs. The volume of BABs was not limited and the purpose was constrained only by the requirement that "the interest on such obligation would (but for this section) be excludible from gross income under section 103."²⁹

Thus, BABs could have been issued for any purpose that would have been eligible for traditional tax-exempt bond financing other than private activity bonds. The bonds must have been issued before January 1, 2011.

In the 112^th Congress, several bills have been introduced to extend and expand a modified version of BABs, including H.R. 11, H.R. 736, H.R. 747, and H.R. 992. Table 3 summarizes the legislation based on the proposed percent credit rates by year and the President's FY2013 budget proposal which would make BABs permanent. The percent credit rate on outstanding BABs is currently 35%.

        Table 3. Proposals in the 112^th Congress that Would Extend BABs

Unlike the other TCBs, the BAB credit amount is 35% of the interest rate established between the buyer and issuer of the bond, not the Secretary of the Treasury. The issuer and investor agree on terms either as a result of a competitive bid process or through a negotiated sale. For example, if the negotiated taxable interest rate is 8%, on $100,000 of bond principal, then the credit is $2,800 (8% times $100,000 times 35%). The issuer has the option of receiving a direct payment from the Treasury equal to the credit amount or allowing the investor to claim the credit. The issuer would choose the direct payment option if the net interest cost was less than traditional tax-exempt debt of like terms. The interest cost to the issuer choosing the direct payment is $8,000 less the $2,800, or $5,200. If the tax-exempt rate is greater than 5.20% (requiring a payment of greater than $5,200), then the direct payment BAB was a better option for the issuer.³⁰

As long as the marginal tax rate that clears the municipal bond market is lower than the credit rate on BABs of 35%, then municipal issuers would likely chose the BAB option. However, when the market clearing marginal tax rate rises, the alternative to BABs, traditional tax-exempt bonds, would be relatively more attractive to issuers and investors alike.³¹ Increases in statutory marginal tax rates would likely induce such an outcome, reducing the attractiveness of BABs relative to traditional tax-exempt bonds.

A U.S. Treasury Department report on BABs estimated that through March of 2010, the bonds had saved municipal issuers roughly $12 billion in interest costs.³²

BABs: The New Taxable Bond Option

The BAB, in cases where the issuer claims the direct payment, is modeled after the "taxable bond option," which was first considered in the late 1960s. In 1976, the following was posited by the then president of the Federal Reserve Bank in Boston, Frank E. Morris:

Recovery Zone Economic Development Bonds

RZEDBs are a special type of BAB. Instead of the 35% credit, RZEDBs offered a 45% credit and are targeted to economically distressed areas. Specifically, these bonds are for any area designated by the issuer (1) as having significant poverty, unemployment, rate of home foreclosures, or general distress; (2) economically distressed by reason of the closure or realignment of a military installation pursuant to the Defense Base Closure and Realignment Act of 1990; or is (3) an empowerment zone or renewal community.³⁵ The purpose of the bonds is, as the name implies, economic development. Specifically, the bonds are to be used for

Large municipalities and counties are also guaranteed a share of the state allocations based on the jurisdiction's share of the aggregate employment decline in the state. A large jurisdiction is defined as one with a population of greater than 100,000. For counties with large municipalities receiving an allocation, the county population is reduced by the municipal population for purposes of the 100,000 threshold. Authority to issue RZEDBs expired January 1, 2011.

In the 112^th Congress, H.R. 992 includes an extension of RZEDBs through 2012 with an additional $10 billion in 2011 and $15 billion in 2012. In contrast to the first round of RZEDBs, the proposed extension would allocate bond authority based on each state's share of total unemployment. As with the first round, each state and territory would be guaranteed a minimum of 0.90% of the $25 billion.

Author Contact Information

² Federal Reserve Board, Table H. 15, "Selected Interest Rates," at http://www.federalreserve.gov/releases/H15/data.htm#top.

³ Federal Reserve Board, Table H. 15, "Selected Interest Rates," at http://www.federalreserve.gov/releases/H15/data.htm#top.

⁴ BABs and RZEDBs where the issuer chooses the direct payment option do not allow for the investor tax credit.

⁵ For issuers choosing the direct payment option, the BABs must be used for capital expenditures.

⁶ See 26 U.S.C. 54A(b).

⁷ U.S. Department of the Treasury, Internal Revenue Service, Internal Revenue Bulletin 2009-6, February 9, 2009, p. 449.

⁸ Unlike other TCBs, CREBs have a range of possible maturities (term), but have the same credit rate as the other TCBs of like term.

⁹ In special cases, some insurance companies may indirectly pay income tax on otherwise tax exempt debt. In addition, interest paid on private activity bonds may be subject to the alternative minimum tax.

¹⁰ The U.S. Treasury publishes a maximum yield for these reserve funds along with the credit rate. The permitted sinking fund yield is equal to 110% of the long-term adjusted applicable federal rate (AFR), compounded semiannually. The permitted sinking fund yield is updated monthly, 26 U.S.C. 54A(d)(4)(C).

¹¹ As reported on the following U.S. Treasury website: https://www.treasurydirect.gov/GA-SL/SLGS/selectQTCDate.htm.

¹² 26 U.S.C. 54A(i).

¹³ For rules on TCB stripping, see the following IRS Notice 2010-28 from Internal Revenue Bulletin 2010-15, April 12, 2010; available at http://www.irs.gov/irb/2010-15_IRB/ar08.html.

¹⁴ 26 U.S.C. 54A(d)(5)(B). The term of TCBs is found by calculating the following: log(2)/log (1+r). The variable r is the "discount rate of the average annual interest rate of tax-exempt obligations having a term of 10 years or more which are issued during the month."

¹⁵ According to IRS Notice 2009-30, the $1.4 billion is for each of 2009 and 2010.

¹⁶ 26 U.S.C. 54E(d)(1)(A). The private entity must donate an amount equivalent to 10% of the bond proceeds. Services of employees as volunteer mentors satisfies the 10% private partnership requirement.

¹⁷ 26 U.S.C. 54F(d)(2)(E)(ii). The Secretary did not exercise this option for 2009.

¹⁸ For more on CREBs, see CRS Report R41573, Tax-Favored Financing for Renewable Energy Resources and Energy Efficiency, by Molly F. Sherlock and Steven Maguire.

¹⁹ 26 U.S.C. 54(j)(2).

²⁰ 26 U.S.C. 54(f)(2).

²¹ U.S. Department of Treasury, Internal Revenue Service, Internal Revenue Bulletin 2005-52, December 27, 2005, p. 1213.

²² 26 U.S.C. 54C(c)(3)(A).

²³ 26 U.S.C. 54C(c)(3)(B).

²⁴ For more on QECBs, see CRS Report R41573, Tax-Favored Financing for Renewable Energy Resources and Energy Efficiency, by Molly F. Sherlock and Steven Maguire.

²⁵ 26 U.S.C. 54B(d)(1).

²⁶ 26 U.S.C. 54B(f).

²⁷ 26 U.S.C. 54B(e).

²⁸ Internal Revenue Service, Internal Revenue Bulletin 2008-50, Notice 2008-109, p. 1285.

²⁹ 26 U.S.C. 54AA(d)(1)(A). BAB proceeds that use the direct payment options are to be used only for capital expenditures.

³⁰ Note that if the credit is claimed by the issuer, the transfer to the issuer is an outlay of the federal government, not a tax credit. This simple example does not consider issuance and underwriter fees.

³¹ Researchers have determined that the federal government subsidy for BABs ". . . disadvantages individual U.S. taxpayers, who are the main holders of municipal bonds, and benefits new entrants in the municipal bond market." New entrants would include international investors and pension funds. See Ang, Andrew, Vineer Bhansali, and Yuhan Xing, "Build America Bonds," National Bureau of Economic Research, Working Paper 16008, May 2010.

³² U.S. Treasury Department, "Treasury Analysis of Build America Bonds and Issuer Net Borrowing Costs," April 2, 2010.

³³ Morris, Frank E., "The Taxable Bond Option," National Tax Journal, vol. 29, no. 3, September 1976, p. 356.

³⁴ See http://www.sifma.org/research/research.aspx?ID=12476.

³⁵ 26 U.S.C. 1400U-1(b).

³⁶ 26 U.S.C. 1400U-2(c).