Investors may have heard of tax credit bonds from the Stimulus Act, also known as the American Recovery and Re-investment Act of 2009 (ARRA). Instead of interest, tax credit bond investors receive tax credits that they can use to offset their tax liabilities. ARRA authorized almost $30 billion of tax credit bonds for 2009 - 2010, a substantial increase over the $1.6 billion of tax credit bonds sold since 1997. One of goals for the tax credit program was to foster capital spending for specific purposes: school construction, school improvements, clean renew-able energy projects, and energy conservation. An-other innovative product of the Stimulus Act was Build America Bonds (“BABs”). BABs can be issued as either tax credit bonds or direct subsidy bonds. Direct subsidy BABs are bonds that pay taxable interest issued by state and local governments in which the federal government directly subsidizes issuers’ interest payments. Direct subsidy BABs were intended to revive the then-moribund municipal market by targeting investors who do not usually participate in the tax-exempt market such as pension funds and foreign investors. Since passage of ARRA in February 2009, direct subsidy BABs have become extremely popular with investors, as over $100 billion of bonds have sold so far. Tax credit bonds, including tax credit BABS, on the other hand, have fizzled. Only $2.7 billion of tax credit bonds were sold in 2009.
Larry Levitz is a contributor to Muni Market Update. The opinions expressed are his own.