Extending another debt bomb
Image via WikipediaIn a Rasmussen poll taken before the midterm election, half of the respondents said that members of Congress who supported the 2009 federal stimulus didn't deserve to be re-elected. Many weren't. Yet the lame-duck Congress might extend one of the key elements of that stimulus: "Build America Bonds" (BABs). States and municipalities have used these bonds to rack up some $160 billion in new debt over the last 19 months.If the Democrats do away with the tax cuts on the upper income people, this subsidy will no longer be attractive because the tax rate is higher than the subsidy and the investors will prefer tax exempt bonds.
Build America Bonds were created to re-energize the municipal bond market, which contracted sharply in late 2008. Investors had become wary that the credit crunch would spread to municipals, as insurers who back state and local bonds got hurt in other markets and stopped insuring public debt. Facing declining tax revenue and growing deficits, some local governments suddenly couldn't borrow.
The Obama administration responded with a new kind of taxable bond that offered a 35% federal subsidy on the interest rate. Washington designed the subsidy to appeal to investors such as pension funds and overseas buyers who don't buy traditional municipal bonds because they can't take advantage of their tax-free status. The federal subsidy allowed states and cities to offer these investors an attractive return. The catch: Congress authorized the program only through 2010, to allay concerns that BABs would become a permanent bailout.
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The larger point is that we are encouraging increased debt by cities and other political subdivisions at time when they need to be reducing debt.
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