This week, the Obama administration released its proposed budget for the 2014 fiscal year. Notably, the budget encourages private investment in infrastructure projects through various liberalizations of the tax laws relating to tax-exempt bonds and tax-credit bonds. If enacted as proposed, the budget would create a new tax-credit bond program, ease certain private activity bond restrictions, and enact tax reforms designed to incentivize foreign investment.

The proposal calls for the creation of “America Fast Forward Bonds.” These bonds, modeled on the expired Build America Bonds, would provide state and local governmental issuers with an optional alternative to tax-exempt bonds. America Fast Forward Bonds would be taxable bonds for which issuers would receive a direct payment from the federal government in an amount equal to 28 percent of their interest costs. The proposal allows the bonds to be issued for any of the following purposes:

  • Original financing for governmental capital projects
  • Current refundings of prior governmental capital project financings, but not advance refundings of such projects
  • Short-term governmental working capital financings for governmental operating expenses subject to a 13-month maturity limitation
  • Financing for section 501(c)(3) nonprofit entities
  • Qualified private activity bond program uses, subject to any applicable private activity bond volume ceiling

The proposal does not appear to restrict the qualified private activity bond categories that could be financed.

Although America Fast Forward Bonds generally would provide a 28 percent tax-credit subsidy rate, the budget provides a temporary increase to 50 percent for bonds issued for original financings for governmental capital projects involving public schools and state universities, as well as new money financings for section 501(c)(3) nonprofit educational entities. Such entities would include nonprofit schools and universities that could be financed with qualified 501(c)(3) bonds.

As presented, the proposal does not appear to limit the classes of potential 501(c)(3) borrowers for purposes of the temporary 50 percent interest cost subsidy. It would not apply, however, to current refundings of prior capital projects for public schools and state universities, or current refundings of prior financings for section 501(c)(3) nonprofit educational entities. The temporary 50 percent subsidy for school construction would expire on January 1, 2016.

In addition to creating the America Fast Forward Bond program, the President’s budget calls for the easing of certain private activity bond restrictions. Specific proposals include the following:

  • Increasing the national limitation for qualified highway or surface freight transfer facility bonds to $19 billion from $15 billion.
  • Eliminating the volume cap requirement for qualified private activity bonds issued for the furnishing of water or sewage facilities.
  • Repealing the $150 million nonhospital bond limitation on all qualified 501(c)(3) bonds. This applies under current law to bonds of organizations other than hospitals where more than 5 percent of the net proceeds of the issue are used to finance or refinance working capital expenditures or capital expenditures incurred on or before August 5, 1997. 
  • Permitting private ownership of qualified private activity bond-supported airports, docks and wharves, and mass commuting facilities.
  • Increasing the limitation on net proceeds of qualified private activity bonds that may be used for the acquisition of an interest in land from 25 percent to 35 percent. Current exceptions in the law for government acquisitions related to future use as an airport, mass commuting facility, high-speed intercity rail facility, dock, or wharf apparently would be continued.

Other infrastructure-related proposals within the budget include an amendment to the Foreign Investment in Real Property Tax Act (FIRPTA) to exempt foreign pension funds’ gains from the disposition of U.S. real property interests (including infrastructure and real estate assets) from U.S. taxation.

Although crafted with the goal of promoting infrastructure investment, the budget also proposes to limit the value of certain tax expenditures to 28 percent for taxpayers in the top three individual income tax brackets (33 percent, 35 percent, and 39.6 percent). The limit would apply to:

  • The benefits from tax-exempt state and local bond interest
  • Employer-sponsored health insurance paid for by employers or with before-tax employee dollars
  • Health insurance costs of self-employed individuals
  • Employee contributions to defined contribution retirement plans and individual retirement arrangements
  • The deduction for income attributable to domestic production activities
  • Certain trade or business deductions of employees
  • Moving expenses
  • Contributions to health savings accounts and Archer Medical Savings Accounts
  • Interest on education loans
  • Certain higher education expenses 

The limit would be effective for taxable years beginning after December 31, 2013.

Conceptually, with the exception of the proposed cap on the value of tax-exempt interest, the fiscal 2014 budget is a positive step towards increased infrastructure funding through both governmental and private sources. It remains to be seen, however, whether the proposals will gain any traction in Congress. Ballard Spahr will continue to monitor these proposals as well as other ongoing developments in the areas of deficit reduction, sequestration, and tax reform.

If you have questions, please contact Charles S. Henck at 202.661.2209 or or the member of the Public Finance Department with whom you work.

Copyright © 2013 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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