By Larry Jones
April 5, 2010

In just less than a week after the President signed the Hiring Incentives to Restore Employment Act (HIRE Act, H.R. 2847) into law, Democratic leaders in Congress wasted no time in moving to the next item on their “jobs agenda,” which calls for passing as many as five separate bills. By a vote of 246 to 178, the House passed March 24 the Small Business and Infrastructure Jobs Act of 2010, which provides a number of tax breaks to encourage small businesses to create more jobs; and extends the Build America Bonds (BABs) program to create more infrastructure jobs.

A key part of the legislation for state and local governments is a provision that would extend the popular BABs program for three years, through December 31, 2013. Under the program, local governments receive a direct federal subsidy equal to 35 percent of their interest payments. For example, on a bond with a 5.8 percent interest rate, the issuing city government would pay approximately 3.77 percent and the federal government would pay a direct subsidy of 2.03 percent.

The popularity of the program was mentioned recently in a March 24 Wall Street Journal article which states, “There’s no denying that direct subsidies for local debt have been a hit with Wall Street, mayors, state legislators and unions. In 2009 nearly 800 states and localities issued some $58 billion of these new bonds, more than twice what was expected.” Citing more recent information on the use of the program as of March 1, House Ways and Means Chairman Sander Levin on March 17 pointed out that state and local governments have used BABs to finance more than $78 billion in infrastructure projects to create jobs in urban and rural areas. In addition to extending the program, the bill would incrementally lower the direct payment of the BABs subsidy from 35 percent to 30 percent by 2013.

Another key provision of the bill would temporarily suspend capital gain taxes on the sale of certain small business stock held for more than five years and acquired after March 15, 2010 and before January 1, 2012. It would also increase the tax deduction for small business start-up costs, from $5,000 to $20,000 in 2010 and 2011.

Other features of the bill include provisions that would remove the state volume cap on private activity bonds used to finance the use of privately-owned water and sewage facilities, and extend provisions that ensure that certain tax-exempt bonds are exempt from the alternative minimum tax (ATM).

The Senate is expected to take action on the bill after members return from the Spring recess.