Coalition Tries to Make a Stimulus Tax Break Permanent

Today, the Congressional Quarterly reported that a coalition of airport authorities, port authorities, and student loan lenders is pushing Congress to extend one of the stimulus tax breaks on “private activity” municipal bonds. The stimulus exempted these bonds from the Alternative Minimum Tax (AMT) for 2009 and 2010.

Municipal bonds help fund local construction projects, such as airports, roads, and ports, and the private activity bonds fund projects that are operated by private companies but serve a public purpose. The earnings that investors earn on private activity bonds are not subject to federal income tax but are subject to the AMT.

The tax exemption on private activity bonds was undoubtedly warranted as part of the stimulus provisions to maintain funding for critical construction projects. And, indeed, reinstating the AMT on these bonds will make them less attractive to investors. But as the economy recovers over the next year, by 2011 the demand for municipal bonds could in all likelihood be strengthening.

CRFB warned back in January, when Congress was considering varying stimulus options, against slipping permanent policies into the stimulus. Although it is now October, the political pressures to do so still exist. Extending our spending and borrowing beyond the economic downturn will make our already-weak fiscal status even worse. Even if extending the tax exemption on certain municipal bonds is a warranted and worthwhile policy, it should be enacted through a normal legislative process with spending or tax offsets.

See our blog from September 21 here, discussing the pressures to extend stimulus provisions. Here’s a chart from the previous blog on the key expiring stimulus provisions and the one-year costs of extending them: