Amidst the wide-ranging facets of federal debate over budgets and spending, one Administration proposal has been offered with local government impact. According to Bond Buyer, the President’s proposal would permanently renew the Build America Bonds program, where the federal government provides subsidies to state and local issuers of taxable municipal bonds, by paying a differential to offset expected higher interest costs from using taxable instruments. (In general, taxable borrowing requires a higher rate of return to investors, since their interest yield is subject to income taxation, unlike conventional borrowing by state and local governments that enjoys tax-free treatment under federal income tax laws)

From the Bond Buyer coverage:

The BAB proposal, the same the president made in his fiscal 2011 budget request, is a case in point. Under the wildly popular program that expired Dec. 31, state and local governments issued taxable bonds and received payments from the Treasury equaling 35% of their interest costs.

Obama proposes making the program permanent with a 28% “revenue-neutral” subsidy rate. BABs, which had been limited to governmental issuers and capital expenditures, could be used more broadly for current refundings, short-term working capital, and they also could be sold by 501(c)(3) nonprofit issuers.

The issue is likely to be controversial, but the breadth of the program during its temporary existence the last two years is likely to bring state and local governments to the table in support of some renewal or extension.