March 16,2010

Grassley: Build America Bonds Program Keeps Getting Richer for Wall Street, Harder on Taxpayers

Floor Speech by Senator Grassley on the Build America Bonds provision in the HIRE Act
Delivered Tuesday, March 16, 2010

One of the few provisions the Democratic leadership decided to put in the HIRE bill is an
expansion of Build America Bonds. Build America Bonds is a very rich spending program
disguised as a tax cut.

One Democratic Senator was asked why the Build America Bonds program is viewed
differently than appropriations, and she replied, “It has a good name.” Ironically, the Finance
Committee is returning to its roots of doing appropriations bills.

When it was established in 1816, the Finance Committee handled the major
appropriations bills that came before the Congress. I ask unanimous consent that a portion of the
document outlining the history of the Finance Committee be printed in the record.

Bloomberg News reported that large Wall Street investment banks were charging 37
percent higher underwriting fees on Build America Bonds deals than on tax-exempt bond deals.
Therefore, American taxpayers appear to be funding huge underwriting fees for large
Wall Street investment banks as part of the Build America Bonds program.

A Wall Street Journal article dated March 10, 2010, stated that Wall Street investment
banks have made over $1 billion in underwriting fees on Build America Bonds in less than one

And the Wall Street Journal article, based on data from Thomson Reuters, stated that the
underwriting fees on Build America Bonds deals are higher than those for tax-exempt bond
deals. That sounds like a great deal for the fat cats on Wall Street, but how about the taxpayers
from Main Street who have to pick up the tab?

The Democratic leadership has said the Build America Bonds program is about creating
jobs, but I want to know whether it’s about lining the pockets of Wall Street executives.
Recently, I asked the CEO of a large Wall Street investment bank a number of questions about
these larger underwriting fees that are subsidized by American taxpayers.

He confirmed that the underwriting fees for Build America Bonds deals are larger than
those for tax-exempt bond deals. The Senate and House have recently passed different versions
of the bill we’re currently debating, which includes a provision that expands the Build America
Bonds program, created in the stimulus bill, to four types of tax-credit bonds.

These four types of tax-credit bonds are Qualified School Construction Bonds, Qualified
Zone Academy Bonds, Clean Renewable Energy Bonds, and Qualified Energy Conservation
Bonds. The Build America Bonds program contains an option for the issuer of the bonds, which
is a non-taxpaying entity, to receive a check from the Treasury Department based on a
percentage of the interest cost incurred by the issuer.

Some refer to this option as the direct-pay option. The percentage of the interest cost on
the four tax-credit bonds subsidized by American taxpayers under the direct-pay option in the
Senate bill is 45 percent, and is increased to 65 percent for small issuers. Small issuers are
defined as those issuing less than $30 million in bonds per year.

The House version increased the direct-pay subsidy to 100 percent for Qualified School
Construction Bonds and Qualified Zone Academy Bonds, and increased the subsidy to 70
percent for Clean Renewable Energy Bonds and Qualified Energy Conservation Bonds.

To put this in context, the Build America Bonds program created in the stimulus bill
contains a 35 percent direct-pay subsidy. And the President has proposed in his fiscal year 2011
budget that it be lowered to 28 percent.

It was reported in a March 11, 2010, Bond Buyer article that a senior House staffer
asserted that no issuers would opt to issue direct-pay bonds under the lower Senate rates of 45
percent and 65 percent. When I read that assertion, I asked Finance Committee Republican staff
to reconcile that assertion with the scoring of the Build America Bonds proposal in the Senatepassed

Finance Committee Republican staff reviewed the Joint Committee of Taxation’s final
estimate of the Senate-passed bill and found that the senior House staffer’s assertion was directly
contradicted by the estimate provided by the Joint Committee on Taxation, which is the
nonpartisan official scorekeeper for Congress on tax matters.

In fact, footnote 2 of the estimate of the Senate Build America Bonds provision states that
the Joint Committee’s estimate of the Senate direct-pay bonds option includes an increase in
outlays of $8.006 billion. This means that the Joint Committee on Taxation’s estimate assumed
that a large number of issuers would elect to use the direct-pay option, contrary to the staffer’s

The Bond Buyer also reported that the senior House staffer stated, “There’s nobody that I
know who does not view the Build America Bonds program as an enormous success with the
possible exception of one person.” I assume that staffer was referring to me. There are many
federal taxpayers who do not view the Build America Bonds program as an enormous success.

To understand why, let’s see which states benefit the most from Build America Bonds.
In looking at data from Thomson Reuters on the ten-largest Build America Bonds deals,
California alone issued 73 percent of those bonds.

Between California and New York together, those two states alone issued 92 percent of
the bonds from the ten-largest Build America Bonds deals.

So California and New York are the biggest winners under Build America Bonds, while
American taxpayers from the remaining 48 states subsidize these states.

As Senator Kyl pointed out in his Dear Colleague letter on Build America Bonds
circulated on March 15, the Build America Bonds program actually rewards states for having a
riskier credit rating by giving them more money.

Build America Bonds create a perverse incentive that causes state and local governments
to borrow more than they otherwise would. This is especially true regarding the school taxcredit
bonds. This bill creates incentives where states and local governments should not care
what the interest rate is. The American taxpayers are picking up 100 percent of the interest

And actually, the cost borne by American taxpayers is more than 100 percent. At least
with tax credit bonds, the taxpayer includes the amount of the tax credit in income, and the
federal government collects taxes on that income. The only purchasers of tax credit bonds are
those that have tax liabilities.

Otherwise, it makes no sense to buy a tax credit bond. However, Build America Bonds
are technically taxable bonds, but most of the investors do not pay tax on these bonds. For
example, under our tax rules, if a foreign person or a pension fund or a tax-exempt entity buys a
Build America Bond, they do not pay tax on the interest they receive.

Thus, the federal government not only cuts a check for 100 percent of the bonds’ interest
costs, it also loses most of the revenue it would have collected from the tax-credit bonds.
States and local governments can view this federal money as free money, because they
don’t even have to collect it from their residents. Therefore, of course state and local
governments are big fans of the Build America Bonds program — they get federal money that
they don’t have to pay back. And the large Wall Street investment banks love Build America
Bonds — they’re getting richer off of them.

However, we all know there’s no such thing as a free lunch. Federal taxpayers are
footing the bill for this big spending program, which only gets bigger every time Congress
touches it. And American taxpayers are the ones I’m looking out for.

And American taxpayers are the ones who, in the words of the senior house staffer, do
“not view the Build America Bonds program as an enormous success.”

I urge my colleagues to look beyond the fancy, well-funded lobbying campaign for this
rich subsidy. Take a look at who wins. The winners are the big Wall Street banks. Maybe a
small number of governments will issue bonds they otherwise wouldn’t.

The only certainty is that the federal taxpayer is on the hook for the interest costs. With
record budget deficits under this Congress and Administration, we cannot casually look away as
new, open-ended subsidies are proposed.