Report shows bonding may not be the right solution

July 09, 2003

The Congressional Budget Office has issued a report analyzing three hypothetical bonding proposals to fund transportation

The Congressional Budget Office has issued a report analyzing three hypothetical bonding proposals to fund transportation. The report, developed for the Senate Budget Committee, found that any form of financing with bonding would be more expensive than regular appropriations.

However, CBO reported that only a 2% add-on would result from a concept like AASHTO's proposed Transportation Finance Corp.

The June 20 CBO report, titled "A Comparison of Tax-credit bonds, Other Special-Purpose Bonds, and Appropriations in Financing Federal Transportation Programs", asserts that tax-credit bonds, the type of bonds proposed in AASHTO's TFC concept, would be less liquid than Treasury bonds, which are the most liquid instruments available in the bond markets.

AASHTO Executive Director John Horsley said bonding experts have confirmed that there will be a lively secondary market for tax-credit bonds, even though they are a relatively new financial instrument.

"The creation of a centralized issuer of bonds, the volume of bonds we propose the TFC would sell, and the ability to strip the principal and interest to broaden the investor base would generate an active secondary market," Horsley said.

CBO's assumptions were that 2.36 cents of the 2,86 cents in fuel taxes currently deposited in the Mass Transit Account of the Highway Trust Fund would finance tax credits; transit funding would then be accomplished with bond proceeds.

Finally, CBO asserts that a tax-credit bond program would increase the federal budget deficit due to lost tax revenue from the tax credits. AASHTO has proposed that the Highway Trust Fund reimburse the Treasury for the scored cost of the tax credits from net new revenues to the trust fund, to be determined. Therefore, there would be no deficit effect, as well as no replacement of transit funding. In addition, an important feature of AASHTO's proposal is that the tax credits would be deemed taxable income, thus reducing the net cost of the program by one-third.