A new report by the Congressional Budget Office (CBO) concludes that tax credit bonds can provide "the same federal subsidy to state and local governments that current tax-exempt bonds provide but at a lower cost."
The CBO report, titled Tax-Credit Bonds and the Federal Cost of Financing Public Expenditures, examines a possible alternative for funding transportation projects and other public works programs.
The report specifically addresses the potential advantages of tax-credit bonds over the commonly used tax-exempt bonds when it comes to financing public expenditures. According to the report, the enactment of carefully structured tax-credit bonds could end up costing the federal government less than the federal tax exemption accorded traditional (or municipal) bonds issued by state and local governments.
Under the redesigned tax-credit bond model, state and local governments issuing those bonds would get a credit against their federal income tax liability--covering the difference in interest cost between the tax-exempt rate and the taxable rate--in place of the cash interest customarily paid on the borrowing.
To illustrate how this might work, the report uses the example of a state issuing $100 million in tax-credit bonds for an infrastructure program. The state, after investing $38 million of the proceeds to repay the principal, would have $62 million--the value of tax credits--to spend on the program.
