BILL ANALYSIS �
AJR 3
Page 1
Date of Hearing: April 4, 2011
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AJR 3 (Dickinson) - As Introduced: February 1, 2011
Majority vote
SUBJECT : Private Activity Bonds: airport financing:
alternative minimum tax holiday.
SUMMARY : Urges Congress to extend the alternative minimum tax
(AMT) holiday for private activity bonds (PABs). Specifically,
this bill :
1)States all of the following:
a) The federal Tax Reform Act of 1986 classified debt
issued by publicly owned airports as taxable PABs;
b) The application of the AMT within the bond marketplace
results in investors requiring higher interest rate
premiums when airports bring debt issues to market;
c) Airport bonds typically carry interest rates 1.5% higher
than nontaxable bonds, costing a $250 million project $20
million in increased financing costs;
d) Congress enacted an AMT holiday for PABs resulting in
increased levels of capital projects at airports
nationwide;
e) Many airport capital construction projects address a
combination of safety, security, and capacity requirements
and will improve the efficiency of airport operations;
f) California airports are currently investing
approximately $2 billion in capital construction projects;
and
g) Capital investments at California airports are
generating hundreds of construction and permanent
employment opportunities.
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2)Resolves that:
a) The Legislature respectfully urges Congress to extend
the AMT holiday for PABs to maintain strong capital
investments at California airports; and
b) The Chief Clerk of the Assembly transmit copies of this
resolution to the President and Vice President of the
United States (U.S.), to the Speaker of the House of
Representatives, to the Majority Leader of the Senate, and
to each Senator and Representative from California in
Congress of the U.S..
EXISTING FEDERAL LAW:
1)Provides that interest on any obligation issued by, or on
behalf of, any state or political subdivision is excluded from
gross income �Internal Revenue Code (IRC) Section 103(a)] if
the proceeds of such bonds are used to finance direct
activities of governmental units or if such bonds are repaid
with revenues of governmental units.
2)Provides that interest on state or local government bonds
issued to finance activities of private persons, so called
"private activity bonds" or PABs, is taxable unless a specific
exception applies. �IRC Section 103(b)].
3)Provides, however, that certain PABs qualify for tax
exemption, so called "qualified PABs." The qualified PABs
include bonds issued to construct airport facilities, provided
that those facilities are owned by, or on behalf of, a
government entity. Those qualified PABs must meet the
applicable volume cap requirements of IRC Section 146 and the
applicable requirements of IRC Section 147.
4)Imposes an AMT on tax-exempt interest (less related expenses)
on qualified PABs issued after August 7, 1986, but temporarily
modified AMT limitations on tax-exempt interest paid on
qualified PABs issued in 2009 and 2010.
EXISTING STATE LAW :
1)Does not conform to IRC Sections 103 or 141 through 150,
relating to the federal rules exempting the interest earned on
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state or municipal bonds and the arbitrage rebate rules.
2)Provides that all interest received or accrued is fully
taxable, except for interest on federal obligations and
tax-exempt bonds issued by the State of California or a local
government in California. �California Constitution, Article
XIII, Section 26(b)].
3)Does not conform to the federal PABs rules and, thus, provides
that if the use of the bond proceeds of a state or local
California issue is for private business use or is secured by
property used for a private business use, the interest on that
bond is still treated as tax-exempt for California income tax
purposes, even if that interest is taxable for federal income
tax purposes.
FISCAL EFFECT : None
COMMENTS :
1)Author's Statement . The author states that, "AJR 3 urges
Congress to extend the AMT holiday for private activity bonds
to maintain strong capital investments at California airports.
California airports have greatly benefited from the 2-year AMT
holiday as they have enticed investors to fund airport
infrastructure projects. For example, Sacramento
International Airport's Central Terminal B is currently under
capital construction projects with great thanks to the AMT
holiday-$480 million. The tax relief was a major beneficial
factor in the financing of the new terminal - without the AMT
holiday, bond investors would have demanded higher interest
rates to compensate for the tax liability of the interest.
This has continued to bring tremendous job growth to the
Sacramento region, thus boosting economic activity.
"In addition to Sacramento, there are currently six other
California airports that have on-airport capital projects
underway, all of which would have been much smaller in scope
or higher in costs absent the AMT holiday. San Francisco
International Airport will be opening Terminal 2 on April 9,
2011 - funding for which was aided by the AMT holiday.
According to the San Francisco Business Journal (February 11,
2011), "SFO also paid less than expected on the bonds it sold
to pay for construction. The airport sold revenue bonds at
interest rates between 4 percent to 4.25 percent, about one
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percentage point cheaper than expected." For every $1 billion
in bonds not subject to the AMT sold by airports, an estimated
28,000 jobs are supported. Nationwide, airports have issued
over $14.5 billion in bonds not subject to the AMT; therefore,
roughly 400,000 jobs have been supported across the nation
with help from the AMT relief. Tens of thousands of those
jobs are here in California. (Data: American Association of
Airport Executives - 2010 Annual Report).
"AJR 3 encourages Congress to extend the AMT holiday for PABs,
as this has been extremely beneficial for California's 30
airports. More importantly, this tax holiday extension
results in boosting economic activity and job creation."
2)Private Activity Bond Financing . For federal income tax
purposes, a "private activity bond" is any bond whose proceeds
are used by, and the debt service of which will be paid by, a
private user. However, in certain cases, government agencies
may issue tax-exempt bonds on behalf of private businesses.
These bonds are known as "Qualified Private Activity Bonds"
and may be issued for various purposes. The purpose of this
bond financing technique is to facilitate low-cost financing
to qualified projects that may not otherwise be feasible if
financed at market rates. Unlike typical municipal bonds, the
payment of principal and interest on private activity bonds is
not the responsibility of the issuing government agency.
Instead, it is the responsibility of the private business
receiving the proceeds. By relieving government agencies of
the financial obligations associated with bond debt, PABs are
a low-risk alternative for communities to finance projects.
This type of financing is especially attractive and low cost
in the case of qualified PABs, since the interest payment is
generally excludable from gross income bondholders for federal
income tax purposes.
3)Airport Financing . Airports play a vital role in the economy
of the United States and California. They ensure an
uninterrupted flow of commerce and provide an efficient way
for people to travel, both domestically and internationally.
Airports, however, need to maintain and improve their
facilities and invest continuously in airside and land side
capacity projects. Airport financing is clearly complex. As
explained by the Airports Council International, terminal
projects usually take three to five years to construct and the
planning, design and construction of runways can take on
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average 8 to 15 years to complete. These projects cost
hundreds of millions of dollars and are financed through
multiple bond issues over the construction period. (Airports
Council International, Alternative Minimum Tax Relief for
Private Activity Bonds Must be Long-Term and Allow Refunding
of Existing Debt, July 19, 2009). General airport revenue
bonds are secured by a pledge of all revenues from operation
and use of an airport's facilities. This pledge is
traditionally supported by a lease agreement with the
airlines, where the airlines pay the airport for the use of
its facilities. Airports also receive revenues from parking,
advertising, land rent (e.g., hotels or office buildings), car
rental companies, restaurants, newsstands, and duty-free
shops, among others.
According to the author, the sub-prime and credit crisis have
caused serious problems for airports; the cost of debt in the
last few years has spiked considerably and most bond insurance
firms were downgraded to levels where their policies are
virtually worthless. Apparently, the flight of investors from
these securities initially forced airports to draw down lines
of credit from commercial banks, but in the last few months,
even those funds have dried up or the cost of credit has
doubled or tripled. The author states that airports continue
to receive partial-year Airport Improvement Program funding,
Passenger Facility Charges user fees and ongoing revenue from
aeronautical and non-aeronautical operations. However,
airports rely on the issuance of debt to provide the majority
of the capital necessary to expand capacity.
4)Alternative Minimum Tax and Airport PABs . Federal tax law
provides that interest on any obligation issued by, or on
behalf of, any state or political subdivision is excluded from
gross income �IRC Section 103(a)]. It limits this exemption
in the case of private activity bonds �IRC Section 103(b)] but
provides that certain facilities may still be financed with
tax-exempt bonds. Prior to 1986, airport PABs were
categorized as municipal tax exempt bonds and a broad range of
airport bond financing was done with tax-exempt bonds.
However, in 1986, the federal tax law was changed to
re-characterize those bonds as PABs and to restrict the use of
tax-exempt financing for airport facilities on the theory that
the tenants of these publicly-owned facilities would be
private companies, such as airlines, rental car companies,
food vendors, and others. Thus, even though interest on
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qualified airport PABs is generally exempt from the federal
income tax, it is subject to the AMT.
The AMT is a separate method of determining income tax, which
was created to ensure that at least a minimum tax is paid by
high-income corporate and individual taxpayers who claim
certain tax deductions, exemptions, losses and credits
(so-called tax preference items). Generally, these tax
preference items must be added back to the taxpayer's taxable
income in computing the AMT income, in order to recapture the
high tax breaks. Without the AMT, some of these taxpayers
might be able to escape income taxation entirely. In essence,
the AMT works as a recapture mechanism for tax breaks
available to high-income taxpayers and represents an attempt
to maintain tax equity. The AMT is computed at rates of 26%
and 28%. Among the tax items that have been singled out as
potential sources of extraordinary tax savings is tax-exempt
interest (less any related expenses) on specified PABs, which
are issued after August 7, 1986. Also, in the case of a
corporation, an adjustment based on current earnings is
determined, in part, by taking into account 75% of items,
including tax-exempt interest, that are excluded from taxable
income but included in the corporation's earnings and profits.
Generally, investors that are subject to the AMT demand a higher
rate of return to compensate for the additional tax liability.
With an increasing number of taxpayers that become subject to
the AMT, the number of investors willing to purchase qualified
airport PABs has significantly decreased.
5)The Federal AMT Holiday for PABs . The American Recovery and
Reinvestment Act (ARRA), which Congress passed in 2009,
included a number of provisions that helped airports to build
critical infrastructure projects. The legislation contained
$1.1 billion for airport construction and an additional $1
billion for the installation of Explosive Detections Systems
and other security projects. The ARRA also included two bond
provisions that have had a positive impact on airports. One
of the provisions was the AMT holiday for bonds that airports
and other state and local government entities issued in 2009
and 2010. That provision also allowed airports to refund a
private activity bond issued after December 31, 2003, and
before January 1, 2009, and provided that the tax exempt
interest on those bonds is not an item of tax preference for
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purposes of the AMT. As a result, more than $24 billion in
non-AMT bonds were issued by airports since the ARRA was
enacted. More than $14.5 billion of those bonds were those
that benefited from the temporary AMT relief. The AMT holiday
provided of approximately $1 billion of financing relief to
airports. (American Association of Airport Executives - 2010
Annual Report, p.1).
The second bond-related provision of the ARRA created the
Build America Bonds program to help state and local
governments to reduce their financing costs and build
infrastructure projects. The new bonds allow state and local
governments to receive a direct payment from the Federal
government in an amount equal to 35% of the interest payment
of the bonds. The U.S. Treasury Department reported that
state and local governments issued more than $165 billion in
Build America Bonds, and airports saved approximately $114
million by issuing $2 billion in Build America Bonds, instead
of tax-exempt bonds. (Id.).
6)California Airports . This resolution urges Congress to extend
AMT relief to assist airports in their current struggle to
maintain and improve the infrastructure. California has 249
public use airports, of which 220 are general aviation
airports. Eleven commercial airports in California are ranked
in the top 100 nationwide. (Aviation in California: Fact
Sheet, prepared by Office of Aviation Planning, Division of
Aeronautics). Currently, several California airports have
capital projects underway, including projects at the Los
Angeles International, Long Beach International, Sacramento
International, John Wayne Orange County, Santa Barbara
Municipal, and San Diego International. Projects were
recently completed at Fresno Municipal, Norman Y Mineta San
Jose International, Charles Shultz Sonoma County, and San
Francisco International. According to the sponsor, these
projects brought over $2 billion worth of capital investment
to the state and would have been much smaller in scope or
higher in costs, absent the AMT holiday.
7)Suggested Amendments . Committee staff suggests the following
non-substantive technical amendments:
AMENDMENT 1
On page 1, line 6, strike out "brings debts" and insert:
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bring debt
AMENDMENT 2
On page 2, line 3, strike out "investment" and insert:
investments
REGISTERED SUPPORT / OPPOSITION :
Support
County of Sacramento
The California Airports Council
Opposition
None on file
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098