BILL ANALYSIS �
AJR 3
Page 1
ASSEMBLY THIRD READING
AJR 3 (Dickinson)
As Amended April 11, 2011
Majority vote
REVENUE & TAXATION 9-0
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|Ayes:|Perea, Donnelly, Beall, | | |
| |Charles Calderon, Cedillo, | | |
| |Fuentes, Gordon, Harkey, | | |
| |Nestande | | |
|-----+------------------------------+-+--------------------------|
| | | | |
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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,
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g) Capital investments at California airports are
generating hundreds of construction and permanent
employment opportunities.
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..
FISCAL EFFECT : None
COMMENTS :
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.
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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 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."
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 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
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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.
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 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
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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.).
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.
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098 FN:
0000226