BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AJR 3 HEARING: 6/15/11
AUTHOR: Dickinson FISCAL: No
VERSION: 4/14/11 TAX LEVY: No
CONSULTANT: Grinnell
PRIVATE ACTIVITY BONDS AND THE ALTERNATIVE MINIMUM TAX
Urges Congress to extend the alternative minimum tax
holiday for airport private activity bonds.
Background and Existing Law
Generally, income from interest on bonds issued by public
agencies is excluded from state and federal taxes.
Tax-free interest income is a significant subsidy for
investors to fund public works projects because they don't
have to pay the tax, drawing more investment into socially
beneficial projects. Additionally, government issuers
generally pay lower interest rates due to increased
investor demand driven by the tax subsidy, lowering project
costs to taxpayers.
Public agencies issue tax-exempt bonds entirely or
partially for private purposes, known as "private activity
bonds." However the bonds have to meet a two part test to
ensure that they maintain its tax exemption. Whenever 10%
or more of the proceeds are used to benefit a private
activity, or more than 10% of the issue is secured by
private party, the issue is not tax exempt. Since 1968,
federal law provides that bonds financing government-owned
airports are always tax exempt regardless of whether the
issue meets the above test.
Federal and state law imposes an alternative minimum tax
(AMT), intended to ensure that all taxpayers pay some tax
regardless of the deductions and credits they claim. Until
recently, taxpayers do not include interest income from
public purpose bonds for AMT purposes, but must include
interest income from tax-exempt private activity bonds for
purposes of calculating the AMT, unlike state law excludes
any income from a bond issued by a state or municipality
for all state income taxes.
AJR 3 -- 4/14/11 -- Page 2
The American Recovery and Reinvestment Act (ARRA) enacted
in March, 2009, excluded income from private activity bonds
for AMT purposes for the 2009 and 2010 tax years. Congress
is currently considering H.R. 992 (Levin), which extends
the exemption for the 2011 tax year. The reasons for the
bill state that "the AMT treatment of interest on
tax-exempt bonds restricts the number of persons willing to
hold tax-exempt bonds, resulting in higher financing costs.
Higher financing costs, in turn, may make it more
difficult for economic development projects to begin or
continue. The Committee believes that extending the
minimum tax treatment of interest on tax-exempt bonds
provided by the American Recovery and Reinvestment Act of
2009 will help create jobs."
Proposed Law
AJR 3 respectfully urges Congress to extend the alternative
minimum tax holiday for private activity bonds for
airports. The Joint Resolution makes several findings
regarding interest rate premiums, airport bond interest
rates, ARRA, the merits of airport capital construction
projects, as well as airport investments and its resultant
employment.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . According to the Author, "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
AJR 3 -- 4/14/11 -- Page 3
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
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. Of Rented Mules . The Alternative Minimum Tax is one of
the least popular topics at cocktail parties, and when
discussed, it is usually done so in bitter tones and
accompanied by expletives. Despite its lack of popular
appeal, the AMT raises a significant amount of federal
revenue and enhances equity in the tax system by ensuring
that higher income individuals that qualify for significant
tax deductions and credits bear some cost of government
services. If taxes are the dues of civil society, the AMT
ensures that there are no free riders. While disdain of
the AMT is as American as apple pie, and the AMT exemption
for airport private activity bonds lowers borrowing costs
for taxpayers all things equal, exceptions are both
expensive at a time when the federal deficit is at an
all-time notional high, and undermine the integrity of the
tax system. Investor subsidies can lower interest rates,
which help debt issuers, but can also lead to issuing more
debt than needed. Additionally, the primary beneficiaries
AJR 3 -- 4/14/11 -- Page 4
of the AMT exclusion are sophisticated investors that
already avail themselves of significant tax benefits. The
Committee may wish to consider whether it's sending the
right message by urging Congress to extend the AMT
exemption for airport private activity bonds.
3. Gate change . The Tax Reform Act of 1986 made a number
of changes to laws guiding private activity bond law, but
it did not classify debt issued by publicly owned airports
as taxable private activity bonds as AJR 3's findings
state. The Revenue and Expenditure Control Act of 1968
designated debt issued for publicly owned airports as
tax-exempt private activity bonds. The Tax Reform Act of
1986 required that taxpayers must include interest income
from private activity bonds as an item in AMT. The
Committee should amend the resolution to reflect the
correct congressional action and taxable status of the bond
interest.
Assembly Actions
Assembly Revenue and Taxation: 9-0
Assembly Floor: 60-0
Support and Opposition (06/09/11)
Support : The California Airports Council; County of
Sacramento; San Diego County Regional Airport Authority.
Opposition : Unknown.