There are plenty of reason to like and dislike the tax deal between President Obama and congressional leaders. On the plus side, we dodge a big tax increase for the next two years. We also replace a goofy and ineffective “make work pay” tax credit with a supply-side oriented reduction in the payroll tax rate (albeit only for one year, so there probably won’t be much economic benefit).

On the negative side, the deal extends unemployment benefits, which has the perverse effect of subsidizing unemployment. The deal is also filled with all sorts of corrupt provisions for various interest groups such as ethanol producers.

Then there are provisions such as the 35 percent death tax. Is this bad news, because it is an increase from zero percent this year? Or is it good news because it is much lower than the 55 percent rate that was scheduled to take effect beginning next year? That’s hard to answer, though I know the right rate is zero.

But here’s one bit of good news that has not received much attention. The tax deal ends the “Build America Bonds” tax preference, which was one of the most destructive provisions of Obama’s so-called stimulus. Here’s an excerpt from a Bloomberg report.

Senate Democrats backing the subsidy, which has helped finance bridges, roads and other public works, fell short in a bid to get the program added to a bill extending the 2001 and 2003 income-tax cuts. That failure was the latest in efforts to keep the Build America program alive beyond its scheduled end on Dec. 31. …While Obama and Democrats have supported prolonging the program, they have run into opposition from Republicans critical of the stimulus package. Extensions have twice passed the Democratic-controlled House only to stall in the Senate, where the Republican minority has sufficient power to block legislation. The U.S. government pays 35 of the interest costs on Build America bonds. …State and local governments, the U.S. Chamber of Commerce and representatives of the construction industry are among the program’s advocates.

Build America Bonds are a back-door handout for profligate state and local governments, allowing them to borrow more money while shifting some of the resulting interest costs to the federal government.

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The municipal bond market is having a tough time today largely in part of looming rumors concerning the expiration of the Build America Bond or ‘BAB’ program.  After all, this program was omitted from Obama’s tax deal with Republicans.

As a part of Obama’s Recovery and Reinvestment Act, BABs allow state and local governments to issue debt to fund basic infrastructure projects at a 35 percent discount on the bond’s interest costs, handing that bill to the federal government.

CNBC reports that the BAB program accounts for nearly 26 percent of today’s municipal bond market- with October being reported as the biggest month for the program, as issuers increasingly position themselves to reap the benefits of the program which is set to expire on the 1^st of January next year.

What will happen when municipal bond issuers are not able to borrow more cheaply?  Well, heaven forbid, they would be forced to pay market rates for debt.  If they can’t afford these rates, then they’ll have to cut spending and re-gear their budgets to enter the credit market.  The 2010 election results at the state level may indeed have changed things.   With a sweeping conservative, Republican wave in state and local governments this past election (the GOP took over a dozen state legislatures), it is almost certain that such cuts will now be possible.

According to Blackrock’s December 2010 Municipal Bond Market Report entitled State of the States and Local Governments, “[State and local governments] have accelerated spending cuts to reduce operating deficits.”  This incoming class at the state and local government level will only advance cost cutting and budget balancing.   They are being mandated to do so by their constituents.  Such a mandate may be just what will protect the American taxpayer from another Obama bailout.  Congressman Frank Wolf (R-VA) has most recently called for an audit on the $5.2 billion Dulles Rail project, which is already looking like it’s over budget.  Such oversight is exactly the attitude we can expect from the incoming class of elected officials at the state and local level.

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Vice President Joe Biden met with state and local government officials from across the country last year to provide guidance on spending federal stimulus funds. Biden implored local leaders to focus on only essential infrastructure needs that will put people back to work and to avoid frivolous projects: “No swimming pools! No tennis courts! No golf courses! No Frisbee parks!”

Since then, dozens of Minnesota cities and counties have taken advantage of a little known stimulus bond program, borrowing $684 million for projects that include municipal swimming pools, a multi-million dollar golf course renovation and a new mega-community center, a Freedom Foundation of Minnesota analysis shows.

The Build America Bonds program offers a substantial subsidy by the federal government to help cover interest payments and entice local governments to borrow money, making it the fastest growing portion of the municipal bond market.

While most of the 65 bonding projects across Minnesota appear to be public improvement projects for roads and basic infrastructure, concerns have been expressed that Build America Bonds could encourage borrowing for unessential government projects, as well.

The City of Plainview approved borrowing $1.5 million through Build America Bonds for renovations to its municipal swimming pool. The City of Coon Rapids leveraged Build America Bonds for a $4.23 million facelift to the city-owned Bunker Hills golf course. Despite a budget crunch, St. Paul Mayor Chris Coleman pitched using Build America Bonds to help fund $24 million in projects.  The construction work includes installing a new $7.2 million swimming pool with a “lazy river”at Como Park, renovations to the Highland Park swimming pool, and building a 36,000 square foot community center.

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