Premium
Federal Intervention in the Municipal Bond Market: The Effectiveness of the Build America Bond Program and Its Implications on Federal and Subnational Budgeting
Author(s) -
LUBY MARTIN J.
Publication year - 2012
Publication title -
public budgeting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.694
H-Index - 30
eISSN - 1540-5850
pISSN - 0275-1100
DOI - 10.1111/j.1540-5850.2012.01023.x
Subject(s) - taxable income , subsidy , bond , business , finance , local government , municipal bond , federal budget , state (computer science) , government (linguistics) , revenue bond , bond market , economics , economic policy , public economics , accounting , public administration , market economy , political science , linguistics , philosophy , algorithm , fiscal year , computer science
The American Recovery and Reinvestment Act of 2009 (ARRA) included several new federal programs intended ostensibly to “unfreeze” the credit markets as a result of the global financial crisis. One such program, the Build America Bond (BAB) program, aimed to lower the borrowing costs for state and local governments by increasing their access to capital and providing a more generous federal subsidy than the traditional indirect tax exemption subsidy. BABs are taxable bonds sold by subnational governments, which carry a 35 percent direct federal payment subsidy to the borrower. In creating this program, the federal government hoped that the large direct federal subsidy along with greater potential investor interest in taxable securities would result in lower borrowing costs for state and local governments vis‐à‐vis traditional tax‐exempt bonds. This research study examines the relative effectiveness of the BAB program and details the various quantitative and qualitative implications on federal and subnational budgeting by moving from an indirect to a direct federal subsidy approach in facilitating state and local government capital raising.