He also noted that an opinion is emerging among muni market participants that announcing a prompt, lengthy extension of BABs could provide an immediate boost to the robust but still developing market.
“There’s beginning to be the perception that a longer-term extension of BABs ... will have benefits because the people in the market will have a reason to invest the resources and the time to expand the market for these bonds,” he said. “They won’t see it as a temporary niche product not worthy of a long-run investment of time and resources.”
If state and local issuers believe “an extension now will have benefits now, not next year, not in 2011, that’s a case you can make … quite successfully,” he added.
Arthur Miller, a vice president at Goldman, Sachs & Co. who sat on the same panel, agreed with Buckley, saying that if investors believe the BAB market will remain liquid in the future, they will be more comfortable with lower interest rates. But an extension should be lengthy if not permanent, and it would be a mistake to periodically extend the program in two-year chunks, he said.
Miller also said that if Congress expands the use of BABs — currently only capital expenditures can be financed with them — it “would further help to liquefy the market and create more competition between the [taxable and tax-exempt] investor bases for the debt of the issuer ... to the benefit of taxpayers in general.”
John J. Cross 3d, the Treasury Department’s associate tax legislative counsel who was also on the panel, said state and local governments have a strong case they can make to their congressional representatives to extend the BAB program, and they should make it.
“Everyone always hears the complaints,” he said. “You don’t hear when things are working nearly as much, so it’s important to make that case.”
However, on the question of expanding the scope of BABs beyond capital expenditures, Cross said that will likely depend on what Congress decides to do with the federal subsidy level, which is currently 35% of interest costs. An expanded BAB program would be “a policy consideration at a revenue-neutral subsidy, but maybe not at a deeper subsidy,” he said.
Buckley also used the event to repeat his previous claims that market participants should not view BABs as a threat to traditional tax-exempt financing, and that concerns about Congress blocking BAB payments in the future are “without basis.”
The law authorizing BABs is written such that lawmakers would have to make an affirmative step to stop the payments, just as they would have to affirmatively cease the exemption for traditional muni bonds, and “the chances of either happening … approach zero,” he said.
Meanwhile, Alice Rivlin with the Brookings Institution argued on an earlier panel that major metropolitan areas, rather than state or local governments, should play a key role in financing and executing major infrastructure projects.
Metro areas are the focal points of the nation’s economy, she said, pointing out that while the 100 largest metropolitan areas nationwide account for just 12% of the land nationwide, they contain 65% of the country’s population and produce more than 75% of its gross domestic product.
However, many metro areas often lack specific governmental bodies to address infrastructure, especially in situations like the one seen in the District of Columbia, where the metropolitan area includes several state and local governments.
Furthermore, she said the nation needs to overhaul how it finances its infrastructure needs, calling the gas tax flawed and increasingly outdated as consumers turn more and more to fuel-efficient vehicles.
“We need a major shift in the financing methods for roads and transit to incent efficiency and send stronger price signals,” she said.
Instead, infrastructure needs should be funded by a vehicle miles-traveled tax in conjunction with fees imposed on drivers using congested roads during peak travel times, she said.
The technology exists to install GPS devices in cars to track miles traveled, but privacy issues would need to be addressed given concerns that the devices could also be used to track where drivers were going, she added.
A pilot program in Oregon, however, might have some answers, she said. There, a portion of cars have been outfitted with GPS devices to track miles traveled, which drivers plug into machines at gas stations to pay the tax.