Tony Curtis, who died last week at the age of 85, had one of the strangest careers in Hollywood history. He was, for years, an extremely pretty boy with not much discernible talent. And then, all of a sudden and for only two years, Curtis became a genuinely great film actor. And then, just as fast as it had blossomed, Curtis's extraordinary talent seemed to desiccate.
Read more Comedy Central The House of Representatives. BY Philip Terzian October 11, 2010, Vol. 16, No. 04 Read more Building America's Next Bailout Here we go again. BY Christopher Papagianis October 11, 2010, Vol. 16, No. 04 Read more Trouble in Fishing Waters China's military provocations. BY Gordon G. Chang October 11, 2010, Vol. 16, No. 04 Read more Nobel Prize for Literature Awarded to Mario Vargas Llosa BY Lee Smith Equality Under the Law? Kathleen Sebelius more or less unilaterally decides to whom Obamacare applies. BY Jeffrey H. Anderson document.write(''); Where the DCCC is spending: Rescuing Rodriguez Dates set for Rangel, Waters congressional ethics trials Viagra for molesters? Oh, yes he did. "?Sitting on Our Assets' $18 million in stimulus payments go to 89,000 people who are dead or in prison more Friday,October 8, 2010 You Throw Like Charlie Crist Florida governor introduces a new epithet? BY John McCormack Gibbs Questioned on Goolsbee's Koch Comments BY John McCormack Happy Hour Links BY John McCormack What Does Obama Have Against Consolacion Esdicul? BY Daniel Halper VFW PAC Endorses Klein Over War Hero West BY Michael Warren Friday, October 8, 2010 Building America's Next Bailout Here we go again. BY Christopher Papagianis October 11, 2010, Vol. 16, No. 04 $(document).ready(function() { fontResizer('14px','16px','18px'); }); SHARETHIS.addEntry({ title: unescape(encodeURIComponent('Building America\'s Next Bailout')), url: unescape(encodeURIComponent('http://www.weeklystandard.com/articles/building-americas-next-bailout')) }, {button:true} );It has become obvious in the past year that states face huge budget holes. And the federal government has come to their rescue: The $814 billion stimulus measure included over $280 billion to help states patch their budgets, and just before Congress went on its summer break, it scattered around another $26 billion to help with state health and education deficits. Despite these efforts, the cumulative budget shortfall for states next year is still projected to top $140 billion. Long-term, states also face massive shortfalls in pension benefits for public employees. They have promised over $3 trillion in retirement benefits and, according to the Pew Center, are at least $1 trillion short. How did states get into this mess?
Some were hit particularly hard by the recession, which crimped tax collections. Others simply made bad budget decisions, or put off necessary spending cuts for too long. But the federal government bears at least some of the blame by making it too easy for states to borrow money.
The main (and traditional) federal subsidy is allowing investors in bonds issued by states and localities to exclude interest payments from their taxable income. A second subsidy, much less well known, was created as part of the 2009 stimulus package: Build America Bonds, or BABs. The BABs program was an effort to reinvigorate the municipal bond market by giving states and localities a financing tool for capital projects that would be attractive to a new set of lenders"”those who didn't benefit from the traditional tax exemption.
document.write('');Given the federal government's history of subsidizing state and local borrowing, what's wrong with a new financing tool? Put simply, it's the name of the program, which was crafted well before the recent economic crisis, and how the bonds are being marketed abroad. These may sound like trivial objections, but the naming and marketing of these debt obligations is misleading and may introduce even greater volatility into municipal finance and the broader financial system.
Unlike traditional munis, the interest earned on BABs is taxable. This means that the states must pay higher rates of interest on them to attract lenders. The federal government in turn provides a cash subsidy to the issuing state or locality that equals 35 percent of the bond's interest costs. From the state's point of view, the cost of borrowing stays the same. But the BABs are especially popular with tax-exempt entities (i.e., pension funds) and foreign institutions that are not subject to U.S. income tax. These buyers or investors are generally unwilling to purchase standard municipal bonds because they do not benefit from the tax exemption.
Interest payments on bonds are included in investors' ordinary income. Let's say an investor with a 35 percent marginal tax rate contemplates buying some kind of bond. A corporate bond may yield 7.5 percent. Because a traditional municipal bond is tax-exempt, this investor would receive the same income from a municipal bond that yields 4.875 percent. (You can see how much money a state or local government saves by being able to borrow at a much lower rate.) Once investors bid the municipal bond's yield down below 7.5 percent, however, it no longer makes sense for tax-exempt or foreign investors to buy the security. With a BAB on the other hand (to continue this same example), the investor would receive 7.5 percent while the state government, thanks to the federal subsidy, would still be borrowing, in effect, at 4.875 percent.
1 2 3 next "º last » TAGS: BABs, Build America Bonds, Congress, Economy, Jobs, Stimulus Go Back© COPYRIGHT 2010 THE WEEKLY STANDARD LLC, ALL RIGHTS RESERVED.
Subscribe | Subscribers Only | FAQ | Advertise | Store | Newsletter Contact | About Us | Site Map | Privacy Policy
/* */It has become obvious in the past year that states face huge budget holes. And the federal government has come to their rescue: The $814 billion stimulus measure included over $280 billion to help states patch their budgets, and just before Congress went on its summer break, it scattered around another $26 billion to help with state health and education deficits. Despite these efforts, the cumulative budget shortfall for states next year is still projected to top $140 billion. Long-term, states also face massive shortfalls in pension benefits for public employees. They have promised over $3 trillion in retirement benefits and, according to the Pew Center, are at least $1 trillion short. How did states get into this mess?
Some were hit particularly hard by the recession, which crimped tax collections. Others simply made bad budget decisions, or put off necessary spending cuts for too long. But the federal government bears at least some of the blame by making it too easy for states to borrow money.
The main (and traditional) federal subsidy is allowing investors in bonds issued by states and localities to exclude interest payments from their taxable income. A second subsidy, much less well known, was created as part of the 2009 stimulus package: Build America Bonds, or BABs. The BABs program was an effort to reinvigorate the municipal bond market by giving states and localities a financing tool for capital projects that would be attractive to a new set of lenders"”those who didn't benefit from the traditional tax exemption.
Given the federal government's history of subsidizing state and local borrowing, what's wrong with a new financing tool? Put simply, it's the name of the program, which was crafted well before the recent economic crisis, and how the bonds are being marketed abroad. These may sound like trivial objections, but the naming and marketing of these debt obligations is misleading and may introduce even greater volatility into municipal finance and the broader financial system.
Unlike traditional munis, the interest earned on BABs is taxable. This means that the states must pay higher rates of interest on them to attract lenders. The federal government in turn provides a cash subsidy to the issuing state or locality that equals 35 percent of the bond's interest costs. From the state's point of view, the cost of borrowing stays the same. But the BABs are especially popular with tax-exempt entities (i.e., pension funds) and foreign institutions that are not subject to U.S. income tax. These buyers or investors are generally unwilling to purchase standard municipal bonds because they do not benefit from the tax exemption.
Interest payments on bonds are included in investors' ordinary income. Let's say an investor with a 35 percent marginal tax rate contemplates buying some kind of bond. A corporate bond may yield 7.5 percent. Because a traditional municipal bond is tax-exempt, this investor would receive the same income from a municipal bond that yields 4.875 percent. (You can see how much money a state or local government saves by being able to borrow at a much lower rate.) Once investors bid the municipal bond's yield down below 7.5 percent, however, it no longer makes sense for tax-exempt or foreign investors to buy the security. With a BAB on the other hand (to continue this same example), the investor would receive 7.5 percent while the state government, thanks to the federal subsidy, would still be borrowing, in effect, at 4.875 percent.
Subscribe | Subscribers Only | FAQ | Advertise | Store | Newsletter Contact | About Us | Site Map | Privacy Policy
Read Full Article »