« BACK  |  PRINT

RS

MEMBER DIARY

Build America Bonds: The Silent Encroachment of the Unitary Nanny State

 

The Build America Bonds program is a wolf in sheep’s clothing. It’s a catchy name. Who could be against building America? It replaces the market-based defense of federalism with a direct federal subsidy of interest payments to state and local issuers. It is beyond doubt that there are going to be federal strings attached to this federal money, and that these terms of endearment will become more restrictive as they are consecrated by the passage of time and the abrogation of local responsibility.

This nugget of a program, which is a part of the Porkulus bill, has Uncle Obama provide 35% of the interest payments for state and local bond issues as direct subsidies to the issuers of the bonds. This program ostensibly has an end date in 2010, but as we know, federal programs as the closest thing to immortality.

As it currently stands, state and local governments can choose to participate in the BAB program, or to issue tax-exempt debt under the existing rules. As I have stated in my prior piece, it should come as no surprise that the disruption in the municipal bond market has resulted in the arrival of federal help. How long will it be before this help becomes mandatory and municipal bonds no longer qualify for federal interest income tax exemptions? There have already been rumors of such a change in a recent CBO study, as referenced by the link to BusinessWeek.

http://www.businessweek.com/investing/insights/blog/archives/2009/08/could_municipal.html

Will these interest subsidies sometimes become larger than 35%? Will special subsidy rates be offered for favored communities and ‘green building’ projects? Will communities that choose to use non-union labor for their projects not qualify for a subsidy? What if they want to issue bonds to buy a fleet of police cars? Will they have to buy hybrids to qualify for a subsidy? The ability to issue debt to fund local needs without federal meddling is vital to the survival of local governance. Do you want federal bureaucrats or members of Congress telling your local elected officials what they can and cannot build? Do you want them to feel no sense of responsibility because they just expect to be bailed out by the federal government if they fail? The answer here should be a resounding NO!!

If state and local governments are neither allowed nor able to raise their own funds or suffer their failures, then federalism will be dead, and we will become nothing more than a unitary state.

http://www.treas.gov/press/releases/docs/BuildAmericaandSchoolConstructionBondsFactsheetFinal.pdf

http://www.investinginbonds.com/learnmore.asp?catid=8&subcatid=92

Get Alerts