EPA's Better America Bonds

Overview

The Clinton Administration has proposed the creation of a new category of tax credit bonds to be used by State, local, and tribal governments for environmental investments. The qualifying purposes for these bond investments would include green space preservation, parkland acquisition and renovation, wetlands and buffer strips easements and purchases, some visitor facilities construction (related to other purposes), and Brownfields assessment and remediation.

These Better America Bonds would offer purchasers a tax credit in lieu of the interest they otherwise would receive. Since the tax credit compensates the purchasers for lending money, it would be treated as a payment of interest for federal income tax purposes. Meanwhile, the governments which issue the bonds would not have to pay interest on them, a considerable cost savings.

The Administrator of the Environmental Protection Agency (EPA) would allocate to qualifying governments the authority to issue the bonds. The volume of bond authority that could be allocated in each of the five years, starting in 2000, would be $1.9 billion. Amounts unallocated in a year could be allocated in the following year. Allocated amounts unissued in the year of allocation could be issued until the end of the third following year.

Interested qualifying governments would apply in an annual competition to the EPA for bond authority. Applications would follow guidelines which EPA would publish by January 1, 2000. The EPA guidelines would provide the criteria for approving applications. EPA, in consultation with other federal agencies, would review applications and award bond allocations in conjunction with the Community Empowerment Board. Issuers would be responsible for repayment of principal to bondholders upon their maturity.

Discussion and comments on the Administration's Better America Bonds proposal are welcome. Please e-mail comments@thecre.com

Technical Details

The tax credit rate on Better America Bonds would be equal to a measure of the yield on outstanding corporate bonds, specified in the Treasury regulations, for the business day prior to the issuance date. The term of the bonds would be fifteen years. Any taxpayer could hold the bonds and claim the credit. The Treasury would write regulations on the treatment of credits through a mutual fund to its shareholders. Unused credits may not be carried backward but may be carried forward for five years.

Issuers would need to expend 95% of bond proceeds for qualifying purposes within three years of issuance. Property financed with proceeds would have to be used for qualified purposes for fifteen years. Investment earnings (and earnings on the earnings) related to unexpected proceeds in the three years after issuance would be treated as proceeds (also to be used for qualifying purposes). In the three-year period, unexpected proceeds could only be invested in bank accounts or Treasury securities maturing in three years or less.

Issuers must incur a binding obligation with a third party to use at least 10% of issue proceeds within six months of issuance and allocate sale proceeds to expenditures with due diligence. To the extent 95% of proceeds are not expended by the end of the three-year period for qualifying purposes, unexpended proceeds would have to be used to retire a portion of the bonds within ninety days. If the issuer sets up a sinking fund to repay principle, the assets must be held in State and local government securities issued by the Treasury.

Discussion and comment on the technical details of the Administration's Better America Bonds proposal are welcome. Please e-mail comments@thecre.com