[Congressional Record Volume 155, Number 10 (Friday, January 16, 2009)]
[Senate]
[Pages S654-S655]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. BINGAMAN (for himself, Mr. Crapo, Mr. Kerry, Ms. Snowe, 
        and Mr. Schumer):
  S. 279. A bill to amend the Internal Revenue Code of 1986 to modify 
the limitations on the deduction of interest by financial institutions 
which hold tax-exempt bonds, and for other purposes; to the Committee 
on Finance.
  Mr. BINGAMAN. Mr. President, I rise today to introduce the Municipal 
Bond Market Support Act of 2009. This bill is similar to one that 
Senator Crapo and I introduced in the 110th Congress, and I am grateful 
for Senator Crapo's continued leadership on this issue, as well as the 
cosponsorship of Senators Kerry, Snowe, and Schumer.
  One of the most unfair--but least discussed--impacts of the credit 
crisis is its severe disruption of the municipal bond market. By 
reducing state and local governments' access to financing, increasing 
interest costs, and shrinking the universe of available investors, this 
disruption is threatening critical infrastructure investments that 
generate significant economic activity, just when the need for 
infrastructure enhancements could not be more apparent.
  Municipal bonds have long played an essential role in financing the 
construction, expansion, and repair of schools; highways, roads, and 
bridges; affordable housing; hospitals; public transit; water and 
sewage systems; and community-owned utilities. But currently, the 
municipal bond market is significantly impaired. This situation has 
been caused by reasons completely extrinsic to events in the municipal 
bond market; indeed, municipal bonds remain among the safest securities 
in the world, with extremely low default rates.
  Because of this market impairment, states, municipalities and 
authorities have been and are continuing to face unreasonably high debt 
issuance costs. Due to these high costs, many other state and local 
governments are finding themselves suddenly unable to issue debt. For 
instance, in the fourth quarter of 2008, bond issuance fell 33 percent 
compared to the fourth quarter of 2007, representing a $35 billion 
drop.
  The pain is being felt by States and municipalities across the 
country, which have had to curtail new bond issuances, delay, or 
withhold borrowing altogether from the capital markets. For instance, 
in Connecticut, the state sought to sell $500 million in General 
Obligation bonds, but was only able to sell $99 million. As an 
indication as to how interest rates have increased significantly, 
secondary market trading data indicates that, for instance, through the 
beginning of 2009 a Clayton, New Mexico, revenue bond series saw a 230 
basis point increase. This increase is indicative of the increase in 
costs that the city would incur if they had to issue new bonds today, a 
rate of 7.60 percent, whereas a year ago the same issue would likely 
have been issued at 5.29 percent.
  Infrequent issuers are experiencing an even more difficult time 
accessing the markets. A study by Municipal Market Advisors found that 
for issuers that borrow once a year or less, borrowing costs increased 
by at least 200 basis points during the last half of last year; in many 
cases, the increase exceeded 250 basis points. For a state or locality 
issuing $100 million in 30-year bonds, a 200 basis point increase 
translates to $60 million in additional interest payments over the 30 
years. Ultimately, these higher costs will be the responsibility of 
taxpayers, through higher taxes and/or reductions in other investments 
or services.
  As Congress looks to legislation that will spur a national economic 
recovery, we should enhance demand for municipal bonds by liberalizing 
restrictions on banks' ability to acquire municipal debt.
  Since the enactment of the Federal income tax in 1913, Congress has 
supported the municipal bond market by exempting municipal bond 
interest from taxation. Tax exemption is an effective means of 
conferring Federal assistance on state and local capital investments; 
it also recognizes that decisions about which projects to fund are most 
appropriately made at the State or local level. Historically, banks 
were significant purchasers of tax-exempt debt. But the Tax Reform Act 
of 1986 severely curtailed banks' participation by automatically 
disallowing deductions for interest expense whenever municipal bonds 
are purchased. The Act left an exception only for bonds purchased from 
smaller municipalities, those selling no more than $10 million of bonds 
each year. In contrast, non-bank corporations are permitted to hold up 
to 2 percent of their total assets in tax-exempt bonds, regardless of 
the size of the issuer, without jeopardizing interest expense 
deductibility.
  Given the severe challenges affecting the municipal bond markets, now 
is the time to modify these limitations and thus help channel 
additional capital to critical infrastructure projects.
  First, the Act will extend the 2 percent de minimis rule to banks, 
placing them on the same footing as other corporate investors.
  Second, the Act will raise the $10 million small issuer exception to 
$30 million. Because the $10 million level was not indexed to 
inflation, its purchasing power has eroded significantly since 1986, 
leaving many smaller governments either to defer projects to comply 
with this low limit or find non-bank purchasers.
  Finally, the Act will ensure that the small issuer is made applicable 
at the ultimate borrower level, so that bonds benefiting non-profit 
universities and hospitals will not exceed the limitation merely 
because they issue bonds through statewide authorities.
  Taken together, these steps promise to significantly boost municipal 
bond demand, adding liquidity to the market. For instance, Municipal 
Market Advisors projects that extending the 2 percent de minimis rule 
to banks would increase their municipal debt purchasing power by $56 
billion. Additional demand will enable municipalities across the 
nation, and particularly those in small and rural communities, to 
finance the critical infrastructure projects that play an important 
role in growing our national economy.
  Ten national organizations representing state and local governments 
are supporting the Act. I urge my colleagues to do the same.
  Mr. President, I ask unanimous consent that the text of the bill be 
printed in the Record.
  There being no objection, the text of the bill was ordered to be 
placed in the Record, as follows:

                                 S. 279

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Municipal Bond Market 
     Support Act of 2009''.

     SEC. 2. MODIFICATION OF SMALL ISSUER EXCEPTION TO TAX-EXEMPT 
                   INTEREST EXPENSE ALLOCATION RULES FOR FINANCIAL 
                   INSTITUTIONS.

       (a) Increase in Limitation.--Subparagraphs (C)(i), (D)(i), 
     and (D)(iii)(II) of section 265(b)(3) of the Internal Revenue 
     Code of 1986 are each amended by striking ``$10,000,000'' and 
     inserting ``$30,000,000''.
       (b) Repeal of Aggregation Rules Applicable to Small Issuer 
     Determination.--Paragraph (3) of section 265(b) of such Code 
     is amended by striking subparagraphs (E) and (F).
       (c) Election to Apply Limitation at Borrower Level.--
     Paragraph (3) of section

[[Page S655]]

     265(b) of such Code, as amended by subsection (b), is amended 
     by adding at the end the following new subparagraph:
       ``(E) Election to apply limitation on amount of obligations 
     at borrower level.--
       ``(i) In general.--An issuer, the proceeds of the 
     obligations of which are to be used to make or finance 
     eligible loans, may elect to apply subparagraphs (C) and (D) 
     by treating each borrower as the issuer of a separate issue.
       ``(ii) Eligible loan.--For purposes of this subparagraph--

       ``(I) In general.--The term `eligible loan' means one or 
     more loans to a qualified borrower the proceeds of which are 
     used by the borrower and the outstanding balance of which in 
     the aggregate does not exceed $30,000,000.
       ``(II) Qualified borrower.--The term `qualified borrower' 
     means a borrower which is an organization described in 
     section 501(c)(3) and exempt from taxation under section 
     501(a) or a State or political subdivision thereof.

       ``(iii) Manner of election.--The election described in 
     clause (i) may be made by an issuer for any calendar year at 
     any time prior to its first issuance during such year of 
     obligations the proceeds of which will be used to make or 
     finance one or more eligible loans.''.
       (d) Inflation Adjustment.--Paragraph (3) of section 265(b) 
     of such Code, as amended by subsections (b) and (c), is 
     amended by adding at the end the following new subparagraph:
       ``(F) Inflation adjustment.--In the case of any calendar 
     year after 2009, the $30,000,000 amounts contained in 
     subparagraphs (C)(i), (D)(i), (D)(iii)(II), and (E)(ii)(I) 
     shall each be increased by an amount equal to--
       ``(i) such dollar amount, multiplied by
       ``(ii) the cost-of-living adjustment determined under 
     section 1(f)(3) for such calendar year, determined by 
     substituting `calendar year 2008' `for calendar year 1992' in 
     subparagraph (B) thereof.
     Any increase determined under the preceding sentence shall be 
     rounded to the nearest multiple of $100,000.''.
       (e) Effective Date.--The amendments made by this section 
     shall apply to obligations issued after December 31, 2008.

     SEC. 3. DE MINIMIS SAFE HARBOR EXCEPTION FOR TAX-EXEMPT 
                   INTEREST EXPENSE OF FINANCIAL INSTITUTIONS AND 
                   BROKERS.

       (a) Financial Institutions.--Subsection (b) of section 265 
     of the Internal Revenue Code of 1986 is amended by adding at 
     the end the following new paragraph:
       ``(7) De minimis exception for bonds issued during 2009 or 
     2010.--
       ``(A) In general.--In applying paragraph (2)(A) there shall 
     not be taken into account tax-exempt obligations issued 
     during 2009 or 2010 (and paragraph (3)(A) shall be applied 
     without regard to section 291(e)(1)(b) with respect to such 
     obligations).
       ``(B) Limitation.--The amount of tax-exempt obligations not 
     taken into account by reason of subparagraph (A) shall not 
     exceed 2 percent of the amount determined under paragraph 
     (2)(B).''.
       (b) Brokers.--Subsection (a) of section 265 of the Internal 
     Revenue Code of 1986 is amended by adding at the end the 
     following new paragraph:
       ``(7) De minimis exception for bonds issued during 2009 or 
     2010.--
       ``(A) In general.--In applying paragraph (2) to any broker 
     (as defined in section 6045(c)(1)) there shall not be taken 
     into account tax-exempt obligations issued during 2009 or 
     2010 (and paragraph (3)(A) shall be applied without regard to 
     section 291(e)(1)(b) with respect to such obligations).
       ``(B) Limitation.--The amount of tax-exempt obligations not 
     taken into account by reason of subparagraph (A) shall not 
     exceed 2 percent of the taxpayer's assets.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to obligations issued after December 31, 2008.

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