How the New ‘Fiscal Cliff’ Law Affects the Municipal Bond Market

by Ballard Spahr LLP

The American Taxpayer Relief Act of 2012 (the Act), passed by the Senate and the House and Representatives on New Year’s Day and signed by the President on January 2, 2013, includes several direct and indirect consequences for the municipal bond market. The Act averted the looming “fiscal cliff” by making permanent certain Bush-era tax rates and allowing taxes on wealthy individuals to increase. The Act only postponed the “sequestration” budget cuts enacted in 2011, however, and did not address the fact that the federal government has again reached its borrowing limit.

Notably, the Act limits the itemized deductions that high-income taxpayers can claim but does not restrict the exclusion of interest on state and local bonds from gross income. By raising rates payable by high-income taxpayers, the Act may increase the value of tax exemptions on bonds. Further, the Act permanently increases the alternative minimum tax threshold and indexes it for inflation, which may benefit issuers of “tax preference” private activity bonds.

The 2011 sequestration legislation included a reduction in the federal subsidy to issuers of Build America Bonds and other direct-pay bonds such as Qualified School Construction Bonds and Qualified Zone Academy Bonds. The potential spending cuts now set to occur on March 1, 2013, still threaten direct payments to issuers of such bonds.

On a more positive note, the Act extends and re-authorizes a number of items of interest to municipal market participants. Specifically, the Act does the following:

Qualified Public Educational Facility Bonds

The Act makes permanent the ability to issue private activity bonds for qualified public educational facilities. Proceeds of such bonds may be loaned to a for-profit corporation to finance facilities leased to a public school. These bonds are subject to a separate annual volume cap equal to $10 per capita for each state, with a minimum allocation of $5 million.

Small Issuer Rebate Exception Increase for Bonds Financing Public School Capital Expenditures

The Act makes permanent the increase in the small issuer rebate exception limit for bonds financing public school capital expenditures. Under this provision, an issuer may exempt from rebate up to an additional $10 million of bonds annually beyond the $5 million generally permitted under this exception if the additional bonds finance the construction of public school facilities.

Qualified Zone Academy Bonds

The Act provides for a $400 million national Qualified Zone Academy Bond volume authorization for 2012 and 2013. These bonds are available to finance the rehabilitation and repair of certain public schools or to provide equipment, course materials, or teacher training for such schools. The volume cap can be carried forward for two years, making the 2012 volume cap available for bonds issued by December 31, 2014. The bonds issued under the 2012 and 2013 volume caps provide the holder with a credit against federal tax liability and may not be issued as direct-pay bonds.

New York Liberty Zone Bonds

The Act extends the deadline to issue New York Liberty Zone Bonds, which provide tax-exempt financing to the area surrounding the former World Trade Center, to December 31, 2013.

Empowerment Zone Tax Incentives

The Act extends the effective period of federal empowerment zone designations through December 31, 2013. This change allows Empowerment Zone Facility Bonds to be issued in 2013, provided that the original empowerment zone volume cap has not been exhausted. Ninety-five percent or more of the net proceeds of Empowerment Facility Bonds must be used to finance new or substantially renovated property that is subject to depreciation, and that is to be used in the active conduct of certain qualifying businesses within empowerment zone communities.

New Markets Tax Credit

The Act provides for $3.5 billion of New Markets Tax Credit allocation for both 2012 and 2013. This program was established to provide federal tax credits as an incentive for investment in certain low-income community businesses.

Low Income Housing Tax Credit

The Act extends the 9 percent fixed-credit percentage to non-federally subsidized buildings that receive a housing tax credit dollar amount allocation before January 1, 2014. The provision sets the credit calculation at 9 percent, rather than at a fluctuating number for qualified costs related to buildings that are newly constructed or that involve certain rehabilitation expenditures, and that set aside a certain percentage of units for low- and moderate-income families and individuals. Prior law required such buildings to be placed in service before December 31, 2013, to receive this fixed-credit percentage.

As a result of the failure of Congress to raise the debt limit, the Treasury has suspended the sale of its State and Local Government Series of Treasury bonds (SLGS). SLGS provide state and local governments with a streamlined way to meet yield restriction rules without having to purchase Treasury securities on the open market. Issuers requiring yield-restricted investments for defeasance escrows should be aware that certain bidding procedures must be followed to ensure that the yield-restriction rules are met.

Further, issuers with existing escrows that require the reinvestment of maturing amounts in “zero coupon SLGS” during the period when SLGS are not available are permitted under IRS guidance to purchase alternate securities and make certain yield reduction payments to the government, in each case within specified time periods. Issuers needing to acquire escrow securities or to reinvest should consult bond counsel to assure that the appropriate procedures are followed.

Over the next two to three months, Ballard Spahr will be monitoring ongoing negotiations between Congress and President Obama regarding deficit reduction, sequestration, and tax reform. These negotiations will likely include discussions of changes to, or restrictions on, the excludability from gross income of interest on state and local bonds.

If you have questions on the Act and its implications for the municipal bond market, please contact Kimberly C. Betterton at 410.538.5551 or, or Scott W. Cockerham at 202.661.2295 or

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Ballard Spahr LLP | Attorney Advertising

Written by:

Ballard Spahr LLP

Ballard Spahr LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.