The Solution: Tax Credit Bonds

A New Financing Approach to Stimulate Construction of New Supply Facilities

The New Water Supply Coalition will seek Congressional support for legislation that would authorize a new tax credit bond program, to be known as "Clean Renewable Water Supply Bonds" that could be issued by public agencies in exactly the same way as those agencies can presently issue traditional tax exempt municipal bonds. The Clean Renewable Water Supply Bonds (CRWSB's) would have a twenty year bullet maturity, meaning that no principal repayment would be required until the twentieth year. At that time, the debt could be refinanced with traditional tax exempt municipal debt.

Congress has authorized the issuance of tax credit bonds in three instances. First in the mid 1990s for the construction of inner city schools, in 2005 for renewable energy projects, and that same year for Gulf Coast reconstruction after Hurricanes Katrina and Rita. The renewable energy tax credit bonds provide the best illustration of the way these bonds operate.

The Energy Tax Incentives Act of 2005 authorized the issuance of $800 million of tax credit bonds to assist not-far-profit utilities to finance the costs of new renewable energy projects. These bonds, known as Clean Renewable Energy Bonds or "CREBs", allow qualified borrowers such as electric co-ops and local government agencies to sell bonds for the construction of renewable energy projects.

With a conventional tax exempt bond the issuer must pay interest to the bondholder. But with a tax credit bond, the federal government pays a tax credit to the bondholder in lieu of the issuer paying interest. The Treasury Department sets the rate of the tax credit on a daily basis and the bondholder is able to deduct the amount of the tax credit from their total income tax liability. As with CREBs, for CRWSB's, the IRS would allocate bond authority among qualified projects and issuers would apply to the IRS for an allocation.

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The New Water Supply Coalition. 1750 H Street, NW, Suite 600, Washington DC 20006. Ph: 202.737.0700 Fax: 202.737.0455