	Introduction

Nearly all state and local governments sell bonds to finance public projects and certain qualified private activities. The federal government subsidizes state and local bond issuances through a number of policies. The mostly widely utilized policy instrument is the tax-exempt bond, which excludes bond interest payments received from the investor's federal taxable income. Tax credit bonds (TCBs) offer an alternative to municipal bonds, providing a tax credit or direct payment proportional to the bond's face value in lieu of the tax exemption. Most TCBs are designated for a specific purpose. TCBs have been used by issuers to finance public school construction and renovation; clean renewable energy projects; refinancing of outstanding government debt in regions affected by natural disasters; conservation of forest land; investment in energy conservation; and for economic development purposes. The relative appeal of TCBs and municipal bonds is dependent on issuer and investor characteristics and on economic conditions. Bonds that are no longer being issued may still be held by the public. In the 114 th Congress, multiple bills have been introduced to extend or modify certain TCB programs. The Consolidated Appropriations Act, 2016 ( P.L. 114-113 ) extended the issuing authority of QZABs for the 2015 and 2016 tax years, and provided for $400 million of issuing capacity for each year. Other legislation, including H.R. 2676 and S. 1515 would extend the BAB program indefinitely. Additionally, the President's FY2017 Budget included a number of proposals related to TCBs, including the creation of a new TCB for certain infrastructure programs. Qualified School Construction Bonds (QSCBs) are for school construction, Build America Bonds (BABs) are for any governmental purpose, and Recovery Zone Economic Development Bonds (RZEDBs) are for economic development purposes. The method of determining the credit rate differs across types of TCBs: the credit rate for investor and issuer credit TCBs depends on a national credit rate set by Treasury, while the credit rate for direct payment TCBs is dependent on interest rate negotiations between the issuer and investor. The investor credit TCB rate is set at the higher amount to ensure the market for the bonds clears. Note that P.L. 110-246 , enacted in June of 2008, created Section 54A of the tax code. As Table 2 shows, the American Recovery and Reinvestment Act of 2009 ( P.L. 111-5 , ARRA) included several bond provisions that use a tax credit mechanism. Specifically, ARRA created QSCBs. These new bonds, BABs and RZEDBs, are also unlike other tax credit bonds in that the interest rate on the bonds is a rate agreed to by the issuer and bond investor. The resulting investor tax credit amount or issuer direct payment is equal to 35% of the interest payment for BABs and 45% for RZEDBs. The Consolidated Appropriations Act, 2016 ( P.L. To qualify for the program, the school must also be a "Qualified Zone Academy." Clean Renewable Energy Bonds26

As authorized by P.L. The Secretary of the Treasury reviews applications and selects projects "as the Secretary deems appropriate." Qualified Energy Conservation Bonds

QECBs were first created under P.L. Similar to the new CREBs, these tax credit bonds offer a credit rate that is 70% of the credit rate offered on old CREBs and other TCBs.
Nearly all state and local governments sell bonds to finance public projects and certain qualified private activities. The federal government subsidizes state and local bond issuances through a number of policies. One such policy is the Tax Credit Bond (TCB), which provides a tax credit or direct payment to the issuer or investor that is proportional to the bond's face value. TCBs represent an alternative to tax-exempt bonds, which exclude interest earnings from the investor's federal taxable income. This report explains the tax credit mechanism and describes the market for TCBs.
The majority of TCBs are designated for a specific purpose, location, or project. Issuers use the proceeds for public school construction and renovation; clean renewable energy projects; refinancing of outstanding government debt in regions affected by natural disasters; conservation of forest land; investment in energy conservation; and for economic development purposes. The relative appeal of TCBs and municipal bonds is dependent on issuer and investor characteristics and on economic conditions.
The first tax credit bonds, qualified zone academy bonds (QZABs), were introduced as part of the Taxpayer Relief Act of 1997 (P.L. 105-34) and first issued in 1998. Clean renewable energy bonds (CREBs) were created by the Energy Policy Act of 2005 (P.L. 109-58), and were later modified as "new" CREBs in the Emergency Economic Stabilization Act of 2008 (P.L. 110-343). Gulf tax credit bonds (GTCBs) were created by the Gulf Opportunity Zone Act of 2005 (P.L. 109-135). Qualified forestry conservation bonds (QFCBs) were created by the Food, Conservation, and Energy Act of 2008 (P.L. 110-246). Qualified energy conservation bonds (QECBs) and Midwest Disaster Bonds (MWDBs) were created by the Emergency Economic Stabilization Act of 2008 (P.L. 110-343).
The American Recovery and Reinvestment Act of 2009 (P.L. 111-5, ARRA) included several bond provisions that use a tax credit or issuer direct payment. Specifically, ARRA created Qualified School Constructions Bonds (QSCBs), Build America Bonds (BABs) and Recovery Zone Economic Development Bonds (RZEDBs). Unlike other tax credit bonds, the interest rate on the BABs and RZEDBs is a rate agreed to by the issuer and investor and the issuers receive direct payments from the Treasury. In contrast, the Secretary of the Treasury sets the credit rate for the other TCBs. The credit rate differs across TCB programs. The QZAB and QSCB credit rate is set at 100% and the "new CREB" and QECB credit rate is set at 70% of the interest cost. In contrast, the BAB tax credit rate is 35%.
Most of the TCBs to date have been established as temporary tax provisions. The authority to issue several TCBs, including GTCBs and CREBs, has expired in recent years. The only permanent TCB, QECBs, are currently fully subscribed. Bonds that are no longer being issued may still be held by the public. In the 114th Congress, multiple bills have been introduced to extend or modify certain TCB programs. The Consolidated Appropriations Act, 2016 (P.L. 114-113) extended the issuance authority of QZABs for the 2015 and 2016 tax years, and provided for $400 million of issuing capacity for each year. Other legislation, including H.R. 2676 and S. 1515 would extend the BAB program indefinitely. Additionally, the President's FY2017 Budget included a number of proposals related to TCBs, including the creation of a new TCB for certain infrastructure programs.