Tax Credit Bonds: Overview and Analysis

April 16, 2009 – April 1, 2021 R40523

Tax Credit Bonds: Overview and Analysis
Updated April 1, 2021
Congressional Research Service
https://crsreports.congress.gov
R40523

Tax Credit Bonds: Overview and Analysis

Summary
Nearly al state and local governments sel 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 economic development purposes. The
relative appeal of TCBs and municipal bonds is dependent on issuer and investor characteristics
and on economic conditions.
Authority to issue al tax credit bonds was eliminated beginning in tax year 2018 through P.L.
115-97, the 2017 tax revision (often referred to as the Tax Cuts and Jobs Act, or TCJA). Issuing
authority for many tax credit bonds had already expired prior to tax year 2018. Federal tax
benefits associated with tax credit bonds issued before 2018 may stil be claimed. Multiple bil s
have been introduced in the 116th and 117th Congresses that would both restore TCB issuance
authority and modify past TCB programs or create new ones.
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. Specifical y, 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 TCBs were established as temporary tax
provisions.
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Introduction
Nearly al state and local governments sel 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. In contrast,
interest payments from other types of bonds, such as corporate bonds, are included in federal
taxable income. Because of the difference in taxability, state and local government tax-exempt
bonds—often referred to as municipal bonds—offer a lower pre-tax interest rate than corporate
bonds, which reduces the interest costs owed by state and municipal governments.1
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 and were established as temporary tax provisions. 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.
Authority to issue all tax credit bonds was eliminated beginning in tax year 2018 through P.L.
115-97, the 2017 tax revision (often referred to as the Tax Cuts and Jobs Act, or TCJA). Issuing
authority for many tax credit bonds had already expired prior to tax year 2018.2 Federal tax
benefits associated with tax credit bonds issued before 2018 may stil be claimed. Multiple bil s
have been introduced in the 116th and 117th Congresses that would both restore TCB issuance
authority and modify past TCB programs or create new ones.
The Details of Tax Credit Bonds
There are several types of TCBs, most of which are provided for a specific purpose, location, or
type of project. Issuers of Qualified Zone Academy Bonds (QZABs) are required to use the
proceeds to finance public school partnership programs in economical y distressed areas. Clean
Renewable Energy Bonds (CREBs) are designated for clean renewable energy projects.
Midwestern Disaster Bond (MWDB) proceeds were for the refinancing of outstanding
government debt in regions affected by the Midwestern storms and floods in the spring and
summer of 2008. Qualified Forestry Conservation Bonds (QFCBs) are intended to help non-
profits or government entities purchase and conserve forest land. Qualified Energy Conservation
Bonds (QECBs) are for investment in capital projects that improve energy conservation.
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.3 Table 1 summarizes the acronyms for the
bonds examined in this report.

1 For ease of exposition, the phrase “state and local tax-exempt bonds” is replaced by “municipal bonds” for the
remainder of the report.
2 Befitting their current-law status, this report generally refers to T CB issuances in the past tense and refers to other
aspects of T CBs in the present tense.
3 For issuers choosing the direct payment option, the BABs must be used for capital expenditures. See below for more
information on the difference between investor credit and issuer direct payment T CBs.
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Tax Credit Bonds: Overview and Analysis

Table 1. Tax Credit Bond Acronyms
Acronym
Type of Bond
BABs
Build America Bonds
CREBs
Clean Renewable Energy Bonds
GTCBs
Gulf Tax Credit Bonds
MWDBs
Midwestern Disaster Bonds
QECBs
Qualified Energy Conservation Bonds
QFCBs
Qualified Forestry Conservation Bonds
QSCBs
Qualified School Construction Bonds
QZABs
Qualified Zone Academy Bonds
RZEDBs
Recovery Zone Economic Development Bonds
TCBs
Tax Credit Bonds
The Mechanics of TCBs
TCBs offer a tax credit that may be used to directly reduce federal income tax liability. The credit
available from a TCB depends on the bond principal and credit rate. 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. Unlike interest on
municipal bonds, which does not create a taxable income stream, the credit amount is included in
the bond holder’s gross income.4 The credit is limited to the bondholder’s current tax liability and
is therefore “non-refundable.” Unused tax credits may be carried over to the succeeding tax year.
Investor Credit TCBs
The credit rate for investor and issuer credit TCBs is dependent on a national credit rate set by the
Secretary of the Treasury. That national credit rate is intended to al ow issuers of TCBs to sel
their bonds at par (face value) without additional interest expense. The rate calculation is
based on its [the Treasury Department’s] estimate of the yields on outstanding bonds from
market sectors selected by the Treasury Department in its discretion that have an
investment grade rating between A and BBB for bonds of a similar maturity for the
business day immediately preceding the sale date of the tax credit bonds.5
The credit rate published (by the U.S. Bureau of the Fiscal Service) on the issue sale date is the
bondholder’s annual rate of credit.
The relationship between the national credit rate set by Treasury and the final credit rate applied
to a bond issue is dictated by the federal tax code, and differs across types of investor and issuer
TCBs. The credit on what are known as 100% credit TCBs provides for a benefit equal to the
product of the national credit rate and the bond principal. For example, the annual tax credit rate

4 In special cases, some insurance companies may indirectly pay income tax on otherwise tax exempt debt. In addition,
interest paid on private activity bonds may be subject to the alternative minimum tax.
5 U.S. Department of the T reasury, Internal Revenue Service, Internal Revenue Bulletin 2009 -6, February 9, 2009,
p. 449.
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Tax Credit Bonds: Overview and Analysis

for investor credit TCBs was 4.12% on January 29, 2018 (the term was 34 years).6 The bonds
sold on that day would al ow the taxpayer to claim a federal tax credit equal to 4.12% multiplied
by the face value of the bond. Thus, a $100,000 bond issued on January 29, 2018, would yield an
annual tax credit of $4,120 for the bondholder.
However, other credit rates may be reduced for some TCBs. CREBs and QECBs al ow for a
credit equal to 70% of the national credit rate. Thus, for these bonds, the investor receives 70% of
the annual tax credit described above, or $2,844 (70% of $4,120).7 The method for determining
the tax credit rate for investor tax credit TCBs is general y the same for 100% and 70% credit
TCBs.8
Issuer Direct Payment TCBs
Unlike investor credit TCBs, the benefit claimed for issuer direct payment TCBs depends on the
interest rate established between the buyer and issuer of the bond, not the Secretary of the
Treasury. The issuer and investor agree on terms either as a result of a competitive bid process or
through a negotiated sale. As with investor credit TCBs, the relationship of the final credit rate
and the negotiated interest rate may differ across types of TCBs.9 BAB and RZEDB credits are
35% and 45%, respectively, of a market-determined taxable bond interest rate for the specific
issuer, not the Secretary of Treasury.
For example, if the negotiated taxable interest rate is 8%, on $100,000 of bond principal, then a
bond with 35% credit amount would produce a credit worth $2,800 (8% times $100,000 times
35%). The issuer has the option of receiving a direct payment from the Treasury equal to the
credit amount or al owing the investor to claim the credit. The issuer would choose the direct
payment option if the net interest cost was less than traditional tax-exempt debt of like terms. The
interest cost to the issuer choosing the direct payment is $8,000 less the $2,800, or $5,200. If the
tax-exempt rate of the bond is greater than 5.20% (requiring a payment of greater than $5,200),
then the direct payment is a better option for the issuer.10
So long as the marginal tax rate of investors in the municipal bond market is lower than the credit
rate of the direct payment TCB, then municipal issuers would likely chose the direct payment
option. However, as the marginal tax rate rises, the alternative to direct payment TCBs, traditional
tax-exempt bonds, is relatively more attractive to issuers and investors alike.11 Increases in
statutory marginal tax rates would likely induce such an outcome, reducing the attractiveness of
direct payment TCBs relative to traditional tax-exempt bonds.

6 Unlike other T CBs, CREBs had a range of possible maturities (term), but had the same credit rate as the other T CBs
of like term. Historical annual tax credit rate data for T CBs is available on the following U.S. T reasury website:
https://www.treasurydirect.gov/GA-SL/SLGS/selectQT CDate.htm.
7 T CBs are not restricted to the 100% or 70% credit rate values under current law, as benefits would rise with the credit
rate provided.
8 See 26 U.S.C. 54A(b).
9 For example, BAB credits are worth 35% of the product of interest rate and bond principal.
10 Note that if the credit is claimed by the issuer, the transfer to the issuer is an outlay of the federal government, not a
tax credit. T his simple example does not consider issuance and underwriter fees.
11 Researchers have determined that the federal government subsidy for BABs “… disadvantages individual U.S.
taxpayers, who are the main holders of municipal bonds, and benefits new entrants in the municipal bond market.” New
entrants would include international investors and pension funds. See Andrew Ang, Vineer Bhansali, and Yuhan Xing,
Build Am erica Bonds, National Bureau of Economic Research, Working Paper no. 16008, May 2010.
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The direct payment TCB, in cases where the issuer claims the direct payment, is modeled after
the “taxable bond option,” which was first considered in the late 1960s. In 1976, the follow ing
was posited by the then president of the Federal Reserve Bank in Boston, Frank E. Morris:
The taxable bond option is a tool to improve the efficiency of our financial markets and, at
the same time, to reduce substantially the element of inequity in our income tax system
which stems from tax exemption [on municipal bonds]. It will reduce the interest costs on
municipal borrowings, but the benefits will accrue proportionally as much to cities with
strong credit ratings as to those with serious financial problems.12
The taxable bond option was wel received by issuers and investors. A U.S. Department of the
Treasury report on BABs, a direct payment TCB, estimated that over the lifetime of the program
more than $181 bil ion in BABs were issued.13
The implementation of annual sequesters, as provided for by the Budget Control Act of 2011 (P.L.
112-25), diminished the credit rates of certain issuer direct payment TCBs. In FY2021,
sequestration reduced the credit rates for issuer direct payment BABs, QSCBs, QZABs, new
CREBs, and QECBs by 5.7%.
Tax Credit Bond Stripping
The credits on TCBs are “strippable,” or separable from the underlying bond.14 Al owing the
separation of the credit from the underlying bond improves the attractiveness and marketability of
the TCBs to issuers, investors, and financial intermediaries. General y, a financial intermediary
could buy the TCB, sel the principal to an investor looking for a longer-term investment, and sel
the stream of credits to another investor seeking quarterly income. For example, assume a
financial intermediary buys the $100,000 TCB presented above. The intermediary sel s the right
to the principal portion (the $100,000) of the TCB to a pension fund for $90,000 and sel s the
stream of credits ($1,980 every quarter for 15 years) to another investor for $90,000. The
stripping provision makes TCBs more competitive with traditional bonds.15
The Term of TCBs
The maximum term (the number of years for which the credit wil be paid) “shal be the term
which the Secretary estimates wil result in the present value of the obligation to repay the
principal on the bond being equal to 50% of the face amount of the bond.”16
Specifical y, the maximum term of the bonds is determined by the prevailing interest rate for
municipal debt with a maturity of greater than 10 years. The maximum term on TCBs issued on
January 28, 2018, was set at 34 years. Midwest Disaster Bonds (MWDBs) had a maximum term
of two years, and the interest rate reflected the shorter term. The Treasury published the credit
rate and term daily.17

12 Frank E. Morris, “T he T axable Bond Option,” National Tax Journal, vol. 29, no. 3 (September 1976), p. 356.
13 U.S. Department of the T reasury, “Treasury Analysis of Build America Bonds Issuance and Savings,” May16, 2011.
14 26 U.S.C. 54A(i).
15 For rules on T CB stripping, see the following IRS Notice 2010 -28 from Internal Revenue Bulletin 2010-15, April 12,
2010; available at http://www.irs.gov/irb/2010-15_IRB/ar08.html.
16 26 U.S.C. 54A(d)(5)(B). T he term of T CBs is represented by the expression log(2)/log (1+r), where the variable r is
the “discount rate of the average annual interest rate of tax-exempt obligations having a term of 10 years or more which
are issued during the month.”
17 As reported on the U.S. T reasury website, at https://www.treasurydirect.gov/GA-SL/SLGS/selectQT CDate.htm.
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Tax Credit Bonds: Overview and Analysis

Application of Davis-Bacon Labor Standards
ARRA included a provision that requires some of the TCBs to abide by the labor standards as
mandated under the Davis-Bacon Act of 1931. General y, Davis-Bacon requires that contractors
pay workers not less than the local y prevailing wage for comparable work. The following bonds
are subject to the Davis-Bacon labor standard: new CREBs, QECBs, QZABs, QSCBs, and
RZEDBs.
Tax Credit Bonds vs. Other Bonds
The Treasury-determined credit rate for investor credit TCBs was set higher than the municipal
bond rate to compensate for the credit’s taxability noted earlier. General y, to attract investors, the
credit rate should yield a return greater than the prevailing municipal bond rate and at least equal
to the after-tax rate for corporate bonds of similar maturity and risk. And for issuers, the interest
cost should be less than, or at least equal to, the next best financing alternative. In almost al
cases, tax-exempt bonds would be the next best alternative for governmental issuers. The
following section offers a brief analysis of the tradeoff between tax credit bonds and other bonds
from the prospective of investors and issuers.
Appeal to Investors
An investor’s marginal tax rate is critical in determining the attractiveness of bond investments.
Consider the following example where we assume an average 4.53% interest rate on munic ipal
debt. Investors in the 15% income tax bracket would need a credit rate of at least 5.33% (4.53%
divided by (1 - 0.15)) to choose TCBs over municipal bonds. Investors in the 35% bracket would
require a credit rate on TCBs of 6.97% (4.53% divided by (1 - 0.35)). General y, the TCB credit
rate would have to exceed the after-tax return on municipal bonds and the after-tax return on
taxable bonds of like term to maturity. The investor credit TCB rate is set at the higher amount to
ensure the market for the bonds clears.
Evaluating an Investor Tax Credit Bond Investment
Bondholders in the highest tax bracket find the tax credit relatively less attractive than do bondholders in the
lower brackets. However, the tax credit is fixed at the same rate for al buyers. For TCBs that offer a reduced
credit rate, such as CREBs and QECBs, the issuer would augment the tax credit with an interest payment or
discount pricing.
t
=
income tax rate of bond holder
rTCB
=
pre-tax rate of TCB credit
rmuni
=
prevailing interest rate on high grade tax-exempt municipal bonds
rtax
=
prevailing interest rate on high grade taxable bonds
Purchase a TCB if:
rTCB
>
rmuni /(1-t)

or
rTCB
>
rtax
To attract investors, the TCB tax credit rate must be greater than (a) alternative tax-exempt municipal
bond interest rate divided by one minus the income tax rate, or (b) the prevailing taxable bond rate.

The choice between a tax credit bond and a taxable corporate bond is not as dependent upon the
bondholder’s tax bracket. At comparable levels of default risk, TCBs and taxable bonds are
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equal y attractive to purchasers that anticipate tax liability. However, an investor without tax
liability that holds a tax credit bond would be al owed to claim a credit for future tax liability or
carry forward the credit. For these investors, “stripping” the tax credits from the bond and sel ing
them to an entity with tax liability would be an option.
Appeal to Issuers
The objective of issuers is to borrow at the lowest possible interest cost. TCBs under both the
investor credit model and the issuer credit model are typical y lower cost than the next best
alternative, tax-exempt bonds. Proposals to reduce the issuer credit rate, to 25% or 28% for
example, increase the likelihood that issuers wil opt for traditional tax-exempt bond finance.
Direct payment TCBs provide issuers with the option of receiving payments directly from
Treasury as another option to tax-exempt bonds. The relative value of direct payment TCBs
increases with the interest rate of the alternative tax-exempt bond, as that rate determines the
payment otherwise required from the issuer.
TCB issuers may also establish a bond reserve fund (or sinking fund). A sinking fund provides for
the eventual repayment of bond principal by devoting certain funds to regular payments on the
bond issue. General y, IRS rules al ow reserve funds to accumulate just enough to repay the bond
principal.18 The sinking fund provision for TCBs significantly reduces the interest cost to the
issuer. On January 28, 2018, the al owable rate for the “Permitted Sinking Fund Yield” to repay
the issue was 2.10%.19 The TCB rate was 4.12% on that day.
Influence of Economic Conditions
The relative appeal of tax-exempt bonds and TCBs to investors and policymakers may vary
significantly with underlying economic patterns. In normal economic conditions, tax-exempt
bonds are offered at a lower interest rate than those of corporate bonds. For example, on February
4, 2021, the average high-grade taxable corporate bond rate was 2.70%, and the average high-
grade municipal bond rate was 2.14% (see Figure 1).20 The municipal bond rate thus offers a
considerable subsidy to the issuer, as without the tax exemption the issuer would have had to pay
56 basis points more for each dollar borrowed (2.70% is 0.56 percentage points greater than
2.14%).
However, from late 2008 to early 2009, early 2011 to early 2015, and early 2017 to late 2020, the
gap between the interest rates of municipal and corporate bonds was much lower than its
historical average, and in some cases the municipal bond rates were actual y higher than the
taxable high-grade corporate bond rates. Turmoil in the financial markets brought about by the
Great Recession and by the economic recession following the COVID-19 crisis may have
contributed to the increase in municipal bond rates. Another contributor to the high yields on
municipal bonds may have been low demand for those bonds due to concerns about potential and
actual defaults by municipalities like Chicago and Detroit, and by Puerto Rico.21

18 T he U.S. T reasury publishes a maximum yield for these reserve funds along with the credit rate. T he permitted
sinking fund yield is equal to 110% of the long-term adjusted applicable federal rate (AFR), compounded
semiannually. T he permitted sinking fund yield is updated monthly , 26 U.S.C. 54A(d)(4)(C).
19 As reported on the U.S. T reasury website, at https://www.treasurydirect.gov/GA-SL/SLGS/selectQT CDate.htm.
20 Federal Reserve Board, T able H.15, “Selected Interest Rates,” available at http://www.federalreserve.gov/releases/
h15/data.htm; and T he Bond Buyer, “ Bond Buyer Indexes,” available at https://www.bondbuyer.com/broker/bond-
buyer-data.
21 Jeff Benjamin, “Muni Bonds are Poised to Shine as Rates Move Higher,” Investment News, August 12, 2015. For
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Tax Credit Bonds: Overview and Analysis

The spread between corporate and municipal bonds began to approach its historical average in
late 2020. This return to normal may be due to anticipated interest rate increases by the Federal
Reserve, because municipal bonds are anticipated to perform better as interest rates increase.22
However, the recent fluctuations in the rate spread make it difficult to predict the nature of the
spread moving forward.
Figure 1. Interest Rates for Municipal, 10-Year Treasury, and Corporate Bonds
Monthly averages from January 2008 to February 2021

Source: Federal Reserve Board, Table H.15, “Selected Interest Rates,” available at
http://www.federalreserve.gov/releases/h15/data.htm, and The Bond Buyer, “Bond Buyer Indexes,” available at
https://www.bondbuyer.com/broker/bond-buyer-data.
Notes: Corporate bond data taken from Moody’s Seasoned Aaa Corporate Bond yields as measured by the
Federal Reserve. Municipal bond data taken from the 20-Bond GO Index as measured by Bond Buyer. Treasury
bonds represent yields from 10-year Treasury Notes (constant maturity, nominal rates).
The value of the TCB credit is a function of both the interest rate of the bond and the credit rate
on the TCB as set by Treasury. However, because the credit rate of the TCB is intended to be such
that the bonds are not sold at a discount, the relative value of TCBs to corporate bonds is less
dependent on general economic conditions than is the value of municipal bonds over corporate
bonds. Therefore, TCBs may be relatively more attractive compared to municipal bonds in
economic periods of low growth or great uncertainty.

more information on the financial issues concerning Puerto Rico, see CRS Report R44095, Puerto Rico’s Current
Fiscal Challenges, by D. Andrew Austin.
22 Ibid.
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Allocation and Purpose of Tax Credit Bonds
The TCJA eliminated the authority to issue al tax credit bonds beginning in tax year 2018.
Previously, the authority to issue TCBs was usual y capped with a national limit or with a state-
by-state cap. BABs were the exception. In addition, some of the TCBs included set-asides for
substate governments or other entities. What follows is a brief overview of how and to whom
each bond program al ocated the authority to issue the bonds.
Table 2 lists the existing TCBs and their authorization levels. A more detailed description of each
type of bond is provided later in the report. Note that P.L. 110-246, enacted in June of 2008,
created Section 54A of the tax code. This section contains many parameters common to al TCBs.
This revision of the tax code was intended to “standardize” some of the TCB parameters.
Table 2. Authorization Levels of Tax Credit Bonds
Code
Bond
Credit
Expired
Enacting
Section
Program
Authorized Amount
Amount
After
Legislation
Energy
54
CREBs I
$1,200,000,000
100%
2009
P.L. 109-58
54C
New CREBs I
800,000,000
70%
2010
P.L. 110-343
54C
New CREBs II
1,600,000,000
70%
2010a
P.L. 111-5
54D
QECBs I
800,000,000
70%
2017
P.L. 110-343
54D
QECBs II
2,400,000,000
70%
2017
P.L. 111-5
General Government, Economic Development, and Forest Conservation
54B
QFCBs
500,000,000
100%
2010
P.L. 110-246b
54AA
BABs
no limit
35%c
2010
P.L. 111-5
1400N(1) GTCBs
350,000,000
100%
2006
P.L. 109-135
1400N(l)
MWDBs
450,000,000
100%
2009
P.L. 110-343
1400U-2
RZEDBs
10,000,000,000
45%d
2010
P.L. 111-5
School Construction
54E
QZABs I
4,400,000,000
100%
2008
P.L. 105-34
54E
QZABs II
5,200,000,000
100%
2016
P.L. 111-5
54F
QSCBse
22,400,000,000
100%
2010
P.L. 111-5
Source: CRS compilation.
a. IRS Notice 2015-12 solicited additional applications for new CREBs in 2015 to claim forfeited amounts
previously al ocated.
b. P.L. 110-246 is the 2008 “Farm Bil ” which was original y signed by the President as P.L. 110-234 on May 22,
2008. Clerical errors in P.L. 110-234 required Congress to pass the revised “Farm Bil ” enacted on June 18,
2008. P.L. 110-246 repealed P.L. 110-234.
c. The underlying tax credit rate is market determined, not established by the Secretary of the Treasury as
with the other TCBs. The credit is 35% of the market-determined interest rate.
d. The credit amount is determined in the same manner as BABs.
e. QSCBs could be issued in 2011 if capacity were carried over from 2010.
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. Specifical y, ARRA created
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Tax Credit Bonds: Overview and Analysis

QSCBs. It also al owed issuers the option of receiving a direct payment from the U.S. Treasury
instead of tax-exempt interest payments or tax credits for investors. 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. In short, with BABs and RZEDBs, the two parties in
the transaction established the tax credit rate, not the Treasury Secretary. The resulting investor
tax credit amount or issuer direct payment is equal to 35% of the interest payment for BABs and
45% for RZEDBs.23
Multiple bil s have been introduced in the 116th and 117th Congresses that would restore TCB
issuance authority, including H.R. 2 from the 116th Congress, the Moving Forward Act.
Qualified Zone Academy Bonds
The aggregate limit for QZAB debt was $400 mil ion annual y from 1998 through 2008, $1.4
bil ion for each of 2009 and 2010, and $400 mil ion annual y from 2011 through 2016.24 The
Consolidated Appropriations Act, 2016 (P.L. 114-113) authorized an additional $400 mil ion
dollars in QZABs for both 2015 and 2016. Further limits are applied to each state, the District of
Columbia, and territory based upon their portion of the U.S. population below the poverty line.
States are responsible for the al ocation of the available credit to the local governments or
qualified zone academies. Unused credit capacity can be carried forward for up to two years.
Individual public schools use QZABs, through their participating state and local governments, for
school renovation (not including new construction), equipment, teacher training, and course
materials. To qualify for the program, the school must also be a “Qualified Zone Academy.” A
“Qualified Zone Academy” is any public school (or program within a public school) that provides
and develops educational programs below the postsecondary level if “such public school or
program (as the case may be) is designed in cooperation with business to enhance the academic
curriculum, increase graduation and employment rates, and prepare students for the rigors of
college and the increasingly complex workforce.”25
In addition, the academy must also be located in an empowerment zone or enterprise community.
Alternatively, the academy also qualifies if it is reasonably expected that at least 35% of the
students qualify for the free or reduced price school lunch program. At least 95% of the bond
proceeds must be used for rehabilitating or repairing public school facilities, providing
equipment, developing course materials, or training teachers and other school personnel.
Qualified School Construction Bonds
These bonds had a national limit of $11 bil ion in each of 2009 and 2010. An additional $200
mil ion in each of 2009 and 2010 was al ocated to Indian schools. The bonds general y are
al ocated to states based on the state’s share of Title 1 Basic Grants (Section 1124 of the
Elementary and Secondary Education Act of 1965; 20 U.S.C. 6333, BG). The District of
Columbia and the possessions of the U.S. are considered states for QSCBs. The possessions other
than Puerto Rico (American Samoa, Commonwealth of the Northern Mariana Islands, Guam, and
U.S. Virgin Islands), however, were al ocated an amount on the basis of the possession’s
population with income below the poverty line as a portion of the entire U.S. population with
income below the poverty line.

23 BABs and RZEDBs where the issuer chooses the direct payment option do not allow for the investor tax credit.
24 According to IRS Notice 2009-30, the $1.4 billion is for each of 2009 and 2010.
25 26 U.S.C. 54E(d)(1)(A). T he private entity must donate an amount equivalent to 10% of the bond proceeds. Services
of employees as volunteer mentors satisfies the 10% private partnership requirement.
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As noted above, 40% of the bond volume ($4.4 bil ion) is dedicated to large LEAs. A “large”
LEA is defined as one of the 100 largest based on the number of “children aged 5 through 17
from families living below the poverty level.” Also, one of not more than an additional 25 LEAs
can be chosen by the Secretary if the LEA is “in particular need of assistance, based on a low
level of resources for school construction, high level of enrollment growth, or such other factors
as the Secretary deems appropriate.”26
Each large LEA, as defined above, would receive an al ocation based on the LEA’s share of the
total Title I basic grants directed to large LEAs. The state al ocation is reduced by the amount
dedicated to any large LEAs in the state.
As noted earlier, issuers of QZABs and QSCBs could have chosen the direct payment option
before 2011.
Clean Renewable Energy Bonds27
As authorized by P.L. 109-58, the original CREBs, which could have been issued through 2009,
had a national limit of $1.2 bil ion of which a maximum of $750 mil ion can be granted to
governmental bodies. In addition to governmental bodies, cooperative electric companies and a
“clean renewable energy bond lender” can issue the bonds. A clean renewable energy bond lender
is defined in the tax code as “a lender which is a cooperative which is owned by, or has
outstanding loans to, 100 or more electric companies and is in existence on February 1, 2002, and
shal include any affiliated entity which is controlled by such lender.”28
The CREB lender would lend to co-ops or governmental bodies. The Secretary of the Treasury
reviews applications and selects projects “as the Secretary deems appropriate.”29 Thus, CREBs
are not al ocated by formula and there are no state minimums. The Internal Revenue Service,
through IRS Notice 2005-98, described the al ocation strategy of the Secretary.30 The smal est
dollar amount projects are considered first and the al ocations continue for ever larger dollar
amount projects until the entire al ocation is consumed.
The term and credit rate for CREBs were determined in the same manner as the other TCBs.
These original CREBs offered a 100% credit.
CREBs were available to finance qualified energy production projects, including (1) wind
facilities, (2) closed-loop bio-mass facilities, (3) open-loop bio-mass facilities, (4) geothermal or
solar energy facilities, (5) smal irrigation power facilities, (6) landfil gas facilities, (7) trash
combustion facilities, (8) refined coal production facilities, and (9) certain hydropower facilities.
New Clean Renewable Energy Bonds
As original y authorized in P.L. 110-343, the new CREBs had a national limit of $2.4 bil ion to be
issued before December 31, 2009.31 In contrast to the original CREBs, as noted in Table 2, the

26 26 U.S.C. 54F(d)(2)(E)(ii). T he Secretary did not exercise this option for 2009.
27 For more on CREBs, see CRS Report R41573, Tax-Favored Financing for Renewable Energy Resources and Energy
Efficiency, by Molly F. Sherlock and Steven Maguire.
28 26 U.S.C. 54(j)(2).
29 26 U.S.C. 54(f)(2).
30 U.S. Department of T reasury, Internal Revenue Service, Internal Revenue Bulletin 2005 -52, December 27, 2005,
p. 1213.
31 IRS Notice 2015-12 solicited additional applications for new CREBs in 2015 to claim forfeited amounts previously
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credit rate on new CREBs is 70% of the credit rate offered on the original CREBs. Not more than
one-third of new CREBs were al ocated to any of the following: (1) public power providers, (2)
governmental bodies, or (3) projects of cooperative electric companies. For public power
providers, the Secretary determines the qualified projects which “are appropriate for receiving an
al ocation.” Each wil receive a share of the al ocation based on the ratio of the projected cost of
the project relative to al other qualified projects receiving an al ocation.32 Governmental bodies
and co-ops receive an al ocation in an amount the “Secretary determines appropriate.”33 As with
original CREBs, there is not a state-by-state minimum or formula al ocation mechanism. As noted
earlier, issuers of new CREBs could choose the direct payment option.
Qualified Energy Conservation Bonds
QECBs were first created under P.L. 110-343 with a national limit of $800 mil ion.34 The program
was expanded with an additional $2.4 bil ion under P.L. 111-5 for a total available authority of
$3.2 bil ion. 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. Though the authority to al ocate QECBs
does not expire, the QECB program is now fully subscribed.
QECBs were al ocated to states based on the state’s share of total U.S. population. The District of
Columbia and the possessions of the U.S. are considered states for QECBs. Large local
governments, defined as any municipality or county with population of greater than 100,000, are
eligible for a direct al ocation. Counties that contain a large city can be eligible if its population
less the large city population is stil greater than 100,000.
These bonds were to be used for capital expenditures for the purposes of (1) reducing energy
consumption in publicly owned buildings by at least 20%; (2) implementing green community
programs; (3) rural development involving the production of electricity from renewable energy
resources; or (4) programs listed above for CREBs. Also included were expenditures on research
facilities and research grants, to support research in (1) development of cel ulosic ethanol or other
nonfossil fuels; (2) technologies for the capture and sequestration of carbon dioxide produced
through the use of fossil fuels; (3) increasing the efficiency of existing technologies for producing
nonfossil fuels; (4) automobile battery technologies and other technologies to reduce fossil fuel
consumption in transportation; and (5) technologies to reduce energy use in buildings. Energy
saving mass commuting facilities and demonstration projects were also included in the list of
qualified purposes.
As noted earlier, issuers of QECBs could have chosen the direct payment option on debt issued
through 2011.
Forestry Conservation Bonds
QFCBs were limited to $500 mil ion to be al ocated before May 22, 2010 (24 months after
enactment of P.L. 110-246), in a manner “as the Secretary determines appropriate.”35 Once the
bonds are issued, the proceeds must be spent within three years. A unique feature of QFCBs is the

allocated.
32 26 U.S.C. 54C(c)(3)(A).
33 26 U.S.C. 54C(c)(3)(B).
34 For more on QECBs, see CRS Report R41573, Tax-Favored Financing for Renewable Energy Resources and Energy
Efficiency, by Molly F. Sherlock and Steven Maguire.
35 26 U.S.C. 54B(d)(1).
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al owance for an al ocation amount to be used to offset any taxes due the federal government.
Any al ocation amount used to settle outstanding federal tax debts cannot be used for bond
issuance. A qualified issuer is a “State or any political subdivision or instrumentality thereof or a
501(c)(3) organization.”36
For purposes of the QFCB program, a qualified forestry conservation purpose must meet the
following criteria:37
(1) Some portion of the land acquired must be adjacent to United States Forest Service
Land.
(2) At least half of the land acquired must be transferred to the United States Forest Service
at no net cost to the United States and not more than half of the land acquired may either
remain with or be conveyed to a State.
(3) All of the land must be subject to a native fish habitat conservation plan approved by
the United States Fish and Wildlife Service.
(4) The amount of acreage acquired must be at least 40,000 acres.
Gulf Tax Credit Bonds
GTCBs were bonds distributed to areas affected by Hurricane Katrina, which made landfal in
late August 2005. A total of $350 mil ion was available to be issued through GTCBs, with up to
$200 mil ion available to be issued by the state of Louisiana, up to $100 mil ion available to be
issued by the state of Mississippi, and up to $50 mil ion available to be issued by the state of
Alabama. The maturity length of GTCBs was much shorter than that of many other TCBs, with a
maximum al owable term of two years. GTCB credits were eligible to be claimed against regular
income tax liability and alternative minimum tax liability.
GTCBs were designed to assist state and local governments that were burdened with additional
fiscal stress. The bonds were largely designed to help with fiscal responsibilities that pre-dated
the arrival of Hurricane Katrina, as 95% of GTCB proceeds were required to be used to make
bond payments (other than private activity bonds) that were outstanding as of August 28, 2005.
GTCBs could be used to pay principal, interest, or premia on state or local outstanding bonds.
Eligibility to authorize GTCBs expired at the end of 2006.
Midwest Disaster Bonds
MWDBs were designated for areas impacted by the severe storms and flooding in the Midwest
that occurred between May 1, 2008, and August 1, 2008. Each affected area could have issued an
amount based on the population of the affected area. States with over 2 mil ion affected residents
were authorized to issue up to $100 mil ion and those with less than 2 mil ion and more than 1
mil ion could have issued $50 mil ion. States with an affected population under 1 mil ion were
not eligible to issue MWDBs. Based on IRS guidance, Il inois, Missouri, and Nebraska could
have issued up to $50 mil ion each. Indiana, Iowa, and Wisconsin could have issued up to $100
mil ion.38 These bonds were issued in calendar year 2009 only and as with GTCBs, had a
maximum term of two years. The credit rate on the bonds reflected the relatively short term of the
bonds.

36 26 U.S.C. 54B(f).
37 26 U.S.C. 54B(e).
38 Internal Revenue Service, Internal Revenue Bulletin 2008-50, Notice 2008-109, p. 1285.
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The bonds were intended for states to use to help those substate jurisdictions which were under
fiscal stress. Specifical y, the proceeds from MWDBs were to be used to pay the principal and
interest on any outstanding state bonds or the bonds of any affected political subdivision within
the state. The proceeds could also have been loaned to a jurisdiction for the same purpose. The
provision required the issuer to issue an equal amount of general obligations for the same
purpose, akin to a matching requirement.
Build America Bonds
Unlike other TCBs, BABs were not targeted in their designation. The volume of BABs was not
limited and the purpose was constrained only by the requirement that “the interest on such
obligation would (but for this section) be excludible from gross income under section 103.”39
Thus, BABs could have been issued for any purpose that would have been eligible for traditional
tax-exempt bond financing other than private activity bonds. The bonds must have been issued
before January 1, 2011.
BABs are a direct payment TCB, and offer a credit amount equal to 35% of the interest rate
established by the buyer and issuer of the bond.
In the 114th Congress, similar legislation has been introduced in the House and Senate to reinstate
and permanently extend BABs. H.R. 2676 and S. 1515 would permanently extend issuance
authority for BABs, and implement a decreasing schedule for the applicable credit rate. The credit
rate would decrease from 35% for bonds issued in 2009 or 2010 to 28% for bonds issued in 2019
or later.
A U.S. Department of the Treasury report on BABs estimated that through December of 2010, the
bonds had saved municipal issuers roughly $20 bil ion in interest costs.40
Recovery Zone Economic Development Bonds
RZEDBs are a special type of BAB. Instead of the 35% credit, RZEDBs offered a 45% credit and
are targeted to economical y distressed areas. Specifical y, these bonds are for any area designated
by the issuer (1) as having significant poverty, unemployment, rate of home foreclosures, or
general distress; (2) economical y distressed by reason of the closure or realignment of a military
instal ation pursuant to the Defense Base Closure and Realignment Act of 1990; or is (3) an
empowerment zone or renewal community.41 The purpose of the bonds is, as the name implies,
economic development. Specifical y, the bonds are to be used for “(1) capital expenditures paid or
incurred with respect to property located in such zone [recovery zone], (2) expenditures for public
infrastructure and construction of public facilities, and (3) expenditures for job training and
educational programs.”42
The volume limit for RZEDBs is $10 bil ion and was al ocated to states (including DC and the
possessions) based on their employment declines in 2008. Al states that experienced an
employment decline in 2008 receive an al ocation that bares the same ratio as the state’s share of
the total employment decline in those states. However, al states and U.S. territories, regardless of
employment changes, are guaranteed a minimum of 0.90% of the $10 bil ion.

39 26 U.S.C. 54AA(d)(1)(A). BAB proceeds that use the direct payment options are to be used only for capital
expenditures.
40 U.S. Department of the T reasury, “Treasury Analysis of Build America Bonds Issuance and Savings,” May 16, 2011.
41 26 U.S.C. 1400U-1(b).
42 26 U.S.C. 1400U-2(c).
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Large municipalities and counties are also guaranteed a share of the state al ocations based on the
jurisdiction’s share of the aggregate employment decline in the state. A large jurisdiction is
defined as one with a population of greater than 100,000. For counties with large municipalities
receiving an al ocation, the county population is reduced by the municipal population for
purposes of the 100,000 threshold. Authority to issue RZEDBs expired January 1, 2011.

Author Information

Grant A. Driessen

Specialist in Public Finance

Acknowledgments
The author wishes to thank Steven Maguire, who originally wrote this report.

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan
shared staff to congressional committees and Members of Congress. It operates solely at the behest of and
under the direction of Congress. Information in a CRS Report should n ot be relied upon for purposes other
than public understanding of information that has been provided by CRS to Members of Congress in
connection with CRS’s institutional role. CRS Reports, as a work of the United States Government, are not
subject to copyright protection in the United States. Any CRS Report may be reproduced and distributed in
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copy or otherwise use copyrighted material.

Congressional Research Service
R40523 · VERSION 26 · UPDATED
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