Tax credit bonds are a debt instrument where, rather than investors/bondholders receiving periodic interest and principal payments, they receive federal tax credits of up to 100 percent of the interest amount in lieu of or in addition to partial interest payment over the life of the bond and full repayment of principal upon its maturity. Investors apply the tax credits to their federal tax liability. In turn, the borrower is responsible for paying off the principal at maturity (in a balloon payment), which it can do by different means, such as investing a portion of the bond proceeds in Treasury securities sufficient to pay off the principal or otherwise setting aside local revenues over the life of the bond. A technical paper prepared for the National Surface Transportation Policy and Revenue Study Commission estimates the federal subsidy in present value terms for financing of this nature to be 75 percent over a 25-year bond in the case of a 100 percent subsidy. As such, tax credit bonds afford borrowers significant project savings, as their responsibility would only be 25 percent in present value terms. The paper also identifies several other benefits associated with tax credit bonds including:
Tax credit bonds have only been available for surface transportation projects during 2009 and 2010 as Build America Bonds authorized under the American Recovery and Reinvestment Act (ARRA). Additional information is available from the FHWA Center for Innovative Finance Support.
