BUILD AMERICA BONDS (BABS)

Summary

Build America Bonds (BABs) were a special type of municipal bond created during the 2008-2009 financial crisis to help state and local governments finance infrastructure projects. Unlike traditional municipal bonds that are tax-free to investors, BABs were taxable but came with federal government subsidies that reduced borrowing costs for municipalities. The federal government provided either a direct subsidy to the issuer (Direct Payment BABs) or tax credits to bondholders (Tax Credit BABs). This program was only available from 2009-2010 as part of the American Recovery and Reinvestment Act, making it a temporary but significant intervention in municipal finance markets.

Usage Context

Understanding BABs is important when studying municipal finance, government intervention in credit markets, crisis-era financial policies, and the relationship between federal and local government financing. This concept is particularly relevant in discussions of how governments respond to financial crises and use fiscal policy to stimulate economic activity through infrastructure investment.

Common Confusions

• Thinking BABs are tax-free like regular municipal bonds when they are actually taxable
• Confusing who receives the federal subsidy (issuer vs. bondholder depending on BAB type)
• Assuming BABs are still available for issuance today
• Not understanding that the federal subsidy made taxable BABs competitive with tax-exempt municipal bonds