The program is small. The small size and short term of the program results in several problems. First, it is difficult for bond issuers, attorneys, underwriters, investors and others associated with municipal bond transactions to commit resources to developing expertise on a new and unknown financing vehicle when very little issuance will be permitted to take place. Second, the small issuance volume has resulted in no significant secondary market for QZABs. A lack of market liquidity discourages investors and raises costs for issuers.
Investors are limited.
Individual investors, a potentially strong source of demand for tax-preferred investments, are excluded as QZAB investors. Recently proposed changes to the program would open the market for QZABs to other investors, including individuals. Under H.R. 3700, it would be possible to strip the tax credit from the underlying debt instrument and market the tax credit separately. This change would help ensure that those investors who bought and held the credit would be those most likely to actually incur a tax liability over the term of the credit, and would help ensure that the credit is priced more efficiently. A similar stripping provision applied to traditional tax-exempt bonds would improve pricing and efficiency in that market, as well.