WASHINGTON — Senate Finance Committee Chairman Max Baucus on Thursday proposed to extend the Build America Bonds program for only one year in legislation he unveiled that would extend several expiring or expired bond and tax provisions.

The Montana Democrat introduced the Job Creation and Tax Cuts Act, which includes a provision that would extend BABs through 2011 at a 32% subsidy rate. That’s half as long as comparable legislation introduced in the House, which would have extended the program for two years and provided a 32% subsidy rate for BABs issued in 2011 and 30% rate for those sold in 2012.

Even though extenders legislation is now pending in both chambers of Congress, market participants contend the legislation will not gain significant traction until after the elections, during a lame-duck session.

The BAB provision was likely halved to cut the cost of the measure, sources said. Baucus touted his bill as fully paid for with revenue-raising offsets. The one-year BAB extension was estimated to cost $2.76 billion over 10 years, whereas the two-year extension proposed in the House would have cost $4.042 billion over the same time frame, according to the Joint Tax Committee.

Apart from the shorter BAB extension, the bond provisions in the Baucus bill mirror those contained in the Investing in American Jobs and Closing Tax Loopholes Act that was introduced in July by House Ways and Means Committee chairman Sander Levin, D-Mich.

Baucus’ bill, like Levin’s, would extend for one year, through 2011, the greater small-issuer exemption for bank-qualified bonds. The American Recovery and Reinvestment Act modified the tax law to allow banks to deduct 80% of the costs of buying and carrying tax-exempt debt sold by borrowers whose annual issuance is no greater than $30 million, up from $10 million. It also allowed for the $30 million limit to be applied to individual borrowers participating in conduit deals, rather than at the conduit-issuer level.

The Baucus bill also would extend for one year the Recovery Zone bond programs, aimed at rejuvenating areas hit hard by the recession. It would make an additional allocation of bond authority to localities under a new formula that would guarantee they each receive a minimum allocation equal to at least their share of national unemployment as of December 2009. Some lawmakers had complained that the formula used to make the original allocation of $25 billion of recovery zone bonds overlooked their hard-hit areas.

The bill also would extend for one year the exemption from the alternative minimum tax for all private-activity bonds, including those issued to refund debt sold after 2003. In addition, it would exempt water and sewer exempt-facility bonds from state volume caps for PABs, and allow Federal Home Loan Banks to guarantee tax-exempt bonds through 2011.

The bill also would reinstate some tax provisions that already expired at the beginning of 2010, if just for a few months. For example, New York City issuers would be able to sell Liberty bonds through the end of 2010 under the new bill. Liberty bonds are a special type of private-activity bond created to help boost economic development in lower Manhattan following the Sept. 11, 2001, terrorist attacks. But the authority to issue those bonds expired at the end of last year.

The Baucus bill also would extend through 2010 relaxed mortgage-revenue bond requirements for areas affected by federally declared disasters so that issuers could sell tax-exempt housing bonds to finance the repair or reconstruction of homes or rental units that were damaged or destroyed.

In addition, it would extend to the end of the year tax incentives for District of Columbia empowerment zones — economically distressed areas where businesses are eligible for tax incentives, including tax-exempt bonds, to spur development.

Further, the bill would modify how some surface transportation funds are allocated, ensuring that each state receives a proportional share of the funding.

Baucus introduced the bill just days after 26 municipal market groups urged Senate leaders to extend the temporary provisions before they expire at the end of the year. In a two-page letter sent Tuesday to Senate Majority Leader Harry Reid, D-Nev., and Senate Minority Leader Mitch McConnell, R-Ky., the groups said the provisions must be extended as part of “whatever legislation is considered in the coming weeks.”

“Helping state and local governments to more easily and affordably access the capital markets provides essential infrastructure for their communities and creates jobs,” they wrote. “Together, they will help governments small and large.”

Failing to extend these provisions would exacerbate the recession, the groups warned. The letter was signed by, among others, the American Hospital Association, the Council of Development Finance Agencies, the National Association of Bond Lawyers, and the Bond Dealers of America, formerly known as the Regional Bond Dealers Association.

House lawmakers had already approved the bond provisions in the American Jobs and Closing Tax Loopholes Act earlier this year, but that measure ultimately stalled in the Senate. As a result, market participants are watching the Senate with the belief that if the legislation can be approved there, it faces a fairly easy path in the House.

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