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Tax Bill Jeopardizes Certain Municipal Bond Financing Tools

By Umbaugh Announcements, November 10, 2017

Congress is currently considering H.R. 1, which passed the House Ways and Means Committee yesterday.  In its current form, the bill proposes substantial changes to the federal tax code.  Since the House Ways and Means Committee approved the bill, it is expected to be considered by the full House of Representatives for a vote.  The Senate Finance Committee bill under consideration is hoped to be more favorable to municipal issuers.

As this process unfolds, it is very important for municipal bond issuers to be alert on these important tax reform issues that would have a major impact on municipal bonds.  Municipal issuers should be concerned about some specific provisions that are currently in the bill.

ADVANCE REFUNDING REPEAL

The bill repeals issuers’ ability to advance refund municipal bonds after 2017.  Current law provides issuers with the ability to have one opportunity to refund outstanding debt more than 90 days in advance of its redemption date.  Having the one opportunity to advance refund bonds is important because it enables issuers to take advantage of placing restrictions on “bond calls” that may affect bond pricing when the debt is issued while still preserving the opportunity for issuers to reduce interest payments in the event that the market is more favorable during the window before the bonds are callable.

PRIVATE ACTIVITY BONDS TERMINATION

Under current law interest on Private Activity Bonds (PABs), like municipal bonds, is excluded from gross income for federal tax purposes. PABs are used for a wide variety of projects like utilities, airports, seaports, affordable housing, and non-profit health and education facilities, all of which provide essential public services.  Under the current bill, newly issued PABs would be income subject to tax for bonds issued after 2017.

NO TAX EXEMPT BONDS FOR PROFESSIONAL STADIUMS

Currently, state and local governments may issue bonds for public purposes as tax-exempt bonds.  Some state and local governments have issued bonds for professional stadiums as tax-exempt bonds, citing these bonds as exempt due to the public purpose of the stadium.  Under the current bill, interest on bonds to finance these projects would be taxable. 

REPEAL OF TAX CREDIT BONDS 

Under current law, governmental issuers may issue various tax credit bonds for projects.  Under the bill, with certain exceptions, the authority to issue tax credit bonds would generally be repealed after 2017.

BOTTOM LINE:  Repealing the provisions listed above will increase the borrowing costs for many issuers that prudently monitor opportunities to lower debt burdens for taxpayers and ratepayers.  For more information about H.R. 1, click here.  We will continue to monitor these developments closely as they occur and we will keep everyone informed as more information becomes available.  As always, you need to contact your bond counsel for legal advice.

If you have any questions or comments regarding these changes, please contact us at .(JavaScript must be enabled to view this email address).

Information in this article was believed current as of the date of publication. As you know, changes occur frequently. The information presented is of a general educational nature. Before applying to your specific circumstances, please contact us at vision@umbaugh.com.


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