House Tax Bill Would Terminate Tax-Exempt Private Activity Bonds and Advance Refunding Bonds

On November 2, 2017, Republicans in the House of Representatives released a bill entitled the “Tax Cuts and Jobs Act” that would make the most thoroughgoing revisions to the federal tax laws in more than a generation.  At the top level, this bill would restructure individual and corporate tax rates, repeal the alternative minimum tax and the estate tax and adjust or eliminate a number of deductions for taxpayers—including the deduction for state and local taxes and the deduction for home mortgage interest.

If enacted, this bill also would create profound sea changes in the tax-exempt bond market.  Specifically, the Republicans’ House tax bill would terminate the tax-exemption for interest on:

  • All private activity bonds issued after December 31, 2017. This repealer would affect all bonds issued for the benefit of 501(c)(3) organizations—including hospitals, private colleges and universities, cultural institutions and social service providers.  It would also impact all bonds issued for other specified purposes, such as production facilities for small manufacturers, privately-operated docks and wharves, airport and sewage facilities, for low and moderate income rental residential property and even to fund mortgages on single family homes for those of limited means.
  • All advance refunding bonds issued after December 31, 2017. Under current law, state and local governmental units, as well as 501(c)(3) organizations, may advance refund their outstanding tax-exempt bonds once.  This advance refunding option, which has been used in the tax-exempt markets for decades, permits tax-exempt bond issuers to realize considerable interest expense savings even if their outstanding bonds cannot be optionally redeemed for more than 90 days.

Together, these bond provisions would create many millions of dollars per year in additional expense for affected bond issuers and borrowers, by increasing their cost of funds.  This is underscored by a summary of the bill published by the House Ways and Means Committee, which notes that the bond provisions of the bill would raise revenues on the order of $56 billion over the next ten years.

Additionally, the bill would also repeal certain “specialty” tax credit bonds, such as so-called “new clean renewable energy” bonds, and would prohibit the use of tax-exempt bonds to finance professional sports stadiums.

It is impossible at this early stage in the legislative process to assess whether tax legislation of any type will be enacted or, if enacted, whether these bond provisions would be part of the final legislation.  Bond issuers and borrowers who may be affected by these bond-related proposals may wish to consider the types of advocacy that would help to ensure their continued access to tax-exempt financing.  They may also wish to evaluate whether their anticipated tax-exempt financings can or should be accelerated so that bonds are issued before the end of 2017, in order to ensure access to tax-exempt rates for those transactions.

Please contact Antonio Martini at (617) 378-4136, Kris Moussette at (617) 378-4194, or any other member of Hinckley Allen’s Public Finance Group if you would like more information about tax law developments that may affect tax-exempt bond financing, or if you have any other tax-exempt bond matter you would like to discuss.