Senate Version of Tax Bill Would Terminate Tax-Exempt Advance Refunding Bonds, Preserve Private Activity Bonds

On November 9, 2017, the Congressional Joint Committee on Taxation released a detailed report on the provisions in the Senate version of the bill entitled the “Tax Cuts and Jobs Act”.  The Senate bill, like the House version of the bill released on November 2, 2017, on which we recently reported, would terminate the tax-exemption for interest on all advance refunding bonds.  The Senate Finance Committee is expected to mark up its version of the bill the week of November 13, and reports indicate that the full Senate may vote on its version of the bill during the week of November 27 (the House is expected to vote on and pass its version of the bill before Thanksgiving).

As we noted in connection with the release of the House version of the tax bill on November 3, 2017, under current law, state and local governmental units, as well as 501(c)(3) organizations, generally may advance refund their outstanding bonds on a tax-exempt basis 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.  The Senate bill, like the House bill, would terminate the tax-exemption for bonds issued after December 31, 2017

Although the Senate bill is aligned with the House bill with respect to the termination of tax-exempt advance refundings, it does not include a counterpart to the House provision that would terminate tax-exempt treatment for private activity bonds issued after 2017.  This is a notable, and encouraging, development for 501(c)(3) organizations and for borrowers wishing to use tax-exempt bonds to finance manufacturing facilities, privately-operated docks and wharves, airport, solid waste and sewage facilities and for low and moderate income rental residential property.  Tax-exempt bonds to finance certain single family mortgages and student loans would also be preserved under the Senate bill.

The Senate bill, like the House version, would also repeal the alternative minimum tax, under which the interest on many types of tax-exempt private activity bonds are subject to taxation as so-called tax preference items.

Finally, in contrast to the House bill, the Senate bill would preserve “specialty” tax credit bonds, such as so-called “new clean renewable energy” bonds, and would not prohibit the use of tax-exempt bonds to finance professional sports stadiums.

It continues to be impossible to assess whether tax legislation of any type will be enacted or, if enacted, whether any bond-related provisions would be part of the final legislation.  Reports in the general press indicate that the White House would like to receive a tax bill for signature before Christmas.  Thus, bond issuers and borrowers who may be affected by the bond-related proposals in the Senate bill and the House bill should today 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.

Read our previous alert on the first development of the Tax Cuts and Jobs Act here.