Public Finance Advisory: House Tax Bill Eliminates Private Activity Bonds, Advance Refundings

By Kendra Follett, Jim Lane, John Swendseid, and Tiffany Lu Leichman

The House Ways and Means Committee released on November 2, 2017, its draft tax bill (the “Tax Cuts and Jobs Act”), which contains provisions restricting the ability of state and local governments to issue certain types of bonds on a tax-exempt basis. Among the provisions that would affect state and local bonds, the bill would eliminate the tax exemption for private activity bonds (including future refundings of private activity bonds) and advance refunding bonds, and would also eliminate certain tax credit bonds, all effective for bonds issued after December 31, 2017. The draft bill would also eliminate tax-exempt bonds for professional stadiums or arenas for professional sports exhibitions, games or training issued after November 2, 2017, and would terminate the New Market Tax Credit. The bill further eliminates the ability for a borrower of outstanding private activity bonds issued on a drawdown basis to take any additional draws after December 31, 2017.

Currently, private activity bonds may be treated as a tax-exempt bond if it is a “qualified bond.” Qualified bonds include: (i) exempt facility bonds (including bonds issued for airports, docks, and wharves, mass commuting facilities, water furnishing facilities, sewage facilities, solid waste disposal facilities, qualified residential rental projects, facilities for the local furnishing of electrical energy or gas, local district heating or cooling facilities, qualified hazardous waste facilities, high-speed intercity rail facilities and environmental enhancement of hydroelectric generating facilities); (ii) qualified mortgage bonds (such as single family mortgage bonds); (iii) qualified veterans mortgage bonds; (iv) qualified small issue bonds; (v) qualified student loan bonds; (vi) qualified redevelopment bonds; or (vii) qualified 501(c)(3) bonds issued for nonprofit corporations (including qualified 501(c)(3) hospitals, private universities, colleges and arts organizations).

Last year, state and local governments sold $428 billion of debt. According to the Council of Development Finance Agencies, private activity bonds comprised about $20.4 billion of such debt, and the 50 states and the District of Columbia received $35.14 billion in new volume cap allocation. Total carry-forward allocation from 2013-15 equaled $63.90 billion, creating a total available capacity of national volume cap of over $97.36 billion. Many bonds are also issued each year for advance refundings, where the refunding bonds are issued more than 90 days in advance of the call date for the refunded bonds.

The proposed elimination of tax exemption for “professional stadium bonds” applies to the proceeds of a bond issue issued on and after November 2, 2017, which proceeds are used to finance or refinance capital expenditures allocable to a facility which, during at least 5 days during any calendar year, is used as a stadium or arena for professional sports exhibitions, games or training. The elimination of the tax exemption for “professional stadium bonds” includes bonds issued for new facilities and bonds issued to refinance existing facilities on and after November 2, 2017.

The House Ways and Means Committee is expected to mark up the bill beginning Monday, November 6th. The Committee meeting is scheduled to last more than one day to accommodate member statements, amendments considered and voted, followed by the vote to report the bill to the full House. If the Ways and Means Committee approves this tax reform legislation, the full House is expected to consider the bill the week of November 13th. The Senate Finance Committee is also expected to consider its version of tax reform legislation the week of November 13th.

The provisions of the proposed bill related to tax-exempt bonds are available here. The full text of the proposed bill is available here.

If you have any questions, please contact any member of our Public Finance Group.