2018 will be a year of monumental tax law changes following the recent approval by the House and Senate of the Tax Cuts and Jobs Act. President Donald Trump is expected to sign the bill into law in the coming days. While the Act in its final form contains some provisions that hurt the tax-exempt municipal bond industry, many detrimental provisions included in prior versions of the bill were dropped.
The prior version of the Tax Cuts and Jobs Act passed by the House on November 16, 2017 would have eliminated all tax-exempt private activity bonds. Private activity bonds are used to finance a variety of facilities under current law. Among other things, they are used to finance airports, water and sewage facilities, facilities for the disposal of solid waste, certain manufacturing facilities, affordable housing projects, and projects for qualified 501(c)(3) tax-exempt organizations (e.g., colleges and hospitals). Under the House’s plan, any series of private activity bonds issued after December 31, 2017 would be federally taxable.
The original House bill also would have eliminated advance refunding bonds. Under current law, public entities and 501(c)(3) organizations are permitted one advance refunding of a prior series of bonds. An advance refunding occurs when the refunding bonds are issued more than 90 days before the date on which the refunded bonds are to be redeemed. As with the elimination of private activity bonds, under the original House bill advance refunding bonds issued after December 31, 2017 would be federally taxable.
The original House bill also would have eliminated tax-exempt professional stadium bonds. A “professional stadium bond” is defined to mean any bond the proceeds of which are used to finance or refinance capital expenditures allocable to a facility (or appurtenant real property, such as a parking lot) which, during at least 5 days during any calendar year, is used as a stadium or arena for professional sports exhibitions, games, or training. “Professional sports” would presumably not be limited to the “majors” – it could include any minor league affiliate or independent league that featured professional (i.e., paid) players.
Under the original House bill, the ability to issue tax credit bonds after December 31, 2017 also would have been eliminated. The authority to issue tax credit bonds falls under sections 54A through 54F of the Code. Such bonds, while taxable, provide tax credits to investors, and are used to finance a variety of special-interest projects, including renewable energy, energy conservation, and school construction.
Finally, while not directly impacting the tax-exempt bond market like the above provisions, the original House bill would have lowered the corporate tax rate from 35% to 20%. It is widely expected that such a substantial cut in the tax rate would dampen demand for tax-exempt municipal bonds by certain investors, including large financial institutions.
The Senate passed an amended version of the Tax Cuts and Jobs Act on December 2, 2017, and the Senate’s version did not eliminate tax-exempt private activity bonds, professional stadium bonds, or tax credit bonds. The Senate version did, however, follow the House’s plan to eliminate tax-exempt advance refunding bonds issued after December 31, 2017. The Senate version also provided for a cut in the corporate tax rate to 20%.
The differences between the House and Senate versions of the Act were ironed out at a conference committee, which concluded its work on December 15, 2017. The conference committee version, while still eliminating tax-exempt advance refunding bonds and tax credit bonds, retains the tax exemption for all private activity bonds, and professional stadium bonds. The conference committee version also sets the corporate tax rate at 21%.
The House formally approved the conference committee version of the bill on December 19, 2017, and the Senate similarly approved early in the morning on December 20, 2017, with minor technical changes that required a subsequent House vote on the same day. With the Act expected to be signed into law by the President in the coming days, municipal issuers contemplating issuing tax-exempt bonds in 2018 should expect that the market for their bonds will be affected.