On Friday, September 10, 2021, the House Ways and Means Committee released the text of a bill – known as the “Build Back Better Act” – that would restore the ability of state and local governments to issue tax-exempt “advance refunding” bonds, i.e., bonds issued more than 90 days before the redemption date of the bonds to be refunded.

As background, the ability to issue tax-exempt advance refunding bonds, which already had been heavily restricted by prior tax legislation, was eliminated by the 2017 Tax Cuts and Jobs Act.  As a result, state and local governments have fewer options available to them when it comes to refinancing of existing debt. Many issuers have turned to issuing taxable advance refunding bonds, with varying levels of success due to the continued compression of interest rates.  Other options, such as forward-starting bonds (bonds purchased at a specified date, but with a delayed issuance date to ensure tax-exempt status), and “Cinderella” bonds (taxable bonds that later automatically convert to tax-exempt), have also been explored.

The “Build Back Better Act,” if passed in its current form, would restore tax-exempt advance refundings as they were permitted before the passage of the 2017 Tax Cuts and Jobs Act. That is, issuers would once again have one “bite at the apple” to advance refund prior bonds on a tax-exempt basis.

The proposed restoration of tax-exempt advance refundings is just one part of a much larger package of proposals contained in the “Build Back Better Act.” House and Senate Democrats are relying on the reconciliation process in their attempts to pass this bill, as it is very likely that no Republicans will support it. The status of the bill remains in flux and its text will likely go through numerous revisions in the days and weeks to come. Prospects for its passage remain unclear at best due to the extremely slim margins Democrats face in both the House and Senate.

For additional information about the proposals contained in the bill, or to get an update on its current status, please contact us.