Public Finance Client Alert – Tax Exempt Bonds and Tax Reform

    By Corporate & Public Finance

    Tax Reform Bill Would Have Significant Impacts on Tax-Exempt Bonds

    On Thursday, November 2, 2017, the Chairman of the Ways and Means Committee of the U.S. House of Representatives released H.R. 1, referred to as the “Tax Cuts and Jobs Act.” This is the House Republicans’first released draft of a full-scale tax reform bill. The bill, if it were to become law, would have significant impacts on the tax-exempt bond market effective as early as December 31, 2017.

    First, the bill would eliminate all “qualified private activity bonds,”which includes all tax-exempt bond authority for issuances that are not pure governmental bonds. There would be no authority to issue tax-exempt bonds to support capital projects of 501(c)(3) organizations such as hospitals, retirement communities and schools, to support low-income housing projects or to qualify for 4% low income housing tax credits, to support certain mortgages or student loans, or to support certain transportation public-private partnerships.

    Second, it would repeal “advance refunding bonds” for all purposes (including governmental bond advance refundings), meaning that tax-exempt bonds could not be issued to defease obligations before their first permitted redemption date. This would prevent issuers from taking advantage of debt service savings in a low interest rate environment.

    Third, the bill would repeal tax credit bonds, removing incentives for certain clean renewable energy projects, forestry conservation projects, energy conservation projects, and certain school building projects.

    Fourth, the bill would generally prohibit use of tax-exempt bonds to finance or refinance capital expenditures on facilities used asprofessional sports stadiums or arenas.

    According to the National Association of Bond Lawyers, the House Ways and Means Committee is scheduled to begin marking up the bill on Monday, November 6 and the full House is expected to take up the bill the following week. The Senate Finance Committee is expected to release its tax reform bill next week, with the Finance Committee marking up the bill the following week and consideration by the full Senate during the week of Thanksgiving.

    It is unclear whether the Bond Provisions of the House bill will be included in the Senate version or evenremain in the House bill without changes. Before yesterday, municipal bond industry participants had received assurances from the White House and members of Congress in both parties that municipal bond authority to finance needed infrastructure would not be impeded.

    We recommend that issuers and obligated parties of tax-exempt bond financings take precautions in case the bill advances as currently written. In particular, for qualified private activity bonds, care should be taken to review whether your indentures or financing agreements allow for future modifications within pre-defined formulas or modes. This will prevent existing tax-exempt bonds from losing their status if modifications must take place in the future. If you do not have pre-defined formulas or modes, any change in interest rate or maturity terms would likely cause a loss of tax-exempt status for those existingbonds. For governmental bonds, review should be made to determine whether contemplated advance refunding candidates may be defeased through an advance refunding transaction prior to the end of the year.

    Kaufman & Canoles will continue to monitor the tax reform debate and will be available to consult with you on the practical consequences for your transactions.

    The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2024.