Congress advances tax reform bills that would impact water sector funding

A comprehensive tax code overhaul passed by the House of Representatives last week, and a similar bill approved by a Senate committee, would preserve the federal tax exemption for municipal bond interest, while eliminating advance refunding. The actions put Congress on track to potentially send a final tax reform bill to President Trump before the end of the year.

The Republican-written, House-approved legislation (H.R. 1, the Tax Cuts and Jobs Act) would preserve the ability of communities to issue tax-exempt municipal bonds to fund water and wastewater infrastructure, which has been a priority for the water sector in the tax reform debate. However, the bill would prohibit bond issuers from advance refunding outstanding bonds, a common way for communities to lower their finance charges if interest rates decrease during a municipal bond’s repayment period. The bill would also bar the issuance of new tax-free private activity bonds beginning in 2018, which would make it more costly for private entities to pursue investments in water infrastructure.

The House vote in favor of H.R. 1 came just hours before the Senate Finance Committee approved its own draft tax reform plan.  Like the House bill, the Senate Republican proposal would continue the existing tax exemption for municipal bond interest but eliminate advance refunding bonds. The Senate bill would not alter the tax status of private activity bonds.

When Congress returns to Washington after Thanksgiving, the full Senate is expected to consider its tax bill under floor procedures that block filibusters – thereby allowing it to pass with the support of 50 senators plus the tie-breaking vote of Vice President Pence, if necessary. Should the Senate approve its tax bill, House and Senate Republican leaders would quickly begin negotiations to hammer out a final tax bill that would then go before each chamber again before being sent to the White House for President Trump’s signature – something Republicans hope to accomplish before the end of the year.

While any number of changes could be made to the bill during those negotiations, the preservation of tax-exempt municipal bonds in both bills sends a strong signal that they are likely to remain protected in the final legislation. 

The Tax Cuts and Jobs Act is the House Republicans’ plan for the largest federal tax code overhaul since 1986, and it generally aims to reduce personal and business rates while removing many exemptions and deductions.  The bill would preserve the ability of communities to issue tax-exempt municipal bonds to fund water and wastewater infrastructure, but it would also prohibit bond issuers from advance refunding outstanding bonds.

Under current law, bond issuers are entitled to a one-time option to reissue outstanding municipal bonds when interest rates decrease.  According to data from the Government Finance Officers Association, between 2012 and 2016 states and localities advance refunded 941 tax-exempt municipal bonds that funded water and wastewater infrastructure, saving communities and ratepayers an average of $1.4 million in interest costs each time.

In response to the GOP plan, water and wastewater sector organizations – the Association of Metropolitan Water Agencies (AMWA), the National Association of Clean Water Agencies (NACWA), the American Water Works Association (AWWA), the Water Environment Federation (WEF), the American Public Works Association (APWA) and the WateReuse Association – wrote to the Ways and Means Committee members this month. The associations expressed concern that the bill would curtail the ability of communities to reduce infrastructure financing costs through advance refunding.

Information contained in this news update appeared in the Association of Metropolitan Water Agencies’ weekly Monday Morning Briefing. 

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