GOP tax plan preserves muni bond tax exemption, eliminates new PABs

Under a draft tax reform plan released by Republican leaders in the House of Representatives last week, interest earned on municipal bonds issued to fund public water and wastewater infrastructure would remain fully exempt from federal taxation. But the plan would also eliminate new issuances of private activity bonds (PABs).

The bill, the Tax Cuts and Jobs Act (H.R. 1) would represent the largest overhaul of federal tax policy since 1986, with House Republicans aiming to reduce personal and business rates while weeding out numerous exemptions and deductions from the tax code.  As House leaders worked to develop the proposal in recent months, AMWA consistently called for the preservation of tax-exempt municipal bond interest, which facilitates affordable investment in water and wastewater infrastructure.  If municipal bond interest earnings were made taxable, AMWA argued, interest rates would rise and communities would face higher expenses with financing water infrastructure investments.

The draft of the bill released last week would leave tax-exempt municipal bond interest in place, with a summary of the bill noting that the legislation “preserves the tax-preferred treatment of public-purpose bonds issued by state and local governments.”  But the bill would eliminate several tax incentives for other classes of bonds: interest earned on new private activity bonds issued beginning next year would be subject to federal tax, and communities would no longer be able to take advantage of advance refunding bonds, which currently offer issuers a one-time opportunity to realize savings when interest rates fall.  Additionally, the bill would bar the use of tax-exempt municipal bonds to fund the construction of professional sports stadiums.

While the draft’s preservation of most tax-exempt municipal bonds is a positive step, the bill will likely see many changes before it is finalized.  The House Ways and Means Committee is scheduled to begin marking up the bill today, with the possibility that amendments affecting municipal bonds will be offered, before the full House considers the bill later this month.  In addition, the Senate Finance Committee is expected to release its own tax reform plan later this week, and it is not known how municipal bonds will fare in that proposal.

Republican congressional leaders hope to agree on a single consensus tax overhaul plan soon after Thanksgiving, with the goal of putting it on President Trump’s desk before the end of the year.

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

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