Tax bill would preserve municipal bonds, restore PABs

A bicameral tax reform agreement released by congressional Republicans last week preserves the ability of communities to issue tax-exempt municipal bonds to finance drinking water and wastewater infrastructure projects. But the bill would dial back the ability of communities to advance refund municipal bonds when interest rates decrease, which until now has been a common way for communities to further manage infrastructure financing costs.

Congressional Republicans released the conference report of the Tax Cuts and Jobs Act late Friday afternoon after GOP leaders in both chambers spent several weeks negotiating a compromise following the House and Senate’s respective approvals their own versions of the bill. Each of the earlier House and Senate bills would have maintained tax-exempt municipal bond interest while also eliminating advance refunding opportunities beginning in 2018, so those provisions had been largely expected to survive into the final bill. A summary of the conference agreement also released last week confirms this while detailing the final bill as agreed to by conferees.

The final bill also preserves current tax advantages for private activity bonds (PABs), which are tax-free bonds issued by private entities to support public purpose projects, including water and sewer infrastructure. The House’s initial tax reform bill would have eliminated tax-free PABs beginning in 2018, while the Senate’s bill would leave PAB tax benefits in place. Negotiators adopted the Senate’s approach, keeping current PAB rules unchanged.

While preserving tax-exempt municipal bond interest was the focus of AMWA during the tax reform debate, bonds were largely a footnote in Congress’ discussions over the massive tax bill that promises to remake the federal tax code by slashing the corporate rate, eliminating or reducing a number of personal deductions, and reshuffling personal income tax brackets. The entire legislation is projected to cost nearly $1.5 trillion over 10 years.

The House and Senate were each scheduled to vote on the compromise bill this week, with no further opportunity for amendment. No Democrats are expected to support the bill in either chamber, leaving Republican leaders with little margin for error. But assuming the bill makes it through Congress as expected, President Donald Trump is anticipated to quickly sign it into law.

Some information contained in this news update appeared in the Association of Metropolitan Water Agencies’ (AMWA) Monday Morning Briefing. 

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