United States: House Tax Reform Bill Contains Provisions Adversely Impacting Public Finance

Last Updated: November 14 2017
Article by Edward J. Rojas

Edward J. Rojas is a financial services attorney in Holland & Knight's New York office.

HIGHLIGHTS:

  • The Tax Cuts and Jobs Act introduced in the U.S. House of Representatives on Nov. 2, 2017 – now in markup by the House Ways and Means Committee – has a number of provisions that would likely have a negative impact on the public finance sector.
  • The bill would eliminate tax exemption of interest paid on private activity bonds, advance refunding bonds and bonds that finance stadium facilities used by professional sports teams, as well as certain tax credit and subsidy bonds.
  • The bill also would eliminate the alternative minimum tax and reduce corporate tax rates, two items that can affect the public finance bond markets.

Rep. Kevin Brady (R-Texas), Chairman of the House Ways and Means Committee, on Nov. 2, 2017, introduced H.R. 1, the Tax Cuts and Jobs Act, and released a section-by-section summary of the bill. A markup of the bill by the Committee started on Nov. 6. The bill, as introduced, would eliminate tax exemption of interest paid on: 1) private activity bonds (including 501(c)(3) bonds), 2) advance refunding bonds and 3) bonds financing stadium facilities used by professional sports teams. The bill would also eliminate certain tax credit and subsidy bonds. In addition, the bill would eliminate the alternative minimum tax and reduce corporate tax rates from 35 percent to 20 percent – two items that are relevant to the public finance bond markets.   

Prohibition on Issuing Tax-Exempt Private Activity Bonds

Provision: Bonds issued by a state or local government are generally classified as private activity bonds if more than 10 percent (in most cases) of the financed project is used by non-governmental entities (including 501(c)(3) institutions). Section 3601 of the House plan would remove the present tax exemption of interest paid on various types of private activity bonds. This would eliminate tax-exempt financing of most airports, most seaports, multifamily housing projects, non-governmental solid waste disposal facilities, manufacturing facilities, single-family housing loans, student loans and several other types of projects. In addition, tax-exempt financing of facilities owned by Section 501(c)(3) organizations would be eliminated. That would prevent future tax-exempt financing of private 501(c)(3) hospitals, colleges and universities, K-12 schools, nursing homes and affordable housing facilities. The bill would also adversely impact the issuance of tax-exempt private activity bonds by Indian tribal governments, including previously allowed private activity bonds for certain reservation-based manufacturing facilities. This prohibition on issuing tax-exempt private activity bonds would apply to bonds issued after Dec. 31, 2017.

Comment: These changes would result in higher financing costs for Section 501(c)(3) organizations that own or operate hospitals, colleges and universities, K-12 schools, retirement homes and housing facilities. These changes would also increase the cost of financing needed infrastructure at airports and seaports. Further, by eliminating tax-exempt financing of student loan programs, the bill, if enacted, would increase the cost of a college education. Still further, by eliminating tax-exempt financing for qualifying multifamily housing projects and single-family housing loan programs, the changes could reduce access to both types of housing.

Prohibition on Issuing Tax-Exempt Advance Refunding Bonds

Provision: Advance refunding bonds are bonds that are issued to refinance outstanding tax-exempt debt more than 90 days prior to the date the refinanced debt is repaid. Current law allows bonds issued for governmental projects and for 501(c)(3) entities to be advance refunded once. The bill would eliminate the ability to issue tax-exempt bonds to advance refund outstanding bonds. This prohibition would apply to advance refunding bonds issued after Dec. 31, 2017.

Comment: This change would limit the ability of states, local governments and Section 501(c)(3) organizations to lock in interest rate savings while rates are low and avoid the risk of rates having increased by the time the outstanding bonds are permitted to be repaid.

Prohibition on Issuing Certain Tax Credit or Interest Subsidy Bonds

Provision: State and local governments are currently permitted to finance certain types of projects by issuing tax-favored bonds carrying a taxable interest rate. They are able to reduce their borrowing costs either by receiving interest subsidy payments from the federal government or through the assignment of federal income tax credits that are provided to the holders of these bonds. The bill would prohibit the issuance of these types of tax-favored bonds.

Comment: The change would eliminate new clean renewable energy bonds, qualified school construction bonds, qualified forestry conservation bonds, qualified energy conservation bonds and qualified zone academy bonds. This prohibition would apply to bonds issued after Dec. 31, 2017.

Prohibition on Issuing Tax-Exempt Professional Stadium Bonds

Provision: Current law allows the use of tax-exempt governmental bonds to finance professional stadiums in limited circumstances. The bill would prohibit the issuance of any tax-exempt bonds to finance professional sports stadiums. "Professional sports stadium" would be defined as a facility (or appurtenant real property) that, over at least five days during any calendar year, is used as a stadium or arena for professional sports, games or training.

Comment: Unlike the other prohibitions, this one would apply to bonds issued after Nov. 2, 2017.

Elimination of Alternative Minimum Tax

Provision: The bill would eliminate the alternative minimum tax. That tax currently has a highest marginal rate of 28 percent. The interest on most tax-exempt private activity bonds currently is subject to the alternative minimum tax. Exceptions from the alternative minimum tax are provided for interest on bonds that finance projects owned or operated by a Section 501(c)(3) organization and for bonds financing certain types of housing programs. The elimination of the alternative minimum tax would be effective for tax years beginning after Dec. 31, 2017.

Comment: This would benefit current holders of private activity bonds subject to the alternative minimum tax who have previously paid that tax on the interest they received.

Reduction of Corporate Tax Rates

Provision: The bill would reduce the general corporate marginal tax rate from 35 percent to 20 percent. The reduction of the corporate tax rates would be effective for tax years beginning after Dec. 31, 2017.

Comment: The corporate tax rate reduction would reduce the value of interest on tax-exempt bonds not being taxable and, as a result, may reduce demand. Also, it is common when a bank directly purchases tax-exempt bonds from the issuer for the loan documents to provide for an automatic increase in the interest rate on the bonds if the corporate tax rates fall to compensate for the reduction in the value of the bonds. Many states, local governments and Section 501(c)(3) organizations that previously privately placed tax-exempt bonds with a bank could see their borrowing costs increase as of Jan. 1, 2018.

Considerations for Bond Issuers and Borrowers

Holland & Knight attorneys are assisting a number of issuers in analyzing the impact of H.R. 1 on both future and prior capital plans and financings. Holland & Knight also has a robust government affairs practice with key relationships in both the executive and legislative branches in Washington, D.C.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Bowditch & Dewey
Pacifica Law Group LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Bowditch & Dewey
Pacifica Law Group LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions