Summary of State and Local Government Bond Provisions in the Tax Cuts and Jobs Act

Public Finance Alert | November.03.2017

On November 2, 2017, the Republican leadership of the United States House of Representatives introduced the Tax Cuts and Jobs Act (the “Bill”).  The Bill would make significant changes to tax rules that apply to tax-exempt bonds and related matters.  Set forth below is a brief summary of the principal proposed changes.      

Termination of Tax-Exempt Private Activity Bonds 

  • Private activity bonds are traditionally the means of tax-exempt financing for airports, port facilities, solid waste facilities, multi-family housing projects and certain other exempt facility bond projects. 
  • Private activity bonds also include bonds issued for § 501(c)(3) schools and universities, hospitals, and other exempt organizations.
  • The Bill would prohibit the issuance of any tax-exempt private activity bonds after December 31, 2017. 
  • The Bill does not yet include any transition rules for refundings.  Accordingly, the Bill would prevent a tax-exempt refunding (or reissuance), after December 31, 2017, of any currently outstanding private activity bonds issued under the general rules of the Tax Reform Act of 1986. 
  • The Bill would appear to eliminate tax-exempt treatment of any rolls and bond take-outs of outstanding private activity commercial paper that occur after December 31, 2017. 
  • The Bill would appear to eliminate the ability for a borrower of outstanding private activity bonds issued on a drawdown basis to take any additional draws after December 31, 2017. 

Repeal of Tax-Exempt Advance Refunding Bonds

  • Under current law, tax-exempt refunding bonds issued more than 90 days prior to the redemption date of the refunded bonds are classified as advance refunding bonds.
  • The Bill would repeal the provisions allowing for tax-exempt advance refundings, prohibiting any tax-exempt advance refunding bonds from being issued after December 31, 2017. 
  • The current draft of the Bill does not include any transition rules. Accordingly, the prohibition would prevent any tax-exempt advance refunding of outstanding bonds.

Prohibition on Any Facilities Used for Professional Sports Stadiums or Arenas  

  • Under current law, tax-exempt bonds can be used to finance facilities that may be used to host professional sporting events, subject to compliance with private business use and private payment or private security restrictions.  
  • The Bill would prohibit the use of any proceeds of tax-exempt bonds to finance or refinance capital expenditures for a facility used as a stadium or arena for professional sports exhibitions, games, or training during at least 5 days of any calendar year. 
  • This prohibition is not limited to facilities financed for the purpose of providing professional sport stadiums or arenas.  Instead, this prohibition would prevent the use of any tax-exempt bond-financed facility, including college or university facilities or local governmental multi-purpose facilities, from being used for more than 5 days of professional sporting events or training in any calendar year. 
  • As drafted, this prohibition is effective for bonds issued after November 2, 2017. 
  • The current draft of the Bill does not include any transition relief for refunding bonds, such that any refunding bonds issued after the effective date (and any facilities refinanced by those refunding bonds) would become subject to this prohibition.

Repeal of Tax Credit Bonds

  • Tax credit bonds are tax-advantaged bonds where the holder of the bonds receives a tax credit, or in certain cases where the governmental issuer of the bonds can elect to receive a direct subsidy payment from the federal government.  Examples include qualified zone academy bonds (“QZABs”), new clean renewable energy bonds (“New CREBs”), and qualified energy conservation bonds (“QECBs”). 
  • Most tax credits bonds are subject to volume cap allocations or other restrictions on the timing of issuance, such as build America bonds (“BABs”), which could only be issued during 2009 and 2010. 
  • The Bill would delete the sections of the Internal Revenue Code of 1986 that authorize tax credit bonds. 
  • The Bill provides that the amendments shall apply to bonds issued after December 31, 2017, and therefore does not appear to affect the status of outstanding tax credit bonds or subsidy payments to be received on outstanding BABs.  

Repeal of Alternative Minimum Tax

  • Interest on most tax-exempt private activity bonds is treated as a specific preference item for purposes of the alternative minimum tax (“AMT”), which reduces the value of the tax-exemption for certain taxpayers that own such bonds. 
  • The Bill would repeal the AMT for tax years beginning after December 31, 2017.  Therefore, holders of outstanding tax-exempt private activity bonds would no longer have to pay any AMT on the interest earned on their holdings.
  • Since the Bill would prohibit the issuance of tax-exempt private activity bonds after December 31, 2017, including refundings of currently outstanding bonds, the elimination of the AMT would not have any impact on future tax-exempt bond issuances, but would enhance the financial benefit of owning existing private activity bonds.

The Bill will likely be revised and amended as it is considered by the House and Senate, and the likelihood of enactment of the Bill into law or the timing of such enactment is uncertain.