It’s been a contentious week in Congress! The newly minted federal tax reform bill has supporters and detractors and they all have strong opinions.
One provision in the bill, however, has attracted an abundance of attention—both from the public at large as well as from private-sector companies of all types—and almost all of it is negative.
The provision would eliminate the tax-exempt status of private activity bonds (PABs) after Dec. 31. Government officials don’t want to see this happen and it is important for taxpayers to realize what will happen if PABs are eliminated. These are bonds that are used to help reduce the cost of large development projects at the local levels of government.
Without PABs, large projects—many of which are critically needed—will definitely suffer and those that move forward will do so with increased spending at the regional level.
In spite of overwhelming support in both the public and private sectors for maintaining the tax-exempt status of some PABs, efforts to pass an amendment to the House bill to restore the tax exemption failed. The Senate Finance Committee will begin debate on the tax bill, which retains the tax-exempt status of PABs, next week. Ultimately, a decision on PABs will be left to a conference committee.
What to know about private activity bonds
It is important for taxpayers to realize a couple of things. Budget writers, in their efforts to find ways to provide tax relief, have suggested many significant changes. They were attempting to generate revenue not only for tax relief but also for infrastructure reform, the next major program the administration hopes to launch.
As a result, many items, such as PABs, have been eliminated in the proposed budget bills. Halting exemptions for state and local tax deductions and interest paid on student loans are also stipulated in the budget bill – along with many additional items that could either generate funding or eliminate federal spending.
PABs are similar to municipal bonds. However, unlike most municipal bonds, these tax-exempt instruments are generally issued for projects where there is a collaboration between a public entity and a private-sector partner. The projects must serve public purposes and examples would include projects related to affordable housing, nonprofit hospitals, airports, transportation and mass transit facilities.
Investors who purchase the tax-exempt PABs do not pay federal income tax on the interest they receive. Therefore, bondholders are willing to accept a lower interest rate than they would accept if the interest were taxable. PABs allow state and local governments to lower borrowing costs because of the lower interest rate.
Opposing tax-exempt PABs
Numerous state and national organizations are lining up to oppose elimination of tax-exempt PABs, including the Texas Municipal League (TML). In a press release this week, TML Executive Director Bennett Sandlin said that eliminating PABs will increase the cost of financing many major infrastructure projects and “limit the use of public-private partnerships to build critical infrastructure and create local jobs.”
The Association for the Improvement of American Infrastructure (AIAI) recently sent a letter to the chair and ranking member of the House Ways and Means Committee expressing “strong opposition” to eliminating the tax exemption for PABs. AIAI is also delivering the same message to the chair and ranking member of the Senate Finance Committee. The organization’s letter states that preserving these bonds for infrastructure projects and expanding them to public buildings “should be a high priority in tax reform, not terminating them.”
Analysis by the Council of Development Finance Agencies (CDFA), which also opposes the legislation, estimates that loss of the tax-exempt bonds could drive costs up 25-30 percent when bond issuers have to turn to the taxable bond market for project funding. CDFA officials note the use of PABs increased from $12.98 billion in 2015 to $20.38 billion in 2016 and warned that doing away with them would “cripple economic infrastructure and community development.”
The American Public Transportation Association also says its members support the continuation of the tax-free bonds. According to a spokesperson, elimination of PABs would have a “chilling effect” on private-sector investments in infrastructure projects.
How did it make it this far?
Many are wondering how this provision made it to the negotiating table. It is in stark contrast to the goal of the Trump administration’s initial $1 trillion infrastructure plan. President Trump has said that the bulk of the $1 trillion investment—$800 billion—would come from private-sector investments and state and local funding. There were even plans to raise the volume cap on PABs, which currently limits the amount that can be issued in each state.
In recent weeks, however, the President has tempered his support for public-private partnerships. The impact of these bonds on transportation infrastructure is unmistakable. As of January of this year, nearly $6.6 billion in PABs had been issued for 17 highway and transportation facility projects, with the U.S. Department of Transportation allocating $4.3 billion for eight of those projects.
Included are four in Texas totaling more than $1.5 billion. Among allocations in other states are $800 million for the Moynihan Station Train Hall in New York, $300 million for an express lane project on I-395 in Virginia and $725 million to help pay for an I-70 East project in Colorado.
Other PAB projects that benefit the public will also suffer from funding shortages. In California, the California Housing Partnership Corp. estimates it will lose about $2.2 billion in funding for affordable housing construction each year if PABs are eliminated.
With local government entities already cash-strapped, the officials who must launch critically needed projects need PABs. And taxpayers should understand the consequences they will face if Congress decides to eliminate them.
These are the types of issues that the public at large should weigh-in on with congressional representatives. It does not take long to send an email or make a call to members of Congress – and the men and women who are elected will definitely take note of incoming communications from constituents.
So, whatever your opinion is about PABs, it is time to let Congress know your thoughts. If PABs are eliminated, taxpayers will definitely pay more for critical infrastructure projects in the future.
DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation in writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.
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