Bonds and Financing

House panel approves bill that retains tax exemption for municipal bonds

The House Ways and Means Committee on Nov. 9 approved H.R. 1, the Tax Cuts and Jobs Act, while Senate Finance Committee Republicans released their own version of the bill. Both versions would retain the current-law tax exemption for municipal bonds, while prohibiting the issuance of advanced refunding bonds. The repeal is estimated to raise $17 billion in federal revenues.

The American Public Power Association continues to work with other stakeholders, including the Large Public Power Council, the Public Finance Network, and the Municipal Bonds for America coalition, to retain the ability to advance refund existing debt.

Public power utilities issued roughly $82 billion of municipal bonds in the last five years, about half of which were refunding bonds and about half of those were advance refunding bonds.

The House bill, approved by the committee on a party-line 24-16 vote, next heads to the House floor for consideration.

The House is expected to take up H.R. 1 the week of Nov. 13, but it will be December at the earliest before the full Senate considers the bill.

The House legislation makes two major shifts in federal tax policy. First, it shifts more of the burden of the federal income tax onto state and local governments. In addition to the prohibition on advance refunding bonds, the House bill would also repeal the deduction for state and local income taxes (SALT), leaving in place a deduction for property taxes capped at $10,000 per year to raise $1 trillion. The Senate bill would repeal the SALT deduction entirely, raising as much as $1.3 trillion.

Additionally, to raise another $39 billion, the House bill would prohibit the issuance of private activity bonds, or PABs. These are most commonly used by cities to finance the construction of multi-family rental units, not-for-profit hospitals, and not-profit colleges and universities. PABs also help finance airports, seaports, toll-roads, water systems, and improvements to hydropower facilities. Public power utilities very rarely issue PABs -- roughly one every year or two. The Senate bill does not repeal PABs.

The House bill also would shift the proportion of federal revenues raised away from business to wages.

The centerpiece of the bill is a cut in the corporate income tax rate from 35 percent to 20 percent that will save corporations $1.5 trillion over 10 years, according to early estimates. Taxes on partnerships, S corporations, and other passthrough entities would be reduced by $500 billion during the same time period. Other revenue raising business tax changes would bring the net effect on corporations and partnerships to a total ten-year tax cut of roughly $1.3 trillion.

On the individual side, the legislation would also reduce the number of personal income tax brackets from eight to five, including the 3.8 percent net investment income tax, which is retained under the Ways and Means Committee bill.

In all, the top marginal personal income tax rate would actually increase for some top bracket taxpayers, from the current law 43.4 percent to 49.4 percent. Overall, the legislation would reduce personal income taxes by about $200 billion over the next decade. However, because a new $300 personal tax credit would sunset after 2022, but revenue raising measures – including the repeal of the SALT deduction -- would continue, the legislation would actually increase revenues raised by personal income taxes after 2024.