The tax exemption for municipal bond interest would remain largely unchanged under a tax plan unveiled Nov. 2 by House Ways and Means Committee Chairman Kevin Brady, R-Texas.
In October, more than 450 public power utilities sent a letter to congressional Republican leaders and administration officials in support of their decision to retain the current-law tax exemption for municipal bonds in a tax reform framework announced by President Donald Trump in September.
Over the next decade, Brady’s proposal would reduce personal income tax receipts by roughly $200 billion, estate tax receipts by roughly $200 billion and corporate and pass through business tax receipts by $1 trillion.
While a reduction in the corporate income tax rate may reduce the demand for tax-exempt municipal bonds, the top marginal personal income tax rate would remain at 39.6 percent under the proposal. A provision to eliminate the value of lower marginal rates for upper-income earners coupled with the current-law 3.8 percent Net Investment Tax could bring the marginal personal income tax rate for some income close to 50 percent.
Interest paid on private activity bonds issued after 2017 would be subject to federal income tax under the plan. While public power utilities generally do not issue private activity bonds, they are occasionally used, typically for hydropower projects. The provision would raise $39 billion.
Coalition sends letter to House lawmakers
In related news, on Nov. 1 the Municipal Bonds for America Coalition sent a letter to Democratic members of the House Ways and Means Committee in support of the lawmakers’ proposal to expand infrastructure investment and enhance economic development by maintaining and expanding the current-law tax exemption for municipal bonds.
That proposal was included in Middle-Class Tax Reform Principles released by House Ways and Means Democrats on Oct. 25.
Sue Kelly, the American Public Power Association’s president and CEO, was one of several signatories to the letter. Kelly is a member of the coalition’s executive committee.
The letter notes that tax-exempt municipal bonds financed more than $2 trillion of infrastructure investments in the last decade and are on pace to finance that, and even more, over the next decade.
Brady proposal also includes energy credits sections
The proposal unveiled by Rep. Brady also includes several sections that would impact energy credits.
For example, under Section 3501, “Modifications to credit for electricity produced from certain renewable resources,” the credit would revert to 1.5 cents/kilowatt-hour from the 2.3 cents/kWh currently being paid for facilities construction of which begins after Nov. 2, 2017.
The provision would also tighten the provision’s deadline for the “beginning of construction” to require “a continuous program of construction which begins before such date and ends on the date that such property is placed in service.” The provision is expected to raise $12 billion over 10 years.
Another section of the plan (Sec. 3502, “Modification of the energy investment tax credit”) generally harmonizes the expiration dates and phase-out schedules for different properties. Under the provision, the 30 percent ITC for solar energy, fiber-optic solar energy, qualified fuel cell, and qualified small wind energy property is available for property the construction of which begins before 2020 and is then phased out for property the construction of which begins before 2022, with no ITC available for property the construction of which begins after 2021.
Also, the 10 percent ITC for qualified microturbine, combined heat and power system, and thermal energy property is made available for property the construction of which begins before 2022. In addition, the permanent 10 percent ITC available for solar energy and geothermal energy property are eliminated for property the construction of which begins after 2027. The provision would reduce revenues by $1.2 billion over 10 years.
The proposal also calls for modifications of credit for production from advanced nuclear power facilities. The provision would rescind the placed in-service deadline for the credit and instead require the credit to be to facilities placed in service until the initial 6,000-megawatt capacity is fully utilized.
Additionally, public power utilities could transfer the value of any tax credit to other participants in the transaction.
The provision would reduce revenues by $400 million.