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GOP Tax Reform Plans Target Municipal Tax-Exempt Bonds

November 13, 2017

by Timothy J. Horstmann

The Republican majorities in the U.S. House and Senate have introduced comprehensive tax reform plans, and each plan contains provisions of interest to municipalities and other public entities that issue tax-exempt bonds.  In particular, each plan calls for the elimination of public entities’ ability to issue tax-exempt advance refunding bonds. And, the House proposal, introduced as the Tax Cuts and Jobs Act, would eliminate public entities’ ability to issue tax-exempt professional stadium bonds.

Under current law, public entities are permitted one advance refunding of a prior series of bonds. An advance refunding occurs when the refunding bonds are issued more than 90 days before the date on which the refunded bonds are to be redeemed. There are no limits on refundings occurring within the 90 day window (referred to as current refundings).

If either bill is passed in its current form, any series of advance refunding bonds issued after December 31, 2017 would be federally taxable. Elimination of tax-exempt advance refundings would be a great loss for public entities. Because municipal bonds are generally not callable at any time, an advance refunding is often the only way a public entity can take advantage of falling interest rates to reduce its interest expense on a particular series of bonds.

The House proposal would also eliminate the ability to issue tax-exempt professional stadium bonds. Unlike with advance refundings, the effective date for the elimination of the tax-exemption for professional stadium bonds is the date the bill was introduced – November 2, 2017. Thus, public entities currently in the planning stages of issuing a series of tax-exempt professional stadium bonds may be immediately affected by the introduction of this bill.

The loss of the tax exemption for stadium facility bonds may be broader than many public entities realize. A “professional stadium bond” is defined to mean any bond the proceeds of which are used to finance or refinance capital expenditures allocable to a facility (or appurtenant real property, such as a parking lot) which, during at least 5 days during any calendar year, is used as a stadium or arena for professional sports exhibitions, games, or training. “Professional sports” would presumably not be limited to the “majors” – it could include any minor league affiliate or independent league that featured professional (i.e., paid) players.

GOP leaders in the House and Senate, and the White House, have indicated a desire to pass comprehensive tax reform before the end of 2017. Whether that goal is feasible remains to be seen – but it is certain that virtually all public entities in the country will be affected by these changes should either proposal become law. Public officials should contact their local federal elected officials to voice their support for the tax exemption for advance refunding bonds and professional stadium bonds.

© 2017 McNees Wallace & Nurick LLC
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