Despite Congress’ lack of action in 2021 on some tax priorities like advance refunding, industry advocates believe they are primed to build momentum to renew the push for important tax law and policy changes in the new year.
Key muni priorities that failed to pass in 2021 after things looked hopeful a few months ago include the restoration of tax-exempt advance refunding, the creation of a new class of direct-pay bond, and the lifting of the bank-qualified cap.
Johnny Hutchinson of Squire Patton Boggs, who is also on the board of directors for the National Association of Bond Lawyers, acknowledged that the public finance community had high hopes for significant tax changes or expansions in 2021.
“Needless to say, [a big burst of muni-favorable legislation] has not yet–and probably is not actually going to come to fruition.” Hutchinson said.
However, Hutchinson points out that the municipal community did get three major tax developments this year and is building momentum that could lead to helpful legislation in the future. “We didn’t get a lump of coal,” Hutchinson mused.
Those tax developments include a doubling of the volume cap that is available for highway and surface freight transfer bonds and
The volume cap authority for state and local governments to issue bonds for transportation went to $30 billion from $15 billion. “I think the initial $15 billion is spoken for–as of sometime last year,” Hutchinson noted. “But we get another $15 billion for that now, which is great."
One new type of private activity bond is available for broadband projects that will expand broadband to households that lack access. The other new PAB category is for carbon capture facilities. Both categories will be 75% exempt from volume cap requirements.
While these new categories are welcome, Hutchinson points out that there’s a wait and see component involved. “Anytime we get a new category of tax exempt private activity bond, it’s always a little unclear how effective the program is going to be,” Hutchinson said.
This is in part because Congress enacting the ability to issue bonds for a specified program is seen as a first step. Hutchinson notes that there are a lot of technical questions surrounding the broadband provisions and whether the bonds will be deemed to be tax-exempt. Those have to be answered by the Internal Revenue Service.
That “will have to be sorted out and the [municipal community] may have to wait for the IRS to fill in the gaps,” Hutchinson says.
Garth Rieman, director of housing advocacy and strategic initiatives for the National Council of State Housing Agencies, agreed that implementing regulations for the new PAB categories will be needed from the IRS, but thinks that such guidance will be fairly straightforward.
The most important issue, Rieman believes, is how states and localities will ultimately prioritize those and other types of important projects.
“They’re going to have to figure out, can we finance these broadband projects and these carbon capture facilities? What are all the different sources of money we need to finance them? How can we pull that together? How do bonds come into that?” Rieman said.
Another issue concerns existing priorities.
“The fact that additional activities are now eligible, but new money has not been provided, could over time, raise some questions about whether existing activities might be displaced or whether states will run out of private activity bond volume more quickly,” Rieman said.
For NCSHA members, housing is the most important eligible activity of the private activity bond volume. As a result, Rieman said that maintaining that volume cap and keeping the exemption are important tax priorities.
However, Rieman noted that there wasn't serious discussion in Congress about getting rid of the exemption or not maintaining the volume cap. He credits that in part to the advocacy work that NCSHA and other groups did with Congress and the Administration.
Despite this, one important item remains in limbo: a provision in the House-passed version of Build Back Better that would
“Suddenly you need half as much bond authority to finance the same project, but you still qualify for the same amount of housing credit,” Rieman explained, adding, “Basically, we would be able to do twice the amount of affordable housing for the same amount of bond authority.”
Rieman noted that the housing threshold provision has bipartisan support. “It’s a provision in legislation in both the House and Senate,” he explained. “We know that the Chairman of the finance Committee and many of the members of the finance committee support it.”
However, the future of Build Back Better was called into question when West Virginia Sen. Joe Manchin revealed just before the holidays that he could not vote for the signature legislation.
Overall, both Hutchinson and Rieman agree that it has been a busy and productive legislative year from a tax perspective and that continued tax advocacy remains important in 2022.
“Everybody who wants improvements to provisions that exist or new provisions that would be a benefit [should] keep those advocacy efforts up, even if they don’t ultimately bear fruit in new legislation,” Hutchinson said.
Rieman echoed that sentiment. “We’ll be right back at it next year thinking about what additional changes or items have not been knocked off the to-do list and talking to the tax writers and others about what might be necessary in the future,” Rieman said
