AMWA joined five other water sector organizations last week in submitting comments to the Internal Revenue Service (IRS) in opposition to proposed regulations that could complicate the ability of public utilities to issue tax-exempt debt to finance infrastructure projects. Released by the IRS in February, the proposed rule would alter the definition of a “political subdivision” that is allowed to issue tax-exempt bonds. Current IRS rules permit “any division of any state or local governmental unit which is a municipal corporation or which has been delegated the right to exercise part of the sovereign power of the unit” to issue tax-exempt debt. The new proposal would add two additional requirements: a “public purpose” requirement and a “governmental control” requirement – each of which could pose challenges to water utilities.
The “public purpose” requirement would only allow political subdivisions to issue tax-exempt debt if they provide “significant public benefit with no more than incidental benefit to private persons.” The “governmental control” requirement would mandate that a single state or local unit of government must have the power to appoint or remove a majority of the directors of a political subdivision that issues tax-exempt debt.
The water sector’s comments warned that regional water authorities would fail the “governmental control” test because in many cases no single governmental entity may exert majority control over the authority’s directors. The letter also argued that some infrastructure projects carried out by water and wastewater systems could be viewed as having a disproportionate benefit to certain private landowners – thus potentially running afoul of the “public purpose” test. The water organizations urged IRS to either throw out the proposed revisions, or rewrite them to clearly allow water and wastewater utilities to continue issuing tax-exempt bonds.
IRS will hold a public hearing on the proposal on June 6 in Washington, D.C., but has not announced a target date for finalizing the rule.