The tax reform agreement passed by Congress in December preserves the ability of communities to issue tax-exempt municipal bonds to finance drinking water and wastewater infrastructure projects. But the bill dials back the ability of communities to advance refund municipal bonds when interest rates decrease, which until now has been a common way for communities to further reduce financing costs. The final bill also preserves current tax advantages for private activity bonds (PABs), tax-free bonds issued by private entities to support public purpose projects, including water and sewer infrastructure.
Governing magazine reported in early January that even before the tax overhaul went into effect, the dramatic cut to the corporate tax rates from 35 percent to 21 percent was already impacting the municipal market. It cited preliminary data showing that banks had begun to reduce their muni bond buying, with third quarter net buying falling to about $5.7 billion, the lowest quarterly number since 2009. The reason: banks and other corporations will start earning more money off other types of investments because their tax rate is much lower. After taxes, those other investments could be more lucrative than the low interest rate muni bonds.
However, since the tax bill also eliminated other types of tax-free municipal bonds, there was a rush to issue them before the end of 2017. Bloomberg News reported that states and localities sold a record $55.6 billion of debt through December 22, which could help to keep interest rates steady for local governments.
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The article “Corporate Tax Break Already Affecting Muni Market” appeared in the January 5, 2018 issue of Governing.