Skip to main content

Tax reform legislation released by the Republican leadership of the Senate Finance Committee on November 9 would preserve the ability of municipalities to issue tax-free municipal bonds, but the plan would also impose federal income taxes on interest earned on bonds issued to advance refund another bond – currently a common way for communities to reduce financing charges when interest rates decrease.

The proposal is part of the Senate version of the Tax Cuts and Jobs Act, which the Republican leadership of the Senate Finance Committee has put forward as its proposal to overhaul the federal tax code.  The release of the Senate plan came just days after House Republican leaders unveiled their own tax code overhaul of the same name.  Like the Senate bill, the House plan would keep tax-free municipal bond interest for new bond issuances, while also taxing interest earned on advance refunding bonds – thus effectively eliminating the ability of communities to realize interest savings through advance refunding.  The House plan would also eliminate the existing tax break on interest earned on private activity bonds, which the Senate bill would leave in place.

According to a summary of the Senate proposal, charging taxes on interest earned on advance refunding bonds would yield $16.8 billion in new federal revenues over the next ten years.  The overall bill uses these new revenues to offset other changes to the tax code that would cost the government money, thus helping the measure receive the clean budget score necessary to move through the Senate.

AMWA and other water sector and municipal associations have spent the past several months urging lawmakers to preserve tax-exempt municipal bond interest in any tax plan, so the Senate bill represents a victory in this regard.  But the provision to eliminate advance refunding opportunities will increase the cost of infrastructure financing, as data from the Government Finance Officers Association indicates that between 2012 and 2016 states and localities advance refunded 941 tax-exempt municipal bonds that funded water and wastewater infrastructure, saving communities and ratepayers an average of $1.4 million in interest costs each time.  In response, AMWA and other water sector groups wrote to Finance Committee leaders on November 13 to express strong opposition to the advance refunding provision and to request its exclusion from the Senate’s final bill.

Senator Ben Cardin (D-Md.) has filed an amendment to the bill that would reinstate the tax break for interest earned on advance refunding bonds, but the Republican leaders of the Finance committee are not expected to accept many changes to the bill over the course of a multi-day markup that began on November 13.  GOP leaders ultimately hope to see the Finance panel approve the bill before Thanksgiving, which would send it to the Senate floor as early as the end of November.