Issuer groups rally behind tax priorities

Bonds

A Congress that just narrowly avoided a government shutdown is getting a fresh wish list from a wide cross section of organizations of issuers, including calls for preserving the tax exemption on municipal bonds.  

The letter originates from the Public Finance Network, which encompasses twenty-four issuer organizations including the Government Finance Officers Association, the National Association of Counties and the National League of Cities. The letter is addressed to Senate Majority Leader Chuck Shumer, Minority Leader Mitch McConnell, Speaker of the House Mike Johnson, and House Minority Leader Hakeem Jeffries.  

The timing of the letter coincides with the upcoming GFOA Winter Meeting that kicks off Sunday and as legislation that includes provisions related to affordable housing finance is moving towards approval in both chambers of Congress.

“This coincides with a tax package that’s moving at lightning speed,” said Emily Brock, director of the Federal Liaison Center at the Government Finance Officers Association. “We know that advanced funding at the very least has to be included in that tax package.” 

GFOA

“This coincides with a tax package that’s moving at lightning speed,” said Emily Brock, director of the Federal Liaison Center at the Government Finance Officers Association. “We know that advance refunding at the very least has to be included in that tax package.” 

“The Government Finance Officers Association found that between 2007 and 2017, there were over 12,000 tax-exempt advance refunding issuances nationwide which generated over $18 billion in savings for tax and ratepayers over the ten-year period,” the groups wrote in the letter.

The letter cites two other active pieces of legislation, one in each house that would bring advance refunding back.  

The bill was scheduled for a mark-up session Friday, which is a congressional committee procedure in which legislation faces final committee level amendments before being moved along.

“The purpose really is not just for the Ways and Means members but also for the Senate, who will certainly be receiving this markup so that municipal issuers are included,” said Brock. 

Advance refunding was killed off by the Tax Cuts and Jobs Act in 2017, to pay for a loss of tax revenue caused by rate cuts. Since then the market has developed alternatives to advance refunding including taxable advance refunding and forward delivery, but neither offer the same advantages due to higher interest costs.    

The top-of-the-list item on the letter is preserving the tax exemption status for municipal bonds. Per the letter, “Elimination, reduction, or capping of the tax exemption would pose immediate increased costs to the critical projects financed by state and local issuers. Added costs to capital projects would force state and local governments, already budget-strained by the pandemic, to make difficult and pro-recessionary choices.” 

The letter also outlines efforts to protect smaller issuers by requesting adjustments to bank-qualified debt. “Limitations on carrying costs’ deductibility, stressed capital requirements and asset caps placed on banks constrain their ability to meet the credit needs of small issuers.”

Bipartisan BQ-related tax legislation is also currently stalled in Congress but could catch a ride on the emerging bill.  

The letter’s co-signers call for expanding the use of direct-pay bonds while eliminating sequestration for new and existing direct-pay bonds.  Per the letter, “Restoring and expanding the use of direct-pay type bonds and ending their subsidy exposure to sequestration, would immediately create an attractive investment option globally while funding thousands of state and local projects, particularly while the municipal bond market is recovering from the effects of the COVID-19 pandemic.”  

As Congress careens from crisis to total inaction Brock feels the time is right to make a move.  ”There are times when things happen with policy that is just too swift to have technical conversations,” she said. “This is now a good time to have a conversation with measurements, data, and dollars.” 

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