On November 2, 2017, the U.S. House of Representatives Ways and Means Committee released the Tax Cuts and Jobs Act (the “Bill”). Among what is being called the “biggest transformation of the tax code in more than thirty years” are the following proposed changes to the provisions of the tax law that pertain to tax-exempt bonds: (i) the termination of the ability to issue qualified private activity bonds; (ii) the elimination of the ability to issue advance refunding bonds; (iii) the repeal of the authorization to issue tax credit bonds; and (iv) a prohibition on issuing tax-exempt bonds to finance professional stadiums. Termination of
Ability to Issue Qualified Private Activity Bonds
Under current law, interest on “qualified private activity bonds” is excluded from gross income. However, as proposed under the Bill, no qualified private activity bond can be issued after December 31, 2017. This means that the following types of tax-exempt bonds could no longer be issued: (i) qualified 501(c)(3) bonds, which provide tax-exempt financing for qualifying capital projects undertaken by 501(c)(3) organizations, such as colleges, hospitals and other health-care facilities, senior housing facilities, libraries, private schools and museums, among others; (ii) exempt facility bonds, which provide tax-exempt financing for, among other types of projects, residential rental projects (e.g., affordable or low-income housing), airports, docks and wharves, mass commuting facilities, facilities for the furnishing of water, sewage facilities and solid waste disposal facilities; and (iii) qualified small issue bonds, which provide tax-exempt financing for manufacturing facilities. While the Bill does not affect the tax-exempt status of currently outstanding qualified private activity bonds, it would terminate the ability to undertake any tax-exempt refundings of such bonds after December 31, 2017. This would also terminate the tax-exempt status of any bond that is considered “reissued” for tax purposes after that date, due to amendments or modifications made to such bonds. Further, with respect to outstanding qualified private activity bonds that were issued as “draw-down” bonds, the Bill would eliminate the tax-exempt status of draws made on such bonds after December 31, 2017.
Termination of Ability to Issue Advance Refunding Bonds
Under current law, bonds issued for governmental purposes (i.e., bonds that are not qualified private activity bonds) and qualified 501(c)(3) bonds are generally eligible to be advance refunded on a tax-exempt basis one time. A refunding is considered an “advance refunding” if the period of time between the issue date of the refunding bonds and the date of final redemption of the refunded bonds is more than 90 days. The Bill eliminates the ability to issue tax-exempt advance refunding bonds after December 31, 2017. Tax-exempt current refundings (i.e., refunding bonds where the time period between the issue date and the redemption date for the refunded bonds is 90 days or less) of governmental bonds could continue to be issued on a tax-exempt basis after December 31, 2017. However, as indicated above, tax-exempt current refundings of qualified private activity bonds would be prohibited after December 31, 2017.
Repeal of Tax Credit Bonds
The Bill would eliminate the ability to issue tax credit bonds after December 31, 2017, including qualified energy conservation bonds, qualified zone academy bonds and qualified school construction bonds, among others. Tax credit bonds are tax advantaged because they either provide the holder of the bonds with a tax credit (either in full or partially) in lieu of interest payments or provide the issuer with a direct subsidy payment from the federal government for all or a portion of the interest payable on such bonds, both of which lower the cost of financing eligible projects. The Bill does not affect the ongoing eligibility for the tax credits or subsidy payments with respect to outstanding tax credit bonds.
Prohibition on Issuance of Tax-Exempt Bonds to Finance Professional Sports Stadiums
Currently, tax-exempt bonds may be issued to finance professional sports stadiums so long as the issuance complies with the restrictions on private business use or private payment or security and the restriction on private loans. Under the Bill, after November 2, 2017 bonds may not be issued on a tax-exempt basis to finance or refinance the construction of, or capital expenditures with respect to, a professional sports stadium. For this purpose, a professional sports stadium includes any facility that is used as a stadium or arena for professional sports exhibitions, games or training for at least five days in any calendar year. It is not possible to predict either the likelihood of any revisions to the Bill, as it works its way through the House of Representatives and the Senate, nor the likelihood of its enactment into law. Republicans have indicated a timetable calling for the Bill to pass the House and the Senate by Thanksgiving and for President Trump to sign the Bill into law by Christmas.