Is advance refunding back in play?
4 min read
Legislation to restore tax-exempt advance refunding is expected to be introduced very soon, as muni advocates begin their push to achieve at least some of their aims in a new Congress with which President Joe Biden has said he wants to work to “finish the job” on infrastructure and other priorities.
Restoring tax-exempt advance refunding has been the top priority for muni market lobbyists since it was eliminated by the 2017 Tax Cuts and Jobs Act, and legislation that would bring it back has failed to reach the finish line over the past four years. Few observers expect sweeping policy changes in this Congress which began last month, as Democrats control the Senate while REpublicans hold the majority in the House. But Biden’s State of the Union Speech Tuesday night struck a number of notes seemingly aimed at more moderate Republicans, leaving some lobbyists hopeful for muni priorities.
“Key items we are watching this Congress for advancement are legislation to reinstate tax-exempt advance refunding which should be introduced in the coming days with robust bipartisan support,” said Brett Bolton, vice president of federal legislative and regulatory policy at Bond Dealers of America.
Bolton said the bill will include one Ways and Means Republican as an original sponsor.
Tax-exempt advance refunding allowed states and localities to refinance existing debt by issuing tax-exempt bonds, which represented about 20% of bond activity in 2017. The refunding market has been slow of late, contributing to low issuance last year as interest rates rose and refinancing made less sense.
Bolton’s groups is also keeping a close eye on moves to lift the cap on bank-qualified bonds, which encourage banks to invest with smaller issuers. Municipalities issuing $10 million or less in bonds per calendar year can designate the instruments as bank-qualified which allows them to bypass traditional underwriting and sell directly to local banks. It also allows the banks to deduct the carrying cost.
In the 217th Congress, the LIFT act would have boosted the limit to $30 million and tied future adjustments to the inflation rate. The provision was included in the House’s Build Back Better Act that was shot down in the Senate.
BDA is also expecting some action to expand the eligible uses of private activity bonds, tax-exempt instruments tied to a specific project on behalf of a private entity.
The funding is targeted at a wide variety of projects including high speed rail, carbon capture, agriculture, broadband, lead pipe replacement and clean energy. Bolton noted that the Tax Subcommittee is Chaired by Rep. Mike Kelly, R-Pa., who has sponsored PAB legislation in the past.
Many of the possibly financeable PAB project areas were touchstones of Tuesday’s State of the Union address. Experts looking for clues about what the Biden Administration can get accomplished in the next two years were treated to heckles and bare-knuckled retorts from the chief executive.
The president’s repeated calls for higher taxes on the wealthy and corporation appear to be dead on arrival. “Kevin McCarthy said, after the State of the Union, ‘over my dead body are we going to raise taxes.'” said Bill Glasgall, senior director, Public Finance, Volcker Alliance. “Congress already raised taxes on corporations last year.”
The political allure of taxing the wealthy can’t be lost on a president under siege but the play may be advance table setting for events unfolding in the next three years.
“This is part of the beginning of a broader debate that culminates in 2025,” said Chuck Marr, VP, federal tax policy, Center on Budget and Policy Priorities. “These things are not going to happen with the current Congress. They’re threatening to sabotage the economy over the debt limit. The individual provisions of the 2017 tax cut expire in 2025. It sets up a big debate.”
The muni hangover from the 2017 legislation lingers and is still causing concern about an emboldened House.
“The Tax Cuts and Jobs Act of 2017 opened my eyes to the fact that existing municipal bond-friendly elements face a new existential threat from a general policy perspective,’ said Tom Kozlik, director, head of municipal strategy and credit at Hilltop Securities. “Policymakers prioritized a tax cut above issuers ability to use tax-exempts for advance refundings and they almost prioritized the tax cut above private activity bonds.”
Bolton believes the tax exempt status of munis remains safe for now and is feeling positive about the near future.
“We feel that the tax exemption is in a strong place on both side of the aisle with the continued growth of the House Municipal Finance Caucus and with both strong Republican and Democratic support in the powerful House Ways and Means Committee, as well Senate Finance,” he said.
