CBO takes aim at qualified PABs

A report from the Congressional Budget Office outlining ways to reduce the budget deficit includes the possibility of eliminating new tax-exempt qualified activity bonds, a tactic that has failed in the past. 

“In connection with the enactment of the Tax Cuts and Jobs Act in 2017, the House Ways & Means Committee wanted to do away with qualified PABs,” said Edwin Oswald, partner at Orrick. “That effort was stopped in the Senate.”    

The report  uses data from the Joint Committee on Taxation to determine that eliminating new tax-exempt qualified PABs starting in January 2025 would decrease the budget deficit by $43.1 billion by 2034. The CBO is a non-partisan government agency that provides budget and economic analysis to Congress.

“‘Qualified’ PABs are tax-exempt because the bonds are issued for a specific purpose permitted under the code,” said Oswald.  

Projects funded by them include multi-family housing, roads, airports, broadband networks, and carbon dioxide capture facilities.

Nonprofit organizations including hospitals and universities tap qualified PABs for financing  capital projects.  

PABs play a vital role in funding affordable housing but the report “excludes any potential interaction between private activity bonds and the low-income housing tax credit.” 

The report could play a key role in the upcoming budget battle as the new administration begins reckoning with a soaring deficit, stubborn inflation numbers, tax cuts promised during the campaign and the sunsetting of the Tax Cuts and Jobs Act. 

“In 2025, a tax bill will likely be enacted that will cost close to $5 trillion over the next 10 years,” said Oswald.  “On the other hand, the national debt is at an all-time high, and the cost of the 2025 tax bill only makes it worse.”

The report breaks possible deficit solutions down into mandatory and discretionary spending options along with revenue boosters. Social Security gets its own appendix. 

According to the report, the largest reductions in mandatory spending could be achieved by modifying Medicare payments which would cut $124 billion to $1.049 trillion from the deficit.   

The biggest savings in the discretionary spending category would come from slashing the Department of Defense’s budget, which could save $959 billion.  

Imposing a 5% value added tax is listed as the biggest revenue booster with a potential to raise $2.18 to $3.38 trillion dollars by 2034. 

Imposing a VAT has been generating buzz from the incoming White House and bipartisan panels of experts.  Many other countries use a VAT to good effect by adding taxes to goods and services at each link in the supply chain. 

A VAT could complicate funding flows between the federal government and states who already have sales tax systems in place. Eliminating qualified PABs promises a similar affect. 

“If the recommendation is enacted, it would be an abrupt end of the ability of state and local government to issue tax-exempt bonds for a wide range of infrastructure that Americans use on a daily basis,” said Oswald.    

Municipal market groups will undoubtedly oppose the elimination of qualified PABs, along with their efforts to protect the existing tax-exemption for muni bonds and to advocate for other market priorities.