Outlook: Tax legislation inspires hope in new year

Bonds

The muni industry is looking forward to key tax legislation moving forward while also eyeing the possible sunset of key provisions of the Tax Cut and Jobs Act, though the number one priority of muni lobbyists remains the restoration of tax-exempt advance refunding.

“We continue to work this issue tirelessly,” said Brett Bolton, VP, federal legislative & regulatory policy, Bond Dealers of America. “The year 2023 is going to pass without a tax bill, 2024 is going to be a tough lift because of the presidential and congressional elections. With that being said, we continue to talk to the Hill, we continue to do educational efforts.” 

Advance refunding was killed off by the Tax Cuts and Jobs Act in 2017, as a way to pay for a loss of tax revenue caused by rate cuts. Tax-exempt advance refunding represented about 20% of bond activity in 2017. Proponents of bringing it back continue to question its effectiveness as a pay-for. The TCJA is set to expire at the end of 2025 which could trigger a number of legislative developments. 

“We continue to work this issue tirelessly,” said Brett Bolton, VP, federal legislative & regulatory policy, Bond Dealers of America. “The year 2023 is going to pass without a tax bill, 2024 is going to be a tough lift because of the presidential and congressional elections. With that being said, we continue to talk to the Hill, we continue to do educational efforts.” 

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“Any tax package that Congress might pass in 2024 is expected to extend expiring or expired provisions until the end of 2025, creating an even bigger set of cliffs at the end of that year,” said P.J. AustinVP, tax, Securities Industry and Financial Market Association. “Members of Congress will spend 2024 identifying and beginning to build support for their key priorities, but all eyes will be on the November elections and which party controls the House, Senate, and White House. Only after November will it become clear what a tax deal may look like in 2025.”

Putting a cap on the state and local tax deduction was another tax mechanism designed to pay for the TCJA. Both parties and houses of Congress have taken swipes at removing the SALT cap with limited success. 

“SALT is coming to the fore in 2025,” said Emily Brock, Government Finance Officers Association. “After the election year, the complexion of House and the Senate may even change, so SALT is going to have a whole different perspective.” 

Emily Brock, GFOA, comments on the year ahead.

Tinkering with the levers that control Low Income Housing Tax Credits appears to have broad bipartisan support and is attracting lobbying efforts spurred by the homebuilding industry.  LIHTC’s are instrumental in building affordable housing and affect the bond market.  

Properties funded through the Treasury’s Low Income Housing Tax Credit are eligible for 4% and 9% tax credits. The 9% credits are dispensed through local housing authorities via competitive awards. The 4% credits are allocated to projects that receive at least 50% of their fundings through tax-exempt private activity bonds. The amount of PAB issuance is capped each year by the federal government and there is never as much PAB authority as there is desire to issue them.

Muni leaders are supporting legislation that would raise the cap. The Affordable Housing Credit Improvement Act, is currently hanging fire in the Senate and is especially interesting to muni experts and housing proponents.  

“I think this one might have a chance,” said Rich Moore a tax partner at Orrick, Herrington & Sutcliffe. “This would come in through an amendment to the low-income housing tax credit rules, not the bond rules.  The low-income housing tax credit lobby is strong, and housing has bipartisan support.” 

“Low income housing tax credits are a long-standing, popular, means of encouraging investment in low income housing,” said Michael Decker, SVP, research and public policy, Bond Dealers of America. “They’re often used in conjunction with tax-exempt multifamily housing bonds. You can get the Low-Income Housing Tax Credit to benefit the equity providers and then you can get preferred debt financing through the tax-exempt bond market.”  

A reexamination of bank-qualified bond rules continues to show promise of cropping up in the coming year. Many muni groups are advocating for raising the cap on BQ bonds to $30 million from $10 million, a move that would help smaller issuers. The cap affects how much an issuer can bring to market in a calendar year and maintain the ability to sell debt directly to banks. 

In 1986, the bank-qualified limit was set at $10 million for a calendar year and banks are allowed to deduct most of the carrying cost of that debt as a business cost. In 2009 the American Recovery and Reinvestment Act temporarily raised the cap to $30 million a year in an effort to jump start the economy but in 2010, the cap returned.  

“It’s crucial to note that the existing limits have remained unchanged,” said Jessica Giroux, general counsel, head of fixed income policy, American Securities Association. “It is time for Congress to take proactive steps by raising the current limit to $30 million and reinstating these limits at the borrower level, as successfully implemented in 2009 and 2010.” 

Small issuer fans and aggie bond aficionados are looking forward to rewriting the Internal Revenue Service regulations for small to mid-sized manufacturers and farmers.  The Modernizing Agricultural and Manufacturing Bonds Act got a big senatorial push in September, that put aggies back in the headlines. 

The proposed legislation would increase the limitation on small issue bond proceeds for first-time farmers, tripling the cap on industrial development bonds to $30 million from $10 million. It would allow up to a quarter of bond proceeds to be used for facilities that are located on or near the same site and align aggie bond definitions with U.S. Department of Agriculture Farm Service Agency, while expanding the definition of “manufacturing.” 

“We support modernizing the finance options available to first time farmers and small manufacturers,” said Brian Egan, director, government affairs, National Association of Bond Lawyers. “Congress has kicked the can down the road on passing a farm bill until September of next year. We have a large comprehensive rural development, agriculture, and nutrition package that could serve as a legislative vehicle for such a package.” 

Chipping away at all the restrictions clogging the muni market has some observers providing consistent reminders about reeducating members of Congress about the importance of keeping municipal bonds tax exempt. 

“I think that the industry needs to be educating lawmakers in D.C. from a bigger picture perspective about the tax exemption,” said Tom Kozlik, managing director, head of public policy and municipal strategy, Hilltop Securities. “The U.S. debt to GDP ratio was 38% before the financial crisis. It’s now almost 100% and is forecast to be something like 120%-130% in the next five or so years.”   

The lobbying side of the issue has similar concerns. “It’s something we’re looking at,” said Bolton. “While it might not be a direct threat, we’re not going to be caught on our backside. We’re going to be offensive on issues such as advanced refunding as well as defensive on the tax exemption. I’d rather be safe than sorry.” 

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