The U.S. Capitol Building is lit at sunset in Washington, U.S., December 20, 2016. REUTERS/Joshua Roberts
November 11, 2017
By Karen Pierog, Laila Kearney and Stephanie Kelly
CHICAGO/NEW YORK (Reuters) – The U.S. Senate Republican tax bill helped soothe nerves in the municipal bond market on Friday, just over a week after the House of Representatives proposed changes that would decrease its future supply of tax-free debt.
While House Republicans sought to remove federal tax exemption for private activity bonds (PABs), an outline of the Senate’s proposal released late on Thursday does not include that provision among its list of revenue raisers.
“When the Senate’s plan came out with no change to the tax exemption for private activity bonds, I think it gave the market a chance to take a sigh of relief,” said Alan Schankel, a managing director at Philadelphia-based Janney Montgomery Scott.
The termination of tax-exempt PABs in the House bill sent shock waves through the $3.8 trillion market after the Ways and Means Committee introduced it on Nov. 2.
Almost $102 billion of the bonds, which are issued through states and local governments for economic development projects, airports, and nonprofits like hospitals, were sold in 2015, according to a recent report from Wells Fargo Securities. That accounted for 27 percent of overall long-term municipal debt sold that year.
The House plan contends that eliminating the bonds will raise $38.9 billion for the federal government between 2018 and 2027.
Analysts have questioned that figure, arguing that it was wrong for lawmakers to assume that PAB issuers would sell a similar amount of taxable bonds for their purposes under the House plan.
“We feel more comfortable about (PABs’) future long term with the Senate bill,” said Tim Fisher, legislative and federal affairs coordinator for the Council of Development Finance Agencies, adding that his group plans to keep to keep up pressure on the House.
But Emily Swenson Brock, director of the Government Finance Officers Association’s (GFOA) Federal Liaison Center, cautioned that amendments to the Senate bill were expected over the weekend and that the status of PABs will not be absolutely clear until the final legislation is released.
The outline of the Senate bill is silent on other issuances the House measure would end, including tax-free debt for professional sports stadiums and tax-credit bonds.
SIMILARITIES
Like the House bill, the Senate’s measure eliminates the alternative minimum tax. That tax is applied to earnings from a small percentage of muni bonds sold by issuers such as airports and housing authorities that have substantial private-activity components in their deals.
Both proposals end tax-exempt status for advance refunding bonds, which issuers in the U.S. municipal bond market use to take advantage of lower interest rates before outstanding bonds can be called back from investors.
The GFOA’s Brock said various groups are trying to explain to Congress that the practice is a big cost saver for state and local governments, schools and other issuers.
In the meantime, issuers of the bonds are rushing to get deals done before year end, said Emilie Ninan, a bond lawyer and partner at Ballard Spahr LLP in Wilmington, Delaware.
“I don’t think anybody should be taking comfort that this is a done deal,” Ninan said of the Senate plan that appears to be kinder to the muni market than the House proposal.
(Reporting By Karen Pierog in Chicago, Laila Kearney and Stephanie Kelly in New York; Editing by Daniel Bases and Tom Brown)
