Debate on Tax Reform Continues

A preliminary draft of the federal tax reform plan released two weeks ago contains provisions that could increase the cost of financing some major municipal infrastructure projects.  The proposal would eliminate the tax-exempt status for two specific types of municipal bonds that are used by Texas cities: advance refunding bonds and private activity bonds. 

Advanced refunding bonds allow cities the ability to take advantage of lower interest rates to saves taxpayers and utility ratepayers money.  Since 2012, advanced refunding has saved Texas taxpayers of cities, counties, school districts, and utilities approximately $1.7 billion.  Since 2012, it has saved the City of Dallas taxpayers $27.83 million and City of Austin taxpayers $38.36 million.

Private activity bonds are used for many types of projects that service the public, such as hospitals, student housing, affordable housing, airports, and water and sewer projects.  For example, Dallas and Austin have used them for hundreds of millions of dollars of Love Field and Austin-Bergstrom Airport improvements.

Local governments account for the lion’s share of the nation’s infrastructure investments.  Keeping that in mind, the House bill’s limits on private activity bonds and the House and Senate proposal to eliminate advanced refunding would increase the costs to invest in infrastructure.  The good news is that both proposals retain the basic federal tax exemption for municipal bonds.

The following chart shows the present status of the major city-related issues and where they currently stand in relation to federal tax reform. 

Provision

House

Senate

Private Activity Bonds

Would completely eliminate the tax exemption for private activity bonds

Would maintain current law treatment re: the tax exemption for private activity bonds

Advanced Refunding of Municipal Bonds

Would eliminate advanced refunding

Would eliminate advanced refunding

State and Local Tax Deduction (SALT)

Would cap the SALT deduction for property taxes at $10,000 and eliminate it entirely for income and sales taxes

Would completely eliminate the SALT deduction

New Markets Tax Credit

Would eliminate NMTC

Would maintain current law

Historic Preservation Tax Credit

Would eliminate Historic Preservation Tax Credit

Would cut the 20% credit for National Register properties in half and would eliminate the 10% credit for pre-1936 properties

Work Opportunity Tax Credit

Would eliminate WOTC

Would maintain current law

 

TML has sent letters to appropriate members of Congress and suggests that interested city officials evaluate the potential impact in their city and discuss tax reform proposals with their member(s) of congress.

TML member cities may use the material herein for any purpose. No other person or entity may reproduce, duplicate, or distribute any part of this document without the written authorization of the Texas Municipal League. 

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